Select business and technology College

school of Graduate study

Department of Accounting

A term paper on Critical appraisal of

Ethiopian tax system for the course
requirement advanced taxation
BY :Yohannes Tesfaye
MACC/4441/12

Submitted To Alebachew Goshim(Phd)

Admin

[Year]

Megnagna Campus
Contents
List of Acronyms .................................................................................................................................................................... 4
Introduction. ......................................................................................................................................................................... 5
2. Ethiopian tax history short and brief ................................................................................................................................ 6
A.The Imperial period: 1941-1974 ................................................................................................................................ 6
B.The Derg: 1974-1991 ..................................................................................................................................................... 6
C. Current period............................................................................................................................................................... 7
3. Objective of the study ....................................................................................................................................................... 8
3.1 General objective ........................................................................................................................................................ 8
3.2 Specific objective ........................................................................................................................................................ 8
4. Methodology ................................................................................................................................................................. 8
4. Description of the Study area ........................................................................................................................................... 8
4.2 Method and source of data collection ............................................................................................................................ 8
4.3 Method of data analysis.................................................................................................................................................. 8
5. Literature review ............................................................................................................................................................... 9
5.1 Theoretical review .......................................................................................................................................................... 9
5.1.1 Definition of Tax, .......................................................................................................................................................... 9
5.1.2 Applicable taxes in Ethiopia ......................................................................................................................................... 9
Direct tax ............................................................................................................................................................................... 9
A. Employment income tax (Schedule A ) ............................................................................................................................. 9
B. Rental tax (Schedule B) ................................................................................................................................................... 10
C. Business l tax (Schedule C) .......................................................................................................................................... 10
D. Other l tax (Schedule D).................................................................................................................................................. 11
INDIRECT TAX ...................................................................................................................................................................... 12
E. Custom duty .................................................................................................................................................................... 12
F. Exercise tax ...................................................................................................................................................................... 12
G. Sur Tax ........................................................................................................................................................................... 12
H. VALUE ADD TAX UNDER THE PROCLAMATION .............................................................................................................. 13
I. TURNOVERTAXPROCLAMATION UNDER THE PROCLAMATION....................................................................................... 13
J. Withholding Tax under the Proclamation ....................................................................................................................... 13
6. Empirical review .............................................................................................................................................................. 14
6.1 Challenges and opportunities of the of the Ethiopian tax system ............................................................................... 14
6.2 Opportunities of the of the Ethiopian tax system ........................................................................................................ 16
7. Conclusion ....................................................................................................................................................................... 17
Reference ............................................................................................................................................................................ 19

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 List of Acronyms
VAT: Value Added Tax
ERCA: Ethiopian Revenue and Customs Authority
EFDR: Ethiopia Federal Democratic Republic
PLC: Private Limited Company
EFY: Ethiopian Fiscal Year
BoFED: Bureau of Finance and Economic Development
RQ: Research Question
CSA: Central Statistical Agency
GDP: Gross Domestic Product
FIRA: Federal Inland Revenue Authority
AACRA: Addis Ababa City Roads Authority
BPR: Business Process Re-engineering
TIN: Tax Identification Number

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Introduction.

The main objective of this term paper is Critical review of the literature on the Ethiopian tax system and Challengesand
opportunities of Ethiopian tax system. To this end, we present a detailed description of the tax and benefit
system in Ethiopia as well as ssessment of the potential data sources.

Since the Ethiopian tax and customs laws are characterized by frequent repeals and amendments,
we do not dwell on covering the reforms that took place over a period of time. Since the main
purpose at hand is to provide a description of the current tax system of the country, we focus on
the latest versions of each of the tax proclamations, regulations, and directives. Besides, in order
to give a full picture of the Ethiopian tax system, we describe all types of taxes in the country
regardless of whether these taxes can be simulated or not.

