CHAPTER 4

ETHIOPIAN TAX SYSTEM

4.1. Structure of Ethiopian Tax System and Administration

4.1.1. History of Ethiopian Tax

A) Ethiopia’s tax system from 1855 to 1942

- Ethiopia‟s taxes were paid both in kind and in money.

- Payment in kind took various forms such as salt, honey, butter, horses and mules,
and even clothes.
• Taxes during the period 1855 to 1868 can be categorized into direct and indirect
taxes.
Direct taxes include the following:
• 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.
• The tithe ("asrat"): This was a tax levied by the sovereign to provide allowances for
governors, local state officials, soldiers and priests.
• Provincial-administrative tax ("ya-nagarit"): "Nagarit" was an administrative term
used to denote territories governed by established noble families of the province.
• Tax for maintenance ("bal"): 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.
• Tax on livestock: 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: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.

B) Taxes for the period 1942 - 1974

In summary, income tax, during this regime, was levied on only a few types of income,
under four different schedules:
(1) income from employment
(2) income from rent of land and buildings used for purposes other than for agriculture;
(3) income from businesses, professional & vocational occupations, from interest, and
from the exploitation of woods and forests for lumbering purposes; and
(4) income from agricultural activities.
Tax rates:
 For employment income tax, the lowest and highest tax brackets were a mere Br 30
to Br 5,000, respectively.
 Tax rates were seemingly progressive, ranging roughly from1.8 % to 25%.
 A tax-free bracket covering a taxable income of Br 30.
 For tax on business and other profits, the tax rates were originally levied
according to category (i.e., traders, retailers, etc.) or grades (i.e., Grades I, II, III,
etc.).
 A tax-free bracket of Br 360 for persons earning business profit.
 Taxable income of incorporated bodies was levied at 15 to 16 percent.
 • For rental income, the tax rates ranged from 2% to almost 16% for taxable
incomes of roughly above Br 360 and Br 15,000, respectively.
• Taxable income of Br 360 and below was generally free of charge.
• For income from agricultural activities, tax was levied on bodies at 20% of taxable
income, and on persons, at varying rates per the mandated schedule.
• Tax rates ranged from 1.5 to 20 percent.
• Other Taxes -land tax,education tax,health tax,road tax,cattle tax,salt tax,
tobacco tax and excise taxes on alcohol, jewelry, etc.; transaction tax, stamp
duty, customs and export duty,

C) Taxes from 1975 to 1991

• For employment income tax, a decree issued in 1978 narrowed down the number
of tax brackets;
• Increased the tax free-bracket to Br 50. The new tax rates ranged from 10% to an
almost whopping 85%.
For a tax on business and other profits,
• The tax rate for organizations increased from 20% to 50%,
• The tax-free bracket was maintained at Br 300, but rates for the highest bracket
increased to 89%, then subsequently lowered to 59%.
• Just like the other income tax rates, the rates for the rental incometax increased,
with the highest rate fixed at 89%.

D) Taxes from 1991 to1995

• Decreasing the number of tax brackets.
• For employment income tax, as per the 1992 Proclamation, the tax rates decreased
to the 10%-50% range and income tax brackets were almost "halved" to 9.
• In the ensuing year, the rates were further reduced to the 10%-40% range, and tax
brackets further decreased to 5.
For business income tax:
 • tax rates were lowered to 10%-40% range for unincorporated bodies, with income
tax brackets reduced to almost a third (from 17 to 5).
• Likewise, the rate applicable to incorporated bodies decreased to 40%.
• The income tax base was widened with the provision of tax on income from
mining operations. Rates for this tax base were 45% (for large-scale mining) and
35% (for small-scale mining) of taxable income.
• It was also during this period that a tax on capital gains was first imposed. Such
tax was levied on realization of gain from the increase of value of shares or bonds
and urban houses at a rate of 30%, though annual capital gains of less than Br
10,000 were exempted.
• For rental income, the tax structure was streamlined to reflect decreases in rates
and tax brackets.

