GOLDEN STARS COLLEGE

DEPARTMENT OF ACCOUNTING AND FINANCE

COURSE TITLE: PUBLIC FINANCE AND ETHIOPIAN TAXATION

CHAPTER THREE

ETHIOPIAN TAX SYSTEM

Instructor: Minaw Belay

April 16, 2024

HAWASSA, ETHIOPIA
TABLE OF CONTENTS
TABLE OF CONTENTS................................................................................................................ii
LIST OF TABLES........................................................................................................................iii
SECTION ONE..............................................................................................................................1
1. INTRODUCTION.....................................................................................................................1
1.1. Tax Collections in Ethiopia............................................................................................1
1.2. The Structure and Categorization of Revenue in Ethiopian Tax System..................1
1.2.1. Federal government tax revenues..........................................................................1
1.2.2. Regional government tax revenues........................................................................2
1.2.3. Joint tax revenues/Concurrent List.......................................................................2
1.3. Tax under the EFDR...............................................................................................2
SECTION TWO.............................................................................................................................3
2. Overview of Ethiopian Tax System:.................................................................................3
2.1. General Definitions And Notion of Income..................................................................3
2.2. The Major Classification of the EFDR Tax Revenue-.................................................3
2.3. Direct Tax........................................................................................................................3
2.3.1. Schedule ‘A’ Income: Employment Income..........................................................4
2.3.2. Schedule ‘B’ Income: Income from Rent of Buildings.........................................5
2.3.3 Schedule ‘C’ Income: Business Income.................................................................7
2.3.4. Schedule ‘D’ Income: Other Incomes..................................................................12
2.3.5. Schedule ‘E’ Exemption Income..........................................................................15
2.4. Indirect Tax...................................................................................................................15
2.4.1. Value Added Tax-VAT..........................................................................................16
2.4.2. Turnover Tax –TOT..............................................................................................19
2.4.3. Excise Tax...............................................................................................................19
2.4.4. Customs Duty (Import and Export Taxes)..........................................................20
2.4.5. Stamp Duty.............................................................................................................20
2.4.6. Withholding Taxes.................................................................................................21
2.4.7. Sur Tax...................................................................................................................21
2.5. Categories of Tax Payers..............................................................................................21
SECTION THREE......................................................................................................................23
TAX OFFENCES AND ADMINISTRATIVE PENALTIES..................................................23

ii | P a g e
 LIST OF TABLES

Table 1 Schedule ‘A’ -Tax Rate and Tax computation -...............................................................................4

Table 2 Schedule ‘B’-Tax Rate and Tax computation..................................................................................5
Table 3 Schedule ‘C’-Tax Rate and Tax computation.................................................................................7
Table 4 Schedule ‘D’-Tax Items Description with Tax Rate......................................................................13
Table 5 Oromiya Region: Agricultural Income Tax Rate...........................................................................14
Table 6 Land Use Tax Rate Per Hectare Per Annum................................................................................14
Table 7 Computation of VAT at each stage of transaction.......................................................................18
Table 8 Stamp Duty Tax Rate and Its Instruments chargeable And Basis of Valuation............................20
Table 9 Category A,B & C Taxpayers ,Tax Period and Bases of Tax Amount Assessments.......................22

iii | P a g e
 SECTION ONE

1. INTRODUCTION
.
1.1. Tax Collections in Ethiopia

Tax collections are the process of the government getting money from people and business
required to pay tax.
The Ethiopia government needs money to maintain law and order in the country; safeguard the
security of the country from foreign powers and promote the welfare of the people. It is the
foremost duty of the government to bring out welfare and development programs which will
bridge the gap between the rich and the poor. All this requires mobilization of fund from various
sources.
In Ethiopia, government collects various types of taxes revenue through Direct and Indirect Tax.

1.2. The Structure and Categorization of Revenue in Ethiopian Tax System

According to "Constitution of Ethiopia” and Proclamation No.33/1992-Proclamation, revenues

shall be categorized as Central, Regional and Joint. That is there are three lists given in the
Articles. They are as follows:

1) Central or Federal government tax revenue

2) Regional government tax revenues
3) Joint tax revenues

1.2.1. Federal government tax revenues

-Central Government

The sources of revenue are given under Federal/Central List, are as follows:
1. Duties, tax and other charges levied on the importation and exportation of goods;

2. Personal income tax collected from the employees of the central Government and the
International Organizations

3. Profit tax, Personal income tax and sales tax (VAT and Turnover Taxes) collected from
enterprises owned by the Central Government.

