Public finance and Taxation

Chapter One
• Basics of Public Finance
Definition of public finance
- Public Finance deals with the income and expenditure of the public
authorities. Here the term Public means the Government that is
Central, state and local authorities.
- Hence, it can be defined as the science that deals with the nature and
principles of the income and expenditure of the government.
 Cont’d
• By this definition, we can understand that public finance deals with
income and expenditure of government entity at any level be it
central, state or local. However in the modern day context, public
finance has a wider scope – it studies the impact of government
policies on the economy.
 THE SCOPE OF PUBLIC FINANCE
The subject matter of the public finance is classified under five broad categories.
They are,

1. Public revenue
2. Public Expenditure
3. Public debt
4. Financial administration
5. Economic stabilization
A. Public revenue
The income of the government through all sources is called public
income or public revenue. Public revenue is the means for public
expenditure. Various sources of public revenue are:

1. Tax revenue, and

2. Non-tax revenue
1. Tax revenue(direct and indirect)
Tax revenue is easy to recognize, it’s the tax paid by people of
the country in the form of income tax, consumption tax, duties,
etc.
Taxes are compulsory contributions imposed by the
government on its citizens to meet its general expenses incurred
for the common good, without any corresponding benefits to
the tax payer.
2. Non-tax revenue
non­tax revenue includes:
(i) Administrative revenue: public authorities can raise some funds in the
form of fees, fines and penalties, and special assessments. Court fees, passport
fees, from offenders of laws as punishment & from construction of roads
(ii) Profit from state enterprises: Surplus from railway earnings, profits from
the state transport corporation and other public undertakings
(iii) Gifts and grants: people or institutions may make gifts to the state
other non-tax income includes interest income
from lending money to other countries, rent &
income from government properties, donations
from world organizations, etc.
Classification of Public Revenue
Of the various classifications of public revenue available in economic literature, we
shall review a few important ones.
• (i) Gratuitous revenue
• (ii) Contractual revenue
• (iii) Compulsory revenue
 Cont’d
• Gratuitous revenue comprises all revenues such as gifts, donations
and grants received by the public authorities free of cost. They are
entirely of a voluntary nature. Further, these are very insignificant in
the total revenue.
• Contractual revenue includes all those types of revenue which arise
from the contractual relations between the public authority and the
people. Fees and prices fall into this category. A direct quid pro quo is
usually present in these types of revenue.
• Compulsory revenue includes income derived by the state from
administration, justice, and taxation. Taxes, fines and special
assessments are regarded as compulsory revenue. These revenues
express an element of state sovereignty. It is the most significant type
of public revenue in modern times.
 Classification of Public Revenues:

Commonly the revenues of the Government are

classified into two ways. They are:
• On the basis of mode of collection; and
• On the basis of nature of revenue.
a. Revenue on the Basis of Mode of Collection:
1.Revenue on compulsion: Taxes, Fines,
penalties, Forfeits etc
2.Revenue by voluntary payment: Income from
public property rent, Income from public
enterprise, Fees, Licenses, Gifts
3.Revenue Partly by Compulsory and partly
Voluntary: Special assessments, Escheats,
printing of currency, Grant-in-aid
b. Revenue on the basis of Nature:
1. Tax revenue:
i. Taxon income includes Personal tax, Corporate tax
ii. Tax on property
iii. Tax on commodities including, customs tax, Value Added Tax, Excise Tax,
Turnover Tax
2. None tax revenue:
iv. Administrative revenue includes, Fees, Licenses, Fines
v. Commercial Revenues, Prices on goods and services
vi. Gifts and Grants, within the country
vii. Others, Issue of Currency
Taylor’s Classification:
• The most logical and scientifically based
classification of public revenue is however provided
by Taylor. He divides public revenue into four
categories:
• Grants and gifts
• Administrative revenues
• Commercial revenues
• Taxes
B. Public Expenditure
Public expenditure plays the dual role of administration and
economic achievement of a nation. Such expenditures are
made for the maintenance of the governments as well as for
the benefit of the society as whole.
 Objectives of Public Expenditure
Dr. Dalton divided the aims of public expenditure into
two parts:

