Course Title: Public Finance &

Taxation
 Course Contents
• Chapter I: Basics of Public Finance
• Chapter 2: Meaning and Characteristics of Taxation
• Chapter 3: Public Finance in Ethiopia
• Chapter 4: Ethiopian Tax System
 Chapter – one
Basics of Public Finance
• Chapter Contents
• Definition of public finance
• Scope of public finance
• The role of government in the economy
• Public expenditure
• Public revenue
• Public debt
• Public administration
•Fiscal federalism
 Introduction
 Governments, all over the world have started number of public
projects.
 To provide social facilities, the government requires adequate
revenue.
 Public Finance, therefore, deals with the income and
expenditure of public authorities.
 It deals with the financial operations or finances of the
government.
 The government raises revenue from internal as well as external
sources to incur huge expenditure on various functions the
government has to perform.
 Cont…
 Public finance is thus concerned with the use and
accomplishment of essential monetary resources of the
government.
 Public finance deals with how and through what different
sources the government gets income, how it spends it and how
it controls and administers its incomes and expenditures.
 Therefore, the subject matter of public finance deals with፡-
– Public revenue,
– Public expenditure, and
– Public debt.
 Definition of Public Finance
 Public finance is a very old science and different economists
have defined it in their own ways.
– Is concerned with the income and expenditure of public
authorities and with the adjustment of one to the other.” Huge
Dalton
– Deals with the provision custody and disbursement of
resources needed for conduct of public or government
functions.” Lutz
– Is a science which deals with the activity of the statement in
obtaining and applying the material means necessary for
fulfilling the proper functions of the state.” Carl Plehn
 Cont…
– Is the study of the principles underlying the spending and
raising of funds of public authorities.” Findley Shirras
– Studies the economic activity of government unit.”
Buchanan
– Deals with expenditure and income of public authorities of
the state and their mutual relations as also with the financial
administration and control.” Bastable
All of them say that it is a study of income and expenditure
of the central, state, and local governments.
– Government performs many functions which the individual can
not or do not perform.
– Therefore, rising of funds for the expenditure and their
disbursement constitutes the subject of Public finance.
 Scope of Public Finance
 The subject matter of the public finance is classifies under five
broad categories.
1. Public Revenue
2. Public Expenditure
3. Public Debt
4. Financial Administration and Control, and
5. Economic Stability and Growth.
 Public Revenue
• Revenue includes all incomes irrespective of the source they are
obtained from.
• Thus, in the wider sense, we can include taxes as well as
borrowings under public revenue.
• But in the interest of the clarity, public revenue includes only
those incomes which do not carry with them the obligation of
repayment for the state.
• Thus, public revenue implies raising income by way of taxation.
 Public Expenditure
• Public expenditure is the end and aim of the collection of
revenues.
• Public expenditure are concerned with:-
– Principles and problems relating to the expenditure of public
funds.
– The fundamental doctrine that governs the distribution of the
expenditure among various heads.
– Various effects of public expenditure on total employment, total
income, aggregate investment, output, distribution and general
price level etc.
– Through public expenditure, the government contributes to the
financial flows of the economy and conditions the demand and
supply patterns.
– Public expenditure is also used as a tool for implementing welfare,
growth, stabilization and other policies, by the government.
 Public Debt
• A public authority can obtain income through loans and public
borrowings.
• The study public debt also includes:
– Methods and objectives of public borrowings;
– Management of public debt
• Economic Stability and Growth
• The study of public finance includes fiscal policy of the
government in dealing with inflationary and deflationary
situations, instability of the price level, promotion of full
employment, growth of economy, welfare of the people, etc.
 Financial Administration and Control
• Public finance also examine the mechanism by which the above
processes are carried on.
• With out a study of relevant dimensions of financial administration the
subject of public finance remains incomplete.
• Thus financial administration and control include the following:
– Study of budgets and their procedure.
– Budget as a instrument of securing certain objectives, such as
promotion of employment, economic growth with stability,
welfare of the weaker sections, infrastructural development for
promoting private investments, etc.
– Financial and physical controls through different fiscal tools for
controlling private expenditure in the economy to avoid the effects
inflation deflation, recession etc.
 Difference between Public Finance and Private Finance
• Finance in general means public as well as private finance.
• Public finance relates to the money-raising and income-
expenditure functions of the government.
• Private finance refers to the income-expenditure phenomenon of
an individual or private business.
• By private finance mean the financial problems and policies of
an individual economic unit.
Similarities
 Satisfaction of Human Wants;-
• Public finance is concerned with the satisfaction of social or
collective wants, whereas
• private finance is concerned with the satisfaction of personal
or individual wants.
 Cont…
 Maximum Advantage from expenditure;-
– Both the public finance and private finance try to secure
maximum advantage or maximum benefit.
 Borrowings;-
– public and private finance is that many times both have to be
obtained from the market in the form of borrowings whenever the
expenditure of either the government or any individual or firm
exceeds their income/revenue.
Engagement in Similar Activities;-
– Both the private and public sectors are engaged in activities that
involve lots of purchases, sales and other transactions. Or
– they are engaged in production, exchange, saving capital
accumulation, investment, and so on.
 Cont…
 Scarcity of Resources;-
– The scarcity of resources is also an important factor which is
common to both.
– They have unlimited objectives, whereas the resources are limited.
 Problem of Adjustment of Income and Expenditure;-
– Public and private finance is that both the public as well as private
sectors face the problem of adjustment of income and expenditure.
 Cont…
Dissimilarities
 Motive;-
– The motive of private finance is personal interest or benefit,
whereas the motive of public finance is social benefit or public
welfare.
 Adjustment Approach of Income and Expenditure;-
– Private tries as far as possible to adjust his expenditure to his
income because his expenditure depends on his income.
– Conversely, the government first prepares its budget. In other
words, the government first determines its expenditure and then
devises ways and means to raise the requisite revenue to meet its
expenses.
 Cont…
 Nature of Resources:-
– The resources (private finance) of an individual are more or less
limited, whereas the resources of the government (public finance)
are enormous.
 Coercive Methods:-
– An individual (private finance) cannot use coercive methods to
raise his income, Where as the government (public finance) can
use forceful methods to collect revenue.
– In other words, to collect revenue, the government imposes taxes
at a high rate on the people irrespective of their capacity to pay.
Private individuals or bodies have no such powers.
 Cont…
 Secrecy of Budget:-
– Public finance is an open affair as the government gives utmost
publicity to its budget by publishing it in newspapers and by
showing it on television. For example, the Ethiopian government
tells to the public the yearly approved budget by parliament,
whereas private finance is a secret affair.
– An individual tries to keep his accounts secret as he does not want
his competitors to know his real financial position.
• Long/Short-term Consideration: -
– Private individuals incur expenditure in those areas of business
which give quick returns. They, as individuals keep in view short-
term considerations.
– Government incurs expenditure keeping in view the long-term
considerations, such as construction of dams, multi purpose
hydro-electric projects, etc.
 Cont…
 Elasticity of Finance:-
– Public finance is elastic in nature-as compared to private finance.
Public finance can be increased by imposing various taxes as
public finance is open to drastic changes. Private finance on the
other hand, cannot be increased as there is not much scope for
changes in private finance.
 Deliberation in Expenditure:-
– The pattern of expenditure of an individual is governed by habits,
customs, status, personal needs etc. On the contrary, the pattern of
public expenditure is governed and controlled by deliberate
economic policy of the Government
 Right to Print Currency: -
– The government has a right to print currency which is legal,
whereas private individual does not enjoy such a right.
 The Role of Government in the Economy
 In the narrowest sense, the government's involvement in the economy
is to help correct market failures or situations in which private markets
cannot maximize the value that they could create for society.
 This includes:
providing public goods,
internalizing externalities (consequences of economic activities
on unrelated third parties), and
enforcing competition
 In general the role of the government
 To promote economic efficiency and growth
 For fair distribution of income through Taxation
 To provide a generous social security system and an egalitarian
society
 To strengthen the institution
 Public Expenditure
• PE is incurred by public authorities - either for the satisfaction of
collective needs of the citizens or for promoting their economic
and social welfare.
• It is incurred by the government for the attainment of public
good.
• Every government has to maintain law and order, armed forces
for providing protection, schools, health of the people, arranging
for cheap food, cloth and low-cost housing for the poor and so
on.
• All these mixed activities which are increasing every year
require huge funds.
• Therefore public expenditure, deals with the expenditure which a
government incur for its own maintenance, the society and the
economy and helping other countries.
 cont…
• Technically, in the structure of a budget, most governments
classify public expenditure into two:
• Current expenditure, and
• Capital expenditure
• Current expenditures
– They are also referred to as non-developmental expenditure.
– All sorts of administrative and defense expenditure
– They are intended for continuing the existing flow of goods and
services and maintaining the capital of the country whole.
• Capital expenditures
– It contribute to increased productive capacity of the nation.
– They are also known as development expenditure.
– Example: Expenditures on construction of dams, public works,
state enterprises, agricultural and industrial development.
 Objectives of Public Expenditure
• Dr. Dalton divided the aims of public expenditure into two parts:
1. Security of life against the external aggression and internal
disorder and injustice.
2. Development or up gradation of social life in the
community.
• The public authority works in many ways for the benefit of the
people. like public health and education.
• The responsibilities of the government are increasing every
year
• Designed to optimize the level of investment
• Incurred at an increasing rate in the backward region to uplift
their economy
 Reasons for Growing Expenditure
• Population growth
• Increasing urbanization
• Maintenance of law and order
• Welfare activities
• Provision of public goods and utility services
• Servicing of public debt
• International obligation
• Defense
• Transport and Communication
• Rising Trend of Prices
• The Rural Development Effect
 Effects of Public Expenditure
 The effects of public expenditure;
– Effects of public expenditure on production.
