Taxation Reforms

TAXATION REFORMS

New Income Tax Slab under the New Tax Regime

(Applicable for FY 2025–26)

Income tax is a direct tax imposed on the income earned by individuals and entities during a financial year. Under the Union Budget framework applicable for FY 2025–26, individuals with annual income up to ₹7 lakh are not required to pay any income tax due to the rebate available under Section 87A. This exemption threshold remains higher than the earlier limit of ₹5 lakh.

The new tax regime continues as the default option for individuals and Hindu Undivided Families (HUFs), though taxpayers may opt for the old regime if they wish

Major features of the New Income Tax Regime (FY 2025–26):

• Basic Exemption Limit: Income up to ₹3 lakh is exempt from tax.

• Tax Rebate: Full tax rebate available for taxable income up to ₹7 lakh under Section 87A.

• Revised Slab Structure: Lower and more evenly distributed tax rates across income slabs, with the highest rate of 30% applicable beyond ₹15 lakh.

• Standard Deduction: Salaried taxpayers and pensioners can claim a standard deduction of ₹50,000.

• Family Pension Deduction: Deduction allowed up to

₹15,000 on family pension income.

• Surcharge Rationalisation: Maximum surcharge capped at 25% for high-income earners.

• Default Regime: The new tax regime is applied automatically unless the taxpayer chooses otherwise.

Compared to the old regime, the new regime offers lower tax rates and simpler compliance, but most exemptions and deductions are not available.

Measures for Simplification of Direct Taxes:

• Lower Corporate Tax Rates: 22% for existing companies and 15% for new manufacturing units to promote investment.

• Reduced MAT Rate: Minimum Alternate Tax lowered to 15%.

• Abolition of Dividend Distribution Tax: Dividend income taxed only in the hands of shareholders.

• Faceless E-Assessment and Appeals: Minimises human interface and enhances transparency.

• Document Identification Number (DIN): Ensures traceable and transparent communication.

• Pre-filled Income Tax Returns: Facilitates easier and faster return filing.

Vivad se Vishwas Scheme – Aims to settle long standing and pending tax disputes under the Direct Tax Vivad se Vishwas Act, 2020 (“DTVsV Act”)

Raising of monetary limit for filing of appeal: Increased Appeal Limits: Higher monetary thresholds for filing appeals at various levels.

Restrictions on Repetitive Appeals: In the event that an assessee’s legal question is the same as one that is currently under appeal before the jurisdictional High Court or the Supreme Court in any case, the assessee’s right to file a further appeal with the Appellate Tribunal or the jurisdictional High Court will be postponed until the relevant Court has resolved the legal question, subject to certain limitations.

GST Reforms 2025

Now there are two-slab structure (5% & 18%) containing the four older slabs of 5%, 12%, 18% and 28%.

Various goods which are injurious to health, are provided in the special slab of 40%. This is done to discourage the people for their consumption and utilisation. These are Tobacco, pan masala, aerated drinks, and luxury goods

Income-tax Act 2025

Effective from April 1, 2026

Operational authority - The Central Board of Direct Taxes (CBDT)

Replace – Older Income-tax Act, 1961

Income-tax Act, 1961 was older and did not meet the requirements of the contemporary time as it faced more than 4000 amendments which requires lot of time and money every time. So, to simplify this procedure and to meet the demand of time and the requirements of future such as cryptocurrencies the new income tax was enacted in 2025.

Key Features of Income Tax Act, 2025

Now the word ‘tax year’ includes in place of ‘Assessment Year’ and ‘Previous Year.

Incorporate the concept of Virtual Digital Assets to meet digital technology like cryptocurrencies and Virtual Digital Space to maintain the accountability for the better management of taxation.

Laffer Curve

The Laffer Curve is a graph depicting the relationship between tax rates and government revenue. It suggests an “ideal” tax rate that maximizes government income.

Key Points

Created by economist Arthur Laffer, it proposes that very high or very low tax rates lead to low revenue.

At 0% tax, there’s no income. At 100% tax, people have no incentive to work.

The curve rises with increasing tax rates until reaching a peak (optimal tax rate) and then falls.

Significance

Influenced supply-side economics and tax cuts under President Reagan in the US.

Lower taxes can stimulate the economy by increasing consumer spending.

India’s income tax rate reductions aim to achieve similar results to boost spending and aggregate demand in the economy.

lowering tax rates would lessen the incentive to invest in tax havens and promote saving and capital formation.

Limitations

• Effectiveness depends on worker responsiveness to tax incentives.

