- Finance Commission (FC) is appointed by the President every five years.
- Role:
- Recommends distribution of net proceeds of taxes between Centre and states (vertical devolution).
- Recommends allocation of such proceeds among states (horizontal devolution).
- Determines principles for grants-in-aid to states from CFI.
- Suggests measures to augment state consolidated fund for Panchayats/Municipalities.
- Addresses vertical imbalance (taxation vs. spending powers) and horizontal imbalance (inequality between states).
- Aims to narrow the development gap between states.