E) Taxes from 1995 to Present

The important changes:-
• Reduction of business income tax rate by incorporated bodies from 40 to 35% of
annual taxable income.
• Levying of equal tax rates of 35 percent for both large-scale and small-scale
mining operations.
• With the allocation of agricultural income tax to Regional States, the Federal
Government entitled each State to issue its own proclamation providing for such
tax and rent.
• In 2002, further changes on income tax were effected. (Proclamation No.
286/2002)
• The required use of a Tax Identification Number (TIN) by taxpayers (person and
organizations).
• Withholding of 3% and 2% on import and on specific payments.
• Replacement of sales tax by Value Added Tax and Turnover tax.
• Reduction of business tax for incorporated bodies to 30%.
4.2. Sharing of Revenue
A) The need for Revenue Sharing
The sharing of revenue aims at the following objectives. (Proclamation 33/1992):
• To enable the Government to carry out their duties and responsibilities efficiently.
• To help Regional Governments for developing their regions by taking initiatives
by themselves.
• To remove the gap between Regional Governments in all sorts of development and
economic growth.
• To encourage those activities towards which the regions have a common interest.
The proclamation also states the basic factors, which are taken into account for revenue
sharing. Thus, the following principles are considered for sharing of revenue:
• The ownership of the source of revenue;
• The national or regional character of the source of revenue;
• The convenience of levying and collection of tax;
• The population of regions, distribution of wealth in the region, and the standard of
development of the region;
• Any other factor that may be taken as a basis for integrated & balanced economy.
Table 1 Revenue sharing
Type of tax Federal government Regional governments Jointly
Payroll tax From employees of From employees of From employees of
Federal Govt. & Regional Govt. and enterprises jointly
International private enterprises owned by Federal and
organizations Regional Governments
Business Profit & sales tax of Profit tax and sales tax of Profit and sales tax of
Income tax enterprises owned by enterprises owned by enterprises jointly
Federal Government Regional Govt. of those owned by Federal &
of individual traders Regional Government
Rental From houses & From houses and
income tax properties owned by properties owned by ____
Federal Govt. Regional Govt.
Mining ____ Profit tax, royalty and Profit tax, royalty and
Income tax rent of land from mining rent of land from large-
 (small scale) activities scale mining petroleum
& gas operations
Agricultural ____ From farmers and rural
Income tax land use fee ____

Fees and On licenses and services On licenses and services

charges issued or rendered by issued or rendered by R ____
Federal Govt. Regional Govt.
Other taxes a) Duties & taxes on a) Tax from inland water a) Profit, dividend tax
import and export. transportation. and sales tax collected
b) Tax on national lottery b) Taxes on income from organizations.
and other chance derived from private b) Forest royalty.
winning prizes. properties.
c) Tax on income from
air, rail & marine
transport activities

4.3. Classification of Taxes in Ethiopia

• The nature of taxes that the Government of Ethiopia collects, there exists a
reasonable ground for classifying them as direct and indirect taxes.
• The reason is that the incidence of some taxes falls on the payer (for e.g. income
taxes) and the payer shifts the incidence of the remaining taxes to the consumers in
the form of selling price (e.g. VAT).
• Direct taxes include all income taxes such as employment income tax, business
income tax, rental income tax, agricultural income tax and land use fee, mining
income tax, and other income taxes.
• Indirect taxes collected by the country include domestic taxes such as value added
tax, turnover tax, excise tax, and stamp duties. Tax on international trade (for e.g.
import tax) is also an indirect tax. In all these cases, a tax is paid indirectly as part
of the payment for goods and services.
• Some economists are of the opinion that direct taxes are income-based taxes and
indirect taxes are consumption-based taxes.
4.3.1. Income Taxes
• Based on Income Tax Proclamation (No 286/2002). The four schedules
incorporated under this tax are Schedules „A‟, „B‟, „C‟ and „D‟.
• The bases for these schedules are given below.
 Schedule A: Income from employment
 Schedule B: Income from rental of building
 Schedule C: Income from Business
 Schedule D: Other income,
(which includes royalties, income from technical services rendered outside the
country, income from games of chance, dividend, casual rental of property,
interest income, and gains from transfer of investment property).

