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Terms of Reference for 16th Finance Commission are comprehensive, says Finance Secretary Somanathan

Finance Secretary T V Somanathan on Thursday said the Terms of Reference (TOR) for the 16th Finance Commission are “short but comprehensive”. He also made it clear that no particular census data has been suggested for the Commission to define the parameters for distribution of funds from devolution pool amongst States.

“They are neither limited nor preliminary. There is nothing more to come. These are the terms of reference of the 16th Finance Commission that have been approved and they are shorter than those of many recent Commissions,” Somanathan said at a press conference here. The remark was made as many experts termed the announcement of ToR as limited.

Distribution of tax proceeds

The Union Cabinet late on Tuesday approved ToR for the 16th Finance Commission. The Commission’s recommendations will be implemented from April 1, 2026 for 5 years. Based on ToR, the Commission will make recommendations on the distribution between the Union and the States of the net proceeds of taxes that are to be divided between them.  t will also suggest the principles that should govern the grants-in-aid of the revenues of the States out of the Consolidated Fund of India and the sums to be paid to the States by way of grants-in-aid of their revenues.

It also included the measures needed to augment the Consolidated Fund of a State to supplement the resources of the panchayats and municipalities in the State based on the recommendations made by the Finance Commission of the State. The Commission may review the present arrangements on financing disaster management initiatives and make appropriate recommendations.

Somanathan said that ToR has been after detailed consultation with States and their views have about incorporated. “In a sense, one could argue that less is more in the sense that this actually gives the commission much more leeway and freedom to take into account all the inputs that they get from the different layers of government in India, from the different experts, from the different people who appear before the commission, and they can then fashion an award which is within the constitutional frame, but takes into account all the stakeholder feedback without too much of pre decided items in the terms of reference,” he said.

No clarity

Some criticism was also made about no clarity on whether the proposed commission would give recommendations based on criteria and weights assigned for horizontal devolution. The previous 15th Finance Commission had retained the criteria and weights according to which 15 per cent weight each is for population and area, 10 per cent for forest and ecology, 45 per cent of income distance, 45.0 2.5 per cent for tax and fiscal efforts, and 12.5 per cent for demographic performance.

This is a point of discomfort for the southern States which have higher human development indices and low population. In the fiscal redistribution process based on weightage to population, their shares get reduced. Somanathan said that no census has been prescribed. “Population is always two sided, even the last commission, there was a mention of the census and then there was a mention of rewarding those whose population growth so it is all a mix. The commission has to find the best way forward. The commission has the discretion. The Constitution doesn’t say that we should prescribe what data they should use,” he said.


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