6.

The Turn over Tax

6.1 Meaning and history of turn over tax in Ethiopia

Turn over tax also known as cascade tax is a tax that the government imposes on certain goods
and services at every stage of production and transaction. 1 Barend defined turnover tax as a tax
calculated and payable on a taxable turnover of the registered small and micro businesses by
applying the relevant tax rate.2 Zee also defined turn over or cascading tax as a multi-stage
general tax which is imposed at various stages of the production to distribution chain. 3 What
makes turn over tax different from value added tax is that it is imposed on the gross receipt rather
than on the value added. Turn over tax does not have an input credit mechanism. It is also
different from retails, manufacturer or wholesalers sales tax because of its multistage nature
while the rest are single stage taxes. By their nature turnover taxes are cascading as a tax is
imposed at each stage of the transaction due to the absence of mechanisms the taxes imposed on
inputs. This tax is usually regarded as a presumptive kind of tax used by developing countries
such as Ethiopia for the sake of simplicity though accuracy might be affected. 4 Turnover tax is at
usually taxed a very low rate compared to most taxes, but it is calculated on gross income
without any deduction.5 What makes turn over taxes different from value added taxes is that they
do not account for taxes already paid, with a new tax being collected at each stage of
transaction.6
In Ethiopia Turn over tax was introduced for the first time in 1963 by expanding the already
existing specific sales tax which was levied only on manufacturing level into the wholesalers and
1
Jason Gordon https://thebusinessprofessor.com/en_US/accounting-taxation-and-reporting-taxation/cascade-tax-
definition; last Accessed on 27/12/2021
2
Barend Lindeque, Turn over tax: Is it good to be true for micro- Business in South Africa? An Exploratory Study;
Available at https://repository.up.ac.za/bitstream/handle/2263/30665/Lindeque_Turnover_2012.pdf?
sequence=3&isAllowed=y, last accessed on 27/12/2021
3
Howell H. Zee, Tax Cascading Concept and measurement,in Tax Policy Handbook, IMF fscal Affairs Deparment
edited by Parthasarathi Shome,(1995), P. 75
4
Barend Lindeque, Turn over tax: Is it good to be true for micro- Business in South Africa? An Exploratory Study;
Available at https://repository.up.ac.za/bitstream/handle/2263/30665/Lindeque_Turnover_2012.pdf?
sequence=3&isAllowed=y, last accessed on 27/12/2021
5
KIPPRA, Tax Compliance Study. Tax Policy Unit, Macroeconomics Division, Kenya Institute of Public Policy
Research and Analysis, Nairobi,(2004)
6
Kimaru Thairu, Adoption of Turn over tax in Kenya: A snapshot of Small and Medium Enterprises in Gikomba
Market, Nairobi kenya, International Journal of Social Sciences and entrepreneurship Vol.3, Issue 1, (2014), P.18-30
retailers’ level.7 Since then cascading turn over tax continued as a major indirect tax in Ethiopia
until it was eliminated in 1993 and replaced with a single stage sales tax. 8 However, after ten
years of its absence from the Ethiopian tax system, it was reinstituted again in 2003 as a
supplementing tax to the newly introduced Value Added Tax to be applied for small
businesses.9I n fact, Value Added Tax like in any other country was introduced in the Ethiopian
tax system to curb the bad effects of the turn over tax. 10 When compared to the turn over tax,
VAT has brought several good qualities that the turn over did not have. 11Some of the perceived
disadvantages of the turn over tax that were regarded as avoided using the VAT are (1) Its
cascading effect or a tax on tax effect; (2) distortion on the production and consumption choice
of the economy and consumers, (3) Encouraging of the vertical integration of businesses; (4) its
unpopularity among the people due to its burden;(5) It taxes capital and as a result it is anti-
investment and anti-growth; and (6) its role in minimizing tax avoidance schemes. 12Despite the
adoption of VAT by several countries, collecting VAT on all businesses small and big has been
impossible due to administrative limitations especially for the governments of developing
countries. Of course originally, the dominant view among tax experts was to make sure that all
potentially taxable transactions are caught in the fiscal net by lowering the VAT threshold as low
as possible and even to the elimination of any threshold.13However, gradually it became much
clearer that the cost of lowering the threshold is higher than the revenue gain due to the
regressive nature of the VAT compliance cost and administrative cost.14