Schedule A: Income from employment

• In Ethiopian income tax system, employment income tax, also called personal
income tax, refers to an income tax imposed by the government on employment
income of an employee.
• That is, money that an individual receive in different ways from their employer(s).
• The major components of earnings (employment income) of an employee include
the following:-
 Basic Salary or Wage
 Overtime Work
 Allowances
 Per-Diem
 Basic salary or wage means a regular payment to which an employee is entitled in
return for the performance of the work that s/he performs under a contract of
employment this is payment received by the employee for regular or normal
working hours.
 Overtime work is a payment made to an employee for overtime work done during a
specific payroll period. That is a payment made for the work done in addition to
one‟s regular working hours.
  Allowances are special payments or benefits made to employees for various
reasons. These may include, but not limited to, transportation allowance, house
allowance, position allowance, hardship allowance, desert allowance, medical
allowance, etc.
 Per-Diem is payment of daily expenses of an employee incurred for duty such as
expenditures for food, bed, transportation (traveling expenses) and others.

Taxable Employment Income

• Taxable employment income is the amount of income from employment which is
subject to employment income tax.
• In determining the taxable income, any income received from former employment
and prospective employment, if any, shall also be included.
• However, it does not include exemptions.

Exemptions
• One hundred fifty (150) birr of the monthly employment income of an employee.
• Medical expenses actually incurred by the employer for the treatment of
employees.
• Transportation allowance paid by the employer to the employees under the
contract of employment.
• Any hardship allowance provided to employees.
• Travelling Allowance
• Board Allowance (paid to members and secretaries of Boards of Public
Enterprises, public bodies, and study groups set up by Federal or Regional
Government).
• Income of persons employed for domestic duties.
• Income from employment received by casual employees. Casual employees are
those who do not regularly work under the same employer for a period of 12
months.
 • Contribution for pension, provident fund or any other form of retirement benefit
made by the employer that does not exceed 15% of the monthly salary of the
employee.
• Income from employment received for services of:
• diplomatic and consular representatives
• persons employed in any embassy, legation, consulate, or mission of a
foreign state who are nationals of that state & bearers of diplomatic passport
• Income received as compensation or gratitude in relation to personal injuries or
death of another person.
Employment Income Tax Rate
• Ethiopian employment income tax rate is a progressive tax rate which demands
more revenue collection as the income increases.
• It also incorporates the vertical equity principle and the principles of productivity.
• The payment date is made convenient for the taxpayers, as they are required to pay
taxes at the end of each month, the time when they get their salary.
• If you analyze the tax, the principle of certainty also is equally applied.
In accordance with article 11 of Income Tax Proclamation No. 286/2002, the tax payable
on taxable employment income of an employee shall be charged, levied and collected at
the following tax rates.
Table 2 Employment income tax rates
Taxable monthly income (Birr) Tax rate
Up to Birr 150 Nil
151 - 650 10%
651 - 1400 15%
1401 - 2350 20%
2351 - 3550 25%
3551 - 5000 30%
Over 5000 35%
While applying this rate, it should be made clear that from the taxable income, Birr 150 is
not to be taxed. On the remaining, the first Birr 500 is subject to tax at 10%, the next Birr
750 is taxed at 15%, the next Birr 950 is taxed at 20%, the next Birr 1200 is taxed at
25%, the next Br. 1450 is taxed at 30%, & any remaining salary is taxed at 35%.
Determination of Employment Income Tax
It may include the basic salary, overtime earning, allowances in the form of
transportation, medical, position, conveyance and the like. The sum total of the payment
an employee gets is his/her gross employment income. Some of the above items are
exempted from inclusion in taxable income. Deduction of these items from gross income
will result in a figure called „taxable employment income‟, which refers to taxable
employment income is the income subject to tax.
This may be understood from the following example. Assume that the monthly salary of
AtoAmha is Birr 1,220. He is not entitled to have any other allowance and hence the
gross income is equal to his taxable income. His tax will be calculated as follows.
Total taxable income 1220
Less: the minimum amount not taxed 150
Remaining taxable income 1070
Less: First Birr 500 taxed at 10% 500 X 10% = 50.00
Remaining taxable income, taxed at 15% 570 X 15% =85.50
Total tax of the month 135.50
Thus AtoAmha is required to pay tax of Birr 135.5 for the month.