• Security of life against the external aggression and

internal disorder and injustice (to maintain law &
order).administration
• Development or upgradation of social life in the
community. economic achievement
 Types of Public Expenditure
Developmental Vs Non-Developmental
i)Development Expenditure: For example, maintenance of education
and public health infrastructure like schools, hospitals, irrigation
facilities, electricity boards etc.
ii) Non-Development Expenditure: not directly contribute to
economic development.They include expenditures on the maintenance
of defence establishments, administrative expenditure, interest
payments, payment of old age pension etc.
Cont’d

Revenue Vs Capital Expenditure

Revenue expenditure recurring in nature and simple
administrative costs includes civil expenditure (e.g., general services,
social and community services and economic services), defence
expenditure, etc. Capital Expenditures are incurred on building durable
assets, like highways, multipurpose dams, irrigation projects, buying
machinery and equipment. They are a non-recurring type of
expenditure in the form of capital investments. Such expenditures are
expected to improve the productive capacity of the economy.
 Cont’d
Planned and Non-planned Expenditure
Non-plan expenditure falls under two broad heads, viz., revenue expenditure
and capital expenditure. The former comprises interest payments, defence
expenditures, subsidies, pensions, other general services (like health, education),
economic services (like agriculture, energy, industry, transport and communication,
science, technology and environment, etc.)
Expenditures on agriculture, rural development, irrigation and flood control,
energy, industry and mineral resources, etc., are included in plan expenditure.
Principles Governing Public Expenditure or Canons of Public Expenditure:

Rules or principles that govern the expenditure policy

of the government are called canons of public
expenditure.
(i) Canon of benefit (iii) Canon of sanction
(ii) Canon of economy (iv) Canon of surplus
(V) Canon of Elasticity (Vi) Canon of Productivity
(vii) Canon of Equality (Viii) Canon of
certainty
(i) Canon of Benefit:
According to this canon, public spending has to
be made in such a way that it confers greatest
social benefits. In other words, public
expenditure must not be geared in such a way
that it provides benefits to a particular group
of the community. Thus, public expenditure is
to be made in those directions where general
benefits rather than specific benefits flow in.
 (ii) Canon of Economy:
Economy does not mean miserliness. It refers
to the avoidance of wasteful and extravagant
expenditure. Public expenditure must be made
in such a way that it becomes productive and
efficient.
(iii) Canon of Sanction:
not be made without any concurrence or
sanction of an appropriate authority.
Arbitrariness in public spending can be
avoided only if spending is approved.
Further, economy in public spending can
never be ensured if it is not sanctioned.
(iv) Canon of Surplus:
This canon suggests the avoidance of
deficit in public spending. Like individuals,
saving is a virtue for the government. So
the government must prepare its budget
in such a way that government revenue
exceeds government expenditure so as to
create a surplus. It must not run deficit to
cover its expenditure.
(5) Canon of Elasticity
This canon requires that the expenditure policy
of the State should be such that changes must
be possible in the expenses according to the
changes in requirements and circumstances. In
other words, there should be scope for changes
in public expenditure according to the
requirements of the country.
(6) Canon of Productivity
This canon or principle implies that the
expenditure policy of the Government should be
such that would encourage production in a
country. That means a large part of public
expenditure must be allocated for
development purposes.
 (7) Canon of Equality
one of the foremost aims of public expenditure is also to
ensure the just and equitable distribution of income by
conferring benefits on the poorer section of the
community. This canon of equitable distribution is more
significant for the countries where the gap between the
highest income and the lowest income groups is very
wide. Developing countries like Ethiopia, have given this
aim a significant and particular importance in the
economic activities of the State and in their fiscal policies
 8. Canon of certainty
This canon requires that public authorities should clearly
know the purpose and extent of public expenditure. The
spending unit should be certain as to the amount and
objective of public expenditure. This requires a proper
expenditure plan well thought out beforehand. The
canon of certainty is followed through the preparation of
budget.
Effects of Public Expenditure
The effects of public expenditure can be summarized
under the following five major categories;
• on production.
• on distribution.
• on employment.
• on economic stability.
• on economic development.
 C. Public debt
Public debt refers to loans incurred by the
government to finance its activities when other
sources of public income fail to meet the
requirements.
Public debt is one of the important source of income
to the government in times of financial crisis,
emergencies like war, drought, etc.
 Cont’d
Public debt: Government bonds or securities