4. Taxes collected from National Lotteries and other chance winning prizes;

5. Taxes collected from air, train and marine transport activities

6. Taxes collected from rent of houses and properties owned by the central government;

7. Charges and fees on licenses and services issued or rented by the central government.

1|Page
1.2.2. Regional government tax revenues

The following shall be Revenues for the Regions:

1. Personal income tax collected from the employees of the Regional government and
employees other than those covered under the sources of central government

2. Rural land use fee.

3. Agricultural income tax collected from farmers not incorporated in an organization.

4. Profit and sales tax collected individual traders.

5. Tax on income from inland water transportation.

6. Taxes collected from rent of houses and properties owned by the Regional governments;

7. Profit tax, personal income tax and sales tax collected from enterprises owned by the
Regional government:

8. With prejudice to joint revenue sources, income tax royalty and rent of land collected
from mining activities.

9. Charges and fees on licenses and services issued or rented by the Regional government.

1.2.3. Joint tax revenues/Concurrent List

The following shall be Joint revenues of the Central Government and Regional governments:
1. Profit tax, personal income tax and sales tax collected from enterprises jointly owned by
the central Government and Regional Governments;
2. Profit tax, dividend tax and sales tax collected from Organizations;
3. Profit tax, royalty and rent of land collected from large scale mining, any petroleum and
gas operations;
4. Forest royalty

1.3. Tax under the EFDR

The currently operating laws with regard to income taxation in Ethiopia are the Income Tax
Proclamation No. 286/2002 and the Income Tax Regulation No. 78/2002

1) In 2008: The former three revenue agencies(listed below) are merged into one authority:
Ethiopian Revenues and Customs Authority (ERCA
 Federal Inland Revenue Authority (FIRA),
 Ethiopian Customs Authority(ECuA), and
 National Lottery
2) In 2016, a comprehensive Federal Tax Administration Proclamation (Proclamation No.
983/2016) was issued. In 2018-Ethiopian Revenues and Customs Authority, became the
Ministry of Revenues

2|Page
 SECTION TWO
2. Overview of Ethiopian Tax System:
2.1. General Definitions And Notion of Income

The concepts that need to be defined in dealing with income tax laws are

 Income: means every sort of economic benefit including gains in cash or in kind, from
whatever source derived and in whatever form paid, credited or received
 Gross Income: is taken to mean the total or aggregate income received by an individual.
 Taxable Income: refers to the amount of income on which actual income is charged,
levied and collected after all deductions have been made in accordance with the relevant
laws
2.2. The Major Classification of the EFDR Tax Revenue-

The Ethiopian Taxation system has two major categories and they will be described and
explained as follows:

1) Direct Tax
2) Indirect Tax

2.3. Direct Tax

 Direct tax is the demanded from the very person who it is intended /desire should pay it.
 They are those which are paid entirely to those people on whom they are imposed on.
 Direct taxes are those taxes which can not be shifted to others.
 Tax payers are categorized into 3 according to their income levels.
1. Category A Taxpayers: A Body or any other person having annual gross income
of ETB 1,000,000 or more.
2. 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.
3. Category C Taxpayer: A person, other than a Body, having an annual gross
income of less than ETB 500,000.
 The proclamation provides for the taxation of Direct income in accordance with the
following 5 Schedules:

I. Schedule A income from employment

II. Schedule B income from rental of buildings
III. Schedule C income from business Activities
IV. Schedule D other income
V. Schedule E: Exempt income. Income that is not subject to tax.

3|Page
2.3.1. Schedule ‘A’ Income: Employment Income
Any remuneration paid by an employer to his employee in consideration of his services is called
salary. It includes the value of fringe benefits provided by the employer.

1. Tax Rate- Schedule ‘A’(Article-11):

The tax payable on income from employment shall be charged, levied and collected at the following
rate

Tax computation
Employment income-I Employment income
Deductions I= Employment income
(per month) Birr tax Rate-EIT
EIT = Employment income tax
0 - 600 0% (Exempted) Nil
601 - 1,650 10% 60 EIT = I x 10% – 60
1,651-3,200 15% 142.5 EIT = I x 15% – 142.50
3,201 - 5,250 20% 302.5 EIT = I x 20% – 302.50
5,251 - 7,800 25% 565 EIT = I x 25% – 565
7,801 - 10,900 30% 955 EIT = I x 30% – 955
Above 10,900 35% 1,500 EIT = Ix 35% – 1 500
Table 1 Schedule ‘A’ -Tax Rate and Tax computation -

2. Determination of Employment Income (Article-12):

 Gross income: all type of income like Basic salary, allowance, overtime and
bonus
 Tax Rate: As of schedule shown above
 Taxable income: After all deductions have been made in accordance with the
laws
3. Exempted Incomes (Article-13) :
The following categories of income shall be exempt from payment of income tax
hereunder:

1. Income from casual employment:

2. Contribution of retirement benefits by employers: not exceed 15 %
3. Income from Diplomatic and consular representatives
4. Payments as compensation
 Personal injuries suffered by that person
 The death of another person
5. Allowable Deductions
 Reimbursed medical expenses
 Transportation allowance (lower of ETB 2,200 or 25% of salary)
4|Page
  Hardship Allowance
 Desert Allowance
 Reimbursed traveling expense (incurred on duty)
 Board Allowance

2.3.2. Schedule ‘B’ Income: Income from Rent of Buildings

Under the Schedule ‘B’ the basis of charge is the rental income received from the property. That is,
Income tax shall be imposed on the income from rental of buildings.

1. Tax Rate - Schedule ‘B’(Article-15):

Corporations (Bodies) are taxed 30% flat rate.