The above example takes only the basic salary in to account. In addition to this, if an
employee gets allowances that are taxable, these should also be taken in to consideration
to determine the tax. Because the step-by-step computation of tax (progression method)
illustrated above consumes time, the tax authority has developed a short cut method to
determine tax. This can be seen from the following table 3
Taxable monthly income Amount of tax
(In Birr) (In Birr)
0 ------- Birr 150 Nil
151 ------- 650 p x 10% - 15
651 ------- 1400 p x 15% - 47.5
1401 ------- 2350 p x 20% - 117.5
2351 ------- 3550 p x 25% - 235
3551 ------ 5000 p x 30% - 412.5
5001 and above p x 35% - 662.5 Where P is taxable income
If we apply the short cut method for computing the employment income salary of
AtoAmha, it will be as given below. Gross salary of Birr 1220 comes under the tax
bracket that is subject to 15% tax rate. Therefore employment income tax = 1220 X 15%
- 47.5 = Birr 135.5
Example II
AtoBelete is an employee of Tiret 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
Example III
The basic salaries, allowances, and overtime payment of six employees for the month
Meskerem2008 are given below.
Table 4 Ingredients of Employment Income
Name Basic salary Allowances Overtime
(Birr) (Birr) (Hrs)
Alem 500 100 12
Getachew 425 - -
Kiros 380 - 5
Nadia 2040 100 -
Mohamad 1280 50 8
Desta 640 50 -
Additional information:
• The allowances paid to Nadia, Mohamed and Desta are for Housing, Position and Travelling
(on duty) respectively;
• The total number of working hours is 160 in the month;
• Overtime of Alem is paid at 150%, & Kiros & Mohammed are paid at 125% of normal pay;
Required: Compute the payroll tax of the individual employees.
(Hint: Overtime pay = Hourly rate X OT Hrs X OT rate)
(Hourly rate = Basic salary /No of working hrs in a month)
Declaration & Payment of Employment Income Tax
• The employer declares taxable employment income of his employees at the end of
each month because the tax period for the tax is a month.
• Declaration should be made in a statement showing the required information
regarding the employees within the stated period. (the name, address and TIN of
each employee, taxable income of the employee, the income tax, and any tax-
exempt income received by the employee during the month.
• If a withholding agent (the employer) fails to withhold the tax, he will be liable to
make the payment.

Schedule B: Rental Income Tax

Income tax proclamation 286/2002 classifies rental income as Schedule “B” income and
the tax is levied and collected on income from rental of building. The tax is collected on
annual basis and the tax period is the Ethiopian fiscal year.
I) Determination of Income
Income includes rent of building and rent of furniture and equipment if the building is
fully furnished. Gross income shall also include any cost incurred by the lessee for
improvement to the land or building in accordance with the contract of lease. The lessor
who allows the lessee to sublease the building will get an agreement in writing from the
lessee for the payment of tax for the additional rent, if any, received on subleasing. Non-
payment of tax by the sublessor will result in the payment by lessor.
II) Taxable Income
Taxable income from Schedule “B” income is determined by subtracting the allowable
deductions from gross income. Allowable deductions include the following:
A) Those who do not maintain books and records:
 Tax on land and building
 20% of gross income as allowance for repairs, maintenance and depreciation
B) Those who maintain books and records:
 Tax on land and building
  Cost of lease of land
 Repairs and maintenance expenses actually incurred
 Depreciation on building (and furniture and equipment if fully furnished) per
income tax proclamation
 Interest on loan if any
 Insurance premium paid on insurance of building
III) Tax Rate
The following is the tax rate applicable for determining tax from Schedule “B” income.
I) For bodies having legal personality: 30%
II) For others, at the following rates:
Table 5- Rent Income
Rent Income per Year (in birr) Rate
0 – 1,800 Nil
(%)
1,801 – 7,800 10%
7,8001 – 16,600 15%
16,601 – 28,200 20%
28,201 – 42,600 25%
42,601 – 60,000 30%
60,000 and above 35%