– Effects of public expenditure on distribution.
– Effects of public expenditure on employment.
– Effects of public expenditure on economic stability.
– Effects of public expenditure on economic development.
 Public Revenue
 PR is very necessary for the govt. to perform its various
functions for the welfare of the society.
 Increasing activities of the government are the cause of
increasing public expenditure.
 Methods of public revenue and their volumes have significant
impact on production & distribution of wealth & income in
the country.
 It has effects on the nature and the volume of economic
activities and on employment.
 According to Dalton, the term “public revenue” has two sense-
wide and narrow.
 Cont…
• In its wider sense it includes all the incomes or receipts
which a public authority may secure during any period of
time.
• In its narrow sense, it includes only those sources of income
of the public authority which are ordinarily known as
“revenue resources”.
• To avoid ambiguity, thus, the former is termed “public
receipt” and the latter “public revenue”.
• As such, receipts from public borrowings is mainly
excluded from public revenue.
 Sources of Public Revenue
• The important and common sources of public revenue are:
– Taxes
– Income from currency
– Sale of public assets
– Commercial revenues
– Administrative revenues e.g., Fees, fines, licenses.
– Grants and gifts
 Cont…
Basic Categories of Government Receipt
– Revenue Receipts
– Capital Receipts
1. Revenue Receipts
It includes “routine” and “earned” ones
1. Tax-revenue
2. Non-tax revenue.
 Cont…
I. Tax Revenue Receipts
• Tax revenue itself is divided into three sections:
i. Taxes on income
• It covers corporation tax, income tax and similar other
taxes, if any, in force.
ii. Taxes on property and capital transactions
• taxes on specific forms of wealth and its transfers such as
estate duty, wealth tax, gift tax, house tax, land revenue and
stamps and registration fees, etc.
iii. Taxes on commodities and services
• This section includes taxes on production, sale, purchase,
transport, storage, and consumption of goods and services.
 Cont…
2. Non-tax Revenue Receipt
i. Currency, coinage and mint:
– This category covers the receipts of Currency Notes Press,
Mints and Profit from circulation of small coins.
ii. Interest receipts, dividends and profits:
– Interest receipts on loans by the government to other parties,
– Dividends and profits from public sector undertaking.
• E.g contributions from railways and posts and
telecommunications,
 Cont…
iii. Other non–tax revenue:
• It covers revenue from various government activities and
services such as from:-
– administrative services,
– public service commission,
– police,
– jails,
– agricultural and allied services,
– industry and minerals,
– water and power development services,
– transport and communications,
– supplies and disposal, public works, education, housing,
information and publicity, broadcasting, grants-in-aid and
contributions etc.
 Cont…
2. Capital Receipts
 Capital receipts of the government take money forms.
 The most important one comprises of borrowings which can be
classified in terms of their origin and maturity
– on the basis of origin, public borrowings may be external (outside the
country), or internal (with in the country).
– In terms of maturity, there may be, ”long term”, “medium term”, or
“short term” loans with specific demarcation of boundaries for each.
• They may be
– marketable or non- marketable,
– interest-free or interest bearing, etc.
– Some capital receipts may be in the form of grants and
donation.
 Sources of Public Revenue in Ethiopia
• Tax Revenue
• Non-Tax Revenue
 Tax Revenue
 Direct Taxes In Direct Taxes
– Personal Income tax - Customs duties
– Business Income tax - Turnover tax
– Capital gain tax - Excise tax
– Rental Income tax - VAT
– Interest Income tax
– Tax on dividend and lottery
– Rural and Urban land use fees
 Cont…
 Non-tax revenue
– Administrative revenues
– Government investment income
– Dividend
– Privatization proceeds
– Capital income form sale of goods and services
 Public Debt
• Public debt is of recent growth and was unheard of prior to the
18th century.
• In modern times, however, borrowing by the States has become
a normal method of government finance along with other
sources such as taxes, fees, etc.
• The government may borrow from banks, business houses, other
organizations and individuals. Besides, it can borrow within the
country or from outside.
• The government loan is generally in the form of bonds (or
treasury bills if the loan is required for short periods) which are
promises of the government to pay to the holders of these bills
the principal sum along with interest at the stated rate.
• Borrowing is resorted to in order to provide funds for financing a
current deficit.
 Cont…
 Public debt is also sometimes referred to as government debt.
 It is a term for all of the money owed at any given time by any
branch of the government. i.e.
– federal government,
– the state government, and
– even the municipal and local government.
 Public debt is a debt or loan taken by the govt. from
– own people
– Foreign countries or both.
 Cont…
 Classification of public debt
– Source of Borrowing
– Purpose of the loan
– According to nature
– Funded and unfunded debt
– Time Duration of loan
 Effects of PD
 Public borrowing from individuals and firms has effects on all
aspects of economic life
• Effects on Consumption
• Effects on Production and Investment.
• Effects on Distribution
• Effects on National Income
• Effects on Liquidity
• Effects on Money Market
 Burden of Public Debt
• Public borrowings are to be paid along with interests.
• Govt. imposes new taxes upon the people to repay the loans
and meet the annual interests on such loans.
• The sacrifice of the people in the form of tax payment is the
burden of public debt.
• If the debt is taken for productive purposes,
– For e.g., for irrigation, transportation, roads, information
technology, human skill development, etc., it will not mean any
burden.
• But if the debt is unproductive it will impose both money
burden and real burden on the economy.
 Cont…
• The burden of public debt into:
– Burden of internal debt
– Burden of external debt
• Burden of Internal Debt
– Internal debt involves a series of transfers of wealth within the
country, i.e., from lender to government and then later on at the
time of redemption from government to lender.
– Money is thus transferred from one section of the community to
other sections.
 Cont…
• Burden of External Debt
– External debt also involves a series of transfer of wealth from the
foreign lender to the borrowing country, and when it is repaid the
transfer is in the opposite direction.
– As the borrowing country paid interest to the foreign lenders, a
direct money burden is fall on the whole community.
– This burden depends on the rate of interest.
– If the rate of interest is high, the money burden, is also high and
vice-versa.
– The community is also suffered from real burden of external debts.
Public Administration
Fiscal Federalism
 Chapter – Two
Meaning and Characteristics of Taxation
• Chapter Contents
• Objectives of taxation
• Principles of taxation
• Tax classifications
• Tax rate structures
• Shifting and incidence of taxation
• Tax evasion, avoidance and delinquency
 Introduction
 Government has played an important role in the socio economic
development of society.
 Social development may be in the form of raising the level of living
and social welfare in the form of providing social amenities to the
people.
 Social amenities are in the form of education, health and sanitation,
utilities like electric supply, water supply etc, and recreation facilities.
 The process of socio-economic development requiring huge
expenditure cannot be carried unless the government has the
perennial source of income.
 Every government has two important sources of revenue.
 These are:
– Tax sources, and
– Non-tax sources.
 Definition of Taxation
 What is a Tax?
 Tax is one of the most important sources of revenue to every
government.
 In the earlier days, payment of taxes was optional.
 A choice was given to the people to pay the tax and to avail the
benefit of social amenities in the form of education, health and
sanitation, utilities and recreation facilities.
 Every Government imposes two kinds of taxes:
(1) Direct taxes, and
(2) Indirect taxes
 A tax, in the modern times, therefore is a compulsory levy and
those who are taxed have to pay the sums irrespective of
corresponding return of services or goods by the government.
 Cont…
 Objectives of Taxation
 Initially, governments impose taxes for three basic purposes:
– to cover the cost of administration,
– maintaining law and order in the country and
– for defense.
 But now government’s expenditure pattern changed and gives
service to the public more than these three basic purpose and it
restore social justice in the society by providing social services
such as:
– Public health,
– employment,
– pension,
– housing,
– sanitation and other public services.
 Cont…
 Therefore, governments need much amount of revenue than before.
 To generate more revenue a government imposes taxes on various
types.
 In general objective of taxations are:
– Raising revenue
– Removal of inequalities in income and wealth
– Ensuring economic stability
– Reduction in regional imbalances
– Capital accumulation
– Creation of employment opportunities
– Preventing harmful consumptions
– Beneficial diversion of resources
– Encouragement of exports
– Enhancement of standard of living
 Characteristics of a Good Tax System
– Tax is a Compulsory Contribution
– The Assesses will be required to pay Tax if is due from him
– Taxes are levied by the Government
– Common Benefits to All
– No Direct Benefit
– Certain Taxes Levied for Specific Objectives
– Attitude of the Tax-Payers
– Good tax system should be in harmony with national
objectives
– Tax-system recognizes basic rights of tax-payers
 Principles of Taxation
• A tax system (that is, the set of all taxes) for achieving certain
objectives chooses and adheres to certain principles which are
termed its characteristics.
• A good tax system therefore, is one of which designed on the
basis of an appropriate set of principles, such as equality and
certainty.
• Mostly, however, objectives of taxation conflict with each other
and a compromise is needed.
• The first set of such principles was enunciated by Adam smith
(which he called Canons(standards) of Taxation)
 Canons of Taxation
 The four canons of taxation as prescribed by Adam Smith are the
following:
• Canon of Equality
• Canon of Certainty
• Canon of Convenience
• Canon of Economy
• In addition to the above four canons given by Adam smith, the
following other canons have been advanced by Basable and
other economists.
• Canon of Productivity
• Canon of Elasticity
• Canon of Diversity
• Canon of Simplicity
• Canon of Expediency
 Canon of Equality
 Every one is subjects of every state ought to contribute towards
the support of the government, as nearly as possible, in
proportion of their respective abilities, that is, in proportion to
the reserve which they respectively enjoy under the protection of
the State.