• Lower rates might not encourage work for everyone (fixed contracts, high earners).

• Reduced tax revenue could impact government programs and lead to borrowings for funding them.

• Reduced tax rates have the potential to increase income disparity.

Tax Buoyancy & Elasticity

Tax buoyancy measures how responsive government tax revenue is to changes in GDP. A buoyant tax sees revenue rise even without increasing tax rates.

Factors Affecting Buoyancy

Tax base size: A larger base (e.g., more taxpayers) generates more revenue with GDP growth.

Tax administration: Efficient collection processes improve buoyancy.

Tax structure: Simple and logical tax rates are easier to administer and collect.

Tax elasticity focuses on how tax revenue reacts solely to changes in tax rates. For example, if the corporate tax rate drops from 30% to 25%, this is a test of tax elasticity.

Key Difference

Tax elasticity considers the automatic response of revenues to changes in income when the tax structure remains unchanged.

Tax buoyancy, on the other hand, takes into account both income and discretionary changes in revenue earnings. It considers both automatic (GDP changes) and discretionary (tax rate changes) factors impacting revenue.

Windfall Tax

A windfall tax is a temporary, one-off tax levied by the government on specific industries experiencing exceptionally high profits due to unforeseen external factors, not necessarily due to their own business strategies or actions.

The oil industry is a prime candidate for windfall taxes. Global events like geopolitical tensions, supply chain disruptions, or natural disasters can cause a sudden surge in oil prices. These price hikes lead to significant profit increases for oil companies, even with constant production levels.

The rationale for imposing a windfall tax is as follows:

Redistribution of unexpected profits, when high prices benefit producers at the expense of consumers

Funding of social welfare systems

Sin Tax

Goods that are viewed as detrimental to society are known as sin goods. Sin goods include things like candy, drugs, alcohol and tobacco, soft drinks, fast food, coffee, sugar, gambling, and so on. The term “Sin Tax” refers to government taxes imposed on sinful goods. Products and services that are deemed to be harmful to society are subject to a sin tax. Thus, products that are subject to a sin tax include cigarettes, alcohol, tobacco, and gambling-related items

Supplementary revenue source for the government

Method for the government to reduce the country’s growing trade imbalance

Tax-GDP Ratio

It is used to assess how effectively the government manages a country’s economic resources. The tax-to-GDP ratio compares the size of a country’s tax revenue to its GDP. The higher the tax-to-GDP ratio, the stronger the country’s financial position. The ratio represents the government’s ability to

cover its expenses It helps a government reduce its reliance on borrowing. According to the World Bank, tax revenues exceeding 15% of a country’s GDP are a critical component of economic growth and poverty reduction.

A decrease in the tax-to-GDP ratio indicates slower economic growth rates. This is because when the economy is growing, tax revenues tend to increase as a result of higher incomes and consumption. Therefore, a decrease in tax to GDP ratio can be an early warning sign of slowing economic growth rates. However, a lower tax-to-GDP ratio does not necessarily imply a less equitable distribution of national income. This is because the tax system can be designed to be more or less progressive, regardless of the amount of tax revenue collected. For example, a country with a lower tax- to-GDP ratio may have a more progressive tax system that more effectively redistributes income than one with a higher tax-to-GDP ratio.

Non-Tax Revenue

Non-Tax Revenue refers to the government’s recurring income from sources other than taxes.

The most significant receipts under this category are interest receipts (received on loans made by the government to states, railways, and others) as well as dividends and profits received from public sector companies.

Non-Tax Revenue refers to the government’s recurring income from sources other than taxes. They are revenue receipts that do not come from taxing the public.

Some of the major sources of non-tax revenue are listed

below.

The government receives interest from loans made to state governments, UTs, private enterprises, and the general public, which is an important source of non-tax revenue.

• Power Supply Fees: This includes fees collected by any nation’s central power authority. In India, this includes fees collected by the Central Electricity Authority.

• Fees are charges imposed by the government to cover the cost of recurring services. It is a compulsory contribution, similar to a tax.

• License Fee: A type of tax levied by the government and its affiliated entities for engaging in an activity, such as opening a restaurant or operating a heavy vehicle.

• Fines and Penalties: Fines are most commonly used in criminal law, where a court will impose a fine on a person who has been convicted of a crime. Penalty is used in both civil and criminal law. It covers both monetary and physical punishment.

• Escheats are the transfers of estate assets or property to the government that occur when an individual dies without leaving a legally binding bill or legal heirs.

