Chapter Four

Ethiopian Tax Systems

Basic Elements of a Tax System
• The five pillars/basic elements of tax system are
– Taxpayer refers to any individual or organization
that is obligated to pay tax
– Tax Base is the value of everything which is subject to
taxation
– Tax Rate is the amount of taxes expresses as a
percentage of the tax base
– Tax Period is the period for tax assessment. It can be
a year (tax year), month, etc.
– Tax Administration refers to any government office
mainly with a responsibility of tax collection and other
related activities.
2
 Tax Related Terms
1. Delinquent Tax: refers to taxes remaining unpaid on
and after the date of penalty.
2. Fiscal Year refers to the twelve month period used by
the government
3. Gross Income is the total income of individual or
business
4. Tax Abatement refers to a complete or partial
cancellation of imposed taxes.
5. Tax Assessment is the determination of the amount
subjected to tax.
6. Tax Avoidance is the practice of paying as little tax as
possible by using available legal loopholes.
7. Tax Bracket is a range of income subject to tax at the
same tax rate. 3
8. Tax Cut is the act of reducing taxes for certain reason.
9. Tax Credit is an investment activity which directly minimizes
the tax to be paid.
10. Tax Deduction is the amounts legally permitted to be subtracted
from gross income.
11. Tax Evasion is an illegal activity in which a taxpayers seek to
hide taxable income by overstating expenses or understating
revenues.
12. Tax Exemption is a legal provision that permits to deduct
specified amount from gross income as a tax free income.
13. Tax Exile refers to somebody who leaves a country in order to
avoid paying taxes.
14. Tax Favored Investment refers to an investment whose profits
are taxed lower tax rate.
15. Tax Function is a function of tax accountant.
4
16. Taxable Income refers to the amount of an Individual or business
income which is subject to taxation
17. Tax Holiday is period of no taxation
18. Tax Liability is the legal obligation of a taxpayer to the government
19. Tax Liens is claim for unpaid taxes.
20. Tax Levy is the total amount of taxes imposed on an individual or
corporation
21. Tax Penalties are fines or punishments imposed on a taxpayer
22. Tax Refund an amount that a government gives back to a taxpayer
23. Tax Relief is tax savings in the form of special allowable deduction.
24. Tax Schedule is the official list of tax rates matched with different level
of incomes
25. Tax Shelter is an investment activity that protects some of a taxpayer's
income from taxes.
26. Tax Subsidy refers to a government subsidy to a particular company in
the form of reduced tax.
5
 Types of taxes in Ethiopia and administration
1. Direct Taxes
Tax Nature Taxpayers Administered by
Employment Monthly Individuals ERCA and Regional Revenue
Bureaus
Rental Annual Individuals Regional Revenue Bureaus
Sole proprietorships Regional Finance Bureaus
Partnerships Regional Revenue Bureaus
Companies ERCA
Business Annual Sole proprietorships Regional Revenue Bureaus

Partnerships Regional Revenue Bureaus

Companies, Public Enterprises ERCA

Miscellaneous Annual Individuals Regional Revenue Bureaus

Sole proprietorships Regional Revenue Bureaus

Partnerships Regional Revenue Bureaus

Companies, Public Enterprises ERCA

6
 2. Indirect Taxes
Value Added Tax Permanent Individuals ERCA
Sole proprietorships
Partnerships
Companies, Other non-profit
organizations and association unless
specifically exempted.