 It implies what the income which a person enjoys under the
protection of the State, should be taxed on the proportional rate
of taxation.
 But modern economists do not agree with Adam Smith.
 They advocate progressive taxation to observe the canon of
equality.
 In other words, they advocate progression should be the basis
for imposing taxes.
 Canon of Certainty
• This canon is meant to protect the tax payers from unnecessary
harassment by the ‘tax officials’.
• It implies that the tax-payer should be well informed about the
time, amount and the method of tax payment.
• According to Adam Smith, “the tax, which each individual is
bound to pay, ought to be certain and not arbitrary.
• The time of payment, the manner of payment, the quantity to
be paid, ought all to be clear and plain to the contributor and to
every other person.”
• Adam Smith was also of the view that the government must also
be certain of the amount which it derives from a particular tax.
• Thus this canon is equally important both for the individual and
the state.
 Canon of Convenience
• According to Adam Smith, “every tax ought to be so levied at
the time or in the manner in which it is most likely to be
convenient for the contributor to pay it.”
• In other words, taxes should be imposed in such a manner and at
the time which is most convenient for the tax-payer, i.e., the best
time for the collection of land revenue is the time of harvest.
• Similarly, taxes on rent of houses should be collected when it is
most convenient for the contributor to pay.
 Canon of Economy
• This canon implies that the administrative cost of tax
collection should be minimum, i.e., the difference between the
money, which comes out of the pockets of people and that which
is deposited in the public treasury, should be as small as
possible.
• Administrative cost of tax collection should be minimum
because levying of a tax may require a great number of
officers, whose salaries may eat up the greater part of the
produce of the tax, and whose pre-requisites may impose another
additional tax upon the people.
• Hence, the administrative cost should be minimum.
 Canon of Productivity
• The productivity of a tax may be observed in two ways.
• In the first place, a tax should yield a satisfactory amount for
the maintenance of a government.
• In other words, the tax should be such that it procures a
considerable amount of revenue for the expenditure of the
government,
• Secondly, the taxes should not obstruct and discourage
production in the short as well as in the long run.
 Canon of Elasticity
 The canon of elasticity implies that yields of taxes should be
increased or decreased according to the needs of the
government.
 The government may need funds to face natural calamities and
other unforeseen contingencies.
 It may need funds to finance a war or for development
purposes.
 The government resources can be raised quickly only when the
system is elastic.
 Canon of Diversity
• Implies that the tax system should be diverse in nature.
• In other words, in a tax system, there should be all types of
taxes so that everyone may be called upon to contribute
something towards the revenues of the state.
• Thus, the governments should adopt multiple tax system.
 Canon of Simplicity
 The canon of simplicity implies that a tax should easily be
understood by the tax-payer, i.e., its nature its aims, time, of
payment, method and basis of estimation should be easily
followed by each tax-payer.
 In other words, the tax imposed on the tax-payers should be so
simple that they are able to guess easily the aim of its imposition
and they are not confronted with accounting, administrative or
any other difficulties.
 Canon of Expediency
 This canon implies that the possibilities of imposing a tax should
be taken into account from different angles, i.e. its reaction
upon the tax- payers.
 Sometimes it is seen that tax may be desirable and may be
productive and may have most of the characteristics of a good
tax, yet the government may not find it expedient to impose it,
for example, progressive agricultural income tax, but it has not
been imposed.
 So far in the manner it should have been imposed.
 Effects of Taxation
 Taxation these days is not used as means of raising revenues
only, but it is an important instrument for achieving socio-
economic objectives, such as:-
• Regulation of consumption and production,
• Controlling booms and depression,
• Promoting economic growth and removing inequalities of
income.
 The economic effects of taxation may be good as well as bad.
 Therefore, the government should not keep only the revenue
considerations in mind, but the economic effects of taxation
should also be considered.
 Cont…
 To put it in the words of Dalton, “The best system of taxation
from the economic point of view is that which has the best, or
the least bad economic effects.”
 Effects of taxation can be analysed in terms of
• Production,
• Distribution and
• Stabilization.
 Effects of Taxation on capacity to Work, Save and Invest
 Capacity to Work:- Imposition of higher tax reduces the
purchasing power of the tax payer and his ability to obtain the
necessaries, comforts and luxuries of life.
 Capacity to Save:- Ability to save is adversely affected by
taxation as taxes fall on income and savings depend on income.
• When income is reduced by taxation, savings automatically
decline.
 Capacity to Invest:- When ability to save is adversely affected
by high taxes, ability to invest of those who take investment
decisions is automatically reduced.
 Effects of Taxation on the will to Work, Save, and Invest
 Effects on the Will to Work:- unduly high rates of income tax,
wealth tax and commodity taxes adversely affect the desire of
the people to work hard.
 Effects on the Will to Save:- If a tax payee has limited income
and is hardly sufficient to meet his/her day to day requirements it
will be difficult for him to save anything.
 Effects on the Will to Invest:- If savings are taxed, nothing will
be left with the people for investment purposes.
• To enhance the will of the people to invest, the government should
devise such a tax policy which provides tax incentives to those
who divert their savings towards investment.
 Effects of Taxation on the Composition and Pattern of Production
 The effects of taxation on the consumption and pattern of
production depend upon allocation of resources.
 When higher taxes are imposed on some industries, resources
will shift from the high taxed industries to low taxed industries.
 Likewise, when a tax rebate is offered, it will encourage
allocation of resources in favour of developing industries.
 Similarly, there will be reallocation of resources from high taxed
regions to the low taxed regions.
 High rate of tax on goods of harmful consumption has a
beneficial impact as the production of these goods will be
diverted to low-taxed essential goods.
 Cont…
 Taxes may thus change the pattern of production in an economy.
 A high tax on the production of luxuries may improve the
production of necessaries.
 Some taxes, however, have no effect on diversion of resources;
• Example:- taxes on windfall gains, high land values, monopoly
profits and non-differential taxes such as income-tax, etc have no
effect on consumption or pattern of production.
 Effects of Taxation on Distribution
There are two aspects of an economy:
1. Income Generation
2. Income Distribution
 Income generated in society if not distributed properly will
create inequality in the distribution of income and wealth.
 It will give rise to the creation of two classes that is the class of
the rich and the class of the poor.
 The gap between rich and poor will lead to class conflict which
may prove disastrous to the society.
 Every government in the world tries to bridge this gap by
imposing higher taxes on the richer section of the society and the
proceeds realized from such taxes are distributed among the
poorer section of the society by way of providing social
amenities to them.
 Cont…
• The effects of taxation on the distribution of income and wealth
among different sections of the society, however, depend upon two
factors:
– Nature of taxes and tax rates
– Kinds of taxes
Nature of taxes and tax rates
• By nature, taxation may be proportional, progressive or regressive.
• The nature of taxation also implies as how the burden of taxation is
distributed among different section of the community.
– Proportional:- if all the tax payers pay the same proportion of their income as
tax.
– Progressive:-if larger is the tax payers income, the greater is the
proportion that he/she pays as tax.
– Regressive:- if larger is the tax payee’s income, the smaller is the
proportion, which he pays as tax.
 a) Effects of Regressive Taxation on Distribution
• If regressive taxation is followed, the inequalities may increase in
the distribution of income and wealth, as the burden of taxation
will fall more heavily on the poor than on the rich.
• A toll-tax is regressive as the amount of the tax is the same for the
rich and the poor, while the utility of money, which is paid in tax, is
greater for the poor than the rich.
• A regressive tax thus tends to widen the gap of inequality.
 b) Effects of Proportional Taxation on Distribution
• Under proportional taxation, inequalities would continue as
before, if the income remains the same.
• However, if the income changes in unequal proportions, the
inequalities in income will increase.
• For instance if A’s income is $620 and B’s income is $1,500 and
both are taxed at the rate of 10% the net income of A and B, after
tax payment, would be $618 and $940 respectively.
• The burden of taxation falls heavily on A than on B. Hence,
the burden of taxation is higher on the poor than on the rich.
 c) Effects of Progressive Taxation on Distribution
• Under the progressive system of taxation, inequalities would be
reduced, because a higher proportion of the income and wealth of the
rich would be taken away by taxes than that of poor.
• The higher the income of a person, the greater would be his ability to
pay taxes and vice-versa.
• People who get unearned income should be taxed at higher rate than
poor because of their greater capacity to pay taxes.
• The progressive tax system may be designed in such a way that it may
not have adverse effects on production.
• In other words, tax system should be progressive to the highest
income group, the middle income groups should be subjected to
lower tax rates and the low income groups should be exempted
from taxation.
 Cont…
• While fixing the rates of taxes, progression should be kept in mind.
• Higher taxes should be imposed on the richer section of society and
revenue realized from the rich should be utilized for the benefit of
the poorer section of the society by way of providing social
amenities to them.
• In other words taxes should be progressive because sharper the
progression, greater is the tendency to reduce inequalities.
 Kinds of Taxes
• Indirect Taxes and Distribution
– The burden of indirect taxes, like taxes on commodities is regressive in
nature.
– The commodities on which indirect taxes are imposed are widely
consumed by the poor and they have to spend larger proportion of their
income on such goods than rich.
– That is, propensity to consume is higher for the poor than that of rich.
– Hence, the burden of indirect taxes, like the tax on foodstuff, raw
tobacco, cheap alcohol, etc., falls more heavily upon the poor than upon
the rich.
– However, the indirect taxes may be made progressive if the necessities
are exempted from taxation and luxuries are subjected to higher rates of
taxation so that the tax rates would be higher for the high priced goods.
– Therefore, indirect or commodity taxes in general are and regressive
nature. Thus, inequalities of income and wealth can not reduced by these
taxes.
