New Delhi - The Indian government is planning to establish the 16th Finance Commission this year. The commission will be responsible for recommending the ratio in which taxes will be divided between the Centre and the states for a period of five years starting from April 1, 2026. According to an official, the members of the commission and its Terms of Reference are currently being worked out. The Finance Commission is a constitutional body that provides suggestions on Centre-state financial relations.

The previous Finance Commission, headed by NK Singh, submitted its report for the 5 fiscals from 2021-22 to 2025-26 to the President on November 9, 2020. The tax devolution ratio was set at 42 per cent, the same level as suggested by the 14th Commission. The central government accepted the report, and states are being given 42 per cent of the divisible tax pool of the Centre during the period from 2021-22 to 2025-26.

The recommendations of the 15th Finance Commission also include the fiscal deficit, debt path for the Union and states, and additional borrowing room to states based on performance in power sector reforms. The government aims to bring down the fiscal deficit to 4.5 per cent of GDP by the 2025-26 fiscal year, as per the glide path for fiscal consolidation. For the current fiscal year, the deficit is projected at 5.9 per cent of GDP, lower than the 6.4 per cent in the last fiscal year that ended on March 31, 2023.