Tax computation
Rental income per year (I) Rental Income Tax Rate Deduction I = Rental income
RIT = Rental income tax
0 – 7,200 0% (Exempted) Nil
7, 201–19, 800 10% 720. RIT = I x 10% – 720
19 801–38 400 15% 1 710. RIT = I x 15% – 1 710
38 401–63 000 20% 3 630. RIT = I x 20% – 3 630
63 001–93 600 25% 6 780. RIT = I x 25% – 6 780
93 601–130 800 30% 11 460. RIT = I x 30% – 11 460
More than 130, 800 35% 18, 000 RIT = I x 35% – 18 000
Table 2 Schedule ‘B’-Tax Rate and Tax computation
2. Determination of Rental Income (Article-16)

 Gross income includes all payments, either in cash or benefited in kind, received
by the lessor
 All payments made by the lessee on the behalf of the lessor.
 The value of any renovation or improvement to the land or the building
3. Allowable Deductions

3.1 For lessor that do not maintain books of accounts

 Taxes paid to the land and buildings being leased; except income taxes
 Allowance for repairs, maintenance and depreciation;(1/5) of the gross income
received
3.2 For lessor that maintain books of accounts
 Expenses can be proven by the taxpayer
 Depreciation Expenses: Building 5%, Equipment 20%,computer and related asset
25%, furniture and other asset 10% of depreciation base.

5|Page
 4. .Notice
 At the earlier of the time construction of a rental building is completed or when
the building is rented, the owner and the builder are required to notify the
administration of the kebele
 Income from the lease of business including goods, equipments and building which
are part of the normal operation of a business, (called business lease) are taxable
under another schedule that is in schedule ‘C’

Example: Ato Belihu. X has a building that is available for rent in year 2012. The following are
the details of the property lease out
 He has let out for twelve months
 Actual rent for a month is birr 30,000
 He paid 15% of the actual rent received as land taxes and 3% as other taxes
 He spent birr 10,000 for maintenance of the building
 Depreciation Schedule

Type Year Original Cost Addition Total Cost

Building 2012 300,000. --- 300,000.
Equipment 2012 15,000. --- 15,000.
Computer &
2012 10,000. 6,000 16,000.
accessory

Required: Compute the taxable rental income and tax liability assume
A. Ato Belihu does not maintain any books of accounts in this regard

B. Ato Belihu has maintained books of accounts

Solution (A):
Annual rental income (birr 30,000*12 months) ---------------------------------------360,000
Less: allowable deductions
 Land tax (lease) (15% of 360,000) -----54,000

 Other taxes (3% of 360,000) ------------10,800

 Maintenance (1/5 of 360,000) ----------72,000 (136,800)

Taxable rental income……………………………………………………………. 223,200

Tax liability = (Taxable income x Tax rate)- deduction

= Birr (223,200 x 35%)-18,000
= Birr 60,120

6|Page
Solution (B):
Depreciation Schedule

1. For building 300,000 x 0.05=15,000

2. For Equipment 15,000 x 0.20= 3,000
3. For computer 16,000 x 0.25 = 4,000

Annual rental income (birr 30,000*12 months) --------------------------------------- 360,000

Less: allowable deductions

 Land tax (15% of 360,000) ----------54,000

 Other taxes (3%of 360,000) ---------10,800

 Maintenance ---------------------------10,000

 Dep Expense Building----------------15,000

 Dep Expense Equipment-------------3,000

 Dep Expense computer---------------4,000----------------------------------------- (96,800)

Taxable rental income……………………….……………………………………... 263,200

Tax liability = (Taxable income* Tax rate) - Deduction
= (Birr 263,200 x 35%) - 18,000
= Birr 74,120

2.3.3 Schedule ‘C’ Income: Business Income

1. Tax Rate -Schedule ‘C’

Corporate businesses are required to pay 30% flat rate of business income tax

Tax computation
Business Income tax Deductio
Business income per year (I) I = Business income
rate n
BIT = Business income tax
0 – 7,200 0% (Exempted) Nil
7, 201–19, 800 10% 720. BIT = I x 10% - 720
19 801–38 400 15% 1 710. BIT = I x 15% - 1,710
38 401–63 000 20% 3 630. BIT = I x 20% - 3,630
63 001–93 600 25% 6 780. BIT = I x 25% - 6,780
93 601–130 800 30% 11 460. BIT = I x 30% - 11,460
More than 130, 800 35% 18, 000 BIT = I x 35% - 18,000
Table 3 Schedule ‘C’-Tax Rate and Tax computation

7|Page
1-Allowable Deductions
The following expenses shall be deductible from gross income in calculating taxable income:

