16th Finance Commission: Are States Losing Fiscal Space?

FC-16 keeps States’ tax share at 41% for 2026-31, but States say rising cess and surcharges are shrinking real, untied funds.

The 16th Finance Commission (FC-16) report, tabled in Parliament on February 1, 2026, has triggered fresh criticism from several States over fiscal federalism. FC-16 recommends retaining States’ share in the divisible pool at 41% for 2026-27 to 2030-31, and the Centre accepted it the same day. 

States, however, argue the visible 41% does not reflect what they actually receive because cess and surcharges are outside the divisible pool. The debate is now about shrinking untied money, not just the devolution headline.

Why States Say The Real Share Is Falling?

The Centre has retained the 41% share despite a broad push by States to raise it to 50%. Reuters reported on February 1, 2026 that 22 of 28 States backed the 50% demand, citing higher spending pressure and limited room to raise revenues under GST. 

The same report noted that States’ “real share” in total tax revenue has dipped as the Centre increasingly uses cess and surcharges, which are not shareable.

LoansJagat reports, the Union Budget for FY 2026-27 provided ₹1.4 lakh crore as Finance Commission grants, as per official communication and budget-linked releases.

Before going deeper, here is the key decision stack from official and policy summaries.
 

This is where the disagreement begins: States focus on what sits outside the divisible pool.

How The Story Reached Here: TOR, Consultations, And A Hard No To Extra Grants

The groundwork was set when the Union government notified FC-16’s Terms of Reference on November 29, 2023 for a 5-year award period commencing April 1, 2026.

By late 2025, States were already pressing for a higher share. Reuters reported that FC-16’s panel, chaired by Arvind Panagariya, submitted its report in November 2025, after consultations.

Two policy choices sharpened the reactions. 

• First, FC-16 did not propose revenue deficit grants or state-specific grants, according to Reuters’ report on February 1, 2026. 
• Second, the commission continued a fiscal discipline push, including a 3% deficit cap relative to GSDP, as highlighted in coverage by Reuters and also explained in news reporting.

A quick look at “what States demanded versus what landed” explains why the arguments have not cooled.
 

The debate shifted from formulas to politics and public statements.

What Stakeholders Are Saying: Claims Of Shrinking Untied Funds? 

Karnataka CM Siddaramaiah claimed the Centre collected ₹6 lakh crore in cess and surcharges and shared “not a paisa” with States, as reported on February 3, 2026. Kerala CM Pinarayi Vijayan alleged grants fell from ₹2.2 lakh crore (2021) to ₹1.4 lakh crore, as reported on February 1, 2026.

Conclusion

FC-16 retains 41%, but the fight is now about “effective devolution” as cess and surcharges grow. States are likely to keep pressing for predictable, untied transfers.