• The government receives several grants from international organisations and foreign governments. Such grants

are not a consistent source of revenue and are typically received during a national crisis such as war, flood, etc.

Forfeiture is the loss of property without compensation as a result of failing to meet contractual obligations or as a penalty for illegal conduct. According to the terms of a contract, forfeiture refers to the defaulting party’s obligation to give up ownership of an asset or cash flows from an asset in exchange for the other party’s resulting losses.

Interests: It includes the interest on loans and insurance provided to the government for both non-plan and planned schemes, as well as interest on loans advanced to Public Sector Enterprises or other statutory bodies.

Fees for Communication Services: This primarily includes license fees from telecom operators for spectrum usage charges licensed Telecom.

Capital Budget

The Union Budget comprises both Revenue and Capital Budgets. The Capital Budget focuses on long-term investments and is financed by Capital Receipts.

Capital Receipts

Inflows of cash used for government investments.

Include debt (loans) from public, foreign sources, and RBI.

Also include non-debt receipts like recoveries of loans given by the central government and disinvestment proceeds (sale of PSU assets).

Recorded on the receipts side of the government’s balance sheet.

Capital receipts themselves are not taxable, but the interest earned on some instruments might be.

Debt vs. Non-Debt Capital Receipts

Debt creates a liability (obligation to repay). E.g. Market borrowings, treasury bills.

Non-debt receipts do not create future repayment burdens.

E.g. Loan recoveries, PSU disinvestment proceeds.

Disinvestment in India

Disinvestment refers to the sale or liquidation of assets by the government, typically central and state public sector enterprises, projects, or other fixed assets.

The Department of Investment and Public Asset Management (DIPAM) handles disinvestment.

Annual disinvestment targets are set in the Union Budget. The government makes the final decision on whether to increase the divestment target or not.

Main objectives of Disinvestment in India:

Reducing the fiscal burden on the exchequer.

Encourages private ownership.

Funding growth and development initiatives.

Maintaining and promoting market competition.

Potential for long-term growth in the country and the ability for the government and even businesses to reduce debt.

Disinvestment allows for a greater share of PSU ownership in the open market, which promotes the development of India’s capital markets.

Are disinvestment and privatisation related?

Disinvestment can be partial, with the government retaining 51% control of the company. However, when the government sells the majority stake or entire enterprise to a private sector owner it is called privatisation.

Methods of Disinvestment of CPSEs

• An initial public offering (IPO) is the first time an unlisted CPSE or the government offers shares to the public for subscription from its shareholding or a combination of both.

• A Further Public Offering (FPO) is an offer of shares to the public for subscription by a listed CPSE or the government from its shareholding, or a combination of the two.

• Offer for sale (OFS) of shares by Promoters via the Stock Exchange mechanism - method that allows for the auction of shares on the Stock Exchange’s platform; extensively used by the government since 2012.

• Strategic sale- the sale of a substantial portion of the government’s shareholding in a central public sector enterprise (CPSE) of up to 50%, or a higher percentage as determined by the competent authority, along with the transfer of management control.

Institutional Placement Program (IPP)- This offering is only open to institutions.

CPSE Exchange Traded Fund (ETF)- Disinvestment via ETF allows the government to sell its stake in multiple CPSEs across various sectors in a single offering.

Revenue Expenditure

Revenue expenditure is defined as spending incurred for purposes other than the creation of physical or financial assets for the central government.

It refers to expenses incurred for the normal operation of government departments and services, interest payments on government debt, and grants given to state governments and other parties (even if some of the grants are intended to create assets).

Capital Expenditure

The government’s expenditures result in the creation of physical or financial assets, as well as the reduction of financial liabilities.

This includes expenditures for the acquisition of land, buildings, machinery, and equipment, share investments, and loans and advances made by the central government to state and union territory governments, PSUs, and others.

The budget documents also divide capital expenditure into two categories: planned and unplanned/non planned. Plan capital expenditure, like revenue expenditure, refers to the central plan and central assistance for state and union territory plans. Non-plan capital expenditure includes a variety of general, social, and economic services provided by the government.

Non-Plan Expenditure

This primarily represents the government’s revenue expenditure, but it also includes capital expenditure. It covers all expenses not included in the Plan Expenditure.

Non-plan Expenditure refers to spending on programs other than those outlined in a country’s current five-year strategic plan. For example, expenditures on defense services, interest payments, administrative expenses, and so on.

Non-Plan Expenditure accounts for the largest proportion of the government’s total expenditure.