The following short cut method may be also applied:

Taxable income (annual) (In Birr)Tax liability (In Birr)

0 – 1800 Nil
1801 – 7800 TI x 10% - 180
7801 – 16800 TI x 15% - 570
16801 – 28200 TI x 20% - 1410
28201 – 42600 TI x 25% - 2820
42601 _ 60000 TI x 30% - 4950
60001 and above TI x 35% - 7950
(Where TI stands for Taxable Income)

Declaration and Payment of Tax

The period within which the taxable income should be declared and paid shall be the
same as that for business income tax. That is, Category “A” taxpayers shall declare and
pay within four months, Category “B” within two months and Category “C” within thirty
days after the end of fiscal year.
Penalties for non-declaration and non-payment, for failure to keep records, failure to meet
taxpayer identification number (TIN) requirements, etc applicable for Schedule “C”
income tax are also applicable for Schedule “B” income tax.
Illustration
Assume that Sunshine Private Limited Company rented a furnished office building to
Desta Company for Br 40,000 per month on Hamle 1, 2006 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: Computes rental income tax for the year ended Sense 30, 1997.
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 (62,280)
Taxable Income Br 417,720
Rental Income Tax for
The year ended Sene 30, 1997 = Br 417,000 X 30% = Br 125,316
 Schedule C: Business Income Tax
I) Meaning
Business is an industrial, commercial, banking, transport, mining or any other activity
persuaded by a person or a body. Compared to the previous income tax rates, the current
proclamation provides for a reduced tax rate on business income (both for incorporated
and for other businesses). The reduction of rate is an incentive for investors, including
foreign investors, which in other words considered as an added advantage for the free
market economy.
At the end of each fiscal year, each taxpayer submits a Tax Return to the Income Tax
Authority. Income Tax Return is a statement containing statistical information filled in a
preprinted form (provided by the tax authority, in Ethiopia), given to the Income Tax
Office. It should contain full and true information about the income earned by the
taxpayer. Income tax laws require the taxpayers to furnish such information within a
stipulated period. Many businesses use the service of qualified professional accountants
to prepare tax returns and determine taxable income. Profits as shown by accountants
may not be the same as admissible for tax assessment. There may be certain items of
expenditure reasonably charged to the income statement but not allowable for tax
purposes. Likewise, certain revenue items permissible to be included in income statement
may not be permissible to include in the tax return. It becomes thus necessary to adjust
those items to determine taxable income.
At present, In Ethiopia, tax on schedule C income is levied and collected per
Proclamation 286/2002 (together with the Council of Ministers Regulation).

II) Category of Taxpayers

For the purposes of payment of business tax, taxpayers are categorized into three namely:
Category “A”, Category “B”, and Category “C”.
Category “A” includes any company incorporated under the laws of Ethiopia or in a
foreign country and other entities having annual turnover of more than Br 500,000. Those
who are categorized under “A” have to maintain all records and accounts which will
enable them to submit a balance sheet and profit and loss account disclosing the gross
profit, general and administrative expenses, depreciation, and provisions and reserves
(together with the supporting vouchers).
Category “B” includes those enterprises having annual income of more than Br 100,000
and less than Br 500,000. Category “B” taxpayers have to submit the profit and loss
statement together with the supporting vouchers.
Category “C” includes all taxpayers who are not classified under the other two
categories and whose annual turnover is estimated at Br 100,000 or less.
Every businessman (except Category “C”) is required to preserve all books of accounts
and other records and documents for a period of not less than 5 years after the year of
income to which such books and documents relate.

III) Tax Period

The period of tax assessment is one fiscal year. The fiscal year starts on Hamle 1 and
ends on Sene 30. The body can change the accounting year only with the permission of
the tax authority. When the tax period of a body is changed (with the permission); the
period between the previous tax period and the new period will be treated as a
“transitional period”.