Turnover Tax Permanent Individuals ERCA

Sole proprietorships
Partnerships
Companies
Non-profit organizations unless
exempted
Excise Tax Permanent Individuals ERCA
Sole proprietorships
Partnerships
Companies
Custom duty Permanent Individuals and companies 7
There are a number of different ways in which the
government raises money from taxpayers. In
Ethiopia, both direct and indirect taxes are
available.
Income taxes
– Ethiopian taxes are divided into categories and
schedules.
– Business income taxpayers in Ethiopian taxation
system are divided into three categories. These are:
–Category “A” taxpayers;
–Category “B” taxpayers, and
–Category “C” taxpayers.
8
1. Category “A” Taxpayers
• Any business having an annual turnover of >Birr
1,000,000
• They are required to file a balance sheet and a profit
and loss statement (income statement) for taxation
purpose.
2. Category “B” Taxpayers
• Includes business which has an annual turnover of over
Birr 500,000 but below Birr 1,000,000.
• They should file profit and loss statement (income
statement) at the end of the year.
3. Category “C” Taxpayers
• Those who have annual turnover of less than Birr
500,000 as estimated by the Tax Authority.
• Neither balance sheet nor income statement is a
requirement to this category. 9
 Schedules of tax
• The Ethiopian Tax System follows the scheduler system
of taxation whereby different types of income are
segregated into different schedules for computing the tax
liability
• According to the Income tax Proclamation number
979/2016 provides for the taxation of income in
accordance with the following schedules:
– Schedule ‘A’ , income from employment;
– Schedule ‘B’ , income from rental of buildings;
– Schedule ‘C’ , income from business profit;
– Schedule ‘D’ , other income;
– Schedule ‘E’, Exempt income.
10
A. SCHEDULE ‘A’ – INCOME FROM
EMPLOYMENT
– It shall be imposed for each calendar month at the rate specified
on an employee who receives employment income during the
month. It is taxed based on the following listing.
Employment income (Per Income tax Deductions
Month-birr) payable (ETB)
0-600 0% -
601-1,650 10% 60 Birr
1,651-3,200 15% 142.50 Birr
3,201-5,250 20% 302.50 Birr
5,251-7,800 25% 565 Birr
7,801-10,900 30% 955 Birr
Over10,900 35% 1,500 Birr

11
Computation of Taxable Employment Income (TEI)
• TEI = Gross Employment Income – Special Tax Exemption
• Gross Employment Income –refers to any income earned
from employment sources regardless of the way it is earned
• Tax Exemptions – are employment incomes exempted
from EIT. Tax Exemptions are classified into two: Special
Exemptions and Personal Exemption
– Special Tax Exemptions – are income directly
exempted by the income tax proclamation in Ethiopia
for special reasons.
– Personal Exemption – is a non-taxable income for each
employee under Schedule “A” per month. It is common
to all employees regardless of their employment income,
which is Br 600 per month. It is considered an income
taxable at rate of 0%. 12
In Ethiopia, in this respect, according to Article 33 of
proclamation No. 64/1975 the following is discussed about
payment for overtime work.
– A worker shall be entitled to be paid at a rate of one and one
quarter (1 )times his/her ordinary hourly rate for overtime
work performed before 10 O’clock in the evening (10 p.m.).
– A worker shall be paid at the rate of one and one half (1 ½)
times his/her ordinary hourly rate for overtime work
performed between 10 o’clock in the evening (10 p.m.) and
six O’clock in the morning (6 a.m.).
– Overtime work performed on the weekly rest days shall be
paid at a rate of two (2) times the ordinary hourly rate of
payment.
– A worker shall be paid at a rate of two and half (2 ½) times
the ordinary hourly rate for overtime work performed on a
public holiday. 13
• Alternative 1: When all payments are made at
the end of the month
Determination of Taxable Employment Income
Basic salary Xxxxx
+ Overtime Pay Xxxxx
+ Transport allowance Xxxxx
+ Other allowances Xxxxx
=Gross Employment Income Xxxxx
Less: Special Tax Exemptions (xxxxx)
Taxable Employment Income Xxxxx14
Alternative 2: Special Exemptions can be paid
any time
Determination of Taxable Employment Income
Basic salary xxxxx
Overtime pay xxxxx
Taxable Transport allowance xxxxx
Other Taxable allowances xxxxx
Taxable Employment Income xxxxx

15
Example 1:
– Ato Solomon is an employee of Excel Pvt. Ltd. Co. The
basic salary of Br 3,200 is meant for 160 normal
working hours. He worked 170 hours during the month
of Tahsas 2011.
– Assuming that all overtime work is done on employee
weekly rest days and the employee received Br 300
transportation allowance according to the employment
contract:
– Required: determine taxable employment income:

16
• Calculation of Employment Income Tax (EIT)
EIT=Taxable Employment Income @ marginal Tax Rate – Deduction

Table 4:1 Employment Income Tax under Deduction Method

TB Range of Tax Deduction EIT Calculation
TEI Rate
1st 0-600 Exempt - No Tax Payment
2nd 601-1,650 10% 60 Birr EIT = TEI @ 10% – 60
3rd 1,651-3,200 15% 142.50 Birr EIT =TEI @ 15% – 142.5
4th 3,201-5,250 20% 302.50 Birr EIT =TEI @ 20% – 302.5
5th 5,251-7,800 25% 565 Birr EIT =TEI @ 25%n – 565
6th 7,801-10,900 30% 955 Birr EIT = TEI @ 30% – 955
7th Over10,900 35% 1,500 Birr EIT =TEI @ 35% – 1,500

