Tax devolution: 16th Finance Commission to be set up this year

NEW DELHI: The Union government may set up the 16th Finance Commission this FY 2023-24. The Commission’s primary objective will be to suggest the ratio in which tax is to be divided between the Centre and states for the next five years, beginning April 1, 2026.

The government is currently finalizing the commission’s members and its terms of reference. The Finance Commission is a constitutional body that provides recommendations on financial relations between the Centre and states.

The previous Finance Commission submitted its report on November 9, 2020, for the period spanning 2021-22 to 2025-26.

The 15th Commission, led by NK Singh, recommended maintaining the tax devolution ratio at 42%, the same as the 14th Commission’s suggestion. The central government accepted this report, resulting in states receiving 42% of the Centre’s divisible tax pool from 2021-22 to 2025-26.

The 15th Finance Commission’s recommendations also included a fiscal deficit, a debt path for the Union and states, and additional borrowing for states based on performance in power sector reforms.

The government has set a glide path for fiscal consolidation to reduce the fiscal deficit to 4.5% of GDP by the fiscal year 2025-26. The current fiscal year is projected to have a deficit of 5.9% of GDP.