Cabinet approves 'terms of reference' for 16th Finance Commission

Chairman, members to be appointed 'as soon as possible'; commission to submit report by Oct 31, 2025

In a departure from convention, the Union Cabinet late on Tuesday approved the terms of reference for the Sixteenth Finance Commission (SFC) without revealing the names of its chairman and members.

Announcing the decision on Wednesday in a press briefing, Information and Broadcasting Minister Anurag Singh Thakur said the chairman and members will be appointed “as soon as possible” as the commission has to finish its report in two years.

The SFC has to submit its report by October 31, 2025, covering a period of five years that will come into effect on April 1, 2026. The recommendations of the Fifteenth Finance Commission (FFC), chaired by N K Singh, are valid till March 31, 2025.

 

The terms of reference released by the Cabinet mostly contained the constitutionally mandated provisions such as distribution of net proceeds of taxes between the Centre and the states and among states, principles that should govern the grants-in-aid of the revenues of the states out of the Consolidated Fund of India, and measures needed to supplement the resources of panchayats and municipalities in the states.

Usually, the FC’s opinion is sought on many matters other than the constitutionally mandated ones. The FFC was asked to analyse the impact of goods and services tax (GST) on states, performance-based incentives, and expenditure on populist measures, among others. The Centre later added an additional clause to the FFC to explore scope for states to contribute to the defence spending of the country.

Speaking to reporters on the sidelines of another event, Economic Affairs Secretary Ajay Seth said: “Whatever the Constitution says, we have done that much. The other details will be out in the gazette notification.”

D K Srivastava, chief policy advisor, EY India, said this is just a reinstatement of the constitutional provisions. “This is not the usual way in which the constitution of the Finance Commission has been announced in the past. It seems the detailed terms of reference would be announced along with the full constitution of the Finance Commission,” he added.

The terms of reference also included a clause regarding the disaster management fund. “The Commission may review the present arrangements on financing Disaster Management initiatives, with reference to the funds constituted under the Disaster Management Act, 2005 (53 of 2005), and make appropriate recommendations thereon,” it said.

Srivastava said this is also a standard reference to the FC since the enactment of the relevant act. “Disaster management requires establishment of certain funds in which both the Centre and state governments contribute. The FC determines the amount of money that will be given to the states through the fund. That has to be revised every five years,” he added.

An advance cell of the SFC was formed in the finance ministry last year on November 21 to oversee preliminary work, pending formal constitution of the FC. Thereafter, a working group, headed by Finance Secretary T V Somanathan and comprising Economic Affairs Secretary Ajay Seth, Revenue Secretary Sanjay Malhotra, Financial Services Secretary Vivek Joshi, Chief Economic Adviser V Anantha Nageswaran, apart from NITI Aayog advisor and Additional Secretary (Budget), was set up to assist in the formulation of the terms of reference. “As part of the consultative process, views and suggestions were sought from the state governments and the Union Territories (with legislature) on the ToRs, and were duly deliberated by the Group,” the press statement said.

(With inputs from Shiva Rajora)