3. CONTENTS
Structure of Ethiopian tax system and
administration
Income Taxes
Consumption Taxes
Stamp Duty
Custom Duties (Import and Export taxes)
Categories of Taxpayers
Tax penalty
Appeal procedure
4. Chapter Objectives
On successful completion of this Chapter, students should;
Understand the structure and administration of Ethiopian tax system
Know the income tax laws and practices
Realize about consumption taxes
Elaborate the stamp duties
Understand foreign trade taxes
5. 4.1. The Ethiopian Tax System
Modern tax system in Ethiopia dates back to 1940s.
According to history, Emperor Haileselassie was the first in
Ethiopia to implement a modern tax system after World War II.
Emperor Haileselassie introduced elements of modern taxation as
well as a variety of taxes under their reign.
all in-kind taxes were removed and monetary taxation was
implemented.
The modern “Ethiopian tax system” is a product of more than
half a century of experimentation in legislation and tax reform.
(Lencho, 2012)
6. Cont..
According to the literature, different tax reforms were implemented in
Ethiopia after the introduction of modern taxation.
Since its humble beginnings in the 1940s, the modern Ethiopian tax system
has developed and evolved by fits and starts as the needs for revenue arise,
as governments change and as the economy and international situations
shift. (Lencho, 2012)
The major tax reforms in Ethiopia occurred in the 1940s, in the aftermath
of the Ethiopian revolution of 1974, after the fall of the Derg in 1991 and
most recently in the 2002 tax reforms.
7. Cont..
Basic Elements of a Tax System
• The five pillars/basic elements of tax system are
– Taxpayer refers to any individual or organization that is
obligated to pay tax
– Tax Base is the value of everything which is subject to taxation
– Tax Rate is the amount of taxes expresses as a percentage of the
tax base
– Tax Period is the period for tax assessment. It can be a year (tax
year), month, etc.
– Tax Administration refers to any government office mainly with
a responsibility of tax collection and other related activities.
8. Cont..
However, noteworthy changes in Ethiopia's tax system have occurred for
the past three decades under the EPRDF regime, signaling the creation of
the country's current tax system profile. (Bulto, 2021)
Since the founding of the EPRDF administration, Ethiopia has federal tax
system.
The fundamental authority to tax is derived from the Constitution of
1995, which, following the federal structure, shares tax powers
between the Federal Government and the Regional States.
9. Cont..
With the exception of customs duties, which are the exclusive preserve of
the Federal Government, most other taxes are sliced into pieces by the
Ethiopian Constitution and shared between the Federal Government and the
Regional States on the basis of certain set formulas.
The Constitution of the Federal Democratic Republic of Ethiopia proclamation
No. 1/1995) classifies taxation powers as
Article 96: taxes exclusive to the Federal Government
Article 97: taxes exclusive to the Regional States
Article 98: taxes concurrent to both the Federal Government and the
Regional States
Article 99: taxes undesignated
10. Cont..
The major tax policy reform during the EPRDF period occurred
in 2002 (Mascagni, 2016), and the reforms were focused on the
three key taxes (i) income and profit taxes, (ii) taxes on goods
and services, and (iii) taxes on foreign commerce (Geda and
Shimeles, 2005).
The Ethiopian tax system has an
Operating set of legal institutions (such as the parliament, tax
authorities, and tax appeal tribunals and courts),
Procedures (for assessment, collection and complaints handling), and
Rules (the constitution, proclamations, regulations, directives, etc.).
11. Cont..
Ethiopia by proclamation No. 1097/2018, delegated to one
government institution called Ministry of Revenue (MOR) in
order to establish tax rules, regulations, and policies; administer
and collect tax revenue to the government.
Moreover, the Custom Commission is hereby established. The
powers and duties of the Commission shall be specified through
Regulation to be issues by the Council of Ministers.
12.
13. Tax Administration
1. Direct Taxes
Tax Nature Taxpayers Administered by
Employment Monthly Individuals MoR and Regional Revenue
Bureaus
Rental Annual Individuals Regional Revenue Bureaus
Sole proprietorships Regional Finance Bureaus
Partnerships Regional Revenue Bureaus
Companies MoR
Business Annual Sole proprietorships Regional Revenue Bureaus
Partnerships Regional Revenue Bureaus
Companies, Public Enterprises MoR
Other Income
Taxes
Individuals Regional Revenue Bureaus
Sole proprietorships Regional Revenue Bureaus
Partnerships Regional Revenue Bureaus
Companies, Public Enterprises MoR
14. Cont..
2. Indirect Taxes
VAT Quarterly Individuals MoR
Sole proprietorships
Partnerships
Companies, Other non-profit
organizations and association unless
specifically exempted.
