CHAPTER-7

7. Taxation in Ethiopia
7.1 Overview of the Ethiopian Tax System
7.1.1 Traditional Taxation in Ethiopia
Taxation policies depend on the socio-economic and political structure of a country. Earlier days
Ethiopian rulers established fiscal measures by force because there was no legal or institutional
mechanism to control and administer the fiscal policy. There were no territorial assemblies and
no representative bodies at the central level to introduce taxes. The very mechanism of revenue
collection and distribution among the ruling class thus became the absolute power of King.
Majority of the state revenue was spent for military purposes.
In Ethiopia, though taxation came into being with the emergence of state and government, there
exists hardly any reliable documentary evidence as to when exactly taxation was introduced.
During the period of Zera Yacob (1434 – 1468) people used to contribute from their cattle and
agricultural products to the governors of the state. The kind of traditional tax system that was
introduced during this period did worth for several centuries smoothly until it was replaced by
the modern tax system in the mid 20 th century. Historical evidences show a picture of giving a
fixed amount of tax in the form of mules, horses or cloth. Evidences indicate that in the third
quarter of 19th century also taxes were paid in kind and in money. Payment in kind included
various forms such as salt, honey, better, grain, livestock (cows, oxen, etc), horses and mules,
and cloth. The amount and form of tax were based on the needs of rulers. Until the second half of
the 19th century different territorial and geographical administrators of the then kingdom were
paying tax in gold.
Taxes during the period 1855-1868 consisted of direct and indirect taxes. Direct taxes included:
 Land tax ("gebr"). This meant an ordinary and regular annual tax paid by peasants of
different categories in return for the use of the land. "Gebr" was used to maintain and
supply the income of governors and administrators. A peasant would be exempted
from this tax if he became a soldier or a cavalryman. Rendering other services in the
local administration would also exempt a peasant from paying "gebr".
 The tithe ("asrat"): This was a tax levied by the sovereign to provide allowances for
governors, local state officials, soldiers and priests.

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  Provincial-administrative tax ("ya-nagarit"): This is a kind of tax levied on territorial
administrative units in districts and provinces. "Nagarit" was an administrative term
used to denote territories governed by established noble families of the province.
 Tax for maintenance ("bal"): This tax took several forms. Generally, it described that
part of the agricultural surplus allocated for the clergy and soldiers in lieu of salaries.
 Tax for appointees and appointment ("maso'amiya and ya-sumat"): This referred to
the tax paid by peasants to a new governor appointed by the King or the military
governor. In return for their appointment, office holders also paid this tax.
 Tax on livestock: The livestock taxes included cattle, sheep and goats, mules and
camels. Taxes levied on these livestock varied in quantity. One king levied a tax of no
less than one-fifth off all cattle and sheep. The levies were irregular and most often
were based on current needs.
 Tax on honey ("ya-mar gebr"): This was a tax levied on producers of honey.
 Production tax from other economic activities: This included levying tax on artisans
and from salt-producing areas.
 Irregular and ad hoc taxes: The levying of this tax was based on the size of the
army, which the kind commanded, on the frequency of military expeditions, and the
like. During times of intensive military campaign, peasant would be taxed more than
two times a year.
Indirect taxes for this period included toll taxes ("bar-qurt") and caravan tax ("qalafat"), and
perhaps a tax called "ferida" (which literally meant cattle for slaughter). The "ferida" tax was
paid either in money or in the form of meat. These taxes were continued to be collected until
1942 both in kind and in money.

During the reign of king Menelik, taxes of various forms, as mentioned earlier, were collected.
The traditional system of taxation put a heavy burden on taxpayers mainly peasants because the
contribution expected from them, in kind and in labor, was more than what they could afford.
This forced the peasants to leave their landholdings. The effect of such taxes resulted in social
disturbances and political instability. These problems necessitated Emperor Menelik to put an
end to the payment of tax in form of labor.

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7.1.2 The Evolution of the Modern Tax System
Taxes are traditionally being paid in kind but monetary payment steadily increased in 19 th and
20th century because of the circulation of money and the changing government policy. As the size
of government and its commitment to economic growth increased gradually every citizen, above
18 years, was asked to contribute one Birr a year to total governors, landlords, or any other local
chief. Moreover, salary and wage earners were obliged to pay a part of their annual income.
Historical evidences reveal that there was no proper assessment of tax during those days. In
certain period, a traditional unit was assigned to collect a fixed amount of tax from various
sources regardless of the quantity of taxable product or the area of land. In certain other period,
tax was collected based on the measurement of land, on the quantity of grain produced or on the
number of cattle possessed.

7.2 Taxes and Tax Reform in Ethiopia

Taxes from 1942 to 1974
During this period (the Regime of Emperor Haile Selassie) taxes were imposed on income from
employment; from rent of land and building (used for purposes other than agriculture); from
businesses, vocational occupation, and interest and from exploitation of wood and forest used for
lumbering purposes. Though at the beginning agricultural income was exempted from payment
of tax, later it was also subject to tax. Tax rates for various heads of income varied according to
the changes in government policies.

