Finance Commission Of India Strengthens Fiscal Federalism

Role Of The Finance Commission  
Constituted every five years, the Finance Commission recommends how tax revenues are shared between the Centre and states. Its latest report, tabled alongside the Union Budget 2026–27, emphasizes equitable distribution to support state-level development while maintaining national fiscal discipline.  

Key Recommendations  
The Commission, chaired by Dr. Arvind Panagariya, recommended that the divisible pool of central taxes—calculated after excluding cesses, surcharges, and collection costs—continue to allocate 41% to states. This ensures predictability in transfers and strengthens the foundation of fiscal federalism.  

Impact On States  
By maintaining the devolution rate, states gain financial stability to plan welfare programs, infrastructure projects, and social initiatives. This decision also reinforces cooperative federalism, allowing states to pursue localized priorities while aligning with national growth strategies.  

Key Highlights  

• 16th Finance Commission report tabled in February 2026  
• States’ share in central taxes retained at 41%  
• Divisible pool excludes cesses, surcharges, and collection costs  
• Ensures stability in fiscal transfers for 2026–31  
• Supports cooperative federalism and state-level development  

Conclusion  
The Finance Commission’s recommendations reflect India’s commitment to balanced fiscal federalism. By ensuring predictable resource transfers, it empowers states to drive inclusive growth while maintaining national fiscal responsibility.  

Sources: The New Indian Express, PRS Legislative Research, Insights India