Nepalese Community Forestry has unclear and inconsistent legal provisions related to fiscal policy instruments. Based on the review of forest policy documents, and semistructured interviews and group discussions with individuals from government units, community forest user groups and traders from Parbat, Baglung and Dolakha districts of Nepal, this paper demonstrates that there are a number of issues and challenges related to fiscal policy instruments that have affected the promotion of sustainable and market-oriented management of forest resources, co-ordination between local and central government authorities, benefit sharing of forest resources, and the overall financial situation of community forest user groups. As a result, local communities do not fully benefit from their forest resources. We argue that a good co-ordination among government units, CFUGs and non-governmental organizations, and their active participation in policy making process can help to make the fiscal policy consistent and unambiguous to mitigate the existing issues and challenges.

Key words: Economic policy instrument; revenue sharing; multiple taxation; forest certification; income generation activities