CHAPTER I INTRODUCTION 1.1 Introduction Fiscal federalism is the study of how expenditure side and revenue side are allocated across different layers of the administration. It is concerned with understanding which functions and instruments are best centralized and which are best placed in the sphere of decentralized levels of government. It constitutes a set of guiding relations between the national and sub-national (vertical) levels of the government. The concepts of fiscal federalism are related to vertical and horizontal fiscal relations. In the case of Nepal, provincial governments also would be required to increase economic growth and the per capita incomes of their citizens. In the traditional theory of fiscal federalism (e.g. Oates, 1999), the three main areas are (a) welfare gains from decentralization; (b) assignment of resources and responsibilities between different tiers of government; and (c) fiscal instruments for the resolution of vertical and horizontal i
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