Forest policies provide signals to decision makers by means of regulatory andfiscal instruments. Spatial decentralization implemented through forestry acts and regulations facilitate national forest handover to users organized into Community Forest Users's Group (CFUGs). These groups are granted rights of access, withdrawal, management, exclusion but not the right to alienate community forest. While roughly fifteen percent of Nepal's national forests are managed by about seven thousand CFUGs, this is not the case in the lowlying Terai region where only about one percent of the total community forest has been handed over. Sustainability of community forestry or any other development cum conservation program requires that beneficial activities could continue even after the termination of external assistance. Community forestry programs in Nepal are being mainly financed from external sources. This cannot lead to sustainable forest management in the long run. Revenue assignment is one of the fiscal policy tools through which financial resources generated from the sale of surplus timber from community forestry can be ploughed back to polycentric organizations engaged in provision and production of services to CFUGs for the promotion of community forestry and other development programs.