 Cont…
• Direct Taxes and Distribution
– To bring about equitable distribution of income and
wealth, all taxes which fall heavily or exclusively upon the
richer section of society can have favourable distribution
effects.
– All direct taxes which are based on the principle of
progression and ability to pay may have desire distributional
effects.
 Effects of Taxation on Stabilization
• Economic stability may be judged by the behaviour of prices.
• This does not mean that prices should remain static.
• Conversely there should be a normal rise in price because a normal
rise in price is a sign of healthy economy.
• Problem, however, arises whenever there are price fluctuations.
• These price fluctuations may be known as abnormal economic
situations prevailing in the country.
• Economic stability also implies stability in the economic activity,
output and employment.
• There may be two abnormal economic situations:
• Inflation
• Deflation
 Classification and choice of Taxes
• A direct tax is paid by a person on whom it is levied.
• In direct taxes, the impact and Incidence fall on the same person.
• If the impact and incident of a tax fall on the same person, it is
called as direct tax.
• It is borne by the person on whom it is levied and cannot be
passed on to others.
• For example, when a person is assessed to income tax or wealth
tax, he/she has to pay it and he/she cannot shift the tax burden to
anybody else.
• In Ethiopia, Government levies the direct taxes such as income
tax, tax on agricultural income, professional tax, land
revenues, taxes on stamps and registrations etc.
• The direct taxes levied in Ethiopia take the form of taxes on
income and property.
 Cont…
• Under indirect taxes, the impact and incidence fall on different
persons.
• It is not borne by the person on whom it is levied and can be
passed on to others.
• For example, when the excise duty is levied on the
manufacturer of cement, s/he shifts the burden of tax to the
consumers by raising the selling price.
• Here the impact of excise duty falls on the manufacturer and
the incidence on the ultimate consumers.
• The person who is required to pay the tax does not bear its burden.
Thus, indirect taxes can be shifted.
 Differences between Direct and Indirect Taxes
 Shiftability of the Burden of Tax
 Principle of Ability to Pay
 Measurement of Taxable Capacity
 Principle of Certainty
 Convenience:- indirect taxes are more convenient
 Civic Consciousness
 Nature of Taxation: direct tax Progressive in nature
 Removal of Disparity in Income and Wealth
 Examples:
– direct taxes are income tax, wealth tax, gift tax, estate duty etc.
– indirect taxes are customs duty, excise duty, sales tax, service
tax etc.
 Tax Rate Structures
 On the basis of volume :- Single Vs Multiple Tax System
• Single tax:- It refers to the system in which the taxes are levied only
on the ‘item’ or ‘head of tax’. There is only one kind of tax, which
constitutes the source of public revenue.
• Multiple taxes: - It refers to the system in which the taxes are levied
on various items.
• On the basis of method
• Proportional taxes: - A system that taxes everyone at the same rate, regardless of
his or her income brackets. It is amount increase with the increase in income and
decreases with the decrease in income.
• Progressive taxes: - It is the tax which varies with the change in income of the
different individuals. The rate of tax is gradually higher for the increasing incomes
and lower for the decreasing incomes.
• Regressive tax: - Under it, the larger the income of tax-payer, the smaller is the
proportion that he contributes. A schedule of regressive tax rate is one in which the
rate of taxation decreases as the base increases.
 Shifting and Incidence of Taxation
 Meaning of Impact
– The impact of a tax is on the person who pays the money in the first instance.
– In other words, the man who pays the tax to the government in the first
instance bears its impact.
– The impact of a tax is, therefore, the immediate result of the imposition of a
tax on the person who pays in the first instance.
– It corresponds to what is often, but erroneously called the “original incidence” or
the “primary incidence” of a tax.
– The impact of tax as such, denotes the act of imposing.
– Impact of a tax, therefore, refers to the immediate burden of the tax and not to
the ultimate burden of the tax.
• Meaning of Shifting
– Shifting of a tax refers to the process by which the money burden of a tax is
transferred from one person to another.
– Whenever there is shifting of taxation, the tax may be shifted forward or
backward.
 Cont…
 Forward Shifting
 A tax is said to have shifted forward if price of the commodity which
constitutes the medium for shifting the money burden of tax is
increased.
 Under complete shifting; the price will be higher by the full amount of
tax.
 In forward shifting of commodity taxation, the money burden of a
tax is transferred from the producer or seller to the consumer or
buyer when the tax is initially imposed on the producer.
 Thus, forward shifting is possible with regard to all indirect taxes
which are generally passed partly or shortly to the buyer of goods.
 Cont…
 Backward Shifting
 Backward shifting refers to the process by which the money burden
of commodity tax is shifted from the consumer or buyer to the
producer or seller, if the tax is initially imposed on the consumer.
 In other words, it is a typical situation in which the tax burden is
shifted backward, that is, from the buyer of good to the seller of
goods under the following conditions:
 Backward shifting is applicable in the case of property tax only.
 Backward shifting is effected when the buyer of property shifts the
entire tax burden to the seller of property.
 Cont…
• Meaning of Incidence
• Incidence of a tax refers to the money burden of a tax on the person
who ultimately bears it.
• In other words, when the money burden of a tax finally settles or
comes to rest on the ultimate taxpayer, is called the incidence of a tax.
• The incidence of tax remains upon that person who cannot shift its
burden to any other person, i.e., who ultimately bears it.
• Thus, there are three distinct conceptions- the impact, the shifting and
the incidence of a tax, which correspond respectively to the
imposition, the transfer, and the settling or coming to rest of the tax.
• The impact is the initial phenomena, the shifting is the intermediate
process, and the incidence is the result.
 Distinction between Impact and Incidence
• The impact refers to the initial burden of tax while incidence refers
to the ultimate burden of the tax.
• Impact is felt by the tax payer at the point of imposition of the tax,
while the incidence is felt by the tax payer at the point of settlement
or rest of the tax.
• The impact of the tax is felt by the person from whom the tax is
collected, while the incidence is felt by the person who actually bears
the burden of the tax.
• Impact of a tax can be shifted, but the incidence of a tax cannot be
shifted.
• Thus, impact of the tax is always on the person who is responsible by
law to pay the tax amount to the Government treasury, in the first
instance.
• Incidence may fall on somebody from whom the manufacturer
ultimately recovers the amount, provided he shifts the tax.
 Factors Influencing Shifting and Incidence
• Elasticity of Demand
• Elasticity of Supply
• Market Conditions
• Magnitude of Tax
• Coverage of Tax
• Substitutability of Product
• Public Policy and Tax Laws
 Tax Evasion, Avoidance and Delinquency
• Tax Evasion
• Tax evasion is the general term for efforts by individuals, firms, and
other entities to evade the payment of taxes by breaking the law.
• Tax evasion means fraudulent action on the part of the taxpayer
with a view to violate civil and criminal provisions of the tax laws.
• It can be defined as “tax evasion implies the activities involving an
element of deceit, mis-representation of facts, and falsification of
accounts including downright fraud”.
• Thus, it may be said that the tax evasion is tax avoidance by illegal
means i.e. tax evasion is against the law and is an unsocial act.
• There are two forms of tax evasion.
1. Suppression of income, and
2. Inflation of expenditure.
 Cont…
• Examples for Tax Evasion:
• A trader makes a sale for Birr.20, 000 and does not account it, in
his books under sales. He is evading tax.
• An individual lends his money of Birr.50, 000 to another person at
20% interest per annum and does not include this income in his total
income.
• Under-invoicing of sales and inflation of purchases.
• A manufacturing business employs 30 workers but include 2 more
additional namesake workers (not in actual) in the muster roles. The
sum shown as paid to such additional namesake workers will amount
to evasion.
 Causes of tax evasion
• High rates of taxation
• Complexity of tax laws
• Inadequate Information as to Sources of Tax Revenue
• Lack of publicity
• Moral and Psychological factors
• officers of the department should be men of integrity

• Methods/Sources of Tax Evasion

• Omission to report taxable income
• Maintenance of multiple set of books of accounts
• Opening accounts under dummy names
• Deduction of personal expenses as business expense
• Omission to report several incomes from irregular sources
• Understatement of receipts
• Over-estimation of business expenses
 Tax avoidance
• Tax avoidance is method of reducing ones tax liability by making use
of loopholes in tax law.
• Therefore, tax avoidance is not illegal.
• But whatever be the method an assessee adopts whether it is avoidance
or evasion, the consequences of his action is the same. i.e., loss of
revenue to the state and increase in the burden of the tax on other tax-
payers.
• Thus, tax avoidance is the art of escaping taxes without breaking the law.
Examples for Tax Avoidance:
• An individual sells his let out house property (long-term capital asset) for
Birr.2,000,000 making a capital gain of Birr 60,000. This capital gain
would normally be taxed. But, if he invests the sale proceeds in a
particular mannerstipulated by law, he need not pay any tax.
 Chapter – Three
Public Finance in Ethiopia
• Chapter Contents
• Features of Ethiopian Federal Finance
• Budget and its process in Ethiopia
• Expenditure Assignment
• Revenue Assignment
• Intergovernmental Transfer
• Borrowing
• Budget deficits
 Public Finance In Ethiopia
• Fiscal Federalism
• Federalism is a system of government in which there is division
of powers and functions between federal government and
several regional governments, each of which in its own sphere
coordinates with the others and each of which acts directly on
the people through its administrative machinery.
• Ethiopia follows a federal government structure.
• The government is divided into federal government and 11
regions.
• There are also two special administrations: Addis Ababa and
Diredawa.
• The form of government is parliamentary having both Federal
and state governments with legislative, executive, and Judicial
powers.
 Cont…
• Federalism requires decentralisation of government decision
making and implementation involves delegating more power to
the decentralised divisions of the government.
