The 16th Finance Commission, mandated to submit its report by 31 October 2025, has been given barebone terms of reference as listed in the Constitution—recommend share of states in central taxes; inter-se distribution amongst the states; grants-in-aid to states’ revenues; augmentation of states’ consolidated funds to meet the needs of local bodies; and any other matter in interest of ‘sound finance.’
The 16th Finance Commission has to figure out the matters of sound finance on its own.
Over the years, Finance Commissions have settled many key issues affecting Centre-state financial relations, such as expanding the pool of shareable taxes from income tax and excise duties to all central taxes, fixing a single rate (41 percent in the 16th Finance Commission) share in central taxes, and addressing states’ indebtedness.
There are five issues, in my opinion, which the 16th Finance Commission must deal with:
Hemorrhage of states’ share in central taxes by cesses and surcharges
Determination of states’ shares in central taxes on a long-term basis
Equitable distribution of shareable pool amongst the states
Restoration of borrowing sovereignty of states, and
A stable arrangement for financing local bodies
How can and will it deal with any or all of these real issues?