The 16th Finance Commission (FC) might recommend that the states’ share in the Centre’s divisible pool of taxes remain unchanged at 41 percent or be raised by one percentage point to 42 percent, sources privy to the matter told Moneycontrol.
“There is a very less probability of states’ share in central taxes going below 41 percent. The 16th FC may either suggest a 41 percent share, or slightly more at 42 percent,” a person directly aware of the matter said.
The 16th FC, headed by Arvind Panagariya, has concluded its consultations with all 28 states, and most states have requested the Commission to raise the states’ share in the pool to 50 percent from 41 percent at present (FY21-26). In a press conference, last week, Panagriya confirmed that 22 of the 28 states have requested the FC to raise the states’ share of central taxes to 50 percent.
The central government, however, is not keen on increasing the states’ share beyond 41 percent, sources said. Panagariya had told reporters: “Practically speaking, I can’t tell you (the press) what the Commission will do because I also don’t know it yet as it’s a decision of full membership of the Commission. What I can speculate though is it is not going to be 50 percent because that would be too large a jump and such a large jump upsets too many cards.”
The 16th FC will make its report available by October 31, 2025, covering a period of five years starting April 1, 2026. As per the recommendation of the 15th Finance Commission, 41 percent of the divisible tax pool of the Centre is transferred to states in 14 instalments annually, covering the five-year period of 2021-22 to 2025-26.
Centre’s share
Moneycontrol had reported earlier, in December 2024, that the central government as part of its submission, will seek to increase its share in divisible pool of taxes, meaning reducing the share of states in the tax devolution. “This recommendation would be supported by expenditure carried out in the past by the Centre and the tax receipts it receives,” an official had said.
Additionally, Moneycontrol had reported earlier this month, that the 16th FC may make significant changes to the formula that determines each state’s share in the Centre’s divisible pool of taxes, which could possibly result in some relatively well-off states getting a higher share of central taxes from 2026-27 onwards.
According to sources, the weight of ‘income distance’ criteria—measured by the per capita gross state domestic product (GSDP)—is likely to be reduced from current 45 percent, implying that states with relatively higher per capita GSDP may not necessarily get a lower share of the divisible pool of central taxes.