Turnover Tax Monthly Individuals MoR
Sole proprietorships
Partnerships
Companies
Non-profit organizations unless
exempted
Excise Tax Monthly Individuals MoR
Sole proprietorships
Partnerships
Companies
Custom duty Permanent Individuals and companies Custom
Commission
15. 4.2. Income Taxes
Ethiopia Tax System follows the scheduler system of taxation whereby
different types of income are segregated into different schedules for
computing the tax liability
The Federal Income tax Proclamation number 979/2016 provides for the
taxation of income in accordance with the following schedules
I. Schedule ‘A’
Employment Income Tax
It shall be imposed for each calendar month at the rate specified on an
employee who receives employment income during the month.
Article 6
Article 10
Article 11
Article 12
17. Cont..
In Ethiopia, in this respect, according to Article 33 of proclamation
No. 64/1975 the following is discussed about payment for overtime
work.
1. A worker shall be entitled to be paid at a rate of one and one
quarter (11⁄4 )times his/her ordinary hourly rate for overtime work
performed before 10 O’clock in the evening (10 p.m.).
2. A worker shall be paid at the rate of one and one half (1 ½) times
his/her ordinary hourly rate for overtime work performed between
10 o’clock in the evening (10 p.m.) and six O’clock in the
morning (6 a.m.).
3. Overtime work performed on the weekly rest days shall be paid at
a rate of two (2) times the ordinary hourly rate of payment.
4. A worker shall be paid at a rate of two and half (2 ½) times the
ordinary hourly rate for overtime work performed on a public
holiday.
18. Cont..
II. Schedule ‘B’
Income Tax From Rental Of Buildings
It is used to tax income earned on rental of buildings.
Income under this schedule is payable by both business
organizations and individuals who have rental of buildings.
Article 13
Article 14
Article 15
Article 16
Article 17
19. Cont..
Article 14
Rental Income Tax Rate
1. The rate of rental income tax applicable to a body is 30%
2. The rate of rental income tax applicable to individual
Taxable Income from rental (Per
year-birr)
Income tax
payable
Deduction in
Birr
0 - 7,200 0% None
7,201 - 19,800 10% 720
19,801 - 38,400 15% 1,710
38,401 - 63,000 20% 3,630
63,001 - 93,600 25% 6,780
93,601 - 130,800 30% 11,460
Over 130,800 35% 18,000
20. For Taxpayers not maintaining Books of Accounts
Rental Income Received
xxxxx
Add: The Following Amounts
Amount on the lease of furniture
xxxxx
Amount on the lease of equipment's
xxxxx
Payments made by the lessee on behalf lessor
xxxxx
Cost renovation or improvement paid by the lessee
xxxxx
Gross Rental Income (GRI)
xxxxx
Less: Deductible Expenses
Land and building tax, if any xxxxx
Allowance for repairs, maintenance & depreciation(50%@GRI) xxxxx
Total deductible expense (xxxxx)
Taxable rental income xxxxx
21. Determination of Taxable rental Income for those Taxpayers Maintaining Books of
Accounts
Rental Income Received xxxxx
Add: the following amounts
Amount on the lease of furniture xxxxx
Amount on the lease of equipment's xxxxx
Payments made by the lessee on behalf lessor xxxxx
Cost renovation/improvement paid by lessee xxxxx
Gross Rental Income xxxxx
Less: deductible expenses
Land and building tax xxxxx
Annual lease payment on land xxxxx
Cost of repairs and maintenance xxxxx
Depreciation of building xxxxx
Depreciation of furniture and equipment xxxxx
Interest on bank loans xxxxx
Adverting expense to call tenant xxxxx
Other expense, if any incurred to generate rental income xxxxx
Insurance premiums xxxxx
Total deduction (xxxxx)
Taxable rental income xxxxx
22. Cont..
III. Schedule ‘C’
Income Tax From Business
Income Tax shall be imposed on the taxable business income realized
from entrepreneurial activity.