1. The direct cost of producing the income, such as expenses incurred in manufacturing
2. General and administrative expenses connected with the business activity.
3. Premiums payable on insurance directly connected with the business activity.
4. Expenses incurred in connection with the promotion of the business inside and outside
5. Any payment made by a branch, subsidiary or associated company
6. Commissions paid for services rendered to the business provided. .
7. Sums paid as salary, wages or other emoluments to the children (have qualifications)
8. Interest on loan :In excess of the rate used between the NBE & CBE increased by 2%
9. Gifts and donations for welfare organization (not exceed 10% of the taxable income)
10. Depreciation allowances for PPE as per ERCA.
11. Reinvestment of profit not exceeding 5% of the taxable income
12. Bad debts ( not recoverable)
13. Special (technical) reserves
14. The cost of trading stock of the business disposed of by that person during that period.
15. Capital expense for buildings and construction shall be depreciated
16. Amortization expense :Intangible assets
17. Indemnity of deduction for financial organization

18. Pension contribution, provident fund and other retirement benefits (not exceed 15%)
19. Losses carry forward only for two periods of 3 year

Notice:-Provision for Loss Carry Forward

If a business incurs a loss in a year, that loss may be set off against taxable income in the
next three years. Which means a net operating loss may be carried forward and deducted
only for two periods of three years.

Loss cannot be carried forward :

 If ownership rights changes more than 25%,

 If the business cannot provide a books of account showing the loss

2-Non-allowable Deductions
1. The cost of acquisition, improvement, renewal and reconstruction of business assets
2. An increase of the share of capital of a company
3. Pension or provident fund contribution in excess of 15%
4. Declared dividends and paid out profit shares;
5. Interest in excess of the rate used between the NBE and CBE increased by 2 percentage
points;
6. Damages covered by insurance policy;
7. Punitive damages and penalties;

8|Page
 8. The creation or increase of Reserves, provisions and other special-purpose funds
9. Income tax paid on Schedule C income and recoverable Value Added Tax;
10. Representation expenses over and above 10% of the salary of the employee
11. Personal consumption expenses;
12. Expenditures exceeding the limits set forth by the Income Tax Proclamation
13. Entertainment expenses.;
14. Donation or gift is not registered as a welfare organization;
15. Sums paid as salary, wages or other personal emoluments to the proprietor or partner of
the enterprise;
16. Losses not connected with or not arising out of the activity of the enterprise.

Exemptions Business Income Tax (Article- 30)

The following categories of income shall be exempt from payment of business income tax
hereunder:

1. Awards for adopted or suggested innovations and cost saving measures

2. Public awards for outstanding performance tax any field.

3. Income specifically exempted from income tax by the law.

4. The revenue obtained by:

 The Federal, Regional and Local Governments of Ethiopia;

 The National Bank of Ethiopia from activities that are

Example 1; Melat enterprise, unincorporated business has reported earnings before tax of birr
80,000 at the tax year ended Sene 30,2012.
Required
A. Determine the amount of business income tax?

B. Record necessary journal entries?

Solutions:
Business income tax = (80,000 x 10%) -720
= 8,000-720
= 7,280

To record recognition of income tax expense;

Income tax expense ……………………7,280
Income tax payable ………………………. 7,280

To record payment of tax;

Income tax payable……………. 7,280
Cash …………………………………… 7,280

9|Page
Example 2: Ato.Mesfin is the proprietor of a business. His P/L A/C for the period ended June
2004 is as follows.

Profit and Loss Account for the Period 1st December 2003 to 30th June 2004.
Particulars Amounts (in Birr)
Sales 100,150,200
Less - Cost of sales 87,300,457
Transport service profit (loss) 420,102
Add: other income 100,255
Gross profit 12,529,896
Expenses:
Administrative Expenses 100,068
Selling and distributing Expenses 2,042,322
Bank Interest and charges 34,217
Audit fees 27,000
Provision for stock obsolescence 41,987
Total Expense 2,245,594
Profit for the Year 10,284,302
Provision for Profit tax 3,600,000
Net Profit 6,684,302
Less: Legal Reserve 60,640
Balance carried forward to balance Sheet 6,623,662

Note:
The following information are available from the records of the
firm.
1. Gross Loss on consignment sales 81,491
2. Vehicle rent overstatement 6,700
3. Rental and general Expenses for sister company 22,500
4. Advertise expenses include spent for sister company 8,700

Required: Compute the adjusted business profit and tax liability of the firm for the year
Particulars Amounts (Birr)
[ Profit as per the external auditors report 10,284,302
Less: Disallowed items
1. Gross loss on consignment sales 81,491
2. Vehicle rent overstatement. 6,700
3. Rental and General Expenses for sister company 22,500
4. Advertisement expense made for sister company 8,700
5. Provision for stock obsolescence 41,987
Adjusted profit 10,122,924
Tax Liability for the year at (35%*Adjusted Profit-18,000) 3,525,023.40

10 | P a g e
Example 3: The following information is obtained from Tossa private limited company.
The book value of a pool of computer in the opening balance sheet of the tax period as of Hamle
1, 2012 was birr 150,000. During the year 2012:

Tossa bought data storage equipment for birr 75,000, software products for birr 50,000.
The existing computer was upgraded and renewed for birr 12,000.
Tossa has also received Birr 15,000 as compensation from Haron computer, supplier,
since some of storage equipment are not functioning.
Tossa also sold two old computers and received birr 8,500
Required:
1. Determine depreciation base of computer?
2. Determine depreciation expense of computer
3. Record necessary journal entries
Solution:
Beginning balance of book value………………………………...........150, 000
Add: Storage equipment …………………………..…75,000
Software product ……………………………….50,000
Upgrading……………………………………… 12,000 ...........137,000
Subtotal -------------------------------------------------------------------------287,000
Less: Compensation……………………………..15,000
Cash proceed from selling…......................................8,500 ...........23,500
Depreciation base for tax ………………………………... …………..263,500 (1)
Depreciation expense = 0.25x 263,500 = 65,875 (2)

Journal entries (3):

Depreciation expense of Computer………………………...65,875
Accumulated depreciation of Computer …………………….65,87

11 | P a g e
 2.3.4. Schedule ‘D’ Income: Other Incomes

This is the last and residuary Schedule of income. Any income which is taxable under them Income Tax Proclamation but does not find place
under any of the remaining three Schedules of income (i.e., Schedules A, B and C) will be taxable under this residuary.
 If the Tax item is not included in the table the Tax Rate will be taken as 15%

Article
S/No. Tax Items Description Rate
No.
A payment of any kind received as a consideration for the use of ,or the right to use,
any copyright of literary, artistic or scientific work, including cinematography films
and films or tapes for radio or television broadcasting, any patent, trade work, design or
1 Royalties 31 model, plan secret 5%
formula or process, or for the use or for the right to use of any industrial, commercial or
scientific equipment, or for information concerning industrial, commercial or scientific
experience
Interest Income on
36
2 Deposits Every person deriving income from interest on deposits shall pay tax 5%

Income from
32 The term “technical service” means any kind of expert advice or technological service
3 Rendering of 10%
rendered.
Technical Services
34 Every person deriving income from dividends from a share company or withdrawals of
4 Dividends 10%
profits from a private limited company shall be subject to this tax
Entertainment This type of tax is obtained from those foreign business firms that render entertainment
5 10%
income tax services like football, series film, and so on...
Income from Games Every person deriving income from winning at games of chance (for example, lotteries,
6 33 15%
of Chance tom bolas, and other similar activities) shall be subject to this tax
7 Income from Rental 35 Every person deriving income from the casual rental of property (including any land, 15%

12 | P a g e
 building, or moveable asset) not related to a business activity taxable under Schedule B
of Property
shall pay tax on the annual gross income.
Article
S/No. Tax Items Description Rate
No.
Gain on Transfer of
Income Tax shall be payable on gains obtained from the transfer (sale or gift) of property
8 Certain Investment 37 15%
described in this Article
Property
Unexpected profit This type of profit may be obtained arbitrary rather than the effort of the taxpayers and the
9
tax tax rate will be specified based on the nature of the profit by the minister
10 Agricultural IT As described below

11 Land Use Tax As described below

Table 4 Schedule ‘D’-Tax Items Description with Tax Rate

13 | P a g e
10-Agricultural Income Tax

According to Proclamation No. 152 of 1978 individual farmers and agricultural producer-
cooperatives earning up to Birr 600 per annum are required to pay 10 Birr. The tax rates on every
additional income vary from 10% to 89% for income above 600 Birr..
The mode of assessment and collection of taxes will differ from region to region.
For instance, Oromiya : Agricultural Income Tax per Proclamation No. 8/1995,

S/No Annual Taxable Income Tax Rate

1 Up to 1,200 Birr 15
2 1,201 - 5,000 5%
3 5,001 - 15,000 10%
4 15,001 - 30,000 20%
5 30,001 - 50,000 30%
6 Over 50,000 40%
Table 5 Oromiya Region: Agricultural Income Tax Rate
11-Land Use Tax
Land use rent is to be collected between the 1st of Hidar and the 30th of Miazia of the year.
S/ Tax Payer Description Tax Rate Remark
No. Birr per hectare
per annum
Not members of producer’ s
1 Farmers cooperatives: Proclamation No. 10
77/1976 and No. 152 /1978
Government >>
2 Agricultural 2
Organizations
Proclamation No. 8/1995 of for the first
3 Farmers 10
Oromiya hectare
>> for each extra
4 >> 7.5
hectare
Farming >>
5 15
Enterprises
Table 6 Land Use Tax Rate Per Hectare Per Annum

14 | P a g e
2.3.5. Schedule ‘E’ Exemption Income

According to article 65 of federal income tax proclamation number 979/2016 the exempted taxes
are regulated differently named as schedule E.