• The goal of this strategy is to speed up government action and
to deliver a more suitable package of services needed by the
locality.
• One component of federalism is fiscal federalism which gives
local governments some taxing power and expenditure
responsibility, and allows them to decide on the level and
structure of their expenditure budgets.
• The main goal of fiscal decentralisation is to move
governance closer to the people, and this does require
strengthening local government finances.
 Cont…
• Fiscal decentralisation requires local governments with some
autonomy to make independent fiscal decisions.
• Fiscal federalism has four components:-
– Revenue Assignment
– Expenditure Assignment
– Intergovernmental Transfer (subsidy)
– Borrowing
 Features of Ethiopian Federal Finance
 The key features of public finance are as follows
• To facilitate the customer
• Improve the quality
• Raise the extra benefits
• Earn maximum turnover
• Improve goodwill
 The Concept of Budgeting in Ethiopia
 The government budget represents a plan/forecast by
government of its expenditures and revenues for a specified
period.
 Commonly government budget is prepared for a year, known
as a financial year or fiscal year.
 In Ethiopia the fiscal year is from July 7 of this year to July 6 of
the coming year (Hamle 1-Sene 30 in Ethiopian calendar).
 Budgeting involves different tasks on the expenditures and
revenues sides of government finance.
 On the side of expenditure, it deals with the determination of
the total size of the budget (i.e total amount of money for the
year), size of outlays on different functions, and the
magnitude of outlays on various activities;
 Cont…
 On the revenue side, it involves the determination of the size of
the overall revenue and foreign aid.
 Furthermore, budgeting also address the issue of the budget
deficit (i.e. the excess of outlays over domestic revenues), and
it’s financing.
 Budgeting is not solely a matter of finance in the narrow sense.
Rather it is an important part of government’s general economic
policy.
 Budget is not solely a description of fiscal policies and financial
plans, rather it is a strong instrument in engineering and
dynamiting the economy and its main objectives are to devise
tangible directives and implement the long term, medium
term, and annual administrative and development programs”.
 Budget and its process in Ethiopia
 The word Budget originally meant the moneybag or the public
purse.
 The word now means, “Plans of government finances
submitted for the approval of the legislature”.
 The budget reflects what the government intends to do.
 The budget has become the powerful instrument for fulfilling the
basic objectives of government.
 The budget covers all the transactions of the central
government.
 Budget is a time bound financial program systematically
worked out and ready for execution in the ensuing fiscal year.
 Cont…
 It is a comprehensive plan of action, which brings together in
one consolidated statement all financial requirements of the
government.
 The budget goes into operation only after it is approved by the
parliament.
 A rational decision regarding allocation of resources to
satisfy different social wants requires considerable thinking and
planning.
 Thus budget is an annual statement of receipts and payments
of a government.
 Functions of Budget
 The functions of budget include the following:
– proper allocation of resources: to relate expenditure decisions
to specified policy objectives and to existing and future
resources;
– to relate all major decisions to the state of the national
economy;
– long term economic growth:- to ensure efficiency and
effectiveness in the implementation of government programs;
– to facilitate legislative control over the various phases of the
budgetary process.
– equitable distribution of income and wealth and
– Securing economic stability and full employment.
 Budget Structures in Ethiopia
 Budget structures are the formats that organize budget data.
 Budget data could be classified in different ways and for
different purposes.
 In the early days, for instance, budget classification basically
focused on providing a better understanding of the intentions and
purposes of government for which funds were planned and to be
spent.
 Later on, the budget structures started to be influenced largely by
the issue of accountability.
 That is in addition to providing information on what the
government proposed to do, the budget structures indicate the
full responsibility of the spending agency.
 Cont…
 To this end the budget heads or nomenclatures the full
responsibility of the spending agency.
 To this end the budget head or nomenclature of the budget are
mostly mapped to each spending agency.
 This should not, however, imply unnecessarily extended and
detailed structure (or mapping).
 Perhaps, due consideration must be taken to make the structure
manageable and appropriate.
 The first classification of the budget is between revenue and
expenditure.
 Revenue Budget
• It represents the annual forecast of revenues to be raised by
government through taxation and other discretionary
measures, the amount of revenues raised this way differ from
country to country both in magnitude and structure, mainly
due to the level of economic development and the type of the
economy.
• In Ethiopia, the revenue budget is usually structured into three
major headings: Ordinary Revenue, External Assistance, and
Capital Revenue.
• Hence, the funds expected from these three sources are
proclaimed as the annual revenue budget for the country.
• The revenue budget is prepared by the Ministry of Finance
(MoF) for the federal government and by Finance Bureaus for
regional governments.
 Cont…
• Ordinary Revenues include both tax and not tax
revenues.
• The Tax Revenues being
– direct taxes (personal income tax, rental income tax, business
income tax, agricultural income tax, tax on dividend and
chance wining, land use fee and lease);
– indirect taxes (excise tax on locally manufactured goods,
sales tax on locally manufactured goods, service sales tax,
stamps and duty); and taxes on foreign trade (customs duty on
imported goods, duty and tax on coffee export). Non tax
revenues include charges and fees; investment revenue;
miscellaneous revenue (e.g. gins); and pension contribution.
 Cont…
• External Assistance:-
• It includes: cash grants, these are grants from
multilateral and bilateral donors for different
structural adjustment programs; and technical assistance
in cash and material form.
• Capital Revenue.
• This could be from domestic (sales of movable
properties and collection of loans), external loan from
multilateral and bilateral creditors mostly for capital
projects, and grants in the form of counterpart fund.
 Categories of Revenues to Government
• Revenue on the basis of Nature
A. Tax Revenue
• Tax on Income
– personal income, and
– Corporation profits
• Taxes on Property
• Taxes on Commodities
– Customs Duty,
– Excise Duty,
– Value Added Tax
– Turnover Tax
B. Non-Tax Revenues
• Administrative Revenue
– Fees, Licenses, Fines and Penalties,
– Forfeitures,
– Escheats, Special Assessment
 Expenditures Budget:
• Government expenditures for administration and developmental
activities are handled through the expenditures budget.
• These expenditures are categorized into recurrent and capital
expenditures.
• The recurrent budget which covers the current expenditures
is financed in principle by taxation (more broadly by domestic
revenue from tax and non tax sources).
• The capital budget which covers the acquisition of newly
produced assets in the economy is financed through external
borrowing and grants.
 Cont…
• The acceptance to this categorization of expenditures is related
to the general change in the perception of deficit.
• Prior to the 1930s, budget deficits were considered to be
reprehensible and indicate bad financial management.
• Over the years, however, the cardinal rule of balanced budget
was changed in favour of cyclical budget, and functional
finance.
• This change in the rule of budgeting, in turn, resulted in several
approaches to measuring and understanding the deficit some
of the concepts that were developed include:
a. the public debt concept of deficit,
b. the net worth concept of deficit,
c. the overall deficit, and
d. the concept of domestic deficit.
 Revenue Assignment
• The division of taxation power is a principal aspect of the
constitution that provides the legal framework of the Ethiopian
federal system.
• The constitution divides the taxation power into three categories,
namely:-
– the federal power of taxation-,
– the state power taxation- and
– the concurrent power of taxation.
• The FDRE Constitution under Article 96 enumerates the
exclusive revenue sources of the federal government.
• They include:-
– Foreign trade tax
– Tax from employees of central government and international
organisations
 Cont…
– personal income tax, value added tax, turnover tax, and excise
taxes from the enterprises owned by federal government
– Tax on lottery and other chance winning
– Tax from air, rail and marine transportation
– Tax on rent of houses and properties owned by central
government
– Fee for services rendered and licenses issued by federal
government
 Cont…
• Revenue of Regional governments
– Employment income tax from employees of regional government and
from private employees
– Personal income tax, value added tax, turnover tax, and
excise taxes from enterprises owned by regional government
– Agricultural income tax from farmers and rural land use fee
– profit, value-added tax, turnover tax, and excise taxes of
individual traders
 Expenditure Assignment
• The first fundamental step in the design of a system of
intergovernmental fiscal relations should be a clear
assignment of functional responsibilities among different
levels of government.
• Instability and controversy in the practice of decentralized
systems has followed when the law was silent or unclear about
the competencies and expenditure obligations of different levels
of government.
• A stable and meaningful decentralization requires an
unambiguous and well defined institutional framework in the
assignment of expenditure responsibilities among the different
levels of government together with the sufficient budgetary
autonomy to carry out the assigned responsibilities at each level
of government.
 Cont…
• Designing the other important pieces of a system of
decentralized finances, revenue assignments and transfers, in the
absence of a clear expenditure assignment is to put the car before
the horse.
• The decentralization movement in many countries of Latin
America over the past decade made this fundamental mistake.
• Revenues were assigned to subnational governments and
transfers put into place before it was decided what functional
competencies would be transferred from the central government
to subnational governments.
• These experiences led to weak decentralized systems and fiscally
overburdened central governments, which in many cases
continued to take on most expenditures responsibilities with
fewer resources.
 General Principles of Expenditure Assignments
• The critical role of the efficiency criterion
• The objectives of redistribution and stability best pursued by the central
government
• No Single Best Assignment
• Importance of a Clear and Stable Assignment
Most Common Problems with Expenditure Assignments
• Lack of Formal Assignment
• Inefficient Assignments
• Ambiguity in Certain Assignments
• Co-sharing of responsibilities
 Budget Deficit
• A budget is considered as surplus or deficit according to the
position of the revenue accounts of the government.
• Thus a surplus budget is one in which revenue receipts
exceed expenditure charged to revenue account regardless of
the gap in capital accounts; while a deficit budget is one in
which expenditure is greater than current revenue receipts.
• Budget deficit is the excess of total expenditure over total
revenue of the government.
