The 16th Finance Commission, chaired by Dr Arvind Panagariya, visited various States from 2023 onwards, held discussions, received representations, and submitted its report to the Hon’ble President on November 17, 2025. Under Article 280 of the Constitution, the President constitutes the Finance Commission.
The Commission is mandated to recommend to the President, who is the head of the federal structure, the formulas for distribution of total tax revenues collected by the Union among the States. In addition, it is required to make recommendations regarding grants to States under centrally sponsored schemes; grants to rural and urban local bodies; grants for health and disaster management; and any other matters related to sound financial management as referred to it by the President.
It is expected that this report will be released on the first day of the Budget session. The 16th Finance Commission has assumed far greater significance than previous commissions. This is because the injustice meted out by the 15th Finance Commission and the Union Government to progressive States has severely weakened the economic condition of most States in the country.
The very foundation of fiscal discipline in major States has been eroded. Even when we examine Karnataka’s economic position, it is evident that compared to the 14th Finance Commission, the 15th Finance Commission reduced our tax share by 23% directly. Some economically ill-informed individuals fail to understand this and indulge in baseless arguments. The 14th Finance Commission had allocated 4.71% to Karnataka, whereas the 15th Finance Commission reduced it drastically to 3.64%, amounting to a grave injustice.
To illustrate: Out of every Rs100 meant for distribution to the states, Karnataka earlier received Rs 4.71, but the 15th Finance Commission reduced this to Rs 3.64. As a result, Karnataka directly lost nearly Rs 80,000 crore in tax devolution, which is an enormous injustice to the State. Karnataka, which plays a driving role in India’s economic strength, ranks first in per-capita economic productivity. The Union Government collects approximately Rs 4.5 to Rs 5 lakh crore annually from Karnataka in the form of taxes, cesses and surcharges. Yet, it is unfortunate that Karnataka receives the lowest share of tax devolution and grants from the Centre among all States.
Therefore, only if Karnataka is restored at least the 4.71% share granted by the 14th Finance Commission, can the State breathe a sigh of relief. Anything less would perpetuate injustice; anything more alone would constitute real justice. Even a reduction of 0.01% below this benchmark would continue the unfair treatment of the State.
The 15th Finance Commission had recommended a special grant of Rs 5,495 crore to Karnataka, along with Rs 3,000 crore for the Bengaluru Peripheral Ring Road and Rs 3,000 crore for lake development, totalling Rs 11,495 crore. However, the Union Government failed to release these funds, thereby committing grave injustice. Under centrally sponsored schemes, States are required to bear 40% of the cost from their own revenues.
From 2021 to 2024-25, Karnataka was supposed to contribute Rs 49,271 crore, but due to the Union Government’s failure to provide its rightful share, the State had to bear an additional burden of Rs 23,402 crore. Consequently, Karnataka’s contribution rose to over 50%. Under the Jal Jeevan Mission alone, the Centre has withheld more than Rs 13,000 crore. From the grants recommended by the Commission, allocations to rural and urban local bodies were reduced by Rs 1,802 crore, and allocations to the health sector by Rs 874 crore.
By collecting cesses and surcharges without limits and not sharing them with States, the Union Government is causing severe injustice. In 2023-24, the Centre collected Rs 5.53 lakh crore through cesses and surcharges alone. While these constituted 9.4% of total tax revenue in 2011-12, they rose to nearly 20% in 2023-24. As a result, despite claims of sharing 42% of tax resources, States effectively receive only about 30%. The Union Government continues to collect GST cess from the public, but States do not receive a single paisa from it. GST compensation has been completely stopped since June 2022. When GST was implemented, States were assured an annual 14% growth in revenues. When this growth did not materialise, the Centre was obligated to compensate States. Its failure to do so has resulted in an annual loss of nearly Rs 20,000 crore to Karnataka.
