The Indian government is set to appoint the 16th Finance Commission this year. The Commission's principal goal is to recommend a suitable ratio for distributing tax income between the Centre and the states during the following five years, beginning April 1, 2026. According to Sources, the government is also finalising the commission's members and terms of reference.

The Finance Commission is a constitutional body that makes recommendations on the Centre's and states' financial ties. The former Finance Commission issued its report for the fiscal years 2021-22 through 2025-26 on November 9, 2020. The 15th Commission, chaired by NK Singh, advocated keeping the tax devolution ratio at 42%, as suggested by the 14th Commission. This study was adopted by the central government, resulting in states getting 42% of the Centre's divisible revenue pool from 2021-22 to 2025-26.

The proposals of the 15th Finance Commission included a budget deficit, a debt route for the Union and states, and increased borrowing capacity for states based on their success in power sector reforms. The administration has devised a glide path for fiscal consolidation, with the goal of decreasing the budget deficit to 4.5 percent of GDP by fiscal year 2025-26. The current fiscal year's deficit is expected to be 5.9 percent of GDP, which is lower than the previous fiscal year's deficit of 6.4 percent.

The formation of the 16th Finance Commission is necessary in order for the Centre and states to make sound financial choices. It will decide the right ratio for splitting tax money between the federal government and the states, ensuring that all sides receive their fair share. The recommendations of the Commission would be critical in reaching India's fiscal consolidation objectives and safeguarding the country's overall economic stability.