7
Proclamation to Provide for Payment of Transaction Taxes, 1963, Proclamation. No. 205, Negarit Gazette, 22nd
year, No. 18
8
Sales and Excise Tax, 1993, Proclamation number 68, Negarit Gazette, 52nd year, No. 61
9
See Federal Democratic republic of Ethiopia Turn Over Proclamation Number 308/2002, Page2024, number 21,
9 year,
th

10
Allan A. Tait, Value Added Tax, International Practice and Problems, P. 9
11
Cnossen Modernizing VATs in Africa, P 1
12
Sijbren Cnossen Modernizing VATs in Africa,(2019), P. 1
13
Richard M. Bird and Pierre Pascal Gerdon, The VAT in Developing and Transitional Countries, P. 115
14
Keen, M., and J. Mintz (2004) “The Optimal Threshold for a Value-Added Tax,” Journal
of Public Economics,88(3/4): 559–76.
As a result, almost all countries except few provide registration thresholds (The VAT thresholds
vary by country though) in order to determine businesses which are to be excluded from VAT. 15
Likewise Ethiopia had put a VAT registration threshold of one million annual gross sales
(originally the registration threshold was five hundred thousand birr) for businesses to
mandatorily be registered.16Those businesses whose annual turnover is below the threshold are
not duty bound to register for and to collect VAT. Nevertheless, the registration of some
businesses and leaving others out of the scope of VAT might raise equity issues and distort the
economy. While some countries exempted businesses below the VAT threshold from sales-based
taxes altogether, others countries such as Ethiopia introduced simplified taxes such as a turnover
tax.17 Hence, to fill the gaps created because of the registration threshold, Turn over tax was
enacted as a necessary evil with all its drawbacks.18

6.2 Scope of the Turn over Tax

All persons who are not registered for VAT and who supply goods and render services except
exempt supplies have an obligation to register for and pay turn over tax. 19As we explained
earlier, businesses who do not register or who do not have to register for VAT because their
annual gross sales is below one million Ethiopian birr or those who do not register voluntarily
even if their annual gross sales is below one million have an obligation to register for and collect
turnover tax.20For a person to be a taxable person, conditions that are applicable for registration
to VAT (Except the registration Threshold) are also applicable for turnover tax. In fact the law is
not as vivid as it is in the VAT. The turn over proclamation for instance defined the term
“taxable transaction” in the definitional part of the proclamation but does not use it in the body
and the law and does not require “taxable activity” as a precondition. The law simply provides

15
David Philips and Lucie Gadenne, The Impact of VAT and turn over Taxes on firms’ Supply Chain Chices:
Evidence From India,IFS Briefing Note BN 231,
16
See VAT Amendment Proclamation of number 1197/2019
17
David Philips and Lucie Gadenne, The Impact of VAT and turn over Taxes on firms’ Supply Chain Chices:
Evidence From India,IFS Briefing Note BN 231,
18
John F. Due and Ann F. Friedlaender, Government Finance, Economics of the Public Sector, 2002, pp. 415-416;
Cited n Tadesse Lencho, Legislative history of modern taxes in Ethiopia,(1941-2008)
19
FDRE, the Turnover Tax, 2002, Proc. No. 307, Federal Negarit Gazeta, 9th year,No. 21
20
FDRE, The Value Added Tax, 2002, Proc. No 285, Federal Negarit Gazeta, 9th year, No. 21
that a person who sales goods and services has an obligation to collect turn over tax. 21It is not
clear why the law defined the term “taxable transaction” if it does not use it as a condition from a
person to be a taxable person. From the law, it is not clear if anybody who sales goods and
services have an obligation to collect turn over tax or if the person should be engaged in a
continuous and regular activity to be taxable. The plain meaning seems to connote that anyone
who sales goods and services is liable to collect and transfer tax to the government.
Nevertheless, it is unjustifiable to oblige any casual non regular sales by a person to collect
turnover tax and free him from value added tax. If casual sales do not attract VAT, for a stronger
reason, it should not attract TOT. Hence, a person must be engaged in a taxable transaction i.e an
activity which is continuous and regular so that he will be obliged to collect TOT.
Therefore, Just like the registration for VAT (except the one million birr threshold), those who
must register for and collect turn over tax are those who;
 Supply goods or render services
 are engaged in a taxable transaction
 receive consideration for their supplies
 supply the goods or services in Ethiopia or partly in Ethiopia
6.3 Rates of Turn Over Tax