We also provide a detailed description of the limited benefit system of the Ethiopian tax system. The term
paper collect secondary source of data from research journals and not duplicated thesis finally a detail
analysis and conclusion is provided

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2. Ethiopian tax history short and brief
A.The Imperial period: 1941-1974

The first major change in Ethiopia‟s tax system was initiated in the post-Second World War period (between
1942-44), the years 1947-52 covering its second stage. These changes were generally discretionary,
including amendments to property taxes (land and cattle). Broad-based taxes on goods and services were also
introduced in the mid 1950s. Later in the decade and in the early 1960s, changes were also made in
the rate and structure of taxes, especially on income. In the post-revolution period (1974-91),
particularly during 1976-79, significant major changes on the rate and structure of all types of taxes
were made. These involved widening the land taxbase, introducing capital and surplus transfers from
nationalized firms, as well as certain minor arrangements on other taxes (Wogene 1994: 26-7).

B.The Derg: 1974-1991

As far as taxation is concerned, the distinctive feature of the Derg regime was the exceptionally high marginal
tax rates imposed on income, in all sectors. The agricultural income tax had an 89 per cent rate for top brackets
- for incomes above 36,000 ETB per year (Gri"n, 1992). Comparable rates were also applied to personal
incomes and business profits. Clearly this situation fuelled economic decline and increased tax avoidance.
As emerged from interviews, nobody had any incentive to increase their income, individuals and private 20
businesses alike, given that the benefit would accrue mainly to a state that was delivering little in return. There
is no doubt that this attitude contributed to the economic decline that became apparent in the last years of the
regime.
However the Derg could count on relatively easy-to-collect taxes such as indirect and trade taxes. These were
relatively easy to administer, as they were collected at the factory gate and at the border, respectively.
Moreover the large state sector, including farms and enterprises, was a source of both tax and non-tax revenue.
Finally, most taxes were collected in urban centres that largely remained under government control, even when
the guerrilla war was ongoing in the countryside (Young, 1997; Clapham, 1988).
As far as agricultural taxation is concerned, two main tax types were levied: the agricultural income tax and the
land use tax. These were introduced by the Derg, and they largely replaced the previous system of obligations.
The contribution of agricultural taxation to state revenue more than doubled in the early years of the Derg
(Markakis, 1989). However, tax incidence in rural areas after the reform is estimated at 5 per cent (Gri"n,
1992), and Eshetu Chole (2004) holds that generally the agricultural sector was not an important source of tax
revenue.

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C. Current period

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. The Ethiopian
Constitution goes to greater lengths than other areas of power in allocating taxation powers between
the Federal Government and the Regional States. The Constitution classifies taxation powers as “taxes
exclusive to the Federal Government taxes exclusive to the Regional States, taxes concurrent to both the
Federal Government and the Regional States, and “taxes undesignated.”11With 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. Income taxes on employment income are, for
example, shared on the basis of the identity of employers so that if an employer is a Federal
Government or an international organization, the Federal Government exercises the power to impose
tax on the employees, and if an employer is a state government or a private enterprise, state governments get to
levy tax on the employees. The Constitution follows similar patterns of tax-power sharing on most other
taxes.
The Ethiopian federal arrangement follows the dual structure in which all the three branches of government
(legislative, executive and judicial) co-exist in respect of the Federal and Regional powers. This, in taxation,
means in principle that both the Federal Government and the Regional States enjoy full legislative, executive,
and judicial powers with respect to taxation powers reserved to them. In practice, however, the Federal
Government has had the most dominant presence in the legislation of taxation, respecting not just “federal
exclusive taxes” but also “concurrent taxes” and at times even “regional exclusive taxes. Although Regional
States have the prerogative to issue their own tax laws with respect to tax sources reserved to them by the
Constitution, many of the Regional States for a while used federal tax laws to levy and collect
regional taxes. The Regional States did not immediately exercise their legislative powers of issuing
their own tax legislations. Some of the Regional Governments have begun issuing their tax legislations
recently. However, the exercise of the legislative power over taxation still remains a formal matter because
the Regional Governments have yet to fully exercise their taxation powers. Many of the Regional States that
have issued their own tax laws have used federal tax laws as models with the result that there is
virtually no difference in substance between federal tax laws and regional tax laws.