1 Hardship allowance;
2 Salary paid to domestic servants;
3 Maintenance or child support payments.
4 Amounts paid to employers to cover the actual cost of medical treatment of employees
5 Travelling expenses paid to employees recruited from elsewhere than the place of
employment;
6 Payments made to a person as compensation or gratitude in relation to personal injuries
suffered by the person or the death of another person;
7 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;
8 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;
9 Reimbursement of travelling expenses incurred on
10 Food and beverages provided for free to an employee by an employer conducting a
mining, manufacturing or agricultural business;

2.4. Indirect Tax

 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.
 Thus, indirect taxes can be shifted
 The person who is required to pay the tax does not bear its burden. .
 The main types of Indirect Tax in Ethiopian are:-

I. Value Added Tax-VAT

II. Turnover Tax –TOT
III. Excise Tax
IV. Customs Duty Tax
V. Stamp Duty Tax
VI. Withholding Tax
VII. Sur Tax

15 | P a g e
2.4.1. Value Added Tax-VAT

 VAT is a consumption tax

 It is imposed on Incremental Value of goods and services made on at each stage of production
and distribution
 A person who carries out a taxable activity is required to file an application for VAT registration
if the total value of taxable transactions, at the end of any 12 calendar months period, exceeds
ETB 1,000,000

Most business transactions involve supplies of goods or services. VAT is payable if they are:

 Supplies made in Ethiopia;

 Made by a taxable person;
 Made in the course or furtherance of a business;
 Are not specifically exempted or zero-rated.

The Value Added Tax would be levied at the rate of 15% of the value of:

 Every taxable transaction by a registered person;

 Every import of goods, other than an exempt import; and
 Import of services.

1-Zero - Rating

VAT zero-rated goods or services are business transactions, which VAT is chargeable at 0%.

 In effect zero-rated means no VAT is charged.

 It does not charge VAT on sells (Output VAT)
 But can reclaim full Input Tax Credit (VAT paid on purchases) related to its zero rated
supplies from VAT Administration Office.

2-Determination of VAT Payable

VAT has two principal components: Input Vat and Output VAT
 Input Tax-IT:- is a VAT that is added to the price when goods or services are purchased
 Output Tax-OT:- is a VAT that is calculated and charged on the sale of goods or services
*VAT Payable (OT>IT) OR (OT-IT=positive difference):
 If VAT on sales exceed VAT on purchase
*VAT Refund (OT<IT) OR (OT-IT=negative difference):-
 If VAT on purchase exceed the VAT on sales

16 | P a g e
Example:
During the VAT period, shop X (which is vat registered person) purchase goods worth of birr
62,000, and sell at birr 65,000.

Required:
1 When does the VAT payable?
2 When does the VAT Refund?

Solution:

Including
Conditions Conditions Excluding VAT
VAT
purchase goods 62,000 62,000
sales goods 65,000 65,000
Input VAT A 8,087 C 9,300
Output VAT B 8,478 D 9,750

Answer2-
Answer 1-During VAT Payable VAT Refund
During
B-A 391 B-C (822)
D-C 450
D-A 1,663

3-Computation of VAT (at each stage of transaction )

Example:
Assume you bought a product that has original cost (price purchase from supplier) Br. 10,000;
Required: Calculate the VAT amount and Net price of the product.
Solution:
Tax amount (liability) = (Original Cost x VAT rate)/100
= (10,000 x 15)/100 = Br. 1,500
Net price = Original Cost + tax Amount
= 10,000 + 1,500 = Br. 11,500

Example:
The computation of the VAT liability from the manufacturer to the final consumer is presented
as follows.

Stages

17 | P a g e
1st Raw material supplier To Manufacturer Birr
Raw material Purchase Price(=Original Cost)
200,000
VAT paid on raw material
30,0
(Tax amount (liability) = (Original Cost x VAT rate)/100 )
00
Total Purchase Price=Tax amount original Cost 230,
000

2nd Manufacturer Sells To wholesaler the 250,000

VAT (250,000 X 15%) 37,
500
VAT liability of the manufacturer (37,500-30,000) 7,500
Or-Value Added At This Stage (=250,000-200,000)*15%

3rd Wholesaler Sells To Retailer 280,000

VAT (280,000 X15%) 42,0
00
VAT liability of the wholesaler (42.000-37,500) 4,5
00
Or-Value Added At This Stage (=280,000-250,000)*15%

4th Retailer stage sells to the final customer at a price 300,000

VAT (300,000 X 15%) 45,000
VAT liability of the retailer (45,000-42,000) 3,000
Total VAT paid to Tax authority 45,000
Or-Value Added At This Stage (=300,000-200,000)*15%

ItMeans-VATcollection
ByTax authority From Each Stage
1st Supplier 30,000
2nd Manufacture 7,500
3rd Wholesaler 4,500
4th Retailer 3,000
Total VAT paid to Tax authority 45,000
VAT collected From Final Consumer (=300,000*15%)
Table 7 Computation of VAT at each stage of transaction

18 | P a g e
4-VAT Exemption
The following types of goods and services are exempted from payment of VAT:
1. Sale, transfer or the lease of a used dwelling;
2. Rendering of financial services;
3. Supply/import of national/foreign currency and of securities;
4. Import of gold to be transferred to the National Bank;
5. Rendering of religious organizations or church services;
6. Import or supply of prescription drugs specified in directives issued by Minister of health,
7. Educational services provided by educational institutions or child care services
8. Supply of goods and rendering of services in the form of humanitarian aid
9. Supply of electricity, kerosene, and water;
10. Goods imported by the government, organizations, institutions or projects
11. Supplies by the post office authorized under the Ethiopian Postal Services Proclamation,
12. Provision of transport; Permits and license fees;
13. Import or supply of books and other printed materials.
2.4.2. Turnover Tax –TOT
The Turnover Tax would be payable on goods sold and services rendered by persons not
registered for VAT.
Turnover tax rates
 2% on goods sold locally.
 For services rendered locally:
 2% on contractors, grain mills, tractors and combine harvesters.
 10% on others.
2.4.3. Excise Tax
In Ethiopia, both the federal and regional governments collect excise tax
Excise tax is imposed on selected goods that are:
 Luxury goods and basic goods that are in inelastic demand.
 Hazardous to health and that are a cause of social problems.