• The deficit financing denotes the direct addition to gross
national expenditure through budget deficits whether the
deficits are on revenue or capital accounts”.
• It implies that the expenditure of the government over and above
the aggregate receipt of revenue account and capital account is
treated as budget deficit of the government.
 Cont…
• Thus deficit financing can be defined as “the financing of a
deliberately created gap between public revenue and public
expenditure”.
• The government of Ethiopia has used deficit financing for
acquiring funds to finance economic development.
• When the government cannot raise enough financial resources
through taxation, it finances its developmental expenditure
through borrowing from the market or from other sources.
 Methods of Financing Deficit
• There are four important techniques through which the Government
may finance its budgetary deficits. They are as follows:
A. borrowing from central bank
B. The running down of accumulated cash balances
C. The government may issue new currency
D. Borrowing from market or from external sources.
• Under the first method, government borrows from central bank as per
budgetary policy.
• In the second source, government spends from available cash balance.
• In the third measure, government issues new currency for financing
deficit.
• The last method is that government borrows from internal and
external sources to finance its deficit.
 Objectives of Deficit Financing
• Deficit financing has generally been used as a method of
meeting the financial needs of the government in times of war,
when it is considered difficult to mobilize adequate resources.
• Keynes advocated deficit financing as an instrument of
economic policy to overcome conditions of depression and to
raise the level of output and employment.
• The use of deficit financing has also been considered essential
for financing economic development especially in under
developed countries.
• Deficit financing is also advocated for the mobilization of
surplus idle and unutilized resources in the economy.
 Intergovernmental Transfer (subsidy)
• Intergovernmental transfers refer to the transfer of money
from central government to regional governments.
• It has been employed in all federations to achieve a variety
of economic objectives.
• In Ethiopia the transfer is in the form of subsidy.
• The main objectives of subsidy in Ethiopia are:
• offsetting fiscal imbalances or closing fiscal gaps
• establishing horizontal equity across the federation and
• offsetting inter-jurisdictional benefit spillovers or for merit good
reasons
 Cont…
• Fiscal Imbalances:
• An important reason for giving transfers arises from fiscal
imbalances or mismatch between revenues and expenditures
of different governmental units.
• Fiscal imbalances can be vertical or horizontal.
• vertical fiscal imbalance refers to the difference between
expenditures and revenues at different levels of government, and
• horizontal fiscal imbalance refers to the differences between
revenue and expenditure levels within a particular level of
government.
 Cont…
• Fiscal Equity:
• The argument for intergovernmental transfers on equity grounds
has been made either in terms of ensuring horizontal equity of
individuals across the states, or simply of ensuring inter-regional
equity.
• Both the approaches build a case for unconditional or general
purpose transfers from the centre to the states on a progressive
scale so as to offset the fiscal disabilities arising from low
revenue capacity and high expenditure needs.
• Variables of the Previous Budget Grant Distribution Formula
 Cont…
• Correction of Spill-overs:
• intergovernmental transfers are seen as a device to resolve the
problem of mismatch between benefit spans from various
hierarchies of public goods and exogenously given spatial
jurisdictional domains.
• when the benefits of public services provided by a state spill
over its jurisdiction, the state ignores the benefits accruing to the
non-residents while deciding the amount of the service provided.
• The jurisdiction equates the marginal benefits from the public
service with the marginal cost of providing it, and as it ignores
the part of the benefit accruing to non-residents the result is
non)optimal provision of the public service.
• Optimal provision of the service is ensured through central
subsidies to offset the spillovers.
 Cont…
• Variables of the Previous Budget Grant Distribution Formula
• Size of Population
• Level of development
• Revenue collection effort
 Borrowing
• Regional governments are not allowed to borrow from abroad.
• They can, however, borrow internally to meet the cash flow
timing problem.
• Borrowing internally requires the permission of MOFED.
• It is the federal government that has the power to borrow from
abroad.
 The Budget Process
• A standard budgeting process has the following major steps.
– Plan Preparation
– Budget Call
– Budget Preparation
– Budget Review
– Budget Hearing
– Budget Approval
– Budget Execution
– Reporting and Control
 Chapter – Four
Ethiopian Tax System
• Chapter Contents
• Structure of Ethiopian Tax System and Administration
• Income Taxes
–Schedule A Income
–Schedule B Income
–Schedule C Income
–Schedule D Income
 Cont…
• Consumption Taxes
–Value-Added Tax
–Turnover Tax
–Excise Tax
• Stamp duties
• Foreign Trade Taxes
–Custom duties
–Import Procedures
–Export Procedures
–Sur-Tax
 Introduction
 The principal objective of tax is to provide revenue to finance
government activities.
 A relative objective is to accomplish certain social goals.
 It is a general concept for devices used by government to extract
money or other valuable things from people and organizations
by the use of law.
 The contribution received from taxpayers may not be used by
government for the benefit of these groups only but for the
general and common benefit.
 Cont…
 The following proclamations and regulations are referred to for
all the information under the tax section.
• ProclamationNo.1097/2018DefinitionofPowers and Duties of the
Executive Organs of the Federal Democratic Republic of
Ethiopia Proclamation.
• Proclamation No. 979/2016 Federal Income Tax Proclamation.
• Proclamation No.983/2016 Federal Tax Administration
Proclamation.
• Proclamation No. 715/2011 Private Organizations Employees’
Pension Proclamation as amended by Proclamation No.
908/2015.
• Proclamation No. 285/2002 Value Added Tax Proclamation, as
amended by Proclamation No. 609/2009 and 1157/2019.
 Cont…
• Excise Tax Proclamation No. 1186/2020 Proclamation No.
308/2002 Turnover Tax Proclamation, as amended by 611/2008.
• Proclamation No. 110/1998 Stamp Duty Proclamation, as
amended by 612/2008.
• Investment Proclamation No.1180/2020.
• Proclamation768/2012 Export Trade Duty Incentive Schemes
Proclamation.
• Proclamation No. 859/2014 Customs Proclamation, as amended
by Proclamation1160/2019.
 Cont…
• Regulations No. 410/2017 Federal Income Tax Regulations;
• Regulations No.407/2017 Federal Tax Administration
Regulations;
• Regulations No. 270/2012 Investment as amended by
Regulations No. 370/2014 (a new regulation is at draft stage);
• Regulations No. 154/2008 Higher Education Cost Sharing
Regulations;
• Regulations No. 79/2002 Value Added Tax Regulations.
 Main Types of Taxes in Ethiopia
 Tax structure of Ethiopia divides tax in the country as direct and
indirect.
 This classification is purely based on the incidence (tax
shifting) of tax.
 Direct taxes are those obligations of payment that cannot be
shifted to a third party.
 On the other hand, the burden of payment is shifted to third
parties, in all indirect taxes, by taxpayers.
 Cont…
 Direct taxes, in Ethiopia, include:-
• Employment income tax,
• Business income tax;
• Rental income tax,
• Capital gains tax,
• Agricultural income tax and rural land use fee,
• Mining income tax,
• Taxes on lottery and other chance winning,
• Tax on royalty, interest, dividend, and casual rental of property.
 Indirect taxes include:
• Import and Export Duty
• Value Added Tax and
• Excise Tax
 Categories of Tax Payers
• Tax payers are categorized according to their income levels.
• Category A taxpayers:
– A body or any other person having annual gross income of ETB
1,000,000 or more.
• Category B taxpayer:
– A person, other than a body, having an annual gross income of
ETB 500,000 or more, but less than ETB 1,000,000.
• Category C taxpayer:
– A person, other than a body, having an annual gross income of less
than ETB 500,000.
 Income Tax
• “Income” means “every sort of economic benefit including
non-recurring gains in cash or in kind, from whatever source
derived and in whatever form paid credited or received”.
• The following are the sources of taxable income.
– Income from employment exercised in the country
– Income from business activities
– Income derived by an entertainer, musician, or sportsman
– Income from an entrepreneurial activity of a non-resident
through a permanent establishment in the country and from
the transfer of movable property of the establishment
– Income from immovable property, livestock, inventory in
agriculture and forestry, right received from immovable
property in the country.
 Income from the Transfer of Property
• Dividend of resident company and profit shares of registered
partnership
• License fee and royalty and income from chance winning
• Interest paid by government units, residents, or non-residents
through their permanent establishment
• Income obtained from a foreign country.
 Taxable income (under direct taxes) is categorized into five
schedules A, B, C, D and E.
1. Employment income as Schedule “A” income.
2. Rental income as Schedule “B” income,
3. Business income as Schedule “C” income,
4. Other income as Schedule “D” income and
5. Schedule ‘E’ as exempt income.
 A. Employment Income Tax
• Employment Income Tax is a direct tax levied on income from
employment.
• It is the largest single source of revenue for the federal
government.
• According to the Income Tax Proclamation, every person
deriving income from employment is liable to pay tax on that
income at the rate specified in Schedule “A” set out in Article 11
of the income proclamation.
• This schedule called Schedule “A” is shown below with its
percentage of tax deduction.
• The total tax payable on employment income can be determined
using a simplest method.
Tax Liability = (Taxable Income X Tax Rate for the Bracket) – Deduction
 Cont…
• The Ethiopian Income tax

Deduction
No Salary Range (ETB) Tax Rate
(ETB)
1. 0 - 600 Non-Taxable -
2. 601-1,650 10% 60
3. 1,651 - 3,200 15% 142.50
4. 3,201 - 5,250 20% 302.50
5. 5,251 - 7,800 25% 565
6. 7,801 - 10,900 30% 955
7. Over 10,900 35% 1,500
 Cont…
 Example: Ato Bultume is an employee of Oromia International
Bank and his monthly basic salary is Br 4,700. In addition he is
getting Br 100 monthly taxable house allowance.
