Union Budget 2026: What is a Finance Commission and what is its function
Budget 2026: The Sixteenth Finance Commission was set up on December 31, 2023 to decide on the devolution of tax revenue between the Centre and the states for the period from April 1, 2026 to March 31, 2031.
- Jan 31, 2026,
- Updated Jan 31, 2026 9:23 PM IST
The government will table the report of the Sixteenth Finance Commission in Parliament along with the Union Budget 2026-27 on February 1, 2026. The Commission's report will lay the blueprint for Centre and state finances for the next five years starting April 1, 2026.
What is the Finance Commission?
The Finance Commission is a constitutional body set up every five years to assess the Centre’s and states finances and decide upon the sharing of financial resources and tax revenue between the two. At present, based on the report of the Fifteenth Finance Commission, the share of states in central taxes is 41% for the period from 2020-21 to 2025-26.
When was the Sixteenth Finance Commission set up?
The Sixteenth Finance Commission was set up on December 31, 2023 to decide on the devolution of tax revenue between the Centre and the states for the period from April 1, 2026 to March 31, 2031. The Commission chaired by Arvind Panagariya, former Vice-Chairman, NITI Aayog, and Professor, Columbia University submitted its report to the President of India on November 17, 2025.
As per the terms of reference, it was mandated to making recommendations on the distribution of the net proceeds of taxes between the Union and the States as well as the allocation between the States of the respective shares of such proceeds, grants-in-aid to States, review arrangements on financing Disaster Management initiatives.
How will its recommendations impact Centre and State finances?
Several new challenges have cropped up in the last few years including lower rates of goods and services tax and increased spending by states on welfare provisions such as cash transfers to women. The Economic Survey 2025-26 also noted that unconditional cash transfers, pegged at about Rs 1.7 lakh crore, have led to deterioration in state finances.
With the compensation cess now gone and rationalised rates of GST, states are also hoping for some reprieve from the Finance Commission. However, with already 41% of Central taxes shared with states, the Centre has often argued that there is limited space for further sharing of resources. Several states, including Tamil Nadu, Kerala, Assam and West Bengal are also headed for elections, the report of the Sixteenth Finance Commission is closely awaited.
Why have southern states been concerned with the Finance Commission?
The Finance Commission decides on the devolution of taxes based on a formula which includes several factors including income, distance, population and performance on various metrics. Southern states like Tamil Nadu and Kerala have argued that the Finance Commission’s recommendations put them at a disadvantage due to their lower population even though they are economically stronger and contribute more to central tax revenues than several other northern and eastern states. As a result, they are not sufficiently rewarded in the divisible pool of resources.
Track live Budget updates, breaking news, expert opinions and in-depth analysis only on BusinessToday.in
The government will table the report of the Sixteenth Finance Commission in Parliament along with the Union Budget 2026-27 on February 1, 2026. The Commission's report will lay the blueprint for Centre and state finances for the next five years starting April 1, 2026.
What is the Finance Commission?
The Finance Commission is a constitutional body set up every five years to assess the Centre’s and states finances and decide upon the sharing of financial resources and tax revenue between the two. At present, based on the report of the Fifteenth Finance Commission, the share of states in central taxes is 41% for the period from 2020-21 to 2025-26.
When was the Sixteenth Finance Commission set up?
The Sixteenth Finance Commission was set up on December 31, 2023 to decide on the devolution of tax revenue between the Centre and the states for the period from April 1, 2026 to March 31, 2031. The Commission chaired by Arvind Panagariya, former Vice-Chairman, NITI Aayog, and Professor, Columbia University submitted its report to the President of India on November 17, 2025.
As per the terms of reference, it was mandated to making recommendations on the distribution of the net proceeds of taxes between the Union and the States as well as the allocation between the States of the respective shares of such proceeds, grants-in-aid to States, review arrangements on financing Disaster Management initiatives.
How will its recommendations impact Centre and State finances?
Several new challenges have cropped up in the last few years including lower rates of goods and services tax and increased spending by states on welfare provisions such as cash transfers to women. The Economic Survey 2025-26 also noted that unconditional cash transfers, pegged at about Rs 1.7 lakh crore, have led to deterioration in state finances.
With the compensation cess now gone and rationalised rates of GST, states are also hoping for some reprieve from the Finance Commission. However, with already 41% of Central taxes shared with states, the Centre has often argued that there is limited space for further sharing of resources. Several states, including Tamil Nadu, Kerala, Assam and West Bengal are also headed for elections, the report of the Sixteenth Finance Commission is closely awaited.
Why have southern states been concerned with the Finance Commission?
The Finance Commission decides on the devolution of taxes based on a formula which includes several factors including income, distance, population and performance on various metrics. Southern states like Tamil Nadu and Kerala have argued that the Finance Commission’s recommendations put them at a disadvantage due to their lower population even though they are economically stronger and contribute more to central tax revenues than several other northern and eastern states. As a result, they are not sufficiently rewarded in the divisible pool of resources.
Track live Budget updates, breaking news, expert opinions and in-depth analysis only on BusinessToday.in