Tax rates for employment income ranged from 1.8% to 25% under different proclamation and
tax brackets from Br 30 to Br 5,000. In almost all proclamations, the tax-free income was Br 30.
The number of tax brackets was also many in most proclamations. Business profit tax was levied
according to different category (Like traders, retailers, etc) or different grades (e.g. Grade I, II,
III, etc). Specific tax-free brackets were also included in all proclamations and incorporated
bodies are taxed at 15 to 16%. Rental income tax rate ranged from 2% to 16% and tax brackets
were ranged from Br 360 to Br 15,000. Taxes on agricultural income, though not imposed at the
beginning of the regime, were levied at rates ranging from 1.5% to 20%. Incorporated
agricultural bodies were taxed at 20%.

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Other taxes collected during this period include land tax (levied on each gasha or gabber of
land), education tax (levied on land used for promotion of education), health tax (levied on land
used for health activities), road tax (collected on the nature and load capacity of vehicles) cattle
tax, tobacco tax excise tax on alcoholic, transaction tax (on import and export and on goods
manufactured locally), stamp duty, customs duty and export duty.

Taxes from 1975-1991

Taxes imposed during this period (under military rule) were similar to those of Haile Selassie
regime except that wider tax bases and increased tax rates. The changes were made for the
purpose of meeting situations of war and to provide for public goods and services.
Employment income tax rates, during this period, ranged from10% to 85% of employment
income. Tax brackets were reduced and tax-exempt income raised to Br 50. For business income
tax, together with the reduction in the number of tax brackets, the rate for incorporated bodies to
50% and that of unincorporated businesses to 89% (but later on reduced to 59%). Rental income
tax rate was also gone up to 89%. Rural land use fee was first introduced during this regime.
Agricultural income was also taxed at varying rates (with the highest rate 89%). It was during
this period; urban land rent and urban house tax were first come in to being. Rental tax varied
from 1% to 4.5%. Public roads, places of worship, and dwelling houses whose annual rent was
less than Br 300 were exempted from tax. Excise tax on tobacco leaf and wooden matchboxes
were introduced and a very high rate for sugar and soft drinks was imposed during this period.

Tax from 1991 to 1995

The reorganization of Ethiopia in to Federal and Regional self government, base on democratic
principles, and the emergence of market oriented economy are imperatives for making structural
changes in tax policy during the transitional period. With the establishment of regional
government (pursuant to Proclamation No 7/19920), major changes took place in the tax policy
of the country. Tax brackets and tax rates were modified and new tax bases such as tax on
mining activities and on capital gains were introduced in this period. The major modifications
and introductions are given below.

Employment Income Tax

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  Tax rate decreased to 10% - 40% range (from 10% - 89% range)
 Tax brackets reduced to 5
Business Income Tax
 Tax rates lowered to 10% - 40%
 Tax rate of incorporated bodies reduced to 45%
Mining Income Tax (newly introduced)
 Rates for larger scale mining fixed at 45% and small scale operation at 35%
Capital Gains Tax (newly introduced)
 Gains on sale of shares, bonds, and urban houses taxed at 30%
 Gain of less than Br 10,000 was exempted from tax
Rental Income Tax
 Tax brackets and rates lowered
 Income up to Br 1,200 was made tax free

Other Income
 Food items such as injera and bread; and fertilizers were exempted
 Most of the duties were made ad Valorem
 Duty range reduced to 5% - 80%
 Duty on export (except coffee) cancelled

Taxes from 1995 onwards

The constitution of Ethiopia approved in 1995 gave powers to Federal and Regional Government
to levy and collect taxes from the sources assigned to them to meet their expenditure needs.
Accordingly, both levels of government collect direct and indirect taxes from the respective
sources. A number of changes have been made in the tax policy of the country pursuant to the
structural changes. Most of them are in the area of income tax and customs duties. The following
are the most relevant changes that are incorporated in tax laws.
 Reduction in the rate of business income tax from 40% to 30%
 Equalization of tax rate at 35% for both small scale and large scale mining activities
 Assignment of collection of revenue from agricultural income tax to regional government
 Exemption of capital gains from houses used for residential purposes

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  Introduction of Taxpayer Identification Number
 Introduction of tax withholding system (At 3% and 2% respectively for import and
certain types of payments, and on interest, dividend, etc)
 Replacement of sales tax by VAT and turn over tax

Tax Assignment
The burden of federal government and regional government in providing public goods and
services is cumbersome. To meet these requirements government units need financial resources
that could be gathered from different revenue sources. Government of Ethiopia mobilizes the
required revenue from sources such as direct taxes, indirect taxes, foreign trade taxes, charges
and fees, sale of goods and services, revenue from government property and investment,
government employees’ contribution to pension, foreign technical aid, capital receipts, and other
miscellaneous revenue.
In assigning the mobilization of taxes to different levels of government, issues such as the type
of taxes to be levied, the principles on which taxes are to be collected, and the criteria of tax
assignment etc should be given serious consideration. Generally the following formula (accepted
by economists) is used for assignment of revenue collection.
i) Taxes suitable for economic stabilization, progressive and redistributive taxes, and
taxes on mobile factors could be assigned to central government.
ii) Tax on consumption goods, residence based taxes and taxes on immobile factors
could be assigned to regions
iii) Benefit taxes and user charges could be given to all levels of government
Application of various principles of tax such as fairness, certainty, predictability, and adequacy
etc is utmost importance in designing a tax system in all levels of government. Uniformity in tax
rate and tax base is another important factor in the tax policy of regional government for
instance, if the tax rate in one region is different from that people shift the taxed activity to the
region from where they could benefit most.
In essence, uniformity avoids tax competition; flow of capital, and cross boarder shopping. Non-
uniformity can be applied if it does not affect the benefits of uniformity. It can be resorted to
foster revenue mobilization and regional development due to the fact that regions differ
significantly in their development and resource availability. For example, in most developing