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3. Objective of the study
3.1 General objective
The general objective of this study is to assess Challenges , opportunities and the tax system Ethiopian

3.2 Specific objective

To achieve above general objective, the following Specific objectives are formulated to be performed:-
 To Assess applicable tax in Ethiopia
 To describe the Ethiopian tax Category and System
 To Evaluate the Ethiopian tax opportunities
 To Identify Ethiopian tax challenges

4. Methodology

4. Description of the Study area

The study was carried out Critical appraisal of Ethiopian tax system by mentioning
 Critical review of the literature on the Ethiopian tax system.
 Challenges and opportunities of Ethiopian tax system
The data which are taken for this paper are basically it was conducted from different documents, reports,
journals, books, magazines, and websites, etc

4.2 Method and source of data collection

Because of the nature of the data that is needed the research will use more data from secondary data source for
this particular research will also use secondary data like report and other primarily.

4.3 Method of data analysis

The collected data would be processed, analyze and interpreted to report. The result of the research finding of
the Ethiopian tax system. The data analysis being by editing and classifying the collected data in more meaning
full and relevance information to the study by attached document as it is in conducting the study.

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 5. Literature review
5.1 Theoretical review
5.1.1 Definition of Tax,
Tax is a compulsory contribution or unrequited payment by the people to the government for which there is no
direct return to taxpayers. A tax is a generalized exaction which may be levied on one or more criteria upon
individuals, groups of individuals, or other legal entities (Bhatia,2002).Taxation is a system of rising money to
finance government. All governments require payments of money –taxes- from people. Without taxes to fund
its activities, government could not exist.
Throughout history, people have debated the amount and kinds of taxes that a government should impose, as
well as how it should distribute the burden of those taxes across society. Unpopular taxes have caused public
protests, riots, and even revolutions. In political campaigns, candidates‟ views on taxation may partly
determine their popularity with voters.
The Ethiopia tax system classifies taxes in to two major categories as direct and indirect taxes. In indirect tax
both incident and tax impact lies on the taxpayers. It mostly known by four schedules as schedule A-income
from employment, schedule B- income from rental of building, schedule C-income from business profit and
schedule D-other income.

5.1.2 Applicable taxes in Ethiopia

Direct tax

A. Employment income tax (Schedule A )

Employment income tax is a tax on the earnings of an employee. Employees who earn birr 601 per month and
above are liable to pay employment income tax. Employment Income means the following

Salary, wages, an allowance, bonus, commission, gratuity, or other remuneration received by an employee in
respect of a past, current or future, employments ;

An amount received by an employee at termination of employment, whether paid voluntarily, under an

agreement, or as a result of legal proceedings; including any compensation for redundancy or loss of
employment, or a golden handshake payment.

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B. Rental tax (Schedule B)

The Federal Income Tax Proclamation No. 979/2016 (hereinafter the Proclamation) envisages that rental tax
falls under Schedule “B” (article 13-17 of the Proclamation).

Rental income tax is imposed for each tax year at the rate or rates (specified below) on building or buildings
that has taxable rental income for the year. The rental income tax payable by a taxpayer for a tax year is
calculated by applying the rate or rates of tax applicable to the taxpayer under Article 14 of the proclamation.

The rate of rental income tax applicable to a body is 30% while the rates of rental income tax applicable to an
individual are:

C. Business l tax (Schedule C)

As per the Proclamation, the tax rates are as follows:

1. Taxable business income of bodies (e.g., PLC, Share Company) is taxable at the rate 30%;
2. Taxable business income of other taxpayers (individuals and Micro Enterprises) is taxed in accordance
with the following Table:

(Article 20-26 of the Proclamation)

The taxable income of a taxpayer for a tax year is the total business income of the taxpayer for the year
reduced by the total deductions allowed to the taxpayer for the year.

