The correct answer is option 2: Finance Commission. Centre-State financial distribution in India is done based on the recommendations made by the Finance Commission. The Finance Commission is a constitutional body that is appointed every five years to make recommendations on the distribution of financial resources between the central government and the state governments.

The Finance Commission takes into account various factors such as the state`s population, its tax efforts, and its socio-economic indicators while formulating its recommendations. These recommendations determine the share of tax revenues that will be allocated to the states from the divisible pool of central taxes.

It is important to note that the other options mentioned in the question are also significant in the context of governance and financial planning in India. The Inter-State Council is a forum for coordination between the center and the states, but it does not have the authority to make financial distribution decisions. The Planning Commission, which was replaced by the NITI Aayog, was responsible for formulating Five-Year Plans and guiding the country`s development, but it did not have the mandate to determine financial distribution. The Parliament, on the other hand, plays a crucial role in approving and implementing the recommendations of the Finance Commission.