The 16th Finance Commission has revised the tax devolution formula to include open forests, assigning different weights to forest densities.
This change aims to incentivise states to expand forest cover, with rewards for increasing forest areas.
The adjustments also address cost disabilities in hilly regions, promoting ecological management and disaster risk mitigation.
The 16th Finance Commission has tweaked the horizontal tax devolution formula under the forest criterion, which now includes open forests and assigns different weights based on forest density.
The Commission’s report was submitted to Parliament on February 1, 2026. It highlights the allocation of weightage to a state’s share of the total forest area as well as the growth in forest area between 2015 and 2023.
Under the 15th Finance Commission, only dense and moderately dense forests were used as parameters to define the overall forest area.
In the revised forest area calculation, the Union government has now included open forests and assigned different weights to open, moderately dense and very dense forests.
‘Very Dense Forests’ (VDF) are identified as areas with a canopy cover of 70 per cent and above, while ‘Moderately Dense Forests’ (MDF) are classified as having a canopy density of 40-70 per cent. ‘Open forests’ (OF) are defined as having a canopy density of 10-40 per cent.
“We have also introduced a small reward for an increase in the weighted forest area over a base period. In implementing the area criterion, we have reduced the minimum area assigned to every State from 2 per cent of the total area to 1.5 per cent,” the report said.
The 16th Finance Commission has also replaced the inverse Total Fertility Rate (TFR) used for the demographic performance variable with the inverse population growth rate between 1971 and 2011, using the 2011 population as the reference for horizontal devolution.
The overall weightage for the forest variable remains at 10 per cent. These changes have been incorporated following recommendations from multiple states.
The central government has defined a weighted forest area by assigning a weight of 0.30 to OF, 0.65 to MDF and 1.0 to VDF.
“These weights are the ratio of the mid-point of the range for that category of forest to the mid-point of the range for VDF. We have combined the share of weighted forest area of the State in the weighted forest area of all States and the share of increase in weighted forest area of the State in the increase in weighted forest area of all States in the ratio of 80:20 to arrive at the forest variable,” the report stated.
Another change introduced by the 16th Finance Commission is the explicit inclusion of forest fires as one of the 10 hazards used to determine the updated Disaster Risk Index. This index is used to allocate 30 per cent of the funds for the State Disaster Response Fund and the State Disaster Mitigation Fund.
Other disasters include floods, droughts, cyclones, landslides, earthquakes, hailstorms, cold waves, cloudbursts, heatwaves and lightning.
The report clarified that the forest criterion continues to serve as a partial proxy for the cost disability faced by states with difficult hilly terrain, where the cost of providing infrastructure and services is significantly higher.
“In India’s special circumstances, the forest-area criterion also serves as a partial proxy for cost disability characterising the northeastern and hilly states. The hilly terrains lead to significantly higher costs of transporting goods and people, and of building physical infrastructure than in the plains. The NEH States also suffer from relatively poor connectivity to the rest of the country,” it observed, adding that because the ten NEH States account for 33.4 per cent of India’s dense forest area in 2021 but only 5.3 per cent of the population, on a per capita basis, the forest-area criterion awards them significantly larger revenues than other states.
These adjustments aim to provide stronger incentives for states not only to conserve existing dense forests but also to expand forest cover and manage ecological risks more effectively.