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countries there exist industrially developed regions and backward (predominantly rural areas)
regions. In the former case revenue could be mobilized with the existing tax base. But in the
latter case, more and more money should be spent towards infrastructure facilities resulting in
failure to meet a majority of public needs. The case is true for Ethiopia also.
In view of the assignment of expenditure, the Government of Ethiopia issued a proclamation (No
33/1992) that shows the allocation of revenue between Federal and Regional government. This
allocation is based on the following objectives.
i) To carry out the duties and responsibilities effectively and efficiency by both levels of
government.
ii) To develop their own region by taking initiatives by themselves.
iii) To eliminate the gap between regions in various development activities
iv) To encourage those activities for which the regions have common interest
Fulfillment of the above mentioned objectives should be the prime responsibility of each
regional state while collecting revenue from the sources. The allocation has takes various factors
into consideration such as ownership and the character of the source; convenience of levying and
collecting tax, population, distribution of wealth, and the standard of development of the region.
Based on the above factors revenue of the country is collected by Federal and Regional
government as given below.

Revenue collected by Federal Government

This category includes foreign trade tax, tax from employees of central government and
international organizations; personal income tax and sales tax from the enterprises owned by
federal government; taxes on lottery and other chance winning; tax from air, rail and marine
transportation; tax on rent of houses and properties owned by central government; and fee for
services rendered and licenses issued by Federal government.
Revenue Collected by Regional Government
Employment income tax from employees of region and from private employees; personal income
tax and sales tax of enterprises owned by regional government, agricultural income tax from
farmers and rural land use fee; profit and sales tax of traders; tax on income from inland water
transport; rent of land, royalty, and income tax from small scale mining operations; fee for
services rendered and for license issued by regional government.

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Revenue Collected Jointly
Personal income tax and sales tax of enterprises owned jointly; profit, sales tax and dividend of
organizations; rent of land, royalty, and profit tax of large scale mining operations, petroleum
and gas operations; and forest royalty are shared by Federal and Regional government on an
appropriate ratio. A committee appointed by the prime minister decides the ratio in which the
revenue should be allocated. This committee consists of representatives of both the government
and is responsible to the Council of Ministers. The committee is responsible for giving solution
to any problem arising there from.
Regions are also entitled to receive subsidy from central government for the fulfillment of certain
objectives. If approved, regions get subsidy for promotion of social services and economic
development, acceleration of development of neglected areas, reduction of gap in per capita
income between regions, encouragement of foreign currency projects, and projects of national
interest.
It should be noted that while making reforms in regional tax policy, regions have to abide by the
rules and regulations of central government, exemption privileges granted to taxpayers should
adhere to such privileges given by central government.

Classification of Tax
Tax structure of Ethiopia divides tax in the country as direct and indirect. This classification is
purely based on the incidence (tax shifting) of tax. Direct taxes are those obligations of payment
that cannot be shifted to a third party. On the other hand, the burden of payment is shifted to
third parties, in all indirect taxes, by taxpayers. Direct taxes, in Ethiopia, include employment
income tax, business income tax; rental income tax, capital gains tax, agricultural income tax and
rural land use fee, mining income tax, taxes on lottery and other chance winning, tax on royalty,
interest, dividend, and casual rental of property.
Import and export duty, value added tax and excise tax are the indirect taxes collected by the
country.

The principles upon which the Ethiopian Tax Law is based are the following:

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Lawfulness
The society which is covered by the tax law is obliged to respect all tax laws, regardless of the
name and kind of the instrument.
The Application of Tax Provision
In the tax assessment procedure, the tax rules, which were in force at the time of occurrence of
the fact, will be applied.
Objectivity
During assessment, the tax authority establishes the facts such as objectivity and conscientious.
Right to Appeal
This principle enables the taxpayers to file complaints against the assessment procedure
Keeping the Books and Records
This binds the taxpayers (except those who are not required per proclamation) to keep books and
Evidences: Both the taxpayers and tax authority have to prove the facts on declaration and
assessment.
Good faith and Behavior
All the parties concerned are obliged to behave properly with good intention, cooperatively and
conscientiously.
Protection of Confidentiality
The duty of the taxpayer is to give records and submit it to the tax authority, truthful data that is
essential for the assessment of tax. At the same time, the tax authority preserves the confidential
data in this manner the privacy of the data is protected.
Protection of Human Dignity
The tax procedures protect the reputation, dignity, and honor of the taxpayer.
Right to Respond
Taxpayers have the right to speak about all the facts related to their taxable income.

7.3 Major Types of Taxes in Ethiopia

The Ethiopian taxation system is composed of a number of different taxes, some of which are
direct taxes and some of which are indirect taxes.

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A) Direct Taxes
Direct taxes include all income taxes such as employment income tax, business income tax,
rental income tax, tax on income from game of chance, dividend income tax, and other income
taxes.

1) Employment Income Tax/ Personal Income Tax

Every person deriving income from employment is liable to pay tax on that income at the rate
specified in Schedule ‘A’ as follows:

Schedule ‘A’
Employment Income Deduction
Tax Rate (in %)
(per month) (in Birr)
Over Birr to Birr
0 150 Exempt threshold
151 650 10% 15.00
651 1 400 15% 47.50
1 401 2 350 20% 117.50
2 351 3 550 25% 235.00
3 551 5 000 30% 412.50
over 5 000 35% 662.00

Computation of Personal Income Tax

Example
Ato Alemu is an employee of Selam Company and his monthly basic salary is Br4,700. In
addition he is getting Br 100 monthly house allowance.
Required: Determine his taxable income and income tax liability.
Solution:
Taxable income = Br 4,700 + Br 100 = Br4,800
Tax liability = (Taxable income X Tax rate for the Bracket) – Deduction
= (4,800 X 30%) – 412.50
= Br 1,027.50

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Employment income shall include any payments or gains in cash or in kind received from
employment by an individual. Employers have an obligation to withhold the tax from each
payment to an employee, and pay the Tax Authority the amount withheld during each calendar
month. In applying the procedure, income attributable to the months of Nehassie and Pagume
shall be aggregated and treated as the income of one month.

If the tax on income from employment, instead of being deducted from the salary or wage of the
employee, is paid by the employer in whole or in part, the amount so paid shall be added to the
taxable income and shall be considered as part thereof.

Exemptions

The following categories of income shall be exempt from payment of personal income tax:
 Income from employment received by casual employees who are not regularly
employed provided that they do not work for more than one month for the same
employer in any twelve months;
 Pension contribution, provident fund and all forms of retirement benefits
contributed by employers in an amount that does not exceed 15% of the monthly
salary of the employee;
 Subject to reciprocity, income from employment, received for services rendered in
the exercise of their duties by diplomatic and consular representatives, and other
persons employed in any Embassy and who are national of that state and bearers of
diplomatic passports;
 Payments made to a person as compensation or a gratitude in relation to personal
injuries suffered by that person or death of another person;
 Amounts paid by employers to cover the actual cost of medical treatment of
employees;
 Allowances in lieu of means of transportation granted to employees under contract
of employment;
 Hardship allowance;
 Amounts paid to employees in reimbursement of traveling expenses incurred on
duty;
 Amounts of travelling expense paid to employees recruited from elsewhere than the
place of employment on joining and completion of employment or in case of
foreigners travelling expenses from or to their country, provided that such
payments are made pursuant to specific provisions of the contract;
 Allowance paid to members and secretaries of board of public enterprises and
public bodies as well as to members and secretaries of study groups set up by the
Federal or Regional Government;
 Income of persons employed for domestic duties.

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Tax Period
Payment of tax to tax authority: within 30 days from the end of each calendar month. Each
payment should be accompanied by a statement containing information such as: the name,
address, taxable income, tax withhold, and tax exempt income of each employee.
Special Provision
The following category of employees shall declare and pay taxable income themselves.
 Those who are work for more than one employer
 Those who work in International Organization-Embassies, etc (who are not exempted)
Penalties
For non-filling or late filing:
 Birr 1,000 for the first 30 days
 Birr 2,000 for the next 30 days
 Birr 1,500 for each 30 days thereafter
For non-payment:
 5% of tax unpaid on the first day after due date
 2%additional tax on the first day of each month thereafter
For failure to withhold:
Withholding agent shall personally be liable to pay the amount due plus Br 1,000 and Br 1,000
will be imposed on the chief accountant or officer who is in charge of supervision.

2) Business Profit Tax

This is the tax imposed on the taxable business income / net profit realized from entrepreneurial
activity. Taxable business income would be determined per tax period on the basis of the profit
and loss account or income statement, which shall be drawn in compliance with the generally
accepted accounting standards. Corporate businesses are required to pay 30% flat rate of
business income tax. For unincorporated or individual businesses the business income tax ranges
from 10% - 35%. Unincorporated or individual businesses are taxed in accordance with the
following schedule below:

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 Schedule ‘C’
Taxable Business Income / Tax Rate (in Deduction
Net Profit per year %) (in Birr)
over Birr to Birr
0 1,800 Exempt
threshold
1,801 7,800 10% 180.00
7, 801 16,800 15% 570.00
16, 801 28, 200 20% 1410.00
28, 201 42,600 25% 2520.00
42, 601 60,000 30% 4950.00
Over 60, 000 35% 7950.00

Computation of business profit tax

Business Net Profit per year/Taxable Income = 70,500.00 Birr
- Business Profit Tax = 70,500 Birr x 35% tax rate = 24,675 Birr
24,675 Birr - 7,950 Birr (deduction fee)
- Tax payment = 16,725.00 Birr

In the determination of business income subject to tax in Ethiopia, deductions would be allowed
for expenses incurred for the purpose of earning, securing, and maintaining that business income
to the extent that the expenses can be proven by the taxpayer.

The following expenses shall be deductible from gross income in calculating taxable income:
 The direct cost of producing the income, such as the direct cost of manufacturing,
purchasing, importation, selling and such other similar costs;
 General and administrative expenses connected with the business activity;
 Premiums payable on insurance directly connected with the business activity;
 Expenses incurred in connection with the promotion of the business inside and
outside the country, subject to the limits set by the directive issued by the Minister
of Revenue;
 Commissions paid for services rendered to the business;
 Sums paid as salary, wages or other emoluments to the children of the proprietor or
member of the partnership shall only be allowed as deduction if such employees
have the qualifications required by the post.

The following categories of income would be exempted from payment of business income tax:
 Awards for adopted or suggested innovations and cost saving measures;

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  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.

Penalty for understatement of tax:

 If the amount of tax shown on a declaration understates the amount of tax required
to be shown, the taxpayer is liable for a penalty in the amount of 10% of the
understatement or 50% if the understatement is considered substantial. The
understatement is considered substantial if it exceeds 25% of the tax required to be
shown on the return or 20,000 Birr;
 The penalty shall continue to apply until, the Appeal Commission or a Court, as the
case may be shall have rendered its final decision.

Penalty for late payment:

A taxpayer who fails to pay tax liability on the due date is subject to:
 A penalty of 5% of the amount of unpaid tax on the first day after the due date has
passed; and
 An additional 2% of the amount of tax that remains unpaid on the first day of each
month thereafter.

3) Tax on Income from Rental of Buildings

This is the tax imposed on the income from rental of buildings. If the taxpayer leased furnished
quarters, the amounts received attributable to the lease of furniture and equipment would be
included in the income and taxed. The tax payable on rented houses would be charged at the
following rates:
 On income of bodies 30% of taxable income
 On income of persons according to the following schedule next page:

Taxable Income from Income Tax Deduction

Rental Payable (in Birr)
of Buildings (per year) (in %)
over Birr to Birr
0 1,800 Exempt threshold
1, 801 7, 801 10% 180.00
7, 801 16, 800 15% 570.00
16, 801 28, 200 20% 1410.00
28, 201 42, 600 25% 2820.00
42, 601 60, 000 30% 4950.00
over 60, 000 35% 7950.00

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Computation of Rental Income Tax
Net profit per-year/Taxable Income 38, 000.00 Birr
- Rental Income Tax = 38,000 Birr x 25% tax rate = 9,500 Birr
- 9,500 Birr -2,820 Birr (deduction fee)
- Tax payment = 6,680 Birr

Conditions of payment:
 The owner of a building who allows a lessee to sub-lease is liable for the payment
of the tax for which the sub-lessor is liable, in the event the sub-lessor fails to pay;
 When the 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 in which the building is situated about such completion and the name,
address, and tax identification number of the person or persons subject to tax on
income from rental of building;
 The Kebele administration has the obligation to communicate the information
obtained to the appropriate tax authority.

4) Tax on Interest Income on Deposits

Every person deriving income from interest on deposits shall pay tax at the rate of 5%. The
payers are required to withhold the tax and account to the Tax Authority.

5) 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%. The withholding agent
shall withhold or collect the tax and account to the Tax Authority.
6) Tax on Income from Royalties
‘Royalty income’ means 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.

Royalties income shall be liable to tax at a flat rate of 5%. The withholding agent who effects
payment shall withhold the foregoing tax and account to the Tax Authority. Where the payer
resides abroad and the recipient is a resident, the recipient shall pay tax on the royalty income
within the time limit set out.

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7) Tax on Income from Games of Chance
Every person deriving income from winning of games of chance (e.g., lotteries, tombolas, and
other similar activities) shall be subject to tax at the rate of 15%, except for winning of less than
100 Birr. The payer shall withhold or collect the tax and account to the Tax Authority.

8) Tax on Gains of Transfer of Certain Investment Property

This is the tax payable on gains obtained from the transfer (sale or gift) of building held for
business, factory, office, and shares of companies. Such income is taxable at the following rates:
 Building held for business, factory, and office at the rate
of 15%;
 Shares of companies at the rate of 30%.
Gains obtained from the transfer of building held for residence shall be exempted from tax
provided that such building is fully used for dwelling for two years prior to the date of transfer.
Any person authorized by law to accept, register or in any way approve the transfer of capital
assets shall not accept, register or approve the transfer before ascertaining that the payment of the
tax has been duly effected.

9) Tax on Income from Rental of Property

The taxable income under this category is income derived from casual rental of property
(including any land, building, or moveable asset) not related to a business activity. This type of
income is subject to tax at a flat rate of 15% of the annual gross income.

10) Rendering of Technical Services Outside Ethiopia

All payments made in consideration of any kind of technical services rendered outside Ethiopia
to resident persons in any form shall be liable to tax at a flat rate of 10% which shall be withheld
and paid to the Tax Authority by the payer. The term “technical service” means any kind of
expert advice or technological service rendered.