Review of Government’s Budget for Financial Year 2026-27: Receipts of Government in FY 26-27 Budget (In Rs. lakh crore)

Measures of Government Deficit

A budget deficit occurs when the government spends more money than it receives in revenue. There are various measures for capturing the government deficit, each with its own economic implications.

The Finance Minister said that the projected fiscal deficit for the fiscal year 2025-26 stands at 4.4% of the GDP.

The government maintains its dedication to fiscal consolidation, aiming to bring down the fiscal deficit to under 4.3% by the fiscal year 2026-27

Revenue Deficit

The revenue deficit indicates the gap between the government’s current income (revenue receipts) and its current spending (revenue expenditure). It’s calculated as revenue expenditure minus revenue receipts. This deficit arises when the government spends more on day-to-day operations like salaries and subsidies than it collects through taxes and other regular income sources.

Impact of Revenue Deficit: A revenue deficit forces the government to borrow money not just for investments but also to meet its basic needs. This increases the national debt and future interest payments, potentially leading to cuts in government spending in the long run. Since essential expenses like salaries are difficult to reduce, cuts often fall on crucial areas like infrastructure development or social welfare programs, hindering economic growth and impacting public well-being.

The effective revenue deficit takes the standard formula a step further by excluding grants-in-aid for capital assets from revenue receipts. These grants are meant for creating new assets, not covering current expenses.

Fiscal Deficit

The fiscal deficit is the difference between the government’s total expenditures and total receipts, excluding borrowing.

Non-debt creating capital receipts are those that are not borrowings and thus do not generate debt. Examples include loan recovery and proceeds from the sale of public-sector undertakings.

The fiscal deficit will have to be financed by borrowing. Thus, it represents the government’s total borrowing requirements from all sources.

Net borrowing at home includes both direct borrowing from the public through debt instruments (such as various small savings schemes) and indirect borrowing from commercial banks via the Statutory Liquidity Ratio (SLR).

It is evident from the above method of measuring gross fiscal deficit that revenue deficit contributes to fiscal deficit.

A large revenue deficit within the fiscal deficit indicates that a significant portion of government borrowing is used to cover daily expenses rather than investments in future growth.

Primary Deficit

The primary deficit is a further refinement of the fiscal deficit. It’s calculated as fiscal deficit minus interest payments on prior borrowings. This deficit reflects the government’s borrowing needs to meet its current spending excluding the burden of interest payments on past debts. By analyzing the primary deficit, we can understand the government’s new borrowing requirements specifically for new expenditures.

Measures to Reduce Government Deficit

Strengthening Tax Collection

Increased emphasis on tax revenues and appropriate measures to combat tax evasion. A broader tax base could also help to reduce the government deficit.

Strategic Disinvestment

Sell off government-owned assets that are underperforming or not core to public functions. This generates one-time revenue and reduces ongoing maintenance costs.

Subsidy Rationalization

A reduction in government subsidies will also help to reduce the deficit.

Budget Discipline

Try to avoid unplanned expenses. Enhance government spending efficiency through better program planning and administration to reduce unnecessary costs.

Deficit financing

Deficit financing is a strategy employed by governments to bridge the gap between their expenditures and revenue. When spending exceeds income (revenue receipts), a deficit arises. Deficit financing involves measures to generate funds and cover this shortfall.

Methods of Deficit Financing

Borrowing from the Central Bank: The government can borrow from the Reserve Bank of India (RBI) through the issuance of new currency. This increases the money supply in circulation. However, this has been prohibited under the FRBM Act.

Bond Issuance: The government can sell bonds to the public, essentially borrowing money from domestic investors.

Withdrawing Cash Balances: The government might utilize its existing cash reserves held with the RBI to finance deficits temporarily.

Economic Effects of Deficit Financing

Inflation: Increased money supply through deficit financing can lead to inflation, particularly if the additional funds are not used productively. However, if developmental expenditures are made, deficit financing may not be inflationary, despite the fact that it increases the money supply.

Capital Formation and Economic Development: It can be a tool for stimulating economic development by funding crucial infrastructure projects or social programs.

Income Distribution: Deficit financing can potentially widen the income gap if the additional purchasing power it creates benefits only certain segments of society. However, if the funds are directed towards social welfare programs or public goods, it can contribute to a more equitable distribution of income.

Debt

The concepts of deficits and debt are closely related. Deficits can be thought of as a flow that increases the stock of debt. If the government continues to borrow year after year, it accumulates debt and must pay increasing amounts in interest. These interest payments add to the debt.