Example 1: Use the previous example and determine the amount of

Employment income tax 17
• Example 2: Assume Ato Abebe is an employee in Addis
Ceramics Factory with a monthly salary of birr 1,200 birr
and is required to work 160 hours monthly. In the month
of Tahsas, he worked for 168 hours and worked extra-
hours on weekends.
– Answer: Employment income tax = Br 72
• Example 3: Assume Ato Abdissa Taddesse earned an
amount of birr 11,175 subject to income tax, his
employment income tax is calculated as follows;
Answer: Employment income tax =Br 2,411.25

18
SCHEDULE ‘B’ – INCOME FROM RENTAL OF BUILDINGS
– This schedule is used to tax income earned on rental of
properties. Income under this schedule is payable by
both business organizations and individuals who have
rental of properties.
• Rental of buildings
– Income tax is imposed on the income from rental of
buildings and collected at the following rates:
– On income of bodies (share companies, PLC's for
example) thirty percent (30%) of taxable income,
– On income of persons according to Schedule B (shown
below) of the Income Tax Proclamation No. 286/2002
and its amendment in July 2016.
19
 Income Deduction
Taxable Income from in Birr
tax
rental (Per year-birr)
payable
0 - 7,200 0% None
7,201 - 19,800 10% 720
19,801 - 38,400 15% 1,710
38,401 - 63,000 20% 3,630
63,001 - 93,600 25% 6,780
93,601 - 130,800 30% 11,460
Over 130,800 35% 18,000
20
 Determination of Taxable rental Income for those Taxpayers
Maintaining Books of Accounts
Rental Income Received xxxxx
Add: the following amounts
Amount on the lease of furniture xxxxx
Amount on the lease of equipment's xxxxx
Payments made by the lessee on behalf lessor xxxxx
Cost renovation/improvement paid by lessee xxxxx
Gross Rental Income xxxxx
Less: deductible expenses
Land and building tax xxxxx
Annual lease payment on land xxxxx
Cost of repairs and maintenance xxxxx
Depreciation of building xxxxx
Depreciation of furniture and equipment xxxxx
Interest on bank loans xxxxx
Adverting expense to call tenant xxxxx
Other expense, if any incurred to generate rental income xxxxx
Insurance premiums xxxxx
Total deduction (xxxxx)
Taxable rental income xxxxx
21
 For Taxpayers not maintaining Books of Accounts
Rental Income Received
xxxxx
Add: The Following Amounts
Amount on the lease of furniture
xxxxx
Amount on the lease of equipment's
xxxxx
Payments made by the lessee on behalf lessor
xxxxx
Cost renovation or improvement paid by the lessee
xxxxx
Gross Rental Income (GRI)
xxxxx
Less: Deductible Expenses
Land and building tax, if any xxxxx
Allowance for repairs, maintenance & depreciation(50%@GRI) xxxxx
Total deductible expense (xxxxx)
Taxable rental income xxxxx

22
 Illustration
Assume that XYZ Private Limited Company rented a
furnished office building to ABC Company for Br 40,000
per month on Hamle 1, 2008 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: Compute rental income tax for the year ended 23
Sense 30, 2009.
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
Total …………......................……… (62,280)
• Taxable Income………………………. Br 417,720
Rental Income Tax: For the year ended Sene 30, 2009
= Br 417,720 X 30%= Br 125,316 24
Example 2:
Assume ATO ABEBE, the owner of ABE BUILDING, let
out (leased) the Building at Br 2,000,000 per annum. In
addition to this, the lessee will incur Br 100,000 cost for
repair and maintenance of the building.
Assume further that Ato Abebe maintains books of Accounts
and the following expenses are incurred by the lessor:

Cost of Lease payments on Land Br 100,000

Land and Building Tax 4,800
Other Deductible
Required: Expenses
Determine 5,200
the Gross Rental Income, Taxable
Rental Income, and Rental Income Tax

25
Solution
Rental Income Received
2,000,000
Add:
Payments made by the lessee on behalf lessor 100,000
Gross Rental Income 2,100,000
Less: deductible expenses
Land and building tax 4,800
Annual lease payment on land 100,000
Other expense, if any incurred to generate rental income 5,200
Total deduction (110,000)
Taxable rental income 1,990,000