11) Agricultural Income Tax

According to Proclamation No. 152 of 1978 of Oromiya 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.

In line with the economic policy and structural set up of the Federal Democratic Republic of
Ethiopia, the former tax on income from agricultural activities and the land use rent was revised
in 1995. Since income tax from this source is allocated to Regional States in consonance with the

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provisions of the new constitution of 1994, each Regional State is entitled to issue a
Proclamation providing for such a tax and rent.

Accordingly, the Oromia Regional State has promulgated Proclamation No. 8/1995 that revised
agricultural income tax rates schedule and rural land use fee. As for the payment of income tax
from agricultural activities other taxpayers, except state farms, shall pay at the following rate.

Agricultural Income Tax per Proclamation No.

8/1995, Oromiya
No. Annual Taxable Tax Rate
Income
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%

A state farm shall pay 40% of the taxable income it realizes from its agricultural activities.
Income from agricultural activities is said to be determined by estimating the price, in the area,
of the crop before harvest. If the crop is sold, the price declared shall be the basis for the
assessment of income.

12) Land Use Tax

According to Proclamation No. 77/1976 and No. 152 /1978 of Oromiya individual farmers, who
are not members of producer’s cooperatives, are required to pay a land use fee of Birr 10 per
hectare per annum. Govern-ment agricultural organizations are paying 2 Birr per hectare per
annum.

Presently regional states have their own land use rent systems. For instance, according to the
Proclamation No. 8/1995 of Oromiya, rural land held for agricultural activities is subject to land
use rent payment on annual basis. The annual land use rent payable by a farmer shall be Birr 10
for the first hectare and Birr 7.50 for each extra hectare of land. Meanwhile state-farming
enterprises shall pay Birr 15 for each hectare of their land holdings. Land use rent is to be
collected between the 1st of Hidar and the 30th of Miazia of the year.

B) Indirect Taxes

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1) Value Added Tax (VAT)
VAT is a tax on consumer expenditure. It is collected on business transactions and imports. A
taxable person can be an individual, firm, company, as long as such a person is required to be
registered for VAT. 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.

A person who carries on taxable activity and is not registered is required to file an application for
VAT registration with the Authority if:
 At the end of any period of 12 calendar months the person made , during that
period, taxable transactions the total value of which exceeded 500,000 Birr; or
 At the beginning of any period of 12 calendar months there are reasonable grounds
to expect that the total value of taxable transactions to be made by the person
during that period will exceed 500,000 Birr.

Registration procedure:
 A person applying to register for VAT is required to do so in such a form as is
established by the implementation directives issued by the Ministry of Revenue;
 When a person carrying out taxable transactions files an application to be registered
for VAT, the Authority is required to register the person in the VAT register, and to
issue a certificate of registration within 30 days of the registration;
 A person registered for VAT is required to use his taxpayer identification number
on all VAT invoices, and on all tax returns and official communications with the
Authority.

There is a VAT invoice prepared by the Ministry of Revenue containing the following
information:
 Full name of the registered person and the purchaser, and the registered;
 Person’s trade name, if different from the legal name;
 Taxpayer identification number of the registered person and the purchaser;

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  Number and date of the VAT registration certificate;
 Name of the goods shipped or services rendered;
 Amount of the taxable transaction;
 Amount of the excise on excisable goods;
 Sum of the VAT due on the given taxable transaction;
 Issue date if the VAT invoice, and
 Serial number of the VAT invoice.

The registered person is required to issue the VAT invoice to the purchaser of goods or services
upon the supply or rendering, but not later than 5 days after the transaction.

Record Keeping Requirement:

A registered person or any other person liable for VAT under the proclamation shall maintain for
10 years in Ethiopia:
 Original tax invoices received by the person;
 Copy of all tax invoices issued by the person;
 Customs documentation relating to imports and exports;
 Accounting records; and
 Any other records as may be prescribed by the Minister of Revenue by directive.

Administrative Penalties:
The following penalties are imposed for violations of the VAT Proclamation:
 Where any person engages in taxable transactions without VAT registration where
VAT registration is required – 100%of the amount of tax payable for the entire
period of operation without VAT registration;
 Where any person issued incorrect tax invoice resulting in a decrease in the amount
of tax or increase in accredit or in the event of the failure to issue a tax invoice –
100%of the amount of tax for the invoice or the transaction;
 Where a person who is not registered for VAT issues a tax invoice – a penalty of
100%of the tax which is indicated in the tax invoice and is due for transfer to the
budget but has not been transferred; and
 Where a person fails to maintain records required – 2,000 Birr for each month or
portion thereof that the failure continues.

