Consider the following statements: 1. Union Finance Commission tries to rectify the vertical and horizontal imbalances in resources and expenditure responsibilities between Union and States. 2. State Finance Commissions that supplement the resources of panchayats and municipalities are constituted along with Union Finance Commission. Which of the above statements is/are incorrect?

Statement 1 is correct: The Union Finance Commission, constituted under Article 280 of the Constitution, is mandated to recommend the distribution of the net proceeds of taxes between the Union and the States (vertical devolution) and the allocation among the States of their respective shares (horizontal devolution). This aims to address both vertical and horizontal fiscal imbalances. Statement 2 is incorrect: State Finance Commissions (SFCs) are constituted by the Governor of a state every fifth year under Article 243I (for Panchayats) and Article 243Y (for Municipalities) to review the financial position of local self-government bodies and make recommendations on matters like distribution of taxes, duties, tolls, fees, and grants-in-aid from the state government to these bodies. While SFCs and the Union Finance Commission are both constitutional bodies constituted every five years, their constitution processes are independent, and they operate at different tiers of government finance (Union-State vs. State-Local Bodies). They are not constituted along with each other simultaneously in a single process.