The forthcoming Union Budget for financial year 2026-27 is expected to operationalise the recommendations of the 16th Finance Commission, whose report has already been submitted to the Hon’ble President of India Ms Droupadi Murmu. While the contents of the report remain confidential for now, its incorporation into the FY 2026-27 Budget will mark a critical transition in India’s framework governing tax devolution and Centre-State fiscal relations.
Finance Commission recommendations are not merely advisory fiscal inputs; they are constitutionally anchored mechanisms that shape revenue-sharing arrangements for an entire award period.
Constitutional Role of the Finance Commission
The Finance Commission is constituted under Article 280 of the Constitution of India and is tasked with maintaining fiscal equilibrium between the Union and the States. Its primary functions include:
- recommending the distribution of net proceeds of central taxes between the Union and the States,
- determining the inter se distribution among States, and
- advising on grants-in-aid, including those related to disaster management financing.
A critical feature of the framework is that cesses and surcharges levied by the Centre are excluded from the divisible pool, a point that has remained contentious in Centre-State fiscal discourse.
The 16th Finance Commission: Composition and Mandate
The 16th Finance Commission was constituted on 31 December 2023 and is chaired by Arvind Panagariya, former Vice Chairman of NITI Aayog. Its members include:
- Annie George Mathew,
- Manoj Panda,
- Soumya Kanti Ghosh,
- T Rabi Sankar,
with Ritvik Pandey serving as Secretary to the Commission.
The Commission submitted its report on 17 November 2025 and also presented copies to PM Narendra Modi and FM Nirmala Sitharaman.
Award Period and Scope of Recommendations
As per its Terms of Reference, the 16th Finance Commission’s recommendations cover a five-year award period from 2026-27 to 2030-31. Its remit includes:
- vertical devolution between the Union and the States,
- horizontal distribution among States,
- grants-in-aid to States, and
- review of financing arrangements for disaster management.
The FY2026-27 Budget will therefore be the first fiscal instrument through which these recommendations are translated into operational tax-sharing ratios.
Historical Context: Tax Devolution Trends
The immediate reference point for assessing the 16th Commission’s impact is the 15th Finance Commission, chaired by N K Singh. The 15th Commission recommended 41 per cent devolution of the divisible pool to States, a level maintained from the earlier 14th Finance Commission.
The 41 per cent figure accounted for the territorial reorganisation of Jammu & Kashmir and Ladakh, which altered the fiscal map without materially reducing States’ overall share.
Notably, the 14th Commission had marked a structural shift by raising States’ share from 32 per cent (13th FC) to 42 per cent, reinforcing cooperative federalism.
Criteria for Horizontal Devolution: The Continuing Debate
Finance Commissions traditionally allocate States’ shares using a weighted formula that includes:
- population,
- geographical area,
- income distance,
- demographic performance,
- forest cover and ecology, and
- fiscal effort.
The 15th Finance Commission assigned:
- 15% weight to population,
- 15% to area,
- 12.5% to demographic performance,
- 10% to forest cover and ecology, and
- 2.5% to tax and fiscal effort.
This weighting has been politically sensitive, particularly among southern States, which argue that reliance on population metrics penalises States that have successfully controlled population growth.
Centre-State Friction and the Road Ahead
The question of tax devolution has remained a persistent source of friction, especially for Opposition-ruled States that allege erosion of fiscal autonomy through:
- increasing reliance on cesses and surcharges,
- delayed or conditional transfers, and
- reduced flexibility in State-level spending.
The incorporation of the 16th Finance Commission’s recommendations into the FY2026-27 Budget will therefore be closely scrutinised not just for headline percentages, but for signals on federal balance, fiscal transparency, and predictability of transfers.
Conclusion
While the contents of the 16th Finance Commission report remain under wraps, historical precedent suggests that the Union Government is likely to broadly accept its recommendations. The Budget 26 will thus serve as a constitutional inflection point, shaping Centre-State fiscal relations for the remainder of the decade.
Beyond numerical devolution ratios, the real test will lie in whether the new award period advances cooperative federalism in substance, rather than merely in form.
Source: HinduBusinessLine