Cabinet approves Terms of Reference for the 16th Finance Commission

The Union Cabinet has approved the Terms of Reference for the Sixteenth Finance Commission on 29 November 2023. However, no decision has been taken regarding the Chairman and other members of the Sixteenth Finance Commission. The tenure of the 16th Finance Commission will be of five years (April 1, 2026 to March 31, 2031).

TOR for the Sixteenth Finance Commission:

• Terms of Reference (TOR) define the purpose and structures of a project, committee, meeting, negotiation, or any similar collection of people who agree to work together to accomplish a shared goal.
• The Finance Commission would make recommendations on the following matters, namely:
  • The distribution between the Union and the States of the net income of taxes which is to be, or may be, divided between them under Chapter I, Part XII of the Constitution and the allocation among the States of their respective shares of such income;
  • The principles which govern the amounts to be paid to the States by way of grants-in-aid and grants-in-aid of their revenues from the Consolidated Fund of India under Article 275 of the Constitution. 
  • Necessary measures to increase the Consolidated Fund of the State to supplement the resources of the Panchayats and Municipalities in the State based on the recommendations made by the State Finance Commission.
• The Commission may review the existing arrangements on funding of disaster management initiatives in the context of the funds constituted under the Disaster Management Act, 2005 and make appropriate recommendations thereon.

Sixteenth Finance Commission to report by October 2025:

• The Finance Commission generally takes about two years to submit its recommendations. The Sixteenth Finance Commission would submit its report by October 31, 2025 and its recommendations would be implemented for the next five years i.e. from April 1, 2026 to March 31, 2031.

Finance Commission:

• Finance Commissions make recommendations regarding the manner of distribution of financial resources between the Union and the States as well as within the State for a period of five years.
• Finance Commissions offer counsel and guidance on various aspects of public finance, governance, and development. They address challenges such as fiscal consolidation, debt management, local bodies, disaster relief, healthcare, education, justice delivery, and the statistical system.
• The Finance Commission has made a significant contribution in increasing the fiscal autonomy, equality and efficiency of the Central and State Governments as well as in promoting cooperative and competitive federalism in the country.

Finance Commission in the Indian Constitution:

• The Finance Commission is described as a constitutional body constituted every five years under Article 280 of the Indian Constitution to make recommendations on the distribution of financial resources between the Union and the States.

Constitution of the Fifteenth Finance Commission:

• The 15th Finance Commission was constituted on November 27, 2017. It made recommendations through its interim and final reports covering a period of six years starting from April 1, 2020.
• The recommendations of the Fifteenth Finance Commission are valid till the financial year 2025-26.
• Chairman of the Fifteenth Finance Commission N. K. Singh.

Background of 16th Finance Commission:

• According to clause (1) of Article 280 of the Constitution, the Finance Commission is to be constituted every fifth year or sooner.
• Since the recommendations of the 15th Finance Commission are about a period of six years till March 31, 2026, the constitution of the 16th Finance Commission is now proposed.
• This will enable the Finance Commission to consider and evaluate the finances of the Union and the States for the period immediately preceding the period of its recommendations.
• The Advance Cell of the 16th Finance Commission was constituted in the Ministry of Finance on 21 November 2022, to monitor the preparatory work till the formal constitution of the Commission.