The government extended the tenure of the 16th Finance Commission by one month to submit its award for tax devolution and grants for the next five years, as the consultation process had not concluded fully, sources told FE.
The Commission, headed by Arvind Panagariya, was to submit its report by October 31, 2025. Panagariya was appointed as head of the Commission on December 31, 2023.
“The consultation is still on, but in the finishing stages,” an official said, adding that report preparation will take some time. The government gave it another 30 days to submit its report by November 30, the official added.
The terms of reference (ToR) for the Commission have been kept shorter than the previous Commissions, as desired by states.
In their representations, most states have requested the Commission for an increase in their respective share of the tax devolution kitty, citing reasons ranging from poverty levels and population counts to contributions to the nation’s economic growth and prosperity. And, almost all of them were unanimous in one demand: their aggregate share in the Centre’s divisible tax pool should be increased from 41% to 50%.
The Commission, led by Panagariya, visited each of the 28 states to understand their fiscal health and needs, which it will factor in before finalising its award for sharing the Centre’s tax revenues for the five years ending FY31.
The first division between the Centre and the 28 states taken together is called the vertical division of the Centre’s tax revenues, while the second is the division of kitty among 28 states called horizontal devolution.
The 15th Finance Commission recommended that 41% of the divisible segment of central taxes will go to all states. This was against a 42% share for all states during the 14th Finance Commission (FY16-20). Striking a judicious balance, the 15th FC in its award assigned a lower weight of 15% to ‘population’ than 27.5% by the previous FC, while giving a respectable weight of 12.5% to progress made in curbing population growth to balance the needs represented by the latest population and progress towards population control, for inter-se distribution of resources among states from the Centre’s divisible tax pool. The 15th FC had given weightage for income distance to 45%, geographical area 15%, demographic performance 12.5%, forest cover 10%, population 15%, and tax collection effort 2.5%.
In their representations to the 16th FC, southern states and some others have sought a weightage reduction in the income distance from 45% to 30-35%. Income distance refers to the disparity between a state’s per capita income and the state with the highest per capita income, with states with lower per capita incomes receiving a larger share to promote equity and reduce disparities among states.
Tamil Nadu suggested that the weightage to income distance be reduced to 35%, while Maharashtra requested that it be brought down to 37.5%.
A substantial reduction in weight could result in a shift in the inter-state share of states in the devolution kitty in favour of states with high per capita income. It has to be noted that the 15th FC had reduced the income distance weight to 45% from 50% in the 14th FC. So, a similar reduction in weight for this criterion can’t be ruled out after factoring in the progress in per capita income over the last six years.
Similarly, Gujarat, Karnataka, Telangana and Tamil Nadu have sought rewards for contributing to the nation’s economic growth and prosperity. Tamil Nadu suggested that a state’s contribution to the country’s economy be made a criterion for horizontal devolution with a weight of 15%.