Taxable business income shall be determined per tax period on the basis of
the profit and loss account or income statement, which shall be drawn in
compliance with the International Financial Reporting Standards, subject to
the provisions of this Proclamation 979 and the directives issued by the Tax
Authority
Article 18
Article 19
Article 20-27
23. Cont.. Article 19
Business Income Tax Rates
1) Taxable business income of bodies is taxable at the rate of 30 %.
2) Taxable business income of other taxpayers shall be taxed in
accordance with the followingSchedule C.
Taxable Income per annum Amount taxable Deduction
0 - 7,200 0% None
7,201 - 19,800 10% 720
19,801 - 38,400 15% 1,710
38,401 - 63,000 20% 3,630
63,001 - 93,600 25% 6,780
93,601 - 130,800 30% 11,460
Over 130,800 35% 18,000
24. Cont..
Deductible Expenses (Allowable Deductions)
• Any Direct Costs and expenses of producing the Income is deductible – General
Concept of deductible expenses. It includes:
– Insurance Expense
– Promotional Expense
– Commissions Expense
– Payment to Holding or Parent Company
– General and administrative expenses
– Salary Expense
A. Salary paid to employees
B. Salary paid to Management of the Company
C. Salary paid to children of business owners
– Interest Expense – Shall not exceed Inter-Bank Interest Rate +2%
A. To lending institutions recognized by the national bank of Ethiopia,
B. To foreign banks permitted to lend to enterprises in Ethiopia;
C. To shareholders of Companies
25. Cont..
– Donations and Gift Expense
– Maintenance and Improvement Expense – 20% of Depreciation Base
– Bad Debts Expense (Uncollectible Accounts Expense)
– Participation deduction (Deduction for Reinvestment of Profit)
– Special Reserves for Finance Institutions – provisions for NPLs
– Transportation Allowance paid to Employees not exceeding the limit
– Retirement Benefits – less or equal to 15% of the basic salary of the
employee
– Representation Expense – 10% of basic salary of employee
– Trading Stock Disposed (Cost of Goods Sold) - The cost of trading stock
disposed during a tax period is determined on the basis of the Average
Cost Method
26. Cont..
Exemptions
• The following categories of income shall be exempt from
payment of business income tax hereunder:
– Awards for adopted or suggested innovations and cost saving
measures
– Public awards for outstanding performance
– Income specifically exempted from income tax by the law in force
in Ethiopia, by international treaty or by an agreement made or
approved by the Ministry of Revenue
– The revenue obtained by the Federal Government, Regional State
Governments and Local Governments of Ethiopia; and the
National Bank of Ethiopia from activities that are incidental to
their operations
27. Business Income Tax Categories
1. Category “A” Taxpayers
• The category shall include the following persons and bodies:
Any business having an annual turnover of >Birr 1,000,000
• Any company incorporated under the laws of Ethiopia or in a
foreign country – Share Companies
• They are required to file a balance sheet and a profit and loss
statement (income statement) for taxation purpose.
• They have to use registered vouchers .
• The tax year can be either the government fiscal year or the
accounting year of the body
28. Cont..
2. Category “B” Taxpayers
• Includes business which has an annual turnover of over Birr
500,000 but below Birr 1,000,000.
• They should file profit and loss statement (income statement) at
the end of the year.
• They have to maintain accounting records
• They have to use registered vouchers
• The tax year can be year of the body.
29. Cont..
3. Category “C” Taxpayers
• Those who have annual turnover of less than Birr 500,000 as
estimated by the Tax Authority.
• They are also called Presumptive Tax Payers
• Neither balance sheet nor income statement is a requirement to this
category.
• It is a predetermined amount of tax paid by small businesses whose
annual sales is less than Br 500,000. The tax is estimated by
estimating annual sales (daily sales)
• Maintaining books of accounts is not mandatory
• They are not required to use registered vouchers
• They are not required to submit any financial statements
• The tax year is the government fiscal year
31. Cont..
IV. Schedule ‘D’
Other Incomes Tax
Any income which is taxable under the Income Tax Proclamation but does
not find place under any of the remaining three Schedules of income (i.e.,
Schedules A, B and C) will be taxable under this residuary Schedule “D”
Other Incomes.
Read the Federal income tax proclamation 979/2016 for these taxes.
V. SCHEDULE ‘E’
EXEMPT INCOME
According to article 65 of federal income tax proclamation number
979/2016 the exempted taxes are regulated differently named as schedule
E.