Rental Income Tax

= 1,990,000 x .35 = 696,500 – 18,000
= 678,500

26
Exercise: Mr Blue leased his furnished building for Br 2,000 per
month and the equipment's and furniture were leased for Br 1,000 per
month. In addition payments made by the lessee on behalf lessor
include 10,000 total. He paid Br 1,200 land and building tax to the city
Municipality. Determine Gross Rental Income, Taxable Rental Income
& Rental Income Tax Liability assuming that the house was vacant for
four months during tax year

Rental Income Received 24,000

Payments made by the lessee on behalf lessor 10,000
Gross Rental Income (GRI) 34,000
Less: Deductible Expenses
Land and building tax, if any 1,200
Allowance for repairs, maintenance & 17,000
depreciation(50%@GRI)
Total deductible expense (18,200)
Taxable rental income 27
15,800
Rental Income Tax
= 15,800 x .10 = 1,580 – 720
=860

28
 Business Income Tax (Schedule C)
Profit earned from business activities are taxed under Schedule C.
Categories of Taxpayers
The categorization of taxpayers depends upon of the following points:
• Annual turnover or annual sales, Maintenance of accounting records or
books of accounts, Requirements for registered vouchers, Number and
types of financial statements to be prepared for tax purposes, Tax Year
Category ‘A’ Taxpayers
Category ‘A’ Taxpayers shall include the following persons and bodies:
– Any business having an annual turnover of >Br 1,000,000
– Any company incorporated under the laws of Ethiopia or in a foreign
country – Share Companies
• They have to use registered vouchers
• They shall submit to two statements to the Tax Authority: a balance sheet
and a profit & loss statement (income statement)
• The tax year can be either the government fiscal year or the accounting
year of the body
29
Category ‘B’ Taxpayers
– They shall include any business having an annual turnover of Br
500,000 and above (500,000 to 999,999.99).
– They have to maintain accounting records
– They have to use registered vouchers
– Category “B” taxpayers shall submit only a profit and loss
statement to the Tax Authority
– The tax year can be year of the body
Category ‘C’ Taxpayers
– They include Taxpayer whose annual turnover is estimated by
the Tax Authority as being up to Birr 500,000
– Maintaining books of accounts is not mandatory
– They are not required to use registered vouchers
– They are not required to submit any financial statements
– The tax year is the government fiscal year
30
Business Profit Tax Rate
1) Taxable Business Profit of body is taxable at the rate of 30 %.
2) The rate of business income tax applicable to an individual is as follows:

Taxable Income per annum Amount taxable Deduction

0 - 7,200 0% None
7,201 - 19,800 10% 720
19,801 - 38,400 15% 1,710
38,401 - 63,000 20% 3,630
63,001 - 93,600 25% 6,780
93,601 - 130,800 30% 11,460
Over 130,800 35% 18,000

Presumptive Tax – is a predetermined amount of tax paid by small

businesses whose annual sales is less than Br 500,000.
31
The tax is estimated by estimating annual sales (daily sales)
Deductible Expenses (Allowable Deductions)
• Any Direct Costs and expenses of producing the Income
is deductible – General Concept of deductible
expenses. It includes:
– Insurance Expense
– Promotional Expense
– Commissions Expense
– Payment to Holding or Parent Company
– General and administrative expenses
– Salary Expense
– Interest Expense – Shall not exceed Inter-Bank Interest Rate
+2%
A. To lending institutions recognized by the national bank of Ethiopia,
B. To foreign banks permitted to lend to enterprises in Ethiopia;
C. To shareholders of Companies 32
– Allowable donations and gift Expense
– Maintenance and Improvement Expense – 20% of
Depreciation Base
– Bad Debts Expense (Uncollectible Accounts Expense)
– Participation deduction (Deduction for Reinvestment of
Profit)
– Special Reserves for Finance Institutions – provisions for
NPLs
– Transportation Allowance paid to Employees not exceeding
the limit
– Retirement Benefits – less or equal to 15% of the basic salary
of the employee
– Representation Expense – 10% of basic salary of employee
– Trading Stock Disposed (Cost of Goods Sold) - The cost of
trading stock disposed during a tax period is determined on
33
the basis of the Average Cost Method
Non-Deductible Expenses
– An increase in the share capital of a company or the basic
capital of a registered partnership
– Voluntary pension or provident fund contributions over and
above 15% of the monthly salary of the employee
– Declared dividends and paid-out profit shares
– Interest in excess of the rate used between the National
Bank of Ethiopia and the commercial banks increased by
two (2) percentage points
– Damages covered by insurance policy
– Punitive damages and penalties

34
– The creation or increase of reserves, provisions and other
special-purpose funds unless otherwise allowed by the
Proclamation
– Income Tax paid on Schedule C income and Recoverable or
Refundable Value-Added Tax
– Representation expenses over and above 10% of basic salary
– Personal consumption expenses;
– Expenditures exceeding the limits set forth in Proclamation
– Entertainment expenses
– Donation/gift to other entities not listed in the proclamation
– Expenditure for maintenance of other private properties of the
proprietor or partner of the enterprises
– Losses not connected with or not arising out of the actively of
the enterprise.

35
Exemptions
• The following categories of income shall be exempt
from payment of business income tax hereunder:
– Awards for adopted or suggested innovations and cost
saving measures
– Public awards for outstanding performance
– Income specifically exempted from income tax by the
law in force in Ethiopia, by international treaty or by an
agreement made or approved by the Ministry of Revenue
– The revenue obtained by the Federal Government,
Regional State Governments and Local Governments of
Ethiopia; and the National Bank of Ethiopia from
activities that are incidental to their operations
36
• Computation of TBI from GAAP Based Financial Statements
Amount Amount
Particulars In ETB In ETB
Taxable Business Profit from GAAP Based Income Statement xxxxx
Add: Non-Deductible Expenses (If they are deducted)
Depreciation on revalued assets .........................................................................................................
xxxxx
Above 15% of the basic salary retirement contribution.....................................................................
xxxxx
Declared dividends and paid-out profit Shares ..................................................................................
xxxxx
Interest in excess of the rate of specified in Proclamation .................................................................
xxxxx
Damages covered by insurance policy...............................................................................................
xxxxx
Punitive damages and penalties .........................................................................................................
xxxxx
Unallowed provisions and reserves ...................................................................................................
xxxxx
Recoverable value-added tax .............................................................................................................
xxxxx
Representation Expense above 10% of the Basic Salary ...................................................................
xxxxx
Personal Consumption Expenses .......................................................................................................
xxxxx
Entertainment Expenses.....................................................................................................................
xxxxx
Donation or gift made to organizations not listed..............................................................................
xxxxx
Other expense if any ..........................................................................................................................
xxxxx
Total Non-Deductible Expenses ........................................................................................................ xxxxx
Less: Allowable Expenses (If not claimed)
Expenses incurred for earning business income ................................................................................
xxxxx
Deprecation Expense .........................................................................................................................
xxxxx
Irrecoverable Bad Debts Expense ......................................................................................................
xxxxx
Total Deductible Expense ..................................................................................................................
(xxxxx)
Taxable Business Profit for tax purpose ............................................................................................ xxxxx
37
Exercise
YBZ Unincorporated business is a trading firm operating a fast food retailing
business. The profit and loss statement for the 12 months ended Sene 30, 2002 for
financial reporting purpose shows the following.
YBZ Business
Income Statement
For the year ended, Sene 30, 2002
Net Sales Br.327,000
Less: Cost of Goods Sold 155,000
Gross Profit 172,000
Less: Operating Expenses:
Salaries and Wages Br.22,000
Supplies 1,200
Advertising 9,100
Entertainment 2,200
Depreciation 20,000
Interest 2,500
Miscellaneous 1,300 58,300
Operating Income Br.113,700
38
The following information was obtained for tax reporting
purpose.
 The Br.55,000 ending inventory cost was determined
based on the FIFO method. If the LIFO or Average Cost
method had been used, the amount would have been
Br.58,000 and Br.52,000, respectively.
 Salaries and wages comprise Br.1,000 disallowable
provident fund of employer’s contribution.
 The interest is on Br.25,000, 10% simple annual interest
borrowed from a recognized financial institution. The
highest interest rate by NBE and commercial banks for
the current year was 6%.