Public debt: Internal or External.

Internal debt refers to the public loan floated
within country,
External refers to the obligation of a country to
foreign governments or foreign nationals, or
international institutions.
 Role of Public Debt
•Smoothening out the tax rate.
•Macro economic stabilization
•Financing war or other emergency
expenditures
•Meeting part of current expenditure
•Remunerative capital formation by the
government
•Filing saving and investment gap
Public Debt classification
• Based on Source of Borrowing (internal debt and external debt).
• Based on Purpose of the loan (Productive and unproductive debt)
• According to the nature loan Compulsory and voluntary debt
• Based Fundability of the loan (Funded and unfunded debt)
• Based on the Time Duration of loan (short, medium, and long-term
loan).
 Classification of Public Debt:
public debt is classified into various categories:
i. Internal and External Debt:
• External debt is an immediate source of funds for
development. However, such debt has following drawbacks.
• Political subordination
• Other obligation
• Excess supply of goods and services in debtor country
• Foreign currency burden increases
However, such external inflows help to achieve faster growth.
ii. Short term and Long Term Loans:
Loans are classified according to the duration of loans
taken.
Most government debt is held in short term interest-
bearing securities, such as Treasury Bills and the period
of Treasury bill is usually 90 days.
For development purposes, long period loans are raised
by the government usually for a period exceeding five
years or more.
iii. Funded and Unfunded or Floating Debt:
• Funded debt is the loan repayable after a long
period of time, usually more than a year. Thus,
funded debt is long term debt. “Debt service fund”
is established.
• Floating or unfunded loans are those which are
repayable within a short period, usually less than
a year.
No “debt service fund” is established
iv. Voluntary and Compulsory(forced) Loans:
• Loans given to the government by the people on their
own will and ability are called voluntary loans.
Normally, public debt, by nature, is voluntary.
• But during emergencies (e.g., war, natural calamities,
etc.,) government may force the nationals to lend it.
Such loans are called forced or compulsory loans.
v. Redeemable and Irredeemable Debt:
•Redeemable public debt refers to that debt
which the government promises to pay off at
some future date. “Term loan”
•In the case of irredeemable debt, government
does not make any promise about the
payment of the principal amount, although
interest is paid regularly to the lenders.
vi. Productive (or Reproductive) and
Unproductive (or Deadweight) Debt:
a. Productive debt: Public debt is productive when it is used
in income-earning enterprises. “ The renaissance dam”
A productive debt creates sufficient assets by which it is
eventually repaid.
b. Unproductive (or Deadweight) Debt: Public debt is
unproductive when it is spent on purposes which do not yield
any income to the government, e.g., refugee rehabilitation or
famine relief work. Loans for financing war may be regarded as
unproductive loans.
Effects of Public Debt
• 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
Methods of Redemption of Public Debt:
• Refers to escaping from the burden of public debt.
Various methods of Debt Redemption are as follows:
1. Repudiation: Writing off the loans i.e. not repaying
2. Refunding: Issue of new bonds and securities by the
govt. to repay the matured loans
3. Conversion: Refers to a process by which public
debt with higher interest is converted to a debt of
lower interest rate.
4. Capital levy: Refers to a very heavy once for all
tax on capital assets, property and wealth.
 Cont’d
5.Sinking Fund: Accumulating a part of public revenue
every year for the repayment of debt. The most
systematic and best method for debt redemption.
6. Surplus budget: When Public revenue is more than
public expenditure there is a surplus budget. The
surplus budget is used to clear off the public debts.
7. Terminal Annuity: By using this method, the
government pays off the debt in equal annual
instalments and at the time of maturity it is fully paid
off
 Cont’d
8. Compulsory Reduction in the Rate of Interest:
The government may pass an ordinance to reduce
the rate of interest payable on its debt.
Importance of Public Debt Management
• Helps to reduce the cost of borrowing.
• Helps to develop the domestic financial market
• Facilitates economic development
• Make countries less vulnerable to financial risks.
 Financial Administration

