Have States gained from the 16th FC? | Explained

Explore the 16th Finance Commission's recommendations on fund allocation, tax sharing, and State demands for equitable distribution.

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.

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.

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.

The criteria for distribution amongst the States (horizontal devolution) since the 13th FC is provided in Table 1. As can be observed, higher weightage has been given for equity (income gap) and needs (population and area) when compared to efficiency (forests, demographic performance and tax effort).

Firstly, as regards vertical devolution, 18 States had demanded that the States’ share be increased from the current 41% to 50%. Few other States had demanded an increase of 45% to 48%. Many States had demanded the inclusion of cess and surcharge in the divisible pool as well as fixing a cap on cess and surcharge that could be levied by the Centre.

Secondly, as regards horizontal devolution, many States had pitched for the continued dominance of equity parameters in the criteria. Equally, many States had recommended reducing the weight assigned to ‘income distance’ as a criterion. Industrialised States such as Maharashtra, Gujarat, Tamil Nadu, Karnataka and Telangana had recommended the inclusion of States’ contribution to GDP among the horizontal devolution criteria.