39
 Solution
YBZ Business
Tax Income Statement
For the year ended, Sene 30, 2002
Net Sales Br.327,000
– Less: Cost of Goods Sold 158,000
Gross Profit 169,000
Less: Operating Expenses:
– Salaries and Wages Br.21,000
– Supplies 1,200
– Advertising 9,100
– Depreciation 20,000
– Interest 2,000
– Miscellaneous 1,300 (54,600)
Business income Tax Liability = Birr 11,400 x 30%
Taxable Income Br.114,400
= Birr 34,920 40
 Miscellaneous Income tax (Schedule D):
• Taxable incomes under this schedule include:
I. Royalties: Includes 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.
– Royalties shall be liable to tax at the flat rate of 5%
Example: assume one Famous musician sold his album at Birr 1,000,000 to
a Music Studio, determine the amount of other income tax and record the tax
liability at the time of payment to the artist and to the tax authority
Royalty tax= 1,000,000 x 5 % = Br 50,000
II. Interest income on deposits: every person deriving income from
interest on deposits shall pay tax at the rate of 5%.
Example: Mr X deposited Birr 200,000 at prevailing Deposit rate (4%) at
Commercial Bank of Ethiopia at the beginning of the tax year 2007. If the
deposit is in the account for two years, determine the tax amount to be
withheld by Commercial Bank of Ethiopia
Interest Income Tax = 16,000 x 5 % = Br 800
41
III. Dividend income tax: every person deriving income from dividends
from a share company or withdrawals of profits from a private limited
company shall be subject to tax at the rate of 10%.
Example: Red Share Company distributes 50% of the Net Income to Share
Holders each year. During the tax year ended June 30, 209 the business had a
Net Income of Br 500,000. Required: Determine the Dividend Income Tax
on the Dividend Distributed
Dividend Income Tax = 250,000 x 10%= Br 25,000
IV. Tax on income from games of chance: every person deriving
income from winning of games of chance (e.g., lotteries, tom-bolas,
and other similar games) should pay 15% of the value unless the
value of the chance is less than Birr 100.
Example: Ato Bedelu won Birr 100,000 from the lottery drawn on April 25th
2009. Determine the Tax Liability to be withheld by the National Lottery
Administration.
Other Income Tax = (100,000 -100) x 1 5% = 99,900 x 15 %
= 14,985
42
V. Income from casual rental of property: every person
deriving income from casual rental of property including
any land, building, or movable property not related to a
business activity, taxable under Schedule B, shall pay tax
on the annual gross income at the rate of 15%.
– This income from rental of movable and immovable
property is derived by a person not engaged in regular trade
or business.
Example: Ato Solomon rented his Land Cruiser Toyota at Br
15,000/month for three months to SS Tour and Travel Pvt. Ltd.
Co.
Required: Determine the income tax to be withheld by the Payer
SS Tour and Travel Pvt. Ltd. Co.
Other Income Tax = 45,000 x 15% = Br 6,750
43
VI.Capital gains tax: income tax shall be payable
on gains obtained from the transfer (sale or gift)
of the following properties based on the
associated rates:
Building held for business 15%
Factory 15%
Office 15%
Shares 30%
• However Buildings fully used for residences for
two years prior to disposal and buildings in non-
municipal area are exempt from payment of tax/
excluded from capital gain tax.
44
Capital Gain Tax
– For Business Buildings
Capital Gain Tax = Taxable Capital Gain @ 15%
Selling Price of the building xxxxx
Less: Cost of Building (xxxxx)
Gross Capital Gain xxxxx
Less: Inflation Adjustment xxxxx
Taxes paid for the land xxxxx
Taxes Paid for the Building xxxxx
Total Deduction (xxxxx)
Taxable Capital Gain xxxxx
Capital Gain Tax (Taxable Capital Gain @ 15%) xxxxx

45
 For Shares of Stock
• Capital Gain Tax = Taxable Capital Gain @ 30%
Selling Price of the Share xxxxx
Less: Par Value or Cost of Shares (xxxxx)
Gross Capital Gain xxxxx
Less: Inflation Adjustment xxxxx
Total Deduction (xxxxx)
Taxable Capital Gain xxxxx
Capital Gain Tax (Taxable Capital Gain @ 30%) xxxxx

46
Example -1-
• SI Business Enterprise sold its building which has a cost of Br
85,000 at Br 185,000. The Building was held for 10 years and Br
11,000 Land and Building tax was paid on the building during the
10 years period. If the average inflation rate is 5%, determine the
Taxable Capital Gain and the Capital Gain Tax.
Selling Price of the building 185,000
Less: Cost of Building (85,000)
Gross Capital Gain 100,000
Less: Inflation Adjustment 5,000
Taxes paid for the land and building 11,000
Total Deduction (16,000)
Taxable Capital Gain 84,000
Capital Gain Tax (Taxable Capital Gain @ 15%) 12,600

