Among other recommendations, it would provide its opinion on compensation to the states under the proposed goods and services tax.
The commission, headed by former Reserve Bank of India Governor Y V Reddy, will now submit its report - prepared over a period of five years starting April 2015 - by December 31. It may be tabled in the Budget Session of Parliament in February next year.
"The commission wanted more time to analyse some data. It has been given time till December end. The terms of reference remain the same," said a finance ministry official, requesting anonymity.
An official with the commission said it asked for an extension to finalise recommendations on the resources to be made available to the new state of Telangana. After the formation of the new state, the additional terms of reference were given to the commission. Its members were able to meet the representatives of Andhra Pradesh and Telangana only last month, after completing consultation with the other states.
"Since Telangana was formed, it added to our work. All other recommendations have been finalised and we will try to submit the report as early as possible," said the official.
The finance commission recommends the percentage of the central taxes to be shared with the states and the distribution among the states is determined on the basis of the criteria formulated by each commission.
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In their representations before the Fourteenth Finance Commission, the states had pitched for increasing the devolution to 50 per cent from 32.5 per cent at present. However, the finance ministry, aiming at a fiscal deficit target of 3 per cent by 2016-17, had recommended against it.
Higher devolution will give the states more flexibility and a free hand in spending, but the Centre's argument was that it couldn't spare more funds, as it had to take care of its long-term payment obligations, such as higher salary burden after the recommendations of the Seventh Pay Commission and compensation to the states if they make any losses after switching to the goods and services tax (GST).
The demand for increase in devolution has been strongly raised by BJP-ruled Gujarat, Rajasthan, Madhya Pradesh and Chhattisgarh, as well as Bihar, Mizoram, Kerala, Tamil Nadu, Odisha and Assam. But Prime Minister Narendra Modi's emphasis on strengthening the federal structure may not translate into higher devolution of tax receipts from the Centre to the states.
Fixed devolution to the states is 30.5 percent at present. A variable component, which depends on the performance of the states, takes it to 32. The demand from the states to increase it is not new. The Twelfth Finance Commission had raised it from 29.5 per cent to 30.5 per cent for 2005-10. Thereafter, The Thirteenth Finance Commission raised it from 30.5 per cent to 32 per cent. So, going by the past recommendations, a small increase cannot be ruled out.