Intergenerational Equity Issues: By borrowing, the government shifts the burden of reduced consumption to future generations. This is because it borrows by issuing bonds to current residents, but may decide to repay the bonds twenty years later by raising taxes. These may be levied on the young population that has recently entered the labor force, whose disposable income and thus consumption will decrease. As a result, national savings may fall. Debt acts as a ‘burden’ on future generations in the sense that it reduces capital formation and growth.

• Affecting Private Sector Funds: Furthermore, government borrowing from the people reduces the private sector’s ability to raise funds. As a result, some private borrowers will be ‘crowded out’ of the financial markets as the government claims an increasing share of the economy’s total savings.

• Using Debt Wisely: However, it is important to note that the economy’s flow of savings is not fixed unless we assume that income cannot be increased. If government deficits achieve their goal of increasing output, there will be more income and, thus, more savings. In this case, both the government and industry may borrow more.

What is Public Debt?

Public debt is defined as a debt incurred by the government from its citizens or foreign countries. The government can collect debts from a variety of sources, including banks, financial institutions, business entities, and foreign banks. The government incurs public debt for a variety of reasons, including insufficient revenue to cover expenditures on various public-related facilities and projects. The government can borrow money in the short, medium, or long term. Short- term debts are typically in the form of treasury bills or bonds, and the government is required to pay interest at a specified interest rate on a regular basis, as well as a lump sum amount at the end of the specified period.

Internal Debt

Internal Debt: This type of debt is obtained by the nation from its citizens, financial institutions, or other sources. Taking internal debt can be voluntary or forced. Internal debts are controllable and can be estimated easily. The sources of internal debt include domestic financial institutions such as commercial banks, etc. The interest rate for such internal debt is also less as compared to external debt. However, these debts do not increase the country’s total available resources. For example, the Government wants to start a new small infrastructure-related project. For this government takes a loan that is public debt from the country’s National Bank for a certain amount of time.

External Debt

External Debt: External Debt is the term for debt that a nation incurs when it borrows money from other nations. These debts are taken from international banks or financial institutions in other countries. When a huge investment or loan is required that cannot be provided within the country then the government goes for external debt. The interest rate on such debts is quite high, making it a less suitable source of borrowing money than internal debt. Besides, external debt can also pose a threat to the country’s economic and political independence.

What is Private Debt?

Private debt refers to loans or credit extended by private entities like banks and firms, not governments. It finances individuals and businesses through various forms like personal loans, business loans, and corporate bonds.

Creditors often require collateral (an asset used as security) to mitigate risk. Late payments or defaults on private debt can incur high charges and penalties.

Fiscal Responsibility and Budget Management Act, 2003 (FRBMA)

The Fiscal Responsibility and Budget Management (FRBM) Act came into being in 2003 to maintain fiscal discipline and promote transparency in India’s government spending. It aimed to address issues like high fiscal deficits, growing debt burdens, and lack of transparency. The Act mandated limits on fiscal deficit and debt levels to promote responsible fiscal management.

Main Features

Ban Debt Monetisation: The purchase of government bonds by the RBI was stopped from April 1, 2006, no more allowing government to borrow directly from the RBI thereby stopping monetisation of deficit.

Deficit and Debt Reduction & Elimination Targets: They are revised from time to time and the latest include

By March 31st, 2021, the government needs to limit the fiscal deficit to 3% of the GDP.

By the financial year 2024-25, the central government is mandated to cap its debt at 40% of the GDP.

Three Policy Statements: The central government is required to present three statements along with the Budget before both Houses of Parliament

The Medium-term Fiscal Policy Statement: It establishes targets for fiscal indicators over a three-year period and assesses whether revenue expenses can be sustained by revenue receipts, as well as the effective utilization of capital receipts.

The Fiscal Policy Strategy Statement: Outlines the government’s fiscal priorities, evaluates current policies, and provides rationale for any deviations in significant fiscal measures.

The Macroeconomic Framework Statement: Evaluates the economy’s prospects, including GDP growth, central government fiscal balance, and external balance.

• Quarterly Review: A quarterly review of budgetary receipts and expenditure trends will be presented to both Houses of Parliament.

• Disclosure of Contingent Liabilities and Off-Budget Transactions: To enhance transparency in fiscal reporting, ensuring comprehensive disclosure of government financial obligations.

• Escape Clauses: The FRBM Act includes clauses that allow for exceptions and escape routes during extraordinary situations, such as national security and natural disasters.