47
• Example-2- Ato Abebe Purchased 100 Shares from NIB
International Bank S. Co. at Birr 1,000 per share when
the par value is Birr 1,000 per share on January 1, 2003.
Ato Abebe sold the shares at Birr 1,700 per share on
February 20, 2005. Taking year 2003 as a base year, the
price index is 1.05 in 2005. Determine the tax on the
Capital Gain
Selling Price of the Share 170,000
Less: Par Value or Cost of Shares (100,000)
Gross Capital Gain 70,000
Less: Inflation Adjustment 3,500
Total Deduction (3,500)
Taxable Capital Gain 66,500
Capital Gain Tax (Taxable Capital Gain @ 30%) 19,950
48
 Indirect tax
1. Value Added Tax (VAT)
– Indirect taxes concern commodities.
– This means VAT is generally a tax on consumption of goods
and services.
– It is collected in the production and distribution process
beginning with importers and producers of raw materials and
ending with retailers.
– The end impact and burden of VAT rests on the final
consumer.
– It is a charged on the added value(incremental value or
newly created value of goods and services)
– The proclamation of VAT no. 285/2002 officially replaced
sales tax in Ethiopia.
– As per this proclamation, value added tax is levied and
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collected at the flat rate of 15%
 Components of Value Added Tax
There are two principal components of VAT:
1. Output Tax
– It is the Value Added Tax collected on the sale of
taxable supplies (goods and services).
– It is the VAT collected on sales.
2. Input Tax:
– It is the value added tax paid on purchases of
taxable goods and services.
– It is the VAT paid on purchases
• Vat Payable or Liability = Output Tax is >Input Tax
• Vat Refundable/Credit = Output Tax is < Input Tax
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 VAT Registration in Ethiopia
1. Mandatory Registration
– If the gross sales value or turnover of the enterprise, which
is gross income for 12 calendar months, exceeds or likely
to exceed Br 500,000, the person conducting the enterprise
must register for VAT with VAT Department of the FIRA.
2. Voluntary Registration
– Even if the annual turnover does not exceed
Br.500,000, a person can apply to be registered for
VAT if the person supplies more than 75% of its
goods and supplies to taxable persons.

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 Classification of supplies for VAT
Zero-Rated Supplies
– Supplies on which VAT on supply is charged at 0%.
– Are part of the VAT system
– The company supplying zero rated supplies must register for
VAT.
– The firm can claim the Input Tax Credit on purchases either it
is domestic or import.
– The input VAT will be recovered but no Output Tax will be
reported for the sales.
Includes:
– Export of goods and services
– rendering of international transportation services
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– the supply of Gold to NBE
B) Exempted Supplies
– Supplies on which VAT is NOT chargeable
– The supplies are outside of the VAT system
– Persons supplying only exempted supplies cannot register for VAT.
– There is neither Input Tax nor Output Tax.
• No tax is collected when a person sells exempt goods & services
• No tax is paid when a person purchase exempt supplies.
• Includes
– rendering of educational services, health services, financial services,
religious services,
– the supply of electricity, water, and kerosene
– the provision of transport
– the import or supply of books and printed materials
– the import of gold to be transferred to the NBE
C) Standard Rated Supplies
– Supplies on which VAT is charged at a standard (15 %) rate.
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• Determination of the VAT Liability
– The amount of tax payable or VAT Liability for any accounting
period by a person who is registered or is required to register is
the difference between the amounts of tax charged on
taxable transactions i.e. the VAT charged on sales and the VAT
paid on purchases of goods and services applying the Standard
Rate.
• Example 1: if a taxable person purchases birr 200,000 goods and
services and sales Birr 300,000 taxable supplies during the month
of Nehase, the VAT liability will be as follows:
Output Tax:
300,000 @ 15 % 45,000
Input Tax:
200,000 @ 15% 30,000
VAT Liability 15,000
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Computation of VAT
The computation of the VAT liability from the manufacturer to the final consumer is presented as follows.
Manufacturer Birr
Purchases of raw materials………………….…….… Br 2,000
VAT paid on raw material (15% x 2,000)…….…… 300
Cost of the material to the manufacturer………….. 2,300
Sells to the wholesaler the finished goods………. ….… ….… 4,000
– VAT (4,000 X 15%)……………………………………. 600
– Total selling price…………………………………. …… 4,600
• VAT liability of the manufacturer (600-300)……………….……Br 300
Wholesaler
– Sells to the retailer at a price ……………….….…….… 5,600
– VAT (5,600 X15%)………………………………………. 840
– Total selling price …………………………………….….. 6,440
• VAT liability of the wholesaler (840-600) …………………….. ……240
Retailer
– Sells to the final customer at a price ………...….……… 8,400
– VAT (8,400 X 15%)………………………………..….….. 1,260
– Total selling price ………………………………….….…... 9,660
• VAT liability of the retailer (1,260 – 840) …………………….……..420
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Total VAT paid to FIRA………………………………………………….…….…..Br 960
Example:
Dire food complex, VAT registered organization, sold 500 quintals of wheat
flours at VAT exclusive price of birr 400 per quintal. The company also
purchased 100 quintals of wheat at exclusive price of birr 300 per quintal from
VAT registered supplier, in the month of Hamle . The factory has also imported
chemicals and raw materials worth birr 100,000 excluding VAT for flour
production in the month of Hamle.
Required : Determine the VAT payable (VAT refund ) for the given month?
Solution
Output VAT : 500 x 400 x 15% = Br. 30,000
Less: Input VAT :
Wheat 100 x 300 x 15% = Br. 4,500
Chemicals 100,000 x 15% = Br. 15,000 = 19500
VAT payable = Br. 10,500

