President Thein Sein, who earlier rejected UN calls for an independent inquiry, announced to set up the commission, BBC reported.
The UN has welcomed the move by the Burmese authorities.
The clashes between Rakhine Buddhists and Rohingya Muslims also displaced thousands of people.
The commission would include 27-member from different political parties and also religious organisations. It would likely to submit its findings next month.
The UNHCR has said that about 80,000 people have been displaced in and around the Sittwe and Maungdaw by the violence.
The massacre of Rohingya Muslims triggered a worldwide protest particularly in Muslim world. A special meeting of OIC, an official body of Muslim states, have also criticized the killings besides calling in to take action against the persons involved in it.