The government is likely to set up the 16th finance commission this year to suggest, among other things, the ratio in which tax is to be divided between the Centre and states for five years, beginning April 1, 2026, an official said.

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The members of the commission and its Terms of Reference (ToR) are being worked out, the official added.

Finance Commission is a constitutional body that gives suggestions on Centre-state financial relations.

The previous Finance Commission submitted its report on November 9, 2020, for the 5 fiscals -- 2021-22 to 2025-26 -- to the President.

The 15th Commission under NK Singh had kept the tax devolution ratio at 42 per cent -- at the same level suggested by the 14th Commission.

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The central government accepted the report of the commission, and accordingly, the states are being given 42 per cent of the divisible tax pool of the Centre during the period 2021-22 to 2025-26.

The 15th finance commission's recommendations include the fiscal deficit, debt path for the Union and states, and additional borrowing room to states based on performance in power sector reforms.

As per the glide path for fiscal consolidation, the government aims to bring down the fiscal deficit to 4.5 per cent of gross domestic product (GDP) by the 2025-26 fiscal.

For the current fiscal, the deficit is projected at 5.9 per cent of GDP, lower than 6.4 per cent in the last fiscal ended March 31, 2023.