Taxable Income= Business income - (deductions + exemptions)

The taxable income of a taxpayer for a tax year is determined in accordance with the profit and loss, or income
statement, of the taxpayer for the year prepared in accordance with the financial reporting standards, subject to
any modifications made in the Proclamation, regulations made by the Council of Ministers, and directives
issued by the Ministry. Thus the reader should consult these laws to identify the constituents of business
income, deductions and exemptions in order to accurately calculate business income tax.

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D. Other l tax (Schedule D)

Non-business capital gains tax (Schedule „D‟) Capital gains tax is payable on gains on transfer (sale or gift)
of certain investment properties such as buildings held for business, factory, and/or office and on transfer of
shares of companies.
The base used to calculate capital gains tax, as specified in Regulation No. 78/2002, is the gain over the
inflation-adjusted historical cost of the capital asset or the par value of the share. Exemptions, as specified in
Regulation No. 78/2002, are aggregate annual gains of less than 10,000 ETB realized upon sale of a capital
asset. For individuals, gains obtained from the transfer of residential buildings are exempted.

. Tax on interest income on deposits (Schedule „D‟) As specified in Proclamation No. 286/2002, every
person deriving income from interest on deposits has to pay tax at the rate of 5 per cent.

Dividend income tax (Schedule „D‟) As specified in Proclamation No. 286/2002, income derived from
dividends from a share company or withdrawals of profits from a private limited company is subject to tax at
the rate of 10 per cent. The withholding agent is required to withhold or collect the tax and account to the tax
authority. This tax is a final tax in lieu of income tax.
Tax on income from royalties (Schedule „D‟) Proclamation No. 286/2002 (p. 1880) defines royalty as
follows: The term „royalty‟ means a payment of any kind received as a consideration for the use of, or the right
to use, any copyright of literary, artistic or scientific work, including cinematography films, and films or tapes
for radio or television broadcasting, any patent, trade work, design or model, plan, secret formula or
process, or for the use or for the right to use of any industrial, commercial or scientific equipment, or for
information concerning industrial, commercial or scientific experience.
Tax on income from rendering of technical services outside Ethiopia (Schedule ‘D’)
Proclamation No. 286/2002 stipulates that all payments made in consideration of any kind of
technical services rendered outside Ethiopia to resident persons in any form are liable to tax at a
flat rate of 10 per cent, which shall be withheld and paid to the tax authority by the payer.
According to Proclamation No. 286/2002 (p. 1880), the term „technical service‟ refers to „any
kind of expert advice or technological service rendered‟.

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 INDIRECT TAX

E. Custom duty

To this end, the Customs Proclamation No. 859/2014 (herein after, "the proclamation") sets the base for the
regulation of customs duty, tariff and tax in Ethiopia. Hence, some of the major issues relating to customs
duties and taxes are dealt with below in accordance with the proclamation. (Other relevant laws will also be
dealt, though briefly.)

F. Exercise tax

Excise tax in Ethiopia is imposed and payable on selected goods, such as, luxury goods and basic goods which
are demand inelastic. Moreover, it is believed that imposing the tax on goods that are hazardous to health and
which are cause to social problem, will reduce the consumption of such goods. We have included in this page
the rate of excise in Ethiopia, base of computation of excise tax in Ethiopia and payment of and time of
payment of excise tax in Ethiopia.
The section on Excise tax is adapted from the Ethiopian Revenues and Customs Authority website:
www.erca.gov.et and Excise Tax Proclamation its amendment; however, it‟s advisable that a reader gets the
documents for a comprehensive understanding of the existing proclamation and regulation.