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Example -2-
Anbesa shoe factory, vat registered company, purchased 10,000 Kgs of
processed leather from Awash leather factory at VAT inclusive price of birr
690 per kg. It has also imported chemicals worth birr 400,000 excluding
VAT for shoe making in the month of Hidar. Anbesa exported international
standard shoes to Germany worth birr 3 million and sold 20,000 pairs of
shoes at VAT exclusive price of birr 300 for each pairs of shoes to local
market.
Required: Determine Vat payable ( refund ) for the given month?
Soln
VAT output :
– Local market: 20,000 x 300 x 15% = Br. 900,000
– Export : 3,000,000 x 0% = 0
Less VAT Input paid for :
Leather 10,000 x 690 x 15/115 = 900,000
Chemicals 400,000 x 15/100= 60,000 = 960,000
VAT refund 60,000
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• Turnover Tax (TOT)
– It is a tax imposed on almost all goods and services on the
total turnover rather than on the Value Added. Turnover tax
is a sales tax. A reduced tax rate is applied for Turnover Tax
as compared to the VAT in most of the countries of the
world
• Rate of Turnover Tax
– 2% (two percent) on Goods Sold Locally
– For Services Rendered Locally;
– 2 % on Contractor, Grain Mills, tractors & Combine-Harvesters
– 10% on other services like Consultancy, Training, Legal advice,
Auditing
Base of Computation of the Turnover Tax
– Base of computation of the Turnover tax shall be the Gross
Receipt in respect of goods supplied or services rendered58
Example: ABC Stationery Materials Sold Birr 3,000 Papers,
Pens, Pencils and Others on June 30, 2009. Determine the
Turnover Tax Liability on this transaction?
Solution;
TOT on sell of goods is computed by 2%
TOT= Br. 3000 X 2%
= Br. 60

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 Excise Tax:
• The other type of indirect tax adopted in Ethiopia is
excise tax.
• Excise tax is, also known as selective tax, an indirect
tax imposed on luxury goods, goods that are hazard to
health and basic goods which are demand inelastic such
as vehicles, jewelers, perfumes, alcoholic products,
tobacco products, salt, textile products, etc.
• Some governments impose excise tax to achieve some
specified objectives such as curving undesirable wants
and avoidance of hazardous products like cigarettes, and
alcoholic beverages.
• Ethiopia also introduced and imposed excise tax on
selected imports and domestically produces goods. 60
• According to the Ethiopian Excise Tax proclamation no.
307/2002, excise tax is applied on goods listed below
either they are imported or locally produced.

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62
63
64
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Customs Duty
– Customs Duty is a duty or tax levied on Import and
Export of goods by the Ethiopian Government.
– Goods shall mean any commodities, personal effect and
animals including money.
– It can be Specific Duty and Ad valorem Duty
– Ad-valorem Taxes – are taxes or duties levied as a
percentage of the Value of Goods and Services.
– Specific Tax – are the taxes levied at a fixed amount,
irrespective of the Value of the goods and services.
– The rate of customs duty varies from 0-35%

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