32. 4.3. Consumption Taxes
1. Value Added Tax (VAT)
– Indirect taxes concern commodities.
– This means VAT is generally a tax on consumption of goods and
services.
– It is collected in the production and distribution process beginning
with importers and producers of raw materials and ending with
retailers.
– The end impact and burden of VAT rests on the final consumer.
– It is a charged on the added value(incremental value or newly
created value of goods and services)
– The proclamation of VAT no. 285/2002 officially replaced sales tax
in Ethiopia.
– As per this proclamation, value added tax is levied and collected at
the flat rate of 15%
33. Cont..
Components of Value Added Tax
There are two principal components of VAT:
1. Output Tax
– It is the Value Added Tax collected on the sale of taxable
supplies (goods and services).
– It is the VAT collected on sales.
2. Input Tax:
– It is the value added tax paid on purchases of taxable
goods and services.
– It is the VAT paid on purchases
• Vat Payable or Liability = Output Tax is >Input Tax
• Vat Refundable/Credit = Output Tax is < Input Tax
34. Cont..
VAT Registration in Ethiopia
1. Mandatory Registration
– If the gross sales value or turnover of the enterprise, which is gross
income for 12 calendar months, exceeds or likely to exceed Br
1,000,000, the person conducting the enterprise must register for
VAT with VAT Department of the MoR.
2. Voluntary Registration
– Even if the annual turnover does not exceed Br.1,000,000 a
person can apply to be registered for VAT if the person
supplies more than 75% of its goods and supplies to
taxable persons.
35. Cont..
Classification of supplies for VAT
Zero-Rated Supplies
– Supplies on which VAT on supply is charged at 0%.
– Are part of the VAT system
– The company supplying zero rated supplies must register for VAT.
– The firm can claim the Input Tax Credit on purchases either it is domestic
or import.
– The input VAT will be recovered but no Output Tax will be reported for
the sales.
Includes:
– Export of goods and services
– rendering of international transportation services
– the supply of Gold to NBE
36. Cont..
B) Exempted Supplies
– Supplies on which VAT is NOT chargeable
– The supplies are outside of the VAT system
– Persons supplying only exempted supplies cannot register for VAT.
– There is neither Input Tax nor Output Tax.
• No tax is collected when a person sells exempt goods & services
• No tax is paid when a person purchase exempt supplies.
• Includes
– rendering of educational services, health services, financial services,
religious services,
– the supply of electricity, water, and kerosene
– the provision of transport
– the import or supply of books and printed materials
– the import of gold to be transferred to the NBE
C) Standard Rated Supplies
– Supplies on which VAT is charged at a standard (15 %) rate.
37. Cont..
• Determination of the VAT Liability
– The amount of tax payable or VAT Liability for any accounting
period by a person who is registered or is required to register is
the difference between the amounts of tax charged on
taxable transactions i.e. the VAT charged on sales and the VAT
paid on purchases of goods and services applying the Standard
Rate.
38. Cont..
Computation of VAT
The computation of the VAT liability from the manufacturer to the final consumer is presented as follows.
Manufacturer Birr
Purchases of raw materials………………….… ….… Br 2,000
VAT paid on raw material (15% x 2,000)…….…… 300
Cost of the material to the manufacturer………….. 2,300
Sells to the wholesaler the finished goods………. ….… ….… 4,000
– VAT (4,000 X 15%)……………………………………. 600
– Total selling price…………………………………. …… 4,600
• VAT liability of the manufacturer (600-300)……………….……Br 300
Wholesaler
– Sells to the retailer at a price ……………….….…….… 5,600
– VAT (5,600 X15%)………………………………………. 840
– Total selling price …………………………………….….. 6,440
• VAT liability of the wholesaler (840-600) …………………….. ……240
Retailer
– Sells to the final customer at a price ………...….……… 8,400
– VAT (8,400 X 15%)………………………………..….….. 1,260
– Total selling price ………………………………….….…... 9,660
• VAT liability of the retailer (1,260 – 840) …………………….……..420
Total VAT paid to FIRA………………………………………………….…….…..Br 960
39. Cont..
2.Turnover Tax (TOT)
– It is a tax imposed on almost all goods and services on the total
turnover rather than on the Value Added. Turnover tax is a sales
tax. A reduced tax rate is applied for Turnover Tax as compared to
the VAT in most of the countries of the world
• Rate of Turnover Tax
– 2% (two percent) on Goods Sold Locally
– For Services Rendered Locally;
– 2 % on Contractor, Grain Mills, tractors & Combine-Harvesters
– 10% on other services like Consultancy, Training, Legal advice, Auditing
Base of Computation of the Turnover Tax
– Base of computation of the Turnover tax shall be the Gross
Receipt in respect of goods supplied or services rendered
40. Cont..
3. Excise Tax:
• Is, also known as selective tax, an indirect tax imposed on
luxury goods, goods that are hazard to health and basic
goods which are demand inelastic such as vehicles,
jewelers, perfumes, alcoholic products, tobacco products,
salt, textile products, etc.
• Imposed on selected imports and domestically produces
goods by Excise Tax Proclamation (No. 1186/2020)
• Objectives of Excise Tax
I. Revenue Generation
II. Vertical Equity
III. Deter negative externalities
41. Cont..
First Schedule of the Proclamation indicated that excise tax
applies to 19 categories of items and 391 goods.
Moreover the applicable tax rate in the new proclamation
ranges from a low of 5% to 500% which is too wide compared
to the old proclamation 10% to 100%.
And also the scope of exemption narrowed by setting detailed
rules on it. The list of exempt goods is exhaustively provided
under Schedule II in the proclamation.
There is license requirements for eligible taxpayers, as well
as the excise tax control system and the excise stamp.
42. Cont..
Customs Duty
– Customs Duty is a duty or tax levied on Import and Export
of goods by the Ethiopian Government.
– Goods shall mean any commodities, personal effect and
animals including money.
– It can be Specific Duty and Ad valorem Duty
– Ad-valorem Taxes – are taxes or duties levied as a
percentage of the Value of Goods and Services.
– Specific Tax – are the taxes levied at a fixed amount,
irrespective of the Value of the goods and services.
– The rate of customs duty varies from 0-35%
43. Basic Elements of a Tax System
The five pillars/basic elements of tax system are
Taxpayer refers to any individual or organization that is
obligated to pay tax.
Tax Base is the value of everything which is subject to
taxation.
Tax Rate is the amount of taxes expresses as a percentage of
the tax base.
Tax Period is the period for tax assessment. It can be a year
(tax year), month, etc.
Tax Administration refers to any government office mainly
with a responsibility of tax collection and other related
activities.
44. Tax Related Terms
1. Delinquent Tax: refers to taxes remaining unpaid on and
after the date of penalty.
2. Fiscal Year refers to the twelve month period used by the
government
3. Gross Income is the total income of individual or business
4. Tax Abatement refers to a complete or partial cancellation
of imposed taxes.
5. Tax Assessment is the determination of the amount subjected
to tax.
6. Tax Avoidance is the practice of paying as little tax as
possible by using available legal loopholes.
7. Tax Bracket is a range of income subject to tax at the same
tax rate.
45. Cont..
8. Tax Cut is the act of reducing taxes for certain reason.
9. Tax Credit is an investment activity which directly minimizes the tax
to be paid.
10. Tax Deduction is the amounts legally permitted to be subtracted from
gross income.
11. Tax Evasion is an illegal activity in which a taxpayers seek to hide
taxable income by overstating expenses or understating revenues.
12. Tax Exemption is a legal provision that permits to deduct specified
amount from gross income as a tax free income.
13. Tax Exile refers to somebody who leaves a country in order to avoid
paying taxes.
14. Tax Favored Investment refers to an investment whose profits are
taxed lower tax rate.
15. Tax Function is a function of tax accountant.
46. Cont..
16. Taxable Income refers to the amount of an Individual or business income
which is subject to taxation
17. Tax Holiday is period of no taxation
18. Tax Liability is the legal obligation of a taxpayer to the government
19. Tax Liens is claim for unpaid taxes.
20. Tax Levy is the total amount of taxes imposed on an individual or corporation
21. Tax Penalties are fines or punishments imposed on a taxpayer
22. Tax Refund an amount that a government gives back to a taxpayer
23. Tax Relief is tax savings in the form of special allowable deduction.
24. Tax Schedule is the official list of tax rates matched with different level of
incomes
25. Tax Shelter is an investment activity that protects some of a taxpayer's
income from taxes.
26. Tax Subsidy refers to a government subsidy to a particular company in the
form of reduced tax.
