Structure of the State: (1) The Federal Democratic Republic of Nepal shall have three main levels of structure: federal, provincial and local.

The State powers of Nepal shall be used by the federal, provincial and the local level in accordance with this constitution.

There shall be the provinces with the districts listed in Schedule-4 that prevail at the commencement of this Constitution in Nepal.

Under the local level, there shall be Village council, Municipal and District Assembly. The number of wards in a Village council and Municipal Council shall be as provided for in a federal law.

Special, protected and autonomous regions may be created for socio-cultural protection and development according to federal law.

The Federation, provinces and local levels shall protect Nepal‟s independence, sovereignty, territorial integrity, autonomy, national interests, overall development, multi-party competitive democratic republic and federal system of governance, human rights and fundamental rights, rule of law, separation of powers and check and balance, equitable society based on plurality and equality, and inclusive representation and identity.

Distribution of State power: (1) The power of the federation shall be relating to the subjects mentioned in Schedule (5), and such authority shall be exercised in accordance with this Constitution and the federal law.

The power of the province shall be relating to the subjects mentioned in Schedule (6), and the exercise of such authority shall be done in accordance with this Constitution and the federal law.

The concurrent/shared power of the federation and the province shall be relating to the subjects mentioned in Schedule (7), and the exercise of such authority shall be done in accordance with this constitution and the laws made by the federal parliament and provincial assembly.

Powers shall be vested in the local level on the matters referred to in Schedule (8) and such powers shall be exercised according to this Constitution and federal law, provincial law and laws formulated by the local level.

Concurrent list of powers of the Federation, province and local level shall be as referred to in Schedule (9) and exercise of such powers shall be according to this constitution, and federal law, provincial law and laws formulated by the local level.

While making law by provincial assembly, village council and municipal council pursuant to clause (5), they shall have to make laws without


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being inconsistent to federal law and if such laws formulated by Provincial legislature, village council and municipal council is inconsistent with the federal law, such law shall, to the extent of its being inconsistent, be void.

While making law by village council and municipal council pursuant to clause (5), they shall have to make laws without being inconsistent to provincial law and if such laws formulated by the village council and municipal council is inconsistent with the provincial law, such law shall, to the extent of its being inconsistent, be void.

Residual powers: Powers relating any subject that are not mentioned in the list of powers of the federation, province or the local level entity, or in the concurrent/shared powers of federation and the province, or not stated in this Constitution, shall rest with the federation as residual powers.

Use of fiscal power: (1) The federal, provincial and the local entities shall enact law, make annual budget, make necessary decisions, formulate policies and planning, and implement them in regard to the subjects related to the fiscal power mentioned in their respective lost of powers.

The federation may make basic laws regarding necessary policies and criteria related to the subjects included in the list of concurrent/shared power and in other areas of fiscal authority, which may also be implemented in provinces.

The federation, province and the local level entity shall make budgets of their respective levels, and the budget shall be presented in accordance with the federal law.

The federation, province and the local level entity shall have to make arrangements for equitable distribution of the benefits from the development of natural resources. A certain portion of such benefit, royalty, services or objects, shall have to be distributed in areas affected by projects and to the local communities as provided for by law.

When the federal, provincial and local level entity utilize natural resources, they shall have to give priority to local communities to make certain percentage of investment if they wish to do that in view of the nature and percentage in the investment.

The government of Nepal shall have the right to seek foreign aid and loan. The economic stability of the country as a whole shall have to be maintained in doing so.

The management of budget deficit of the federation, province and the local level entity and the arrangements regarding fiscal discipline shall be in accordance with federal law.

Distribution of sources of revenue: (1) The federation, province and the local level entity shall impose tax on subjects within their fiscal jurisdiction and collect revenue from such sources.



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Provided that with regard to the source that are not included in the concurrent/shared list or in any list at any level, it shall be as determined by the Government of Nepal.

The Government of Nepal shall make necessary arrangements to equitably distribute the revenue generated by it from its sources, between the federation, province and the local level entities.

The amount of the fiscal transfer the province and the local level entities are to receive shall be as recommended by the National Natural Resources and Fiscal Commission, as provided for in Part 25.

The Government of Nepal shall distribute fiscal equalization grants to province and local level entity on the basis of their need for expenditure, their capacity in generating revenue and the efforts made by them.

The province shall distribute fiscal equalization grants received from the Government of Nepal and the revenue generated from its sources, to the local level entities under it on the basis of need for their expenditures and their capacity to generate revenue, in accordance with provincial law.

The Government of Nepal shall make arrangements regarding conditional grants to be provided through the Federal Consolidated Fund, complementary grants, or the special grants for other purposes.

The distribution of revenue between the federal, provincial and the local level entity shall be transparent.

While enacting the federal Act regarding revenue distribution, the matters that need to be included are: national policy, national needs, the autonomy of provinces and local level entities, the service delivery of the provinces and local level entities and the fiscal rights given to them; their capacity to generate revenue; their contribution to development works; regional imbalance; poverty and inequality; exclusion, emergency works and the support of meet temporary needs.