Excise tax will be applicable on 19 groups of items and 378 goods. The tax rate ranges from 5%
to 500%.
 Excisable value in respect of goods produced locally, ex-factory selling price excluding
VAT, cost of excise stamps and the cost of returnable containers.
 The customs value of the goods plus the amount of customs duty payable (whether paid
or not).

Time of payment
Excise tax on excisable goods shall be payable:
 When imported at the time of clearing the goods from the customs area;
 When produced locally, not later than 30 days from the date of production.
Relief for raw materials
The excise tax paid on the raw materials shall be offset against the excise tax payable on the
finished goods except for tax paid on alcohol, tobacco, and sugar

19 | P a g e
2.4.4. Customs Duty (Import and Export Taxes)
 Customs duty has 6 bands or groups of rates which are applied to imported goods.
 These bands of rates are 0%, 5%, 10% 20%, 30% and 35%.
 To calculate the customs duty, the CIF (Cost + Insurance + Freight is multiplied by tariff
rate applicable to each imported item.
 Other taxes like VAT and excise tax are levied on imports at the same rate as domestic
transactions.

2.4.5. Stamp Duty

The following instruments shall be chargeable with stamp duty with the respective Tax Rates
Basis of Rates of Stamp
S.no. Instruments chargeable with stamp duty
Valuation Duty
Memorandum and articles of association of any business
organizations, or any association:
1
 upon 1st execution Flat Br.350
 upon any subsequent execution Flat Br.100
Memorandum and articles of association of
cooperatives:
2  upon 1st execution Flat Br.35
 upon any subsequent execution Flat Br.10

determinable
3 Award On value value; 1%
un determinable
value; Br 35
4 Bonds On value 1%
Contracts and agreements and
5 Flat Br 5
Memoranda
6 Security deeds On value 1%
Collective agreement:
7  on 1st execution Flat Br. 350
 on any subsequent execution Flat Br. 100
8 Contract of employment Salary 1%
Lease including sub-lease and
9 On value 0.5 %
transfer thereof
10 Notarial act Flat Br 5
11 Power of attorney Flat Br 35
12 Register title to property On value 2%
Table 8 Stamp Duty Tax Rate and Its Instruments chargeable And Basis of Valuation

20 | P a g e
2.4.6. Withholding Taxes
As per income tax proclamation no979/2016,
 Withholding Taxes is a tax on an income which is required to be withheld by the
Withholding agent.
 Withholding agent means a person liable to Withhold a tax from a payment made to a
person
 It is a payment of business tax selling paid in an advance
 It is only from cash transaction
 It is advance payment for seller and liability for purchaser
 It is deductible from business tax payable at the end of the year.
 Offsetting is not allowed as VAT
Rate of Withholding Taxes
 2% of the value of the transaction; remit to the tax authority monthly.
 30%. on suppliers that fail to provide a TIN and valid trade license
 The threshold subject to withholding tax is:
ETB 3,000 for purchase of services
ETB 10,000 for purchase of goods.
2.4.7. Sur Tax
 It is an additional 10% tax that is applicable on imported goods
 It is except for fertilizers, petroleum and lubricants, motor vehicles, for freight,
passengers and special purpose motor vehicles, aircraft, spacecraft, and parts thereof, and
capital (investment) goods.
 The Ministry of Finance is authorized to increase or decrease the list of goods exempt
from surtax.
2.5. Categories of Tax Payers

 As discussed in section 2.3 the following are the tax categories under the income tax
proclamation No. 979/2016 which are according to their Income Levels are categorized
into three major categories.
I. Category “A “Taxpayers
II. Category “B” Taxpayers
III. Category “C” Taxpayers

1-Category “A “Taxpayers

This category of taxpayers includes:

 Any company incorporated under the laws of Ethiopia or in a foreign country;
 Any other business having an annual turnover of Birr 1,000,000 or more
 They are required to submit to the Tax Authority, Book of Account at the end of the year,
 Balance sheet and
 Profit and loss statement

21 | P a g e
 2-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.
 Business with no legal personality
 They are required to submit to the Tax Authority, Book of Account at the end of the year,
 Profit and loss statement with the supporting vouchers.