This category includes the preparation of financial

budget, the control and administrations of the budget
relevant problems auditing etc. The term budget includes
‘Annual Financial Statements’ which incorporates all the
annual statements of receipts and expenditures of the
government. Now comes the problem of organisation
and administration of the financial mechanism of the
Government.
 Economic Stabilization
Describes the various economic policies and other
measures of the government to bring about economic
stability in the country.
As the economic and social responsibilities of the state
are increasing day by day, the methods and techniques of
raising public income, public expenditure and public
borrowings are also changing.
 Public finance Vs Private finance
Similarities between Public Finance and Private Finance:

1. Satisfaction of Human Wants: Individual is concerned with

the personal wants, while the Government is concerned with
the social wants. Thus, both the private and public finance have
the same objective, ie, the satisfaction of human wants.
2. Balancing of Income and Expenditure: Both individual an
Government have incomes and expenditures and trying to
balance each other.
3. Maximum Satisfaction: Both private and public finance aim at
maximum satisfaction.
 Cont’d

4. Borrowing a Common Feature: . Both of them are having

loan repayment plans.

5. Economic Choice a Common Problem: Both the individual

and Government face the problem of economic choice. That is
their sources of revenue are limited, comparing with their
expenditure. Hence they have to satisfy the unlimited ends with
limited means.
Dissimilarities between Public Finance and Private Finance
Even though the private and public finances look alike, there are certain
fundamental differences between them. They are,
1. Adjustment of Income and Expenditure:
In private finance, the individual first considers their income and then decides
about their expenditure.
But the case of public finance, the government first estimates the volume of
expenditure and then tries to find out the methods of raisins the necessary income
That is the private finance tries to adjust its income to expenditure, whereas the
public finance tries to meet the expenditure by raising income.
2. Nature of Benefit:
The private finance aims at individual benefit ie the benefit of individual
household.
But the public finance aims at collective benefit, i.e. the benefit of the nation as a
 Cont’d

3. Postponement of Expenditure:
In private finance, the individual can postpone or even avoid
certain expenditure, as they likes. But in the case of public
finance, the Government cannot avoid certain commitments like
social welfare, like relief measures, defense, etc.
4. Motive of expenditure:
In the case of private finance, the individual expects return in
benefit from the expenditure made.
But the government cannot expect return in benefit from
various expenditures made.
Cont’d

5. Influence on expenditure:
The expenditure pattern of private finance is influenced
by various factors such as customs, habits culture religion,
business conditions etc.
But the pattern of expenditure of public finance is
influenced and controlled by the economic policy of the
Government.
6. Nature of Perspective
That is private finance has a short-term perspective
whereas the public finance has a long-term perspective.
Cont’d
7. Nature of Budget:
In private finance individuals prefer surplus budget as virtue and a
deficit budget is undesirable to them.
But the Government does not prefer a surplus budget. This is because
surplus budget is the result of high level of taxation or low level of public
expenditure both of which may affect the Government adversely.
8. Nature of resources:
In private finance the individuals have limited resources. They cannot
raise the income, as they like. They do not have the power to issue
paper currencies.
But, in the case of public finance the Government has enormous kinds of
resources. Tax, commercial revenue, grant even printing of currency.
 Cont’d
10. Coercion:
Under private finance the individuals and business units cannot use force to get
their income.
But, in public finance the governments can use force in the form of imposing
taxes to get income.
11. Publicity:
Individuals do not like to disclose their financial transactions to others. They
want to keep them secret.
But, the Government gives the greatest publicity to its budget proposals and
the allocation of resources to different heads.
12. Audit:
In the case of private finance, auditing of the financial transactions of the
individuals is not always necessary. But the accounts of the public authorities
 Public Administration
Public Administration in broad terms can be described as
the development, implementation, and study of
government policy.
It is concerned with the pursuit of the public good and the
enhancement of civil society by ensuring that the public
service is well run, fair, and that the services are effective
in meeting the goals of the state
 Cont’d
As a discipline, Public Administration is linked to the
pursuit of public good through the enhancement of
civil society and social justice in order to make life
more acceptable for citizens through the work done
by officials within government institutions and to
enable these institutions to achieve their objectives at
all three levels.
The role of government in the economy

