16th Finance Commission

Why in News? On February 1, Finance Mi-nister Nirmala Sitharaman Tabled the 16th Finance Commission report in Lok Sabha, outlining tax devolution between the Centre and States.
The Commission was mandated to make its recommendations for the five year period commencing on 1 April 2026 and ending on 31 March 2031.
Constitutional Provision : Article 280 of the Constitution provides for the Finance Commission, which has a quasi-judicial character and is constituted by the President every five years or earlier, if necessary.
Composition - Chairman: Dr. Arvind Panagariya
Members: Ajay Narayan Jha, Annie George Mathew, Soumya Kanti Ghosh, Manoj Panda, T. Rabi Sankar
Key Recommendations of 16th Finance Commission : 
1.     Vertical sharing of tax revenue : States’ share in the divisible pool shall be retained at 41%. 
2.     Transparent Reporting of Transfers to States :  Annual disclosure by the Union Government of CAG-certified net proceeds to ensure transparency in tax devolution.
3.     Criteria for horizontal tax sharing between states : Population, demographic performance, area, forest, per capita income distance and contribution of the State to Gross Domestic Product (GDP)
4.     Revenue deficit grants to states : FC recommended phasing out and discontinuing revenue deficit grants.
5.     Strengthening Urban Data Platform – to support Urban Local bodies in financial accounts and reports preparation.
6.     Transparent Reporting of Transfers to Local Bodies - States should ensure transparent and separate reporting of all transfers to urban and rural local bodies—from Finance Commission, CSS, State Finance Commission and State grants—in their budgets and State Finance Accounts.
7.     Removal of Mandatory Reliance on SFC Recommendations under Article 280 - Given persistent practical obstacles in meaningfully using State Finance Commission recommendations for local body devolution, the Finance Commission recommended removing this constitutional requirement and suggested that NITI Aayog compile and disseminate SFC best practices.
8.     Citizen-friendly GIS based property tax IT system : to be developed by states for efficient enumeration, assessment and collection of property tax.
9.     Strengthening State Finance Commissions - NITI Aayog to study the functioning of SFCs across States and publish a compendium of best practices for wider reference.
10.     Structure of Local Body Grants – Rural Local Bodies (RLB) grants to have basic and performance components, while Urban Local Bodies (ULB) grants to include basic, performance, urban infrastructure and urbanisation premium; basic–performance split at 80:20, with a 60:40 aggregate division between RLBs and ULBs.