3-Category C Taxpayer:

 A person, other than a body, having an annual gross income of less than ETB 500,000.
 To determine the income tax liability of such tax payer, Standard Assessment or
Presumptive Method shall be used.
 However, if categories “C” tax payer maintain books of account, they shall pay taxes on
the basis of their books of account

Note:

Taxpayer Tax declaration period: After Tax The Amount of Tax will be
S/No
Category the end of the fiscal Payments Period Assessed by, Based on
July 1 - October 30 Books of accounts
1 Category A 4 months, up to October 30.
(Both SOFP & IS)
2 months. up to September 5 or July 1 up to Books of accounts
2 Category B September 5or 6.
6 (Only IS)
July 1 up to July 30
3 Category C 1 month, up to July 30 Estimation
to pay tax
Table 9 Category A,B & C Taxpayers ,Tax Period and Bases of Tax Amount Assessments

22 | P a g e
 SECTION THREE
TAX OFFENCES AND ADMINISTRATIVE PENALTIES

1. The Main Obligation Of Tax Payers

1 Declaration of tax
2 Payment of tax
3 Maintains of Accounts and Records

2. Administrative Penalty:
The following penalties are provided in the proclamation regarding business income tax.
1. For Non-declaration
2. For late payment
3. For understatement of taxable income
4. For failure to keep records
5. For Failure to meet TIN requirement
6. For Late filling and under payment of value at VAT, TOT & Excise tax
7. For failure to withhold

1-For Non- Declaration of Income Tax

 Late filling/Late Declaration

 Non-filling /Non- Declaration
The current income tax law of Ethiopia has stated the following legal provision with regarded to
income to income declaration by tax payers.
A tax payer who fails to file a timely tax declaration is liable to pay the following penalty.
 Birr 100 for the first 30 days (or part thereof ) of non- declaration
 Birr 2,000 for the next 30 days (or part thereof) non- declaration
 Birr 1500 for each 30 days (or part thereof) there after until is field.

2-Late payment of income tax

A tax payer who focus to pay income tax liability within the date stated above is liable to pay the
following penalty
i. A penalty of 5% of the amount of un paid tax on the first date after the due date has
passed
ii. An additional 2% of the amount of the tax that remains un paid on the first day of each
month thereafter.( Income tax regulation 78/2002 Article 8)

23 | P a g e
3-Under statement of Income tax

 The understatement of the income tax result in the following penalty The tax payer is
liable for penalty in the amount of 10% the understatement if the understand amount of
tax is considered not substantial or
 The tax payer is liable for penalty in the amount of 50% of the understatement if the
under seat amount of tax is considered substantial.
 Substantial under stamen of tax occurs if the amount of understatement exceeds the
smaller of the fooling two amounts.
25%of the tax required to be shown on the return
Birr 20,000 - Income tax proclamation No 286/2002 Article

4-Failure to keep proper Records

 A category “A” or category “B” tax payer to maintain proper books of account record
and other document regarding a certain tax payer result in a penalty of 20% of the tax
assessed ( determined) by the tax authority.
 It the tax payer will be suspended one more year’s failure lets the tax authority to revoke
the tax payer license (which is non finical penalty)- Income tax proclamation No
286/2002 Article

5-Failure to meet TIN requirement

Tax payers failing to meet the requirement for TIN are subjects to the following penalty.
i. A withholding agent who makes a payment to a person who has not supplied a TIN is
required to withhold thirty percent (30%) of the amount of the payment.
ii. In additional to the 30% withholding tax the tax payer who has not supplied the TIN to
the withholding agent is liable to pay affine of Birr 5,000 or the amount of payment
whichever is less to the tax authority-Income tax proclamation No 286/2002 Article

6-Late filling and under payment of value at VAT, TOT & Excise tax

The prevailing indirect tax law of Ethiopia has stated the following legal provisions regarding the
declaration and payment of indirect taxes by tax payers.

 Every registered person is require to file VAT return (vat declaration) with the tax
authority for each the end of tax payer period (month) whether or not VAT is payable in
respect of that period.

24 | P a g e
  Every producer subject to excise tax shall submit every 30 days to the tax authority a
declaration contain such information as may be necessary for proper collection of tax not
later than 30 days from the date of production.

A tax payer whether vat or excise tax payer who fails to file a timely return/ declaration is liable
to pay the following penalty

 Penalty equal to 5% of such amount under payment of tax for each month (or portion
thereof) during which the failure continue up to 25% of such amount under payment of
tax is different between the tax required to be shown on the return and the amount of tax
paid by the due date.

The penalty of 5% is limited to Birr 50 for the first month ( or portion thereof ) in which no
return is field.

 In any event the penalty may not be less than smaller of the two amounts.
 Birr 10,000
 100% of the amount of tax required to be shown on their turn.- Income tax proclamation
No 286/2002 Article and Turnover Tax proclamation no 307/2002

7-For failure to withhold

 A withholding agent, who fails to withhold tax per the proclamation, will be personally
liable to pay tax (which has been withheld).
 In addition, this failure obliges the agent to pay Br 1,000 per case.
 The following individuals are also liable in this regard:
1) The manager that has known of the failure
2) The chief accountant or a senior officer who was responsible for the supervision of the
withholding activities.

25 | P a g e