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Poverty alleviation has become one of the main development agendas of the twenty first century worldwide. But, the identification targeting of poor has been facing fundamental problems due to the lack of required information. Using the micro-level estimation technique we estimate household expenditure for the census households using 1995/96 and 2003/04 household surveys, and estimate different measures of poverty and inequality using the estimated expenditure for those two years at the country level as well as at the regional, districts and village levels, and for the different caste/ethnic households. The public good aspects of this research is that these measures can be used as a guide for formulating decentralization and fiscal policies for decentralized communities across Nepal. Despite the indication that the aggregate level of poverty went down by 10 percentage points during the past eight years (1995/96 — 2003/04), our findings indicate that the reduction is not uniform in the first place, and the level of poverty actually went up in the significant part of the country. The increased poverty accompanied by the accelerating inequality throughout the country has compounded the divide between the haves and the have-nots and provided a suitable atmosphere for the conflict. As the foremost contributors of rising inequality are enterprise income and remittance, and agriculture income, high school and college level education help to reduce it, there are some clear policy implications of our findings that focusing on agricultural sector, high school and college education along with fiscal policy-mix (tax-transfer) could address the rising inequality and poverty.