In general
-Mobilization and Allocation of resource
-Stabilization of the National Economy
-Promotion of technological development
The role of government in the economy
(1) provides the legal and social framework within which
the economy operates,
(2) maintains competition in the marketplace,
(3) provides public goods and services,
(4) redistributes income,
(5) corrects for externalities, and
(6) takes certain actions to stabilize the economy
applications.
 The market-friendly view
The appropriate role of government in the market-friendly
strategy
- Securing sufficient investment in human resources
- Ensuring an environment that promote competition
among private enterprise
- Maintenance of an economic system on to international
trade
- Maintenance of stable macro economy
 Fiscal federalism

Fiscal federalism, financial relations between units

of governments in a federal government system.
Fiscal federalism is part of broader public finance
discipline.
Fiscal federalism deals with the division of
governmental functions and financial relations
among levels of government.
Forms of State Structure
The three forms of state structure in which the history of
the world experiences; are unitarism, federalism and
confederalism. Let us briefly discuss them orderly.
I. Unitarism
Unitarism is a form of state structure that is characterized
by centralization of power and indivisibility of sovereignty.
In unitary government, there is only one source of
authority whatever local territorial units exist. Local units
are merely agencies of the central government
established for its convenience for local administration.
 Cont’d
II. Federalism
Federalism is a form of state structure by which power of a state is
formally (constitutionally) divided among different level of
government, each of which is legally supreme over its own sphere.
It is the direct opposite of unitarism. It provides for an actual
division of power between two or more nearly independent
government each of which is against particularism and centralism
authority over the same people.
III. Confederalism
Confederalism is voluntary association of independent states. It is
an association of states, which rests upon the common agreement
of its members expressed in an elaborate document
..
 The major issues of fiscal federalism are
summarized as follows:
• allocation of expenditure responsibilities, which
deals with the issue of which item of power of
spending should be carried by which level of
government;
• allocation of revenue raising power; which deals
with the issue of which types of taxes should be
levied and non-tax revenues should be assumed in
which jurisdiction by which level of governments;
 Cont’d
• the fiscal imbalance between the tires of government
and disparities between them in executing their
respective responsibilities; vertical and horizontal
imbalances; and
• The intergovernmental financial transfer; which deals
with the issue of financial flows between the federal and
the states and among the states; vertical transfer and
horizontal transfer in order to adjust the imbalance and
keep a viable federal system.
Fiscal Federalism: Merits and Demerits
a) Merits of Fiscal decentralization

