Tax Devolution Formula: 16th Finance Commission Submits Key Report To President Murmu

Chairman of the 16th Finance Commission Arvind Panagariya on Monday submitted to President Droupadi Murmu the panel's report, which will provide the formula for devolution of taxes between the Centre and states.

The commission, which was mandated to submit its report by October 31, was given an extension of one month till November 30.

'Members of the 16th Finance Commission, led by its Chairman, Dr Arvind Panagariya, called on President Droupadi Murmu and submitted the Commission's report for 2026-31,' Rashtrapati Bhavan said in a post on X.

As per the terms of reference, the 16th Finance Commission is mandated to determine the formula for states' share of central taxes and the grants-in-aid for five years beginning 2026-27.

The commission has visited all states and Union Territories as a precursor to firming up its views on states' share in grants in aid and taxes.

The commission has four members-- Retired bureaucrat Annie George Mathew and economist Manoj Panda are full-time members of the Commission, while SBI Group Chief Economic Advisor Soumya Kanti Ghosh and RBI Deputy Governor T Rabi Sankar are part-time members.

Besides suggesting tax devolution between the Centre and states, and revenue augmentation measures, the commission has also reviewed the present arrangements for financing disaster management initiatives with reference to the funds constituted under the Disaster Management Act, 2005.

he Finance Commission is a constitutional body that gives suggestions on Centre-state financial relations. The 16th Finance Commission was set up on December 31, 2023.

The 15th Finance Commission, under NK Singh, had recommended that states be given 41 per cent of the divisible tax pool of the Centre during the five-year period, 2021-22 to 2025-26, which is at the same level as was recommended by the 14th Finance Commission under YV Reddy.

According to 2025-26 Budget documents, the Centre is projected to transfer Rs 14.22 lakh crore to states as their share in taxes, out of the Rs 42.70 lakh crore total tax that the central government has budgeted to collect this fiscal.

Historically, finance commissions have determine states' share in central taxes based on a weighted sum of population, area, demographic performance, fiscal effort, income distance and forest cover.

The issue has long been a point of friction between the Centre and states, particularly Opposition-ruled ones, which said they have not received their fair share. Southern states have also objected to the use of population as a criterion for devolution, arguing that it penalises them despite their success in controlling population growth.

The 15th Finance Commission had given 15% weightage to population, 15% to area, 12.5% to demographic performance, 10% to forest cover and ecology and 2.5% to tax and fiscal efforts.