16TH FINANCE COMMISSION REPORT

NEWS: Submitted its report for the award period 2026-31. The recommendations signal a significant shift from “entitlement-based” transfers to “compliance-driven” fiscal federalism

IMPORTANT Recommendations

Vertical Devolution

• States’ share in the divisible pool of central taxes was retained at 41%, unchanged from the 15th Finance Commission
• The divisible pool excludes cesses, surcharges, and cost of collection from gross central tax revenue.

Horizontal Devolution

• Distribution among states is based on a revised devolution formula with weights for income distance (42.5%), population as per the 2011 Census (17.5%), demographic performance (10%), area (10%), forest & ecology (10%)
• A new 10% weight for contribution to GDP, while excluding the tax and fiscal effort parameter used by the 15th FC.

Fiscal roadmap:

• Recommended the centre to reduce fiscal deficit to 3.5% of GDP by 2030–31.
• It recommended the annual fiscal deficit limit for states to be 3% of GSDP.
• It recommended ending Off-budget borrowings and including all such liabilities in fiscal deficit and debt.
• Combined Centre–state debt is projected to decline from 77.3% of GDP in 2026–27 to 73.1% in 2030–31.

About FC

• It is a Constitutional body under Article 280, constituted by the President of India every 5 years or earlier.
• Composition: Chairman and 4 other members appointed by the president for a term specified by him.
• Under Article 281, Government lays the Finance Commission’s report and an Action Taken Memorandum before Parliament.