Excise Tax Proclamation No 307/2002 or 307/1994 EC

Excise Tax Amendment Proclamation 610/2008

G. Sur Tax

An importer has to pay 10% sur-tax on goods imported to Ethiopia. This article is compiled from Import Sur-
Tax Council of Ministers Regulation. The basis of computation, scope of application and applicable
exemptions are also included.
Sur-tax on Imported Goods Regulation No 133/2007

These Regulations are issued by the Council of Ministers pursuant to Article 5 of the Definition of Powers and
Duties of the Executive Organs of the Federal Democratic Republic of Ethiopia Proclamation No. 471/2005
and Article 4 of the International Convention on the Harmonized Commodity Description and Coding system
Ratification Proclamation No. 67/1993.
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H. VALUE ADD TAX UNDER THE PROCLAMATION

This is a sales tax based on the increase in value or price of product at each stage in its manufacture and
distribution. The cost of the tax is added to the final price and is eventually paid by the consumer.
The rate and impose of VAT:
The rate of VAT is 15% of the value for every taxable transaction by a registered person, all imported goods
other than an exempt import and an import of services;
The export of taxable goods or services to the extent provided in regulations for zero tax rate are: The export
of goods or services to the extent provided in the regulation;
The rendering of transportation or other services directly connected with international transport of goods or
passengers, as well as the supply of lubricants and other consumable technical supplies taken on board for
consumption during international flights;
The supply of gold to the National Bank of Ethiopia; and A supply by a registered person to another registered
person in a single transaction of substantially all of the assets of a taxable activity or an independent
functioning part of a taxable activity as a going concern, provided a

I. TURNOVERTAXPROCLAMATION UNDER THE PROCLAMATION

This is an equalization tax imposed on persons not registered for value-added tax to fulfil
their obligations and also to enhance fairness in commercial relations and to complete the
coverage of the tax system. Administrative feasibility considerations limit the registration
of persons under the value-added tax to those with annual transactions to the total value
exceeding 500,000 Birr.Rate of turnover tax is 2% on goods sold locally and 10% on others; as provided by the
„Excise Tax Proclamation No. 307/2002'

Notice in writing, signed by the transferor and transferee, is furnished to the authority within 21 days after the
supply takes place and such notice includes the details of the supply.

J. Withholding Tax under the Proclamation

An employer paying employment income to an employee who is subject to employment income tax under the
Proclamation must withhold tax from the gross amount of each payment of employment income made to the
employee at the tax rate or rates applicable to the employee. In cases where the employee has more than one

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employer, the employer who is aware of such tax is required to withhold the income tax provided that the other
employers didn‟t withhold tax based on the aggregated employment income.
An obligation of an employer to withhold tax from a payment of employment income to an employee has
priority over any obligations of the employer to withhold any other amount from a payment of employment
income to an employee.

6. Empirical review

6.1 Challenges and opportunities of the of the Ethiopian tax system

Several scholars have suggested approaching the issue of what drives tax compliance from more social,
cultural and psychological perspectives.
The comparative treatment theory suggests that if taxpayers believe the government treats them fairly, tax
compliance will increase. Willingness to comply might increase if there are severe social sanctions against
non-compliant taxpayers, as taxpayers value their relationship with others. Reviewing the theoretical and
empirical literature on this topic, we conclude that many existing theories could be applicable to VAT
compliance. (Worku T,2019)

The diffusion of tax administration in the hands of multiple government bodies may have been unavoidable but
it has side effects.
Conflicts of jurisdiction may arise between the different government bodies. Jurisdictional conflicts may, for
example, arise between the regular prosecution offices or the Federal Anti-Corruption Commission on the one
hand, and the prosecutors of ERCA on the other, over the characterization of certain offenses, which depending
on who is looking at them, may be characterized either as corruption offenses or customs/tax offenses. The
chances for conflicts of jurisdiction or lack of coordination have been considerably reduced as a result of recent
reforms to merge the authorities that are directly involved in tax administration, but there are still many
government bodies involved (at least indirectly) in tax administration, raising concerns of miss-coordination
and conflicts of jurisdiction. (Taddese .L,2010)

