The 1995 constitution is the base for fiscal decentralization in the country, which provided forrnthe division of power on expenditure and revenue-raising responsibilities of the centralrngovernment and the regional state. Fiscal decentralization is one component of decentralizationrnthat gives authority to local governments to collect revenue through taxes and responsibility overrnspending decisions. As proclamation No. 65/2003 of the urban local government proclamation ofrnOromia regional state, municipalities of the region have powers and responsibilities overrnmunicipal revenue and expenditure. Even though fiscal decentralization has given revenuernraising and spending decision powers to lower levels of government, the implementation processrnhas often been a daunting task for many local authorities in the region. Although the regionrndecentralized municipal revenue to its cities/towns on revenue raising and expenditurernmanagement are not efficiently and effectively exercised. Insufficient revenue collection andrnweak expenditure management leads to financial incapability such that public infrastructure andrnservices could not be financed amply. Sebeta municipality faces the problem of financialrncapacity to deliver infrastructure and services to its citizens. While a number of studies haverndocumented the financial incapacities of Ethiopian ULGs, they have been focused on staternrevenue which ULGs lack fiscal autonomy both on its revenue raising and expenditure but theyrndid not gave much emphasis on municipal revenue. Municipals in the region have full autonomyrnover municipal revenue, even though there is little interference on the tariff setting, because thernRegional Revenue Authority set the upper and the lower limit. Therefore, the main focus of thisrnpaper is to assess Fiscal capacity of ULG on municipal revenue: the efficiency and effectivenessrnof revenue collection and expenditure management of Sebeta Municipality. To obtain edifyingrndata the paper used a positivist survey study. Municipality financial documentation andrnquestionnaires were the main sources of secondary and primary data respectively. Descriptivernstatistical methods were applied in the analysis of data to arrive at measures of efficiency andrneffectiveness in revenue collection and expenditure management of the municipality. The studyrnrevealed that the municipality is not efficient and effective in its revenue collection andrnexpenditure management. The main explanation for such inefficiency comprise; weakrnassessment of taxable sources, poor organizational structure, inadequate accounting system,rnabsence of clear operational guidelines, poor planning and data base management, and lack ofrnskilled manpower. To resolve such challenges, the paper recommend the following actionablernmeasures; Establishing Tax payers data base systems, improving planning and implementingrncapacity, Expanding and exhaustively raising the revenue base of local revenue sources,rnEstablishing appropriate guidelines and methods of revenue collection, strengthening valuation,rnenforcement and tariff setting effort, installing accounting system that produces timely andrnreliable information, encouraging community participation in planning and resource allocationrnand revising municipal organizational Structure.