A person who fails to file a timely return is liable for a penalty equal to 5% of the amount of tax
underpayment for each month (or portion thereof) during which the failure continues, up to 25%
of such amount. The penalty is limited to 50,000 Birr for the first month (of portion thereof) in

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which no return is filed. If any amount of tax is not paid by the due date, the person liable is
obliged to pay interest on such amount for the period from the due date to the date the tax is paid.
The interest is set at 25% over and above the highest commercial lending interest rate that
prevailed during the preceding quarter. The following types of supplies of goods (other than by
way of export) or rendering of services, as well as the following types of imports of goods are
exempt from payment of VAT:
 Sale, transfer or the lease of a used dwelling;
 Rendering of financial services;
 Supply/import of national/foreign currency and of securities;
 Import of gold to be transferred to the National Bank;
 Rendering of religious organizations or church services;
 Import or supply of prescription drugs specified in directives issued by Minister of
health, rendering of medical services;
 Educational services provided by educational institutions, or child care services for
children at pre-school institutions;
 Supply of goods and rendering of services in the form of humanitarian aid, as well
as import of goods transferred to state agencies of Ethiopia and public
organizations for the purpose of rehabilitation after natural disasters, industrial
accidents, and catastrophes;
 Supply of electricity, kerosene, and water;
 Goods imported by the government, organizations, institutions or projects
exempted from duties and other import taxes to the extent provided by law or by
agreement;
 Supplies by the post office authorized under the Ethiopian Postal Services
Proclamation, other than services rendered for a fee or commission;
 Provision of transport; Permits and license fees;
 Supply of goods or services by a workshop employing disabled individuals if more
than 60 % of staff are disabled;
 Import or supply of books and other printed materials.

2) Turnover Tax
The Turnover Tax would be payable on goods sold and services rendered by persons not
registered for Value Added Tax. The rate of Turnover Tax is
 2% on goods sold locally;
 for services rendered locally:
- 2% on contractors, grain mills, tractors and
combine-harvesters;
- 10% on others.

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The base of computation of the Turnover Tax is the gross receipts in respect of goods supplied or
services rendered. A person who sells goods and services has the obligation to collect the
Turnover Tax from the buyer and transfer it to the Tax Authority. Hence, the seller is principally
accountable for the payment of the tax. In accordance with the Turnover Tax Proclamation No.
308/2002, the following would be exempted:
 Sale or transfer of dwelling used for a minimum of two years, or the lease of a
dwelling;
 Rendering of financial services;
 Supply of national or foreign currency and of securities;
 Rendering by religious organizations of religious or other related services;
 Supply of prescription drugs specified in directives issued by the relevant
government agency, and the rendering of medical services;
 Rendering of educational services provided by educational institutions;
 Supply of goods and rendering of services in the form of humanitarian aid;
 Supply of electricity, kerosene and water;
 Provision of transport;
 Permits and license fees;
 Supply of goods or services by a workshop employing disabled individuals (if
more than 60% of the employees are disabled);
 Supply of books.

Assessment of the Tax

 If after review by the Tax Authority, it appears that a person has understated his tax
obligation, the Authority can issue an additional assessment;
 If, for any reason, the books of account are unacceptable to the Tax Authority, or if
the tax payer fails to submit same when requested by the Authority, or if no books
of account and supporting documents are maintained, the Tax Authority would
assess the tax on the basis of information available;
 A presumptive turnover tax would be payable by Category “C” taxpayers who are
not required to keep records. The base for the presumptive turnover tax would be
the total turnover used as base for the income tax;
 The assessment made would be prepared in an assessment notification and be
delivered to the taxpayer;
 If the Authority makes an additional assessment and within 30 days of notice the
person assessed does not pay the additional assessment or appeal the assessment the
person is in default;

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  If the Tax Authority fails to assess the tax and notify the taxpayer of the amount
still due within five years from the date of declaration and payment of the tax by the
taxpayer the tax so paid would be final and conclusive. In case where the taxpayer
has not declared his income or has submitted a fraudulent declaration, no time limit
provided in any other law shall bar the assessment of the tax by the Tax Authority.

Notification of Changes

A registered taxpayer is required to notify the Tax Authority:

 Any change in the name, address, place of business, constitution, or nature of the
principal taxable activity or activities of the person;
 Any change of address from which, or name in which, a taxable activity is carried
on by the registered person, with in 21 days following such change.

Tax Evasion
A person who evades the declaration or payment of tax, commits an offence and in addition to
any penalty may be prosecuted and be subject to a term of imprisonment of not less than five (5)
years.

If any amount of tax is not paid by the due date, the person liable is obliged to pay interest on
such amount for the period from the due date to the date the tax is paid. The interest rate is set at
25% over and above the highest commercial banks lending interest rate that prevailed during the
preceding quarter.

A person who fails to file a timely return is liable for a penalty equal to 5% of the amount of tax
underpayment for each month (or portion there of) during which the failure continues, up to 25%
of such amount. The penalty is limited to 50, 000 Birr for the first month in which no return is
filed

3) Excise Tax
It is believed that this tax should be imposed on luxury goods and basic goods, which are
demand inelastic. It is also believed that imposing the tax on goods that are hazardous to health
and which are causes to social problems will reduce the consumption thereof.

Rate of Excise tax:

The excise tax would be imposed on goods imported or either produced locally in accordance
with the following schedule, given in Excise Tax Proclamation No. 307/2002.