The analysis of the distributional impact of tax reform pointed to some interesting facts
about tax incidence in Ethiopia.
Most commodities that are subject to some kind of tax, whether excise or import duty or sales tax, turned out
to be progressive. But commodities such as salt, sugar and kerosene tend to be regressive, suggesting that
reduction of taxes on these commodities compensated by taxes on, say, tobacco, alcohol or butane, or even

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electricity for that matter, could enhance overall social welfare. In addition, the distributional impacts of the
benefits of freely provided services such as education were examined. The results indicate that primary level
education is more or less uniformly distributed as compared to secondary level education, suggesting that the
non-poor benefit disproportionately from free secondary level education. (Alemayehu .G,2003)
The sensitivity response of revenue to changes in the tax base for personal income tax and Business profit
income tax was estimated to be less than one. So it shows that the power of the economy to extend revenue on
its remains fairly weak; requiring discretionary measures coupled with other measures for the shortfalls in
revenue. The low elasticity could be as a result of the various reasons that existed over the periods.
(Azim.A,2016)

Due to lack of knowledge, poor tax administration and fear of unnecessary competition
from similar unregistered business voluntary compliance in the branch office is low from
the results of the findings selling without invoice, providing forged invoices, manipulation
of cash register, not maintaining proper books of returns, non-filing and late submission of
the VAT return are among non-compliances which frequently occurred. They may be
either voluntarily or deliberately. This needs the development of strong and modern audit
and enforcement program. But penalty cannot be the only way to increase compliance;
especially for those taxpayers who do not know tax laws and procedures. Therefore, to
reduce the gap help taxpayers to understand their rights and obligations and make them
aware of any revised rules and regulations. (Sara.G, 2016)

Lack of awareness creation programs for taxpayers, failure of most of the taxpayers to maintain books of
account to control their operations, lack of adequately qualified personnel, lack of objective tax estimation
procedures and the resultant tax under- and over-statement, lack of taxpayers awareness about tax procedures
and calculations are some of the major problems on category “C” tax assessment and collection of we believe
this problems will be simplified if not eliminated.
Taxpayers showed less cooperation audit case selection. The office didn‟t apply the statistical, automated risk
scoring and risk based techniques in their audit case selection. In this case, even though there were criteria for
audit case selection, scientific and statistical techniques were not applied as expected. However, there was no
manual selection by the auditors. There was practice of selecting audit case in group of employees and auditors
from the office.

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6.2 Opportunities of the of the Ethiopian tax system

According to (Azim .A 2016) It would be interesting to expand the analysis to tax elasticity, which Corrects
revenue performance for changes in tax policy parameters. For example, the observable cost of insecurity of
land rights is that it reduces farmers' investments in land and land's value as collateral. The insecurity of land
rights affects the farmers to invest less in both land development and capital invested for long term. It requires,
however, more detailed information about underlying tax morals and their revenue impacts.

A study found that the introduction of electronic cash registers increased value added tax (VAT) collections
and payments by about 32%, with variations by sectors of activity, size of firms and locations. This increase
can be considered large. However, given the low tax base, there is significant scope to mobilize domestic
resources by accelerating reforms, notably on the use of third-party information on taxpayers, promoting
electronic tax filing and payment systems, and enhancing analytical capacity using comprehensive national
databases. (www.afdb.org)

Foreign direct investment has negative relationship with tax revenue in Ethiopia as the study explained. With
this, tax revenue collection increased as foreign direct investment decrease in Ethiopia. This result come from
incentives given by government like duty free import of raw materials and machineries, low price of lease land,
tax holly day from minimum two years to maximum of six years as investment well explained on investment
proclamation number 280/2002, investment regulation number 84/2003 and 270/2012 and related directives
(Minyichel. B)

By focusing on ETRs, I am able to quantify tax payments by firms and assess the extent of tax preferences in
Ethiopia. (Giulia .M, 2013) find that tax incentives are indeed generous in the Ethiopian manufacturing sector,
with most firms facing an ETR well below the statutory rate. The econometric exercise allows the
identification of some of the regulatory sources of tax preferences such as regional development and incentives
for investment. However the analysis explores also less official sources of tax preferences such as lobbying and
political connections. While these elements are not easily pinned down in a precise manner, this analysis
nonetheless allows the identification of some aspects of it. By using proxies to capture these aspects, I find that
effective tax rates do not seem to be influenced by the lobbying of larger firms or by political connections.
These results support the „political cost hypothesis‟, postulating a positive relation between visibility, and
particularly size, and tax payments

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7. Conclusion

Employment income tax can be simulated. Information is available on wages outside of allowance in the
Ethiopian Socioeconomic Survey (ESS). Information on how many months an individual in a household has
worked in year (to distinguish from a casual worker) is also available. Compensations, allowances, and
expenses are recorded separately. Pension contribution is not recorded, but it can be imputed. Information is
available on where a person has worked

Tax on income from rental of buildings cannot be simulated. Household income from rental of different
properties is entered as an aggregate, and the tax rate on rentals of these different properties is not the same

Business profit tax can be simulated partially for individual business as the ESS survey data contains
information on total sales and operational expenses. Although there is information on the asset for a household,
there is no information on business assets. Some calculation can be done to estimate the business assets that are
needed to determine depreciation which forms the basis for deductions.

Tax on income from dividend cannot be simulated as income from dividends is aggregated with other
investment income.

It cannot be simulated. Information from lottery winnings is recorded together with gambling income and
inheritance. It cannot be simulated. Household income from rental of different properties is entered as an
aggregate, and the tax rate on rental of these different properties is not the same.

Customs duty on import cannot be simulated. This is because there is no information about the origins of them goods
consumed by a household. One could assume that price of all potentially imported goods is inclusive of customs duty.
However, since the customs duty rate is different for different items, it is difficult to simulate this tax given the level of
disaggregation in the expenditure data.

Import surtax can be partially simulated under the strong assumption that the price of all potentially imported
goods includes surtax. The fact that surtax involves a uniform 10 per cent rate on all but few exempted goods
makes it possible to simulate this tax with a rough approximation.

VAT can be partially simulated. This can be done with the assumption that the price of all goods, with the
exception of VAT-exempt items, implicitly includes VAT. Although not very unrealistic, this assumption is
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important because VAT is paid only if the seller‟s turnover is 500,000 ETB or above; and we do not have
information about where households make their purchases. Since some VAT-charged and VAT-exempt
expenditure items can be aggregated together, it is not possible to fully simulate this tax.

Turnover tax (TOT) can be partially simulated. Although it is not possible to tell where households make their
purchase from, as TOT is paid only if the seller‟s turnover is below 500,000 ETB, we can partially simulate
this tax by assuming that VAT and TOT are in principle the same. Excise tax cannot be simulated. This is
because there is no information about the source of the goods consumed by a household. Different rates apply
to different products and even to items in one category. For example, there is no single excise tax rate on
alcohol, and the level of disaggregation of the expenditure data is not enough to take this into account.

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Reference

 Alemayehu Geda And Abebe Shimele,s Taxes And Tax Reform In Ethiopia,1990-2003
 Azime A(MAY,2016). Hassen Agricultural Taxation And Economic Growth In Ethiopia
 Belay Tafesse (June, 2017) Assessment Of Tax Audit Practice And It‟s Challenges:The Case Of
Adama Revenues And Customs Officeby:
 Sara Gebeyehu (June, 2016)Assessment Of Value Added Tax Administration - The Case Of Addis
Ababa No.2 Medium Taxpayers Branch Office
 Markakis, J. (1989). Revolution In Ethiopia: 15 Years On. Review Of African Political Economy (44),
1–3.
 Eshetu Chole (2004). Under Development In Ethiopia. OSSREA.
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Fiscal Decentralization In Ethiopia. Addis Ababa: Addis Ababa University Press.
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Leather Giulia Mascagni(November,2013) Tax Revenue Mobilisation In Ethiopia
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 Www.Afdb.Org

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