The Union Cabinet, under the leadership of Prime Minister Shri Narendra Modi, has given approval to the Terms of Reference for the Sixteenth Finance Commission. These terms, as per Article 280(1) of the Constitution, outline the commission’s mandate to make recommendations regarding the distribution of taxes between the Union and States, allocation of respective shares among States, grants-in-aid, and measures to enhance resources for Panchayats.
The recommendations of the Sixteenth Finance Commission, once accepted by the government, will cover a period of five years starting from April 1, 2026. The Fifteenth Finance Commission, constituted on November 27, 2017, made recommendations for a six-year period, ending in the financial year 2025-26.
The Terms of Reference for the Sixteenth Finance Commission include specifying the distribution of net tax proceeds between the Union and States, principles for grants-in-aid from the Consolidated Fund of India to States, and measures to supplement State resources for Panchayats and Municipalities. Additionally, the Commission may review the financing of Disaster Management initiatives and make recommendations.
The report of the Sixteenth Finance Commission is expected to be available by October 31, 2025, covering the five-year period from April 1, 2026. The formation of the commission follows the precedent of previous finance commissions, considering the unique circumstances of the financial period preceding its recommendations.
The Advance Cell of the Sixteenth Finance Commission was established in the Ministry of Finance in November 2022, and a Working Group, consisting of key officials, was formed to assist in formulating the Terms of Reference. The consultative process involved seeking input from State Governments and Union Territories, which was deliberated upon by the Working Group.