 Required: Determine his taxable income and income tax
liability.
 Solution:
Taxable income = Br 4,700 + Br 100 = Br 4,800
Tax liability = (Taxable income X Tax rate for the Bracket) –
Deduction
= (4,800 X 20%) – 302.5 = Br 657.5
 B. Rental Income Tax
• Income tax proclamation 286/2002 and 979/2016 classifies
rental income as Schedule “B” income and the tax is levied and
collected on income from rent of building.
• The tax collected on annual basis and the tax period is the
Ethiopian fiscal year.
• Income includes rent of building and rent of furniture and
equipment if the building is fully furnished.
• Taxable income from Schedule “B” income is determined by
subtracting the allowable deductions from gross income.
• Allowable deductions include the following:
A. Those who do not maintain books and records:
• Tax on land and building 20% of gross income as allowance for
repairs, maintenance and depreciation
 Cont…
B) Those who maintain books and records:
– Tax on land and building
– Cost of lease of land
– Repairs and maintenance expenses actually incurred
– Depreciation on building (and furniture and equipment if fully
furnished) per income tax proclamation
– Interest on loan if any
– Insurance premium paid on insurance of building
 Tax Rate
 The following is the tax rate applicable for determining tax from
Schedule “B” income.
i. On income of bodies or corporations: 30% flat rate
ii. On income of persons according to schedule B (Here under):
 Cont…
• The Ethiopian Rental Income tax Rate (Personal)

N Taxable Rental Income Deduction

Rental Tax Rate
o per year (ETB) In Birr
1. 0 – 7,200 Non-Taxable None
2. 7,201-19,800 10% 720
3. 19,801 - 38,400 15% 1,710
4. 38,401 - 63,000 20% 3,630
5. 63,001 - 93,600 25% 6,780
6. 93,601 - 130,800 30% 11,460
7. Over 130,800 35% 18,000
 Cont…
• Example: Assume that XYZ Private Limited Company rented a
furnished office building to ABC Company for Br 40,000 per
month for 5 years. The following data pertain to the expenses
incurred and other allowable deductions. The company keeps
books and records properly.
Tax on building…………………………..…….Br 2,400
Tax on land………………………………..……… 2,160
Maintenance on building…………………..……. 12,000
Depreciation on building (for 12 months)………. 28,000
Interest on loan (for 12 months)….……… 12,000
Insurance premium (for 12 months)……… 5,720
• Required: Computes rental income tax for the year ended Sene
30, 2011
 Cont…
 Solution:
Annual Rental Income ……….…40,000 X 12 = Br 480,000
Less: Allowable Deductions:
Tax on building………. Br.2,400
Tax on land ………………2,160
Maintenance ……………12,000
Depreciation…………… 28,000
Interest………………… 12,000
Insurance……………….. 5,720………………… (62,280)
Taxable Income………………………………….Br 417,720
Rental Income Tax for The year ended Sene 30, 2011
= Br 417,720 X 30% = Br 125,316
 Cont…
 Example 2: Assume Mr. Rori rent his building for 5000 per month
in 2009 E.C fiscal year. What will be the annual rental tax paid by
Mr. Rori?
 Required: Computes rental income tax for the year ended Sense
30,2009.
 Solution:
Annual Rental Income …5,000 X 12 = Br 60,000
The year ended Sene 30, 2009 Rental tax liability:
= Br 60,000 X 20% -3,630
= Br. 8,370
 C. Business Income Tax
 Business is an industrial, commercial, banking, transport, mining
or any other activity persuaded by a person or a body.
 As per Federal Income tax proclamation No.979/2016, the tax
rates are as follows:
I. Taxable business income of bodies (e.g PLC, Share company)
is taxable at the rate 30%;
II. Taxable business income of other tax payers is taxed in
accordance with the following table;
 Cont…
• The Ethiopian Rental Income tax Rate (Personal)

N Business Income per Business Income Deduction

o year (ETB) Tax Rate In Birr
1. 0 – 7,200 Non-Taxable None
2. 7,201-19,800 10% 720
3. 19,801 - 38,400 15% 1,710
4. 38,401 - 63,000 20% 3,630
5. 63,001 - 93,600 25% 6,780
6. 93,601 - 130,800 30% 11,460
7. Over 130,800 35% 18,800
 Cont…
 EXAMPLE:
• Assume Taxable business Income/profit of Mr. Alsan Murtess a is
Br.170,500.00
Business Profit Tax = Br.170,500 x 35% tax rate
= Br. 59,675
Deduction = Br.59,675 – Br.18,800 deduction fee
Tax payment = Br.40,875
 D. Taxation of Other Income
Those do not fall under the three schedules discussed earlier
specified as Schedule “D” income.
It includes:
I. Royalty Income from royalty is the payment received for the
use of (or the right to use):
– copyright,
– literary/fictional,
– artistic or scientific work;
– films or tapes for radio and TV broadcasts;
– patent or trademark, design, model, plan, or secret formula;
– any industrial, commercial, scientific equipment or experience, etc.
• The tax rate is 5%.
 Cont…
• II. Income paid for Technical Services
– This includes income received by residents for services
rendered outside Ethiopia.
– Any kind of expert advice and technical service will come
under the purview of the said income.
– The tax rate is 10% and which is withheld and paid to the tax
authority by the payer.
• III. Income from Game of Chance
– This includes income from lottery and other chance winning.
– The tax rate is 15%.
– Winning of less than Br 100 are not taxable.
– The payer withholds tax and pays tax office within the time
specified.
 Cont…
• IV. Dividends
– This includes dividend income received from share
companies and private limited companies.
– The tax rate is10%.
– The payer deducts tax at source and remits to the tax office
like other Schedule “D” income tax.
• V. Income from Casual Rental of Property
– This category includes income received from rental of land,
building and other movable asset, which are not related to
business activities.
– The tax rate is15% and tax is determined on the gross annual
income and declared and paid within the period specified.
 Cont…
• VI. Income from Interest on Deposit
– Interest received on deposit is taxed at 5% and the amount of
tax is withheld at source by the payer and transferred to the
tax office.
• VII. Gain on Transfer of Investment Property
– Under this category, gain from transfer of building held for
business and factory office; and gain from transfer of shares of
companies are included.
– Both sale and transfer byway of gift are considered to determine
gain.
– Gain on building is taxable at 15% and that of shares is taxable at
30%.
– According to the proclamation, gain on transfer of
dwelling/residence houses is free from tax.
 E. Exempt Income
• This schedule contains income items that are exempted from
taxation.
• Following is a list that includes some of the exempted income
items under Schedule E:
– Pension contribution, provident fund and all forms of retirement benefit
contributed by the employers in an amount that does not exceed
15% of the employee’s monthly salary;
– Payments made to a person as compensation or gratitude in
relation to personal injuries suffered by the person or the death
of another person;
– Amounts paid to employers to cover the actual cost of medical
treatment of employees;
 cont…
– Allowance in lieu of means of transportation granted to
employees under contract of employment to the extent of the
amount to be determined by the tax authority. Currently,
transportation allowance is the lower of ETB 2,200 or 25% of
the employee’s salary;
– Hardship allowance;
– Re-imbursement of travelling expenses incurred on duty to the
extent of the amount to be determined by the tax authority;
– Travelling expenses paid to employees recruited from else
where than the place of employment;
– Food and beverages provided for free to an employee by an
employer conducting a mining, manufacturing or agricultural
business;
– Salary paid to domestic servants;
– Maintenance or child support payments.
 INDIRECT TAXES
• VAT
• TOT
• Excise Tax
• With Holding Tax
• Customs Duty
• Sur-Tax
1. VAT
• Principal Components of VAT
– VAT has two principal components that are input and output VAT.
• Input VAT:- is VAT paid or payable by a taxable person on purchase
of goods and services.
– It is not the components on the cost of purchase rather it is deducted from the
collected VAT on sales.
 Cont…
• Output VAT:- is the VAT collectable by taxable person at the
time of taxable sales.
• Out put VAT is not a component of sales revenue of the person
rather it is a liability to the taxable person, which is collected by
him on the behalf of the tax authority.
• Net VAT Liability: is the difference b/n the input VAT and Out
Put VAT.
– When the output VAT exceeds the input VAT the taxpayer has
a net VAT liability or payable, on the other hand if the input
VAT exceeds the output VAT shows the VAT credit/ Net VAT
refundable.
 Cont…
• Exempted from VAT
– Supply or import of basic food items such as agricultural crops, milk,
flour, oil etc
– Rendering educational service and child care service
– The import or supply of prescription drugs specified in defective issues
by the MoH, and the rendering of medical service
• VAT Withholding by Buyer
– Federal and Regional Gov’t organizations or agencies
– City Administrations Agencies
– Public enterprise
 Cont…
• VAT is a consumption tax in the sense that individuals pay VAT
when they are money spends on goods and services
• VAT is imposed on the incremental value of goods and services
made at each stages of production and distribution
• VAT is imposed not only on tangible goods but also on services
• Example Assume that XYZ company is registered VAT and has
the following transaction
1. sold different goods on cash at birr 10,000 and 15% VAT
Excluded
2. purchase different goods at Br 2000 and 15% VAT excluded
3. Sales different goods at Br 15,000 and 15% VAT excluded
4. Sold d/t goods on account for Br. 3,450 and 15% VAT included
5. purchase goods on account for Br. 9200 and included 15% VAT
 Cont…
• Solution
1. 10,000 X 0.15 = 1,500
cash ------------ 11,500
sales ------------------- 10,000
VAT Payable ---------- 1,500
2. 2000 X .15 = 300
Purchase ----------- 2,000
VAT receivable ---- 300
cash ---------------------- 2,300
3. 15,000 X .15 = 1,250
cash ------------------ 17,250
VAT Payable -------------- 2.250
sales ------------------------ 15,000
 Cont…
4. 3,450 ÷ 1.15 = 3,000
A/Receivable ------------ 3,450
sales ------------------- 3,000
VAT Payable ---------- 450
5. 9,200 ÷ 1.15 = 8,000
Purchase ----------- 8,000
VAT receivable ---- 1,200
A/payable ---------------------- 9,200
• Total VAT payable = 1,500 + 2,250 + 450 = 4,200
• Total VAT receivable = 300 + 1,200 = 1,500
• VAT out put – VAT input = VAT Payable – VAT receivable =
4,200 – 1,500 = 2,700 VAT Payable
 TURNOVER TAX (TOT)
• The Turnover Tax would be payable on goods sold and services
rendered by persons not registered for Value Added Tax.
