Contents
What is the Finance Commission?
The Finance Commission is a constitutional body set up by the President under Article 280 of the Constitution, normally every five years. Its main task is to recommend how the net proceeds of taxes collected by the Union should be shared between the Union and the states, and how the states’ share should be divided among them.
Two decisions
The Commission makes two kinds of decision:
- Vertical sharing. What share of the divisible pool of central taxes goes to the states as a whole. The Fourteenth Finance Commission raised this share to 42 per cent; the Fifteenth set it at 41 per cent after the reorganisation of Jammu and Kashmir.
- Horizontal sharing. How the states’ share is divided among individual states. This is done using a formula with several criteria, each given a weight.
The formula
The Fifteenth Finance Commission used these criteria:
| Criterion | What it measures | Weight |
|---|---|---|
| Income distance | How far a state’s per capita income is below that of the richest states | 45% |
| Population | Population in the 2011 Census | 15% |
| Area | Geographical area | 15% |
| Forest and ecology | Share of dense forest | 10% |
| Demographic performance | Success in reducing fertility | 12.5% |
| Tax and fiscal effort | Efficiency in collecting own taxes | 2.5% |
Why it matters to Kerala
Criteria such as income distance favour poorer states, which is the purpose of redistribution. States like Kerala, with higher incomes and early success in reducing population growth, have argued that some criteria penalise them. The demographic performance criterion was introduced partly in response to such concerns.
Grants
Besides tax sharing, the Commission recommends grants, for example to local governments, for disaster management, and to states whose revenue falls short of their needs.
What next
The Sixteenth Finance Commission’s recommendations cover the five years from 2026 to 2031. CRGD will publish an analysis of what they mean for Kerala.
[Placeholder publication. Verify figures against the latest official documents before publishing.]