• Application to State Governments: The act applies to the central government. However, 26 states have already enacted fiscal responsibility legislation, broadening the government’s rule-based fiscal reform programme

NK Singh Review Committee Recommendations, 2016

• Revise Targets: The committee found that the fiscal deficit targets in the FRBM Act were too strict, given the requirement for flexibility in adapting to changing economic circumstances. It proposed following:

• The committee proposed aiming for a fiscal deficit of 3% of the Gross Domestic Product (GDP) until March 31, 2020 and afterwards an annual reduction target of 0.3% of GDP.

• The committee proposed targeting a debt-to-GDP ratio of 60%, with 40% allocated for the central government and 20% for the states.

• The committee suggested lowering the revenue deficit to 0.8% of GDP by March 31, 2023, with a yearly reduction target of 0.5% of GDP.

• Targeting Debt: Until now, the focus of the act has mainly been on targeting fiscal deficit. However, the Committee proposed shifting the primary target for fiscal policy to debt. They recommended setting a target debt-to-GDP ratio of 60%, with 40% allocated to the central government and 20% for all states combined.

• Escape Clause: It grants the central government leeway to adjust fiscal deficit targets under exceptional circumstances, upon advice from the Fiscal Council. However, the deviation must not exceed more that 0.5% of the GDP in that year. These exceptions include

• National security concerns, war, natural disasters, or agricultural crises affecting output and incomes,

• Structural reforms in the economy with fiscal implications, or

• A decline in real output growth of at least 3% compared to the previous four quarters’ average.

Amendments to the FRBM Act

In the year 2012 and 2015, notable changes were introduced to the FRBM Act, resulting in an extension of target realization years.

Introduction of Effective Revenue Deficit (E.R.D): Effective Revenue Deficit (E.R.D) is the difference between revenue expenditure and revenue receipts, excluding grants for creation of capital assets.

Inclusion of Medium-Term Expenditure Framework Statement: The MTEF aims to improve integration between the budget and the FRBM Statements. It is presented separately in the session immediately following the presentation of the Budget, which is typically held during the Monsoon Session.

Finance Commission of India

Article 280 provides for the constitution of Finance Commission. It is constituted every fifth year or as deemed necessary by the President. Comprising a Chairman and four members whose qualifications are outlined by the Parliament. Its functions include advising the President on financial matters which are given to it in its terms of reference. The recommendations made by the Finance Commission are considered as advice and are not binding on the Central Government. The first Finance Commission was established on November 22, 1951, with K.C. Niyogi as chairman. The Government of India has constituted the Sixteenth Finance Commission with Shri Arvind Panagariya as the Chairman in December 2023.

Functions of Finance Commission

It is tasked with advising the President of India on several matters like

Division of taxes between Centre and States and manner of allocation of share of States

Principles governing grants-in-aid from the Centre to the States from the Consolidated funds of India

Measure to boost Consolidated Funds of a State, supporting local panchayats and municipalities based on the recommendations made by State Finance Commission (added by the 73rd and 74th Constitutional Amendment: this amendment also granted constitutional status and protection to the panchayats and the municipalities)

Deciding whether to keep or change the terms of an agreement between the government of India and a specific state in Part B of First Schedule under Article 278 or Article 306.

Any other financial matters which are referred to by the President.

State Finance Commissions: Are Established by state governors to review Panchayat finances (Article 243(1).

Recommendation of 16th finance commission:

Chaired by Arvind Panagariya, has submitted its report for the award period 2026-31.

• Tax Devolution:

• Vertical Devolution: This is the percentage of the Central Government's Divisible Pool of taxes that is given to the States.

• Under 16th FC, states’ share in the divisible pool of central taxes was retained at 41%, unchanged from the 15th Finance Commission.

• Horizontal Devolution: This is the formula used to decide exactly how many rupees each state gets from that 41% pot.

• The 16th FC has introduced a major shift toward rewarding economic performance.

Grants-in-aid under 16th FC

Modernisation Fund for Defence and Internal Security (MFDIS): Was recommended as a non-lapsable dedicated fund necessary to defend India in the times of rising cybercrime.

• Performance Incentives: Grants to be allocated to States based on achieving certain benchmarks by States in various welfare programmes like

Developing online and professional courses in regional language.

Undertaking agricultural reforms.

Aligning land laws with the NITI Aayog model law.

Growth in agricultural exports.

Maintenance of roads under Pradhan Mantri Gramin Sadak Yojana.