Why in News?
The 16th Finance Commission (16th FC), chaired by Arvind Panagariya, tabled its report for the award period 2026–2031. The central highlight is the retention of 41% vertical devolution of central taxes to states while introducing a landmark 10% weightage for GDP contribution in the horizontal distribution formula
Key Highlights:
Vertical Devolution:
vertical devolution refers to the distribution of the net proceeds of central taxes between the Union (Central) government and all the State governments collectively
- Retained at 41% of the divisible tax pool (same as 15th Finance Commission).
- Applicable for the award period 2026–31.
Horizontal Devolution Changes:
Horizontal devolution refers to the allocation of central tax revenues among individual states in a federation
- Introduction of 10% weightage for GDP contribution.
- Aims to reward economically productive and efficient states.
What is Finance commission?
The Finance Commission is a constitutional body under Article 280 of the Indian Constitution. It is constituted every 5 years to recommend:
- Distribution of tax revenues between Centre and States (vertical devolution)
- Distribution among States (horizontal devolution)
Exam Tip:
- Article 280 – Finance Commission.
- Difference between vertical & horizontal devolution