Centre approves 16th Finance Commission’s terms of reference, extends PMGKAY to 2028

New Delhi: The union cabinet has approved the terms of reference for the 16th Finance Commission, but is yet to decide on the members of the panel, information and broadcasting minister Anurag Thakur said on Wednesday.

The cabinet, which met on Tuesday night, also extended the tenure of the Pradhan Mantri Garib Kalyan Ann Yojana (PMGKAY) for another five years, starting from 1 January 2024, while allocating another ₹11.8 trillion to the scheme that provides free ration to the poor.

The decision to extend the tenure of the scheme, initiated during the covid-19 pandemic, comes a few months before the general elections.

Under PMGKAY, AAY (Antyodaya Anna Yojana), the poor are entitled to 35 kg of foodgrains per family every month, while priority households get five kg per person per month.

At present, up to 75% of rural and 50% of urban population are covered under AAY and priority households.

Meanwhile, the 16th Finance Commission will submit its report by October 2025. These recommendations will be valid for five years from April 2026 till 31 March 2031.

Its terms of reference are crucial to the sharing of tax revenue between the Centre and the states as well as among states and, thus, for overall income redistribution.

The 16th Finance Commission will make recommendations on the distribution of the net proceeds of taxes between the Union and the states, the cabinet said in a statement.

It will also recommend the principles which should govern the grants-in-aid of the revenues of states out of the Consolidated Fund of India and the sums to be paid to states by way of grants-in-aid of their revenues under article 275 of the Constitution.

The 16th Finance Commission will also recommend measures to augment the Consolidated Fund of a state to supplement the resources of panchayats and municipalities, it added.

For states, tax devolution is a significant funding source for initiatives and programmes in development, welfare and priority sectors. Currently, states get 14 instalments from the Centre during a fiscal year, totalling 41% of the taxes collected by the Centre.

The share of net proceeds recommended for devolution to states has increased from 29.5% during the 11th Finance Commission to 42% in the 14th Finance Commission. However, after the carving out of Jammu and Kashmir into two union territories, the final report of the 15th Finance Commission recommended a 41% rate.

Article 279 of the Constitution defines net proceeds as gross tax revenue of the Centre minus surcharges and cesses and cost of collection.

The 16th Finance Commission will be the first to be constituted in the post-pandemic era, marked by a high-interest cost regime and external challenges due to a slowdown in global growth.

The constitution of the new commission also comes at a time when the central government has raised concerns about the fiscal management of some states. Several experts have flagged the need for expenditure reforms at the state-level amid a debate around welfare spending, freebies and fiscal discipline. The finance commission’s terms of reference are often the subject of Centre-state friction. Some states usually are unhappy about the extent of funds they stand to get, while the Centre remains under pressure to be equitable while rewarding performance.

Meanwhile, the Cabinet also approved a scheme to provide drones to 15,000 womens’ self-help groups for hiring them out to farmers for agricultural use such as spraying pesticides.