i. Optimum utilization of resources and

development growth
ii. Job opportunity to professionals and workers
iii.Decrease central bureaucracy and corruption:
 b) Demerits of Fiscal Federalism
1. Imbalance and competition: - the very nature of federalism is
devolution of power and functions among different levels of
governments.
2. Mobility and Migration of workers and professionals: - the other
disadvantage of fiscal federalism is mobility and migration of
professional and skillful persons due to disparity of payment for the
same professions in different states and in between the federal or states
governments.
3. Spillover effects: - in expenditure and revenue assessment after budget
allocation of a fiscal year spillover effects may be shown. Spillover effect
is meant to indicate services which are provided by one federating units
either of the federal or a state or even a local administration in the
region/state but used by people of other regions which are not
Features of Ethiopian Federal Finance
Ethiopia is a federal state which comprises of a
central government and nine Regional
Governments. There are also two chartered
cities. As a federal country, the functions and
duties of the government are divided between
central and state governments and they are
generally defined in the constitution.
 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; on the revenue side, it
involves the determination of the size of the overall revenue and
foreign aid.
 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.
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.
Features of budget
In general
1. It is an estimate of the economic activities of an entity
which related to a specified future period.
2. It must be written and approved by the appropriate
authority.
3. It should be modified or corrected, whenever, there is a
change in circumstances.
4. It plays the role of a business framework that helps in
measuring the performance of the business by comparing
actual and budgeted results.
 Cont’d
5. It is prepared on the basis of past experiences and
trends in the business.
6. It is a business practice, which is used to forecast
the operating activities and financial position of the
business
Timeline for the annual state budget process
Phases of the budget Cycle
• A standard budgeting process has the following major steps:
• Plan preparation
• Budget call
• Budget preparation
• Budget Review
• Budget hearing
• Budget Approval
• Budget Execution
• Reporting & Control
 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.
 Cont’d
- Ordinary revenues include both tax and not tax revenues.
- 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.
 Budget Deficit
• 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.
 Methods of Financing Deficit
There are four important techniques through which
the Government may finance its budgetary deficits.
They are as follows:
• Borrowing from central bank
• The running down of accumulated cash balances
• The government may issue new currency
• Borrowing from market or from external sources.
Pattern of Revenue Sharing in Ethiopia
Ethiopia has chosen the federal structure in which a clear
distinction is made between the union and state functions and
sources of revenue, but residual powers, belong to the center,
although the states have been assigned certain taxes, which are
levied and collected by them, they also share in the revenue of
certain federal taxes. In addition, the states receive grants-in-aid
of their revenue from the federal government, which further
increase the amount of transfers between the two levels of
government. The transfer of resources from the central
government to the states is an essential feature of the present
financial system.
Objectives of Revenue sharing:
The sharing between the central government and the Regional
Governments has the following objectives:
 To enable the central Government and the Regional
Governments efficiently carry out their respective duties and
responsibilities.
 To assist Regional Governments develop their regions on their
own initiatives;
 To narrow the existing gap in development and economic
growth between regions;
 To encourage activities those have common interest to regions.
Distribution of Revenues between Central and States
The present federal fiscal system in Ethiopia is of a recent
origin. The distribution of revenues between the center and
states is followed on the basis of "constitution of Ethiopia”
and proclamation no.33/1992-proclamation “to define
sharing of revenue between the central government and the
national/regional self-governments”.
The articles 96, 97, 98, 99 and 100 of the constitution of
Ethiopia make a clear demarcation of areas where the
central alone or state alone have authority to impose taxes. It
contains a detailed list of the functions and financial
 Basis for Revenue Sharing
The sharing of revenue between the central government and
the National/ Regional governments shall take in to
consideration the following Principles:
• Ownership of source of revenue;
• The national or regional character of the sources of revenue;
• Convenience of levying and collection of the tax or duty;
• Population, distribution of wealth and standard of
development of each region;
• Other factors that are basis for integrated and balanced
economy.
Categorization of Revenue
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:
• Central List,
• Regional List, and
• Joint/Concurrent List
A. Central List
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 collected
from enterprises owned by the Central Government.
(Now sales tax is replaced with VAT and Turnover taxes).
Cont’d
4. Taxes collected from National Lotteries and other chance
winning prizes;
5. Taxes collected on income 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;
 B. Regional List
The following shall be Revenues for the Regions:
1. Personal income tax collected from the employees of the
Regional Government and
2. Employees other than those covered under the sources of
central government.
3. Rural land use fee.
4. Agricultural income tax collected from farmers not
incorporated in an organization.
5. Profit and sales tax collected individual traders.
6. Tax on income from inland water transportation.
 Cont’d
7. Taxes collected from rent of houses and properties
owned by the Regional Governments;
8. Profit tax, personal income tax and sales tax
collected from enterprises owned by the Regional
Government:
9. With prejudice to joint revenue sources, income tax,
royalty and rent of land collected from mining
activities.
10. Charges and fees on licenses and services issued or
C. Joint/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.
..