IV) Allowable Deductions

In order to determine taxable income under Schedule “C” the following items of
expenditures are allowable deductions.
1) Direct cost of producing the income such as the direct cost of manufacturing,
purchasing, importation, selling and such other similar costs.
2) General and administrative expenses incurred for earning, securing and maintaining
the income.
3) Depreciation expense
4) Bad debt
5) Premium payable on insurance directly connected with the business activity
6) Expense incurred for the promotion of business
7) Commission paid for services rendered, provided that the amount shall not exceed the
normal rates provided by other similar businesses or persons
8) Any payment made by a branch, subsidiary or associated company in Ethiopia to the
foreign head office for services rendered (actually), provided that such a services
cannot be rendered by any other person at a lower cost.
9) Salaries, wages or other emoluments paid to the children of proprietors or member of
partnership, provided it should be proved that they possess the required qualification
10) Salaries and other personal emoluments paid to manager or managers of a private
limited company.
11) Interest expense, if the lending institution is recognized by NBE or a foreign bank
permitted to lend to enterprises in the country.
12) Donations and gifts under the following conditions:
a. If they are given to welfare organizations that have a record of outstanding
achievement and have a good accounting system showing the utilization of resources.
b. If the payments are made under emergency call issued by government to defend
sovereignty and integrity and to prevent manmade or natural catastrophe, epidemic or
any other similar cause.
c. If the payment is made for non-commercial education or health facilities.
Note: Grants and donation will be allowed as deduction only if it does not exceed 10% of
the taxable income.
The following are the rates of depreciation permitted per the rule:
1) Building: 5% of the original cost
2) Intangible Assets: 10% (straight-line basis)
3) Computers, information systems, software products and data storage equipment:
25% (on a pooling system).
4) All other business assets: 20% (on a pooling system)
For assets for which the pooling method is used, the rate is applied to the depreciation
base for the determination of depreciation. Depreciation base is the book value of the
asset on the opening day of the tax period, increased by the cost of acquisition, creation,
renewal, etc during the period and reduced by the sales price of the asset disposed during
the period. Loss incurred during the period due to natural calamity and other involuntary
conversion will also be considered for the computation of depreciation base. Any
compensation received for these purposes will be deducted from the book value.
According to the Regulation issued by the Council of Ministers, depreciation will be
allowed as deduction only if the tax payers keep satisfactory record and submit the same
to the tax authority regarding the date and cost of acquisition and a record of the total
amount of depreciation deducted on the asset so far.
However, depreciation on assets such as fine art, antiques, jewelry, trading stock, etc
(which are not subject to wear and tear) are not allowed.
Financial institutions are permitted to deduct special reserves from taxable income in
accordance with the directives issued by NBE. However, the amount drawn from such
reserves will be added to the taxable income of such institutions.
Dividend and profit shares, received by a resident body, are exempted from taxable
income provided:
i) The dividend distributed by the body were subject to taxation
ii) The recipient body has at least 25% shareholdings in the share capital or voting
right of the distributor body
iii) The profit shares distributed by the registered partnership were subject to
taxation
iv) The recipient body holds at least 25% of the capital of the distributor. (the
registered partnership)

V) Non-allowable Deductions
All those expenses, which are not wholly or exclusively incurred for the business activity,
shall not be allowed as deductions per the provisions of law. Such expenses include:
1) capital expenditure: the cost of acquisition, improvement, renewal, etc that is
depreciated;
2) additional investment: an increase in the share capital of a company or the original
capital of a registered partnership;
3) pension or provident fund contribution in excess of 15% of the monthly salary of
employees;
4) Dividend declared by companies and profit shares distributed by registered
partnership;
5) Interest expense in excess of the rate used between the National Bank of Ethiopia and
Commercial banks increased by 2%;
6) Any tax, fine or penalty paid under any proclamation & recoverable value added tax;
7) Fines or penalty paid under violation of law;
8) Losses that are not connected with the business activity;
9) Losses recoverable by insurance;
10) Donation and gift other than permitted by regulation;
11) Entertainment expenses;
12) Any reserve, provision or special purpose fund, if not permