Published on 01.02.2026
Sixteenth Finance Commission recommendations submitted to the Union President of India in November 2025 now has been tabled in the parliament along with the Action taken report.
Sharing and devolution of Union Taxes for the Period from 2026 April to 2031 April shall be in accordance with recommendations of the sixteenth FC as approved by the Union Government.
Sixteenth Union Finance Commission has recommended 41 percent of the divisible pool, thereby maintaining the status quo. As we are aware, Union Taxes and duties except cesses and surcharges constitute the divisible pool that is shared among the States and Union. The divisible pool has been consistently shrinking since the Union Government resorts to cesses and surcharges for revenue generation which is nor shared with States. Irrespective of the ruling front in power, most states and a number of Public Finance experts have raised a demand to cap the quantum of cesses and surcharges to halt further shrinkage of divisible poll.
Sixteenth Finance Commission maintained a status quo in vertical shares to States. It did not heed to the demands of the states to enhance the share or to enrich the divisible pool either by capping the cesses and surcharges or including non-tax revenue to the divisible pool (as some States including Kerala have demanded). Non-tax revenue has become a major source in the gross revenue receipts of the Union Government. Dividends and profits of the union government have skyrocketed from Rs. 1 lakh crore to Rs. 3.25 lakh crore from 2023 to 2026 (estimate provided in Economic Survey 2025). The non-tax revenue under ‘other’ category also registered significant growth during this period. It is argued that Union Government unilaterally slashes GST rates on the strength of this burgeoning non-tax revenue. But GST rate cuts further shrink the divisible pool thereby resulting in a decline in the States’ tax share. Demand of the states to include non-tax revenue in the divisible pool shall be viewed in this context.
The inter se share of Kerala has been hiked from 1.925 to 2.382 percent, a hike of 0.457 percent compared to the previous Finance Commission award. Sixteenth Finance Commission report has not provided a projection on the quantum of devolution over the award period. Kerala received an amount of Rs. 37814 crores as post devolution revenue deficit grant during the previous Finance Commission award period that has been totally done away with in the sixteenth Finance Commission recommendations. The reasons cited for the discontinuation of revenue deficit grants is that it makes the states complacent in achieving fiscal consolidation. The fact that the tax avenues available to the states have declined significantly with the introduction of GST has not been considered. Kerala received Rs. 2412 crores as state and sector specific grants during the fifteenth Finance Commission period. This has been discontinued in the sixteenth Finance Commission report. The hike in inter se tax share for Kerala is counterbalanced with the elimination of revenue deficit grant and specific purpose grant. Finance Commission has not agreed to expand the vertical share of the states or to nourish the divisible pool. The aggregate specific purpose grants given to states during the previous Finance Commission was Rs. 122037 crores which the present Commission declined to continue.
Inter se share of Kerala in grants for rural local bodies shall be 0.76 percent where as the share in grants for urban local bodies shall be 5.73 percent. In effect, the rural local bodies in Kerala shall get only Rs 3308 crores whereas the urban local bodies shall get Rs 16,683 crores during 2026-2031. Ninety percent weightage is given to population in the devolution Finance Commission grants to local bodies. The remaining 10 per cent is for area in the case of rural local bodies and own resource mobilisation in the acse of urban local bodies. No weightage is given to the decentralisation index. Thus, the significant devolution of powers and functions to local bodies in Kerala and efficiency of local governance are not considered in the Finance Commission grants to local bodies. Keral losses significantly on account of this. The projections made by the Technical Group on Population Projections, MoHFW (2020) has been taken by the sixteenth Finance Commission for determining inter se shares in rural and urban local body grants. As per this projection, the rural population in Kerala is 6351000 and the urban population is 29912000. These projections have been taken mechanically for ascertaining the inter se shares in local body grants without considering the fact that ‘urban population’ by definition is not all residents of Urban local bodies. Urban population is calculated based on Census figures which categorises census towns as urban areas. Many of the census towns in Kerala are grama panchayats. As a result of this misclassification, the rural local bodies in Kerala sustained a heavy loss. Previous Finance Commission provided Rs 3242 crores for rural local bodies and Rs. 3242 crores for urban local bodies. The scenario, therefore, has reversed.
The allocation of disaster management funds for Kerala during the award period shall be Rs. 2580 crores of which Rs. 2,064 is the share in State Disaster Response Fund (SDRF) and Rs. 516 crores is the share for Disaster Mitigation Fund (SDMF). Disaster grants for all states during the award period shall be Rs 2,04,401 crores. The share of Kerala is has declined to 1.2 percent from 1.4 per cent during the previous Finance Commission period.
Though the sixteenth Finance Commission retained the vertical tax share of the states, its decision to discontinue specific purpose grants and revenue deficit grants is a severe blow to the states. In effect, the quantum of total Finance Commission transfers to states seems to be declining. Kerala appears to be a major victim.
Centre for Socio-economic & Environmental Studies
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