In September last year, the Union Government abruptly reduced GST rates, leading to GST growth falling to 5%. The primary reason for this sudden revision is the decline in people’s purchasing power. Otherwise, there would have been no justification for reducing repo rates twice since February. After amassing enormous tax revenues since 2017 under GST, the Centre would not suddenly revise rates merely to project itself as people-friendly. Yet, consumer price index (CPI) data remains deeply discouraging. Inflation should ideally be between 2% and 4%; anything below 2% is considered dangerous.
From May 2025 onwards, CPI trends in most States, except Karnataka, have been unsatisfactory. Only in December did Tamil Nadu and Andhra Pradesh show marginal improvement. Karnataka’s healthy CPI is solely due to our guarantee schemes. It is our duty to place before the people the demands and representations submitted by the State before the 16th Finance Commission. Our key demands are as follows:
1. The injustice suffered under the 15th Finance Commission arose primarily from the flawed formulas it adopted. The excessive 45% weightage to income distance was the main reason. Karnataka was allocated a lower share simply because per-capita income is higher. Per-capita income is merely one indicator of economic measurement, and cannot be the sole determinant. It averages income across rich and poor alike, masking inequality. Due to the policies adopted by the Union Government since 2014, wealth has become highly concentrated. According to global inequality studies, the poorest 50% earn only 15% of total income, while the richest 10% earn over 58%. Treating everyone uniformly under the income distance formula, and thereby reducing grants is fundamentally unjust. We have demonstrated to the 16th Finance Commission that several districts, including Kalyana Karnataka, have per-capita incomes below the national average. Hence, the weightage for this formula must be reduced from 45% to 25%.
2. Karnataka also suffered because the 15th Finance Commission changed the GSDP base year from 2004-05 to 2011-12. In 2004-05, States were relatively similar in exports and production methods. After the IT revolution, companies gravitated to States with favourable law and order, with Bengaluru being a prime example. While IT exports benefit the Centre immensely, they artificially inflate Karnataka’s GSDP. Due to the base year change, Karnataka’s GSDP growth appeared to rise by 33%, whereas the national average was calculated at 5.6%, resulting in injustice. This methodology must be corrected realistically.
3. Using 2011 population data instead of 1971 also caused severe injustice. States that successfully controlled population growth were effectively penalised rather than rewarded. To rectify this, 1971 population data must be restored, and population weightage must be rationally reassessed.
4. Funds under NDRF and SDRF should be scientifically assessed. Between 2018 and 2024, Karnataka suffered losses of Rs 1.56 lakh crore due to natural disasters. Despite recurrent droughts, floods and excessive rainfall since 2002, the State was assigned only 5 risk points. This must be increased to 15%.
5. To encourage decentralisation, a Panchayat Devolution Index must be adopted. Earlier commissions assigned 90% weightage to population and 10% to area, disadvantaging well-performing States. The formula should instead be 60% population, 20% geographical area, and 20% devolution index.
6. Karnataka has allocated Rs 25,000 crore over five years for Kalyana Karnataka. The Union Government must provide a matching grant and an additional Rs 10,000 crore special package for environmental protection and disaster management in the region.
7. The Malnad, Coastal, and Western Ghats regions are ecologically sensitive zones that safeguard India’s environmental health. Farmers there face severe hardship and must be supported with special grants. Karnataka also has the second-largest dryland area after Rajasthan, and irrigation support must be provided accordingly.
8. For Bengaluru’s infrastructure development, investments of Rs 1.15 lakh crore are required over five years. We have requested the 16th Finance Commission to recommend at least Rs 27,793 crore for this purpose.
9. As demanded by the Hon’ble Prime Minister when he was Chief Minister of Gujarat, the States’ share in divisible taxes must be increased from 41% to 50%, and cesses and surcharges must be capped at 5% of Union revenue, with the remainder shared with States.
Since 2020, Karnataka has suffered immensely due to economic injustice. Taking all these factors into account, we hope the 16th Finance Commission and Union Government will deliver justice to the State. As trustees of public money, it is the Government’s duty to place these facts before the people.