16th Finance Commission Retains 41% Devolution, Introduces GDP Criterion β Key Highlights for Exams
Why in News?
TheΒ 16th Finance Commission (16th FC), chaired byΒ Arvind Panagariya, tabled its report for the award periodΒ 2026β2031. The central highlight is theΒ retention ofΒ 41% vertical devolutionΒ of central taxes to states while introducing a landmarkΒ 10% weightage for GDP contributionΒ in the horizontal distribution formula
Key Highlights:
Vertical Devolution:
Β vertical devolutionΒ refers toΒ 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 2026β31.
Horizontal Devolution Changes:
Horizontal devolution refers toΒ theΒ allocation of central tax revenues among individual statesΒ 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 β Finance Commission.
- Difference between vertical & horizontal devolution
