Centre clears partial terms of reference of 16th Finance Commission

livemint.com:

Narendra Modi on Tuesday approved partial terms of reference of the 16th Finance Commission to be set up shortly, according to a person informed about the development. The cabinet meeting, however, did not decide on the constitution of the commission, which would entail naming the members and chairperson. The meeting began in the evening and continued till late in the night.

An official announcement is expected on Thursday. The terms of reference of the 16th Finance Commission are crucial to the sharing of tax revenue between the Centre and the states as well as among states and, thus, for overall income redistribution. The commission will also make recommendations for tax reforms, efficiency in tax administration and expenditure reforms.

At present, the formula that applies till FY26, recommended by the 15th Finance Commission led by N.K. Singh, prescribes devolution of 41% of the Centre’s net tax revenues to the states. Among the states, the share is decided by a formula designed to incentivize demographic performance and each state’s effort to mobilize its own tax revenue.

The formula also takes into account geographic area, forest cover and the state’s per capita income. For one year—FY21—the 15th Finance Commission had recommended devolution of 42% of the Centre’s net tax revenues to the states, but since Jammu & Kashmir's reorganization, given that it is now a Union territory, the amount has been kept at 41% for the next five years. The 16th Finance Commission comes in the post-pandemic macroeconomic context marked by high interest cost and external challenges to growth, especially exports.