Finance Ministry to constitute 16th Finance Commission this year

The finance ministry on Monday told the Lok Sabha that it was going to constitute the 16th Finance Commission (SFC) in the current calendar year. The recommendations of the SFC will be for five years starting FY27.

Replying to a question by Ambedkar Nagar MP Ritesh Pandey, Minister of State for the Finance Ministry Pankaj Chaudhury answered in the affirmative. “The terms of reference and other modalities are governed under Article 280 of the Constitution,” Chaudhury said, without answering if the government is considering taking up the matter of the North-South divide with respect to the devolution of taxes and if the 16th Finance Commission will work in tandem with the GST council.

The Finance Ministry in its FY24 Budget has allocated a token Rs 10 crore for establishing attached offices for the 16th Finance Commission.

The Finance Commission is a constitutionally mandated body established once every five years to devise a formula for distributing net tax proceeds between the Centre and the states as well as among states and local bodies. The 15th Finance Commission headed by NK Singh was set up in November 2017 with a mandate to submit its report in two years for a period of five years. However, due to the Covid pandemic, the FFC submitted a standalone report for FY21 and another report for a period of five years ending FY26. The FFC marginally reduced the un-tied share of states in net central taxes to 41 per cent from 42 per cent, as Jammu and Kashmir was split into two Union Territories.

D K Srivastava, member of the 12th Finance Commission and chief policy adviser at the EY India, said there may be references to the target for the overall size of the Indian economy and how states can be facilitated to achieve that target. “India’s tax GDP ratio is languishing at a low level. The government might ask the commission how to uplift the overall tax-GDP ratio. The commission may also be asked how to reform the GST and whether some states would still require compensation,” he added.