The story so far: The 16th Finance Commission under the chairmanship of Dr. Arvind Panagariya has submitted its report for the period of 2026-31. The Central government has accepted its recommendations with respect to devolution of funds from Centre to States.
What were past recommendations?
The Constitution in Article 270 provides for the scheme of distribution of net tax proceeds collected by the Central government between the Centre and the States. The taxes that are shared between the Centre and the States include corporation tax, personal income tax, Central Goods and Services Tax (GST), Centre’s share of the Integrated Goods and Services Tax (IGST) etc. This division is based on the recommendation of the Finance Commission that is constituted every five years as per the terms of Article 280. This divisible pool, however, does not include cess and surcharge that are levied by the Centre. For the year, 2025-26, it is estimated that the divisible pool constitutes only around 81% of the gross tax revenue of the Centre after excluding cess and surcharge.
Also read: Has the 16th Finance Commission prioritised the Centre’s needs and sidelined States?
Till the 13th FC (2010-2015), the devolution involved specific transfers for Centrally Sponsored Schemes (CSS) with extensive conditionalities. The share of States in Central taxes (vertical devolution) was fixed at 32%. However, since the 14th FC (2015-2020), the specific transfers for CSS were discontinued and the vertical devolution was increased to 42%. It was revised down to 41% in the 15th FC (2020-2026) due to the reorganisation of Jammu and Kashmir into two Union Territories.