• The rate of Turnover Tax is
1. 2% on goods sold locally;
2. for services rendered locally:
– 2% on contractors, grain mills, tractors and combine-harvesters;
– 10% on others service rendered locally such as consultancy, auditing,
legal advice, hotel, printing, advertising, laundry etc
• The base of computation of the Turnover Tax is the gross receipts in
respect of goods supplied or services rendered.
• A person who sells goods and services has the obligation to collect the
Turnover Tax from the buyer and transfer it to the Tax Authority.
• Hence, the seller is principally accountable for the payment of the tax.
 Cont…
• In accordance with the Turnover Tax Proclamation No. 308/2002, the
following would be exempted:
– Sale or transfer of dwelling used for a minimum of two years, or
the lease of a dwelling;
– Rendering of financial services;
– supply of national or foreign currency and of securities;
– Rendering by religious organizations of religious or other related
services;
– Supply of prescription drugs specified in directives issued by the
relevant government agency, and the rendering of medical
services;
– Rendering of educational services provided by educational
institutions;
 Cont…
– Supply of goods and rendering of services in the form of
humanitarian aid
– Supply of electricity, kerosene and water;
– Provision of transport;
– Permits and license fees;
– Supply of goods or services by a workshop employing disabled
individuals (if more than 60% of the employees are disabled);
– Supply of books.
• Example:
• HM PLC is a non VAT registered taxpayer that sells alcohol drinks the
company undertakes the ff transaction.
1. June 5 purchase inventory from non Vat registered tax payer at
Br.8,000 excluding TOT
2. June 10 sales inventory to w/ro Genet at Br 60,000including TOT
 Cont…
• Required:- Recorded the Transaction
• Solution
1. TOT = 8,000 X .02 = 160
Inventory ----------------- 8,160
cash ----------------------------- 8,160
2. TOT = 60,000 X .02 = 1,200
cash ------------------------- 60,000
sales ------------------------------ 58,800
TOT Payable -------------------- 1,200
 EXCISE TAXES
• Excise taxes are taxes levied on particular products and
services, typically with discriminatory intent.
• Sometimes, they refer to the profits of fiscal mono polies.
• Excise taxes are also called selective sales taxes.
• In most countries, a large share of excise revenue comes
from tobacco products, alcoholic beverages, and
petroleum products, which are the traditional excisable
commodities.
• Excises are also levied on a variety of other items such as
motor vehicles, soft drinks, sugar, cement,
entertainment, insurance, and consumer luxuries.
 Cont…
• Imposition of Excise Tax
• The excise tax of the country is imposed with three
objectives in mind:
• to improve government revenue,
• to improve equity by imposing tax on luxury goods and
basic goods which are demand inelastic, and
• to discourage the consumption of goods that are
hazardous to health and which causes social problems.
• The Rate, Base and Payment of Excise Tax
– The excise tax is paid on imported as well as locally produced
goods listed in the table below at the stated rate.
– For locally produced goods the excise taxes computed based on the
production cost(excluding depreciation cost)of the goods, whereas
for imported goods the tax base will be cost, insurance and freight
(C.I.F.).
 Type of Product and Excise Tax Rate in (%)
1. Any type of sugar (in solid form) excluding molasses……….33
2. Drinks
2.1 All types of soft drinks (except fruit juices) ………………. 40
2.2 Powder soft drinks ……………………………………….... 40
2.3 Water bottled or canned in a factory ….…………………… 30
2.4 Alcoholic Drinks 2.4.1 All types of beer & stout …………. 50
2.4.2 All types of wine.……………….. ………………………..50
2.4.3 Whisky …………………………………………………… 50
2.4.4 Others alcoholic drinks ………………………………….. 100
3. All types of pure Alcohol ……………………. 75
4.Tobacco &Tobacco Products
4.1 Tobacco Leaf ………………………………... 20
4.2 Cigarettes, cigar, cigarillos, pipe tobacco, snuff and Other tobacco
products… 75
 Cont…
5.Salt…………………………………………….. 30
6. Fuel-super Benzene, Regular Benzene, Petrol, Gasoline and other
Motor Spirits…30
7. Perfumes and Toilet Waters…………………... 100
8. Textile and Textile products
8.1 Textile fabrics, knitted or woven of natural silk, rayon, nylon, wool,
or other similar materials... 10
8.3 Garments……………………. 10
9.Personal adornments made of gold, silver or other materials…….. 20
10. Dish washing machines of a kind for domestic use ………….. 80
11. Washing machines of a kind for domestic purposes ……….…. 30
12. Video decks……………………………………. 40
13. Television and Video Cameras ……………..….. 40
 Cont…
14. Television broadcast receivers whether or not combined with
Gramophone, radio, or sound receivers & reproducers …………… 10
15. Motor passenger cars, Station Wagons, Utility cars and Land Rovers,
Jeeps, Pickups, similar vehicles (including motorized caravans), whether
assembled together with their appropriate initial equipment:
15.1 Up to 1,300 C.C. …………………….………………….. 30
15.2 From 1,301 up to 1,800 C.C. ……………………………. 60
15.3 Above 1,800 C.C. ………………….…………………… 100
16. Carpets ………………………………….………………… 30
17. Asbestos and Asbestos products ………………….………. 20
18. Clocks and watches …………………….………………… 20
19. Dolls and toys ……………………………..……………… 20
 Example
1. Assume Wonji Sugar Factory incurs the following costs
and expenses for the production of sugar in the month of
Sene 1996.
– Raw material used ..…………………… Br 1,200,000
– Labour used ….…………………………..…… 80,000
– Repair and maintenance of factory machinery ……16,000
– Utility expenses(Applicable to production Dept.)…… 36,000
• Required: Compute excise tax for the month
• Solution:
Total cost of production = Br 1,332,000
Excise tax rate = 33%
Excise Tax = Br 439,560
 CUSTOMS DUTY
• Any good imported or exported would be subject to:
– Payment of duties and taxes according to the tariff of
Harmonized Commodity Description and coding system;
– Payment of duties and taxes at the rate in force on the day the
declaration of the goods are presented to, and accepted by
the customs office.
 IMPORT SUR-TAX
• Council of ministers regulations to provide for the payment of
sur-tax on import of goods
• The Sur-tax levied under these Regulations shall apply to all
goods imported into Ethiopia except those exempted; which are
– Fertilizers;
– Petroleum and lubricants;
– Motor Vehicles for freight and passengers, and special
– purpose motor vehicles;
– Aircraft, spacecraft, and parts thereof;
– Capital (Investment goods).
 Cont…
• Without prejudice to above exemptions Surtax of 10% shall
be levied and collected on goods imported.
• Basis of Computation :-
– The basis of computation for the sur-tax levied under these
Regulations shall be the Aggregate of:
1. Cost, insurance, Freight (CIF) value;
2. Customs duty, value Added Tax and Excise Tax Payable on the
good.
 STAMP DUTY
• The following instruments(Legal documents)shall be
chargeable with stamp duty:
– Memorandum and articles of association of any business
organization, cooperative or any other form of association;
– Award; Bonds; Warehouse bond;
– Contract and agreements and memoranda;
• Collective agreement;
• Contract of employment;
• Lease, including sub-lease and transfer of similar rights;
• Notarial acts;
• Power of attorney;
• Documents of title to property.
 Cont…
 Time and Manner of Payment
1. The stamp duty would be paid:
– On memorandum and articles of association, before or at the time
of registration;
– on awards, before or at the time of issuance of the award;
– on contracts or agreements, before or at time of signature;
– on leases or sub-leases, before or at the time of signature;
– on notarial acts, at the time of issuance;
– on security deeds, before or at the time of signature;
2. The payment of stamp duty
– Under Birr 50 would be effected by affixing stamp of appropriate value to the
instrument;
– when the stamp duty exceeds Birr 50 or where the type and nature of instrument
so requires, the Federal Government Revenue Board may by directive provide;
– That stamp duty be paid by means other than affixing stamp.
 Instruments chargeable with Stamp Duty & Basis of Valuation Rates of Stamp Duty
1. Memorandum and articles of association of any business
organizations, or any association:
• a) upon 1st execution
• b)Upon any subsequent execution flat Birr 350 Birr 100
2. Memorandum and articles of association of cooperatives
• a) upon 1st execution
• b) upon any subsequent execution flat Birr 35 Birr 10
3. Awardon value
• a) determinable value 1%
• b)undeterminable value Birr 35
4. Bondson value15%
5. Warehouse bondson value 6%
 cont…
6. Contracts and agreements and memoranda flat Birr 75
7. Security deedsonvalue18%
8. Collective agreement
• a) on 1st execution
• b) on any subsequent execution Flat Birr 3950 Birr 10100
9. Contract of employmentsalary1%
10. Lease including sub-lease and transfer thereof on value 0.5 %
11. Notarial act flat Birr 5
12. Power of attorney flat Birr 35
13. Register title to property on value 2%