Federal Government Regional Government

Jointly Established Enterprises

Profit Tax In proportion to their capital contribution

Employment I/Tax 50% 50%

Value Added Tax (VAT) 70% 30%

Turnover Tax (TOT) 70% 30%

Excise Tax 70% 30%

Companies

Profit Tax 50% 50%

Dividend Income Tax 50% 50%

Value Added Tax 70% 30%

Turnover Tax 70% 30%

Excise Tax 70% 30%

Minerals & Petroleum Operations

Profit Tax 50% 50%

Royalty 60% 60%

Inter-governmental Revenue transfer:
Inter-governmental Revenue transfer:- means
transferring resource from the central
government to the state government and from
some states of the country to the others
generally through the medium of central
government.
The following statutory methods may be used:
• Tax sharing or assignment:- under this technique, a tax (taxes) is levied
by the central government and the proceeds are shared between the
central government and the state governments on some rational basis
such as on the basis of population or on the basis of economic
backwardness states
• Grant-in-aid or subvention: - under this technique, the central
government gives conditional grant to the states to redress certain
inequalities between states. The grants are conditional in the sense
that they may be given for specific purposes only; and they should be
spent for the purpose for which they are made under the supervision
of the granting authority.
 Cont’d

Loan: - the central government may also use loan

technique instead of straightway grant. For instance,
if it is found that a state should undertake a
particular capital project which will generate income
to partially or fully recover its cost, then the central
government may give a loan for financing the project
instead of a straightway grant.
Expenditure Assignment
Assigning responsibilities for spending,
including the exercise of regulatory
functions must precede the assignment of
responsibilities for taxation because tax
assignment is generally guided by the
spending requirements of the different
organs of government and cannot be
determined in advance.
 Principles of Expenditure Assignments
1. On efficient provision of public services, public
services are provided most efficiently by the jurisdiction
having control over the minimum geographic area that
would internalize benefits and costs of such provision.
Nevertheless, some degree of central control or
compensatory grant may be warranted in the provision
of services in some cases. These cases include
economies of scale, and administrative and compliance
costs
Cont’d
2. On redistribution role of the public sector, it is
commonly argued that effective redistribution is
possible only through national programs by means
such as progressive tax systems.
3. As far as the preservation of internal common
market is concerned, it is argued that the federal
government is best suited to regulate economic
activities such as inter- state commerce and
investment.
Cont’d

4. On economic stabilization function, it is customary to

argue that the federal government should be responsible
for stabilization policies because such policies cannot be
carried out effectively by local jurisdictions
Cont’d

Article 52 (2) of the constitution assigns the regional

governments such powers and functions enacting and
executing the state constitutions;
• Establishing state police force;
• Maintaining public peace and order;
• Administration of land and other natural resources within the
region;
• And formulating and executing economic, social and
developmental policies
• Strategies and plans of the states;
•
 Cont’d
Level of Government Expenditure Assignment
National Defense
Foreign/International relations
Justice and internal security
Macroeconomic stabilization
International trade
Federal Government
Currency, banking, and insurance
National interest capital projects
Shared with regions: environment, airlines and railways
Universities

Secondary Educations and colleges

District and referral hospitals
Nursing schools
Water supply
Regional and zonal roads
Regional Government
Regional police
Maintenance of irrigation systems
Maintenance of small-scale water supply projects
Agricultural planning
Shared with federal: Justice, env’t, police and vocational and preparatory schools

Primary Education
Basic health care
Agricultural Extension programs
Veterinary clinics
Land administration
Wereda
Local police
Local road
Shared with regions: small-scale capital projects