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Talking about tax is usual among people in the developed world, while
the collection of the taxes commensurate to the
economy is a serious concern of countries.
Tax is a source of revenue to meet the ever-growing needs of citizens
and also ensures political and economic stability
that all citizens at all levels benefit from and
equally share.
Nowadays, tax is widely discussed as a serious agenda in Ethiopia. This
has never happened before. It is not as if some
people view it as a threat to the business
community. Rather, it is a sign of a positive change
in the public's attitude towards tax obligations.
Understanding tax as a civil duty is the foundation of voluntary
compliance with tax laws, whereby all citizens pay
tax from their economic activities on their own
initiative. The government’s commitment to inform
the public about tax obligations exhibits an effort
to release the country from financial dependency on
aid and foreign loans. It is the right path toward
sustainable national economic development, and many
of the advanced nations have gone through it.
The very few types of major income taxes applied in Ethiopia’s tax
system include employment (income), rental (capital
gains), and profit (corporate) taxes from formal
economic activities. On the other hand,consumption
tax, levied on purchased items, comprises
value-added tax (VAT) and turnover tax (TOT).
The number and types of taxes in the country are very limited when
compared to the rest of the world. Most of the taxes
are very common ones. Other countries have many
taxes imposed on their citizens for pollution,
inheritance, and property.
The principal difference between income and consumption taxes is that
principal tax is derived from any economic activity
above the legally limited threshold, while
consumption tax is levied when one spends one’s
money. So it is sometimes called expenditure tax
because, unless one spends, one is not liable to be
taxed.
VAT is one of the major consumption taxes that came into operation
following the national tax reform that was launched
10 years ago. It is a broad based tax, which has
made significant changes in the process of
mobilising revenues for the state.
The federal government collected over 13 billion Br in VAT last year,
according to a report by the Planning Directorate of
the Ethiopian Revenues and Customs Authority (ERCA),
in July 2010.
The VAT system is not only a means of collecting state revenue but also
stimulates investment and trade in the economy and
supports the low-income segment of the population.
The tax has not imposed a burden on the majority of consumers, as a
wide range of products (bread, injera, milk, and all
types of grain and flour) and services (utilities)
have been left out of the scope of the tax system,
mainly to avoid or neutralise the regressive effect
of tax. The result is the VAT system enjoying the
full support of people with low earnings.
All imports meant to be used for agriculture (seeds, chemicals, and
fertiliser), transport, health and education
services, and housing are exempt from VAT, but this
appears to be disregarded by most people.
Contrary to the practice in some countries, Ethiopia’s VAT system
provides credit for any kind of capital expenditure
related to business activities. VAT paid for the
purchase of capital assets are credited or offset
against the output tax that is collected by the
business. It also allows for crediting taxes paid on
the purchase of raw materials and services,
including administrative expenses.
VAT is not charged on export supplies of goods and services; it is
rebated to the exporter after shipping the goods
overseas. This is intended to promote export trade
as it plays an important role in the economy.
The generosity of the country’s VAT system, in comparison with that of
other countries, has been pointed out by some
donors. Most of the tax base is exempted, forgoing
considerable portions of revenues, resulting in its
inability to significantly fill the budget deficit,
they argue.
Despite this form of tax having been well managed by both suppliers and
consumers for the past eight years, voices against
VAT have recently been heard. The timing of the
critics is more surprising than their arguments as
the tax rate has not been changed for about 10
years. The state, considering the impact of
inflation caused by global financial crises, has
exempted basic food items from VAT, which has helped
the lower income sector tremendously.
The latest outcry against the enforcement of VAT may have something to
do with the measures taken to organise a tax data
system useful for development and at the same time
to ensure a fair tax administration.
As the ability to access data for tax assessment is the fundamental
requirement for a good and fair tax system, the
state issued a law that forces businesses to use
electronic cash register machines. Its use enables
tax authorities to compile data on the real-time
transactions undertaken by taxpayers.
A number of businesses have been evading tax for a long time and the
tax authority was unable to access accurate data in
its bid to determine the proper tax amount. The new
technology makes data for all sales accessible and
will help to limit evasion and fraud and ensure a
fair tax system.
Quite a number of businesses had never paid the tax collected from the
consumers on the state’s behalf, but, following the
enforcement, they began to seriously collect VAT.
Although the machines have nothing to do with the
VAT rate, which has not been revised, some taxpayers
have increased their prices in an attempt to
compensate for the amount of tax that used to be
evaded before.
In some cases, it was not only because the businesses did not know how
to determine the tax. It had been long enough since
its introduction, and both the suppliers and the
consumers were well practiced in it from their
day-to-day transactions. It was well understood that
most of them were able to assess the tax in
accordance with the law.
However, a few consumers, without a thorough understanding of how the
system worked, bitterly complained.
VAT has different methods of computation, but Ethiopia’s system was
designed to be invoice based for simple calculation
and lodging of the tax with the authority. It is a
mere deduction of invoices issued for output tax
against invoices paid for input tax. Invoices are
thus crucial for the VAT system, without which it
would remain non-functional.
The taxable base is the newly created value at any stage of production
or service. The newly created value multiplied by
the VAT standard rate equals the net VAT rebated to
the tax authority.
However, some businesses may miscalculate and increase the margin by
again adding the input VAT, which could be credited
from the output tax (collected tax). Accordingly,
the tax charged from the consumer will relatively
increase and the input tax, which should be counted
as a credit, is included as a cost.
Whether this is done intentionally or not is unclear, but it could be
considered part of a profit margin or new value,
which is later subject to VAT. This is not the right
method of assessment, according to the tax law and
neither does the state want to collect more taxes in
this manner.
VAT registered taxpayers, including new ones, need to become more
familiar with the self assessment method to comply
with the system. More effort should be exerted to
upgrade the knowledge of registered businesses, the
authority admits.
However, being aware of the adverse situation caused by some
businesses, consumers at large should defend their
interests and fight price escalation, perhaps in the
form of consumer associations. The other advisable
defence against the unfair rise in prices is to
choose suppliers with fair prices, as all businesses
are not skyrocketing prices for consumable goods.
It is obvious that consumers who can afford to enjoy goods and services
in a relatively higher range, pay VAT. The largest
segment of the population does not complain about
VAT; the regressive effect of the tax has been well
addressed by providing a wide range of tax
exemptions.
What would be a significant danger is if the tax induced distortion
occurred in terms of the mobility of factors of
production. This has not happened; for almost two
planning periods, since the inception of the tax
regime, agricultural and manufacturing industries
have registered growth due to the privilege of tax
credit for capital assets.
The tax system thus serves as an incentive tool for the promotion of
important economic sectors.
Not all taxpayers collect VAT. It is only businesses whose annual
turnover exceeds half a million Birr that are
eligible for VAT registration. Taxpayers whose
turnover is below the threshold collect TOT at the
rate of two per cent for goods and 10pc for service
provision.
Although the VAT law imposes the obligation to register as businesses’
turnover attains the legal threshold, a great number
of taxpayers are not willing to voluntarily
register. These include certain restaurants, cafés,
hotels, goldsmiths, and retail shops, which cause
distortions in some supplies of goods and services
with less backward linkage effects of input taxes.
Tax authorities conduct enforcement to bring the nonregistered
taxpayers into the tax net. This is intended to
avoid market distortions caused by the different
prices between the registered and the nonregistered
taxpayers.
However, they should do more to eliminate the adverse effect of this in
the system and to avoid such challenges.The business
community should also do its part, by voluntarily
approaching the tax authority.
The rise in prices of some service providers in the hospitality
industry, such as cafés and medium sized
restaurants, can be mainly attributed to different
kinds of enforcement. As a result, a number of
businesses began to use electronic cash registers to
tax all supplies and those out of the tax net were
forced to join the system.
The imposition of VAT on food in cafés and restaurants is objected to
by some people. However, food served in cafés and
restaurants contain some kind of integrated
services, which is subject to VAT or TOT, because
the café or the restaurant does not only provide
mere food. |