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Goods to be liable to Excise Tax (produced locally or imported)

Excise
S/ Type of Product Tax Rate
NO. (%)
1 Any type of sugar (in solid form) excluding molasses 33
2 Drinks
2.1 All types of soft drinks (except fruit juices) 40
2.2 2Powder soft drinks 40
2.3 Water bottled or canned in a factory 30
2.4 Alcoholic Drinks
2.4.1 All types of beer &stout 50
2.4.2 All types of wine 50
2.4.3 Whisky 50
2.4.4 Others alcoholic drinks 100
3 All types of pure Alcohol 75
4 Tobacco &Tobacco Products
4.1 Tobacco Leaf 20
4.2 Cigarettes, cigar, cigarillos, pipe tobacco, snuff and 75
Other tobacco products
5 Salt 30
6 Fuel-super Benzene, Regular Benzene, Petrol, Gasoline 30
and other Motor Spirits
7 Perfumes and Toilet Waters 100
8 Textile and Textile products
8.1 Textile fabrics, knitted or woven of natural silk,
rayon, nylon, wool, or other similar materials 10
8.2 Textile of any type partly or wholly made from cotton, which is gray, white,
dyed or printed, in pieces of any length or width (except Mosquito net and 10
of “Abudgedid”) and including blankets, bed sheets, Counterpanes, towels,
table clothes and similar articles
8.3 Garments 10
9 Personal adornments made of gold, silver or other materials 20
10 Dish washing machines of a kind for domestic use 80
11 Washing machines of a kind for domestic purposes 30
12 Video decks 40
13 Television and Video Cameras 40
14 Television broadcast receivers whether or not combined with
Gramophone, radio, or sound receivers &reproducers 10
15 Motor passenger cars, Station Wagons, Utility cars and Land Rovers, Jeeps,
Pickups, similar vehicles (including motorized caravans), whether
assembled together with their appropriate initial equipment:
15.1 Up to 1,300 C.C. 30
15.2 From 1,301 up to 1,800 C.C 60

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 15.3 Above 1,800 C.C 100
16 Carpets 30
17 Asbestos and Asbestos products 20
18 Clocks and watches 20
19 Dolls and toys 20

The base of computation of Excise Tax is the cost of production for goods produced locally;
whereas for goods imported the base of computation would be the cost of production, insurance
and freight costs.

Obligations of the taxpayer:

 Maintaining books of accounts and supporting documents in accordance with proper
accounting principles and in a manner acceptable to the Tax Authority;
 Submit every 30 days to the Tax Authority, in a form which would be supplied by the
Authority, a declaration containing the necessary information for the proper collection
of the tax;
 Comply fully with the requirements of inspection of his premises by the delegates of
the Tax Authority;
 Immediately communicate to the Tax Authority the type and address as well as the
commencement and termination date of his business;
 Pay in full the tax due within 30 days from the date of termination where such business
is terminated.

Regarding goods imported the Tax Authority can sell such goods where the tax in respect of
them is not paid within six months from the day of deposit within the premises of government
warehouse, or in the case of perishable goods.

Notification of Change
Every taxpayer should notify the Tax Authority of:
 Any change in the name, address, place of business, constitution, or nature of the
principal taxable activity or the activities of the person;
 Any change of address from which, or name in which, a taxable activity is carried on
by the taxpayer, with in 5 days of the change occurring.

Tax Evasion

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A person who evades the declaration or payment of tax, commits an offence and in addition to
any penalty may be prosecuted and be subject to a term of imprisonment of not less than five (5)
years.

If any amount of tax is not paid by the due date, the person liable is obliged to pay interest on
such amount for the period from the due date to the date the tax is paid. The interest rate is set at
25% over and above the highest commercial banks lending interest rate that prevailed during the
preceding quarter.

A person who fails to file a timely return is liable for a penalty equal to 5% of the amount of tax
underpayment for each month (or portion thereof) during which the failure continues, up to 25%
of such amount. The penalty is limited to 50, 000 Birr for the first month in which no return is
filed.

7.5 Categories of Taxpayers

Taxpayers are classified into the following three major categories:

1) Category “A” Taxpayers
2) Category “B” Taxpayers
3) Category “C” Taxpayers

2.1 Category “A” Taxpayers

This category of taxpayers includes:
a) Any company incorporated under the laws of Ethiopia or in a foreign country;
b) Any other business having an annual turnover of Birr 500,000 or more.

Category “A“ taxpayers are required to submit to the Tax Authority, at the end of the year, a
balance sheet and a profit and loss statement and the following details:
a) Gross profit and the manner in which it is computed;
b) general and administrative expense;
c) depreciation expense; and
d) provisions and reserves.

In addition, these taxpayers should register with the Tax Authority the type and quantity of
vouchers they use before having such vouchers printed. Any printing press before printing
vouchers of taxpayers shall ensure that the type and quantity of such vouchers is registered with
the Tax Authority.

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2.2 Category “B” Taxpayers
Unless already classified in category “A”, any business having an annual turnover of over Birr
100, 000 would be classified under Category “B” taxpayers. This category of taxpayers should
submit to the Tax Authority profit and loss statement at the end of the year.

2.3 Category “C” Taxpayers

Unless classified in Categories “A” and “B”, those businesses whose annual turnover is
estimated up to Birr 100, 000 are classified under this category of taxpayers.

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