Unlike the value added tax which applies a single uniform rate, turn over tax has two different
tax rates. Goods and services are treated with different tax rates. While all sorts of goods are
taxed at two per cent (2 %), services are taxed in two alternatives. 22 Accordingly, the services
rendered by the contractors, grain mills services, rentals of tractors, and combine harvesters are
taxed at two percent whereas all other services rendered locally are taxed at the rate of ten per
cent (10 %).23 The base used to apply the tax rates is the gross receipt or turn over received by
the TOT registered person.24 Unlike the VAT whose base is the vale added only, the base of TOT
is the total price of the goods or services.

6.4 Exempted Transactions

21
FDRE, the Turnover Tax, 2002, Proc. No. 307, Federal Negarit Gazeta, 9th year,No. 21
22
FDRE, the Turnover Tax, 2002, Proc. No. 307, Federal Negarit Gazeta, 9th year,No. 21
23
FDRE, the Turnover Tax, 2002, Proc. No. 307, Federal Negarit Gazeta, 9th year,No. 21
24
FDRE, the Turnover Tax, 2002, Proc. No. 307, Federal Negarit Gazeta, 9th year,No. 21
The transactions which are exempted by the turn over proclamation are identical to the
transactions which are exempted by the VAT legislation. The standard exemptions provided by
the turnover tax proclamation similar to the VAT proclamation include the used dwelling,
financial services, educational services, health services, religious services, prescription drugs,
humanitarian services, supply of books, transport services, electricity, water, kerosene, supply by
the disabled individuals, supply of currency and license fees.25In addition to the standard
exemptions, the items that are exempted from ToT by the Directives of MoFED include injera,
publication and supply of books, fuel gas, animal skins and hides, air tickets, pension fund,
agricultural raw materials, medicine, milk, bread, palm oil, wheat, mosquito net, input for
leather, food grain and other cereals, supplies by disabled individuals, license fees.26

6.5 Assessment, Filing of Return and Payment of the ToT

In principle, any businessman who is not registered for VAT has a duty to assess his tax liability
by himself. Indeed, he is expected to assess his tax liability, to prepare a ToT return and to make
a payment together with the submission of the ToT return. Nonetheless, the tax assessment of the
category “C” taxpayers who are not required by the law to keep book of account is made by the
tax authority based on a presumptive taxation using the total gross sale amount of the income
tax.27The taxpayer must submit his tax return and the tax amount to the tax authority within a
month by the end of every accounting period.28 The law has provided varying accounting periods
for the different categories of taxpayers. For category “A” taxpayers the accounting period is
every month, for category b taxpayers it is every three months and for category “C” taxpayers it
is every year.29

Turn over tax is done based on a self assessment system does not however mean that whatever,
the amount assessed by the taxpayers is acceptable by the tax authority. 30 There are cases in

25
FDRE, the Turnover Tax, 2002, Proc. No. 307, Federal Negarit Gazeta, 9th year,No. 21
26
See the Various Circulars at www. Ministry of Finance. Gov. et
27
FDRE, the Turnover Tax, 2002, Proc. No. 307, Federal Negarit Gazeta, 9th year,No. 21
28
FDRE, the Turnover Tax, 2002, Proc. No. 307, Federal Negarit Gazeta, 9th year,No. 21
29
FDRE, the Turnover Tax, 2002, Proc. No. 307, Federal Negarit Gazeta, 9th year,No. 21
30
FDRE, the Turnover Tax, 2002, Proc. No. 307, Federal Negarit Gazeta, 9th year,No. 21
which the tax authority might reassess the tax liability of the taxpayer. These are when the books
of account prepared by the taxpayer are unacceptable, when the amounts of tax are understated,
if the taxpayer fails to submit his tax amount, if no book of account and other supporting
documents are maintained. On the above situation, the tax authority can make official assessment
taking the relevant and available information and taking the fair market value of the sales that are
understated by the taxpayer.31

31
FDRE, the Turnover Tax, 2002, Proc. No. 307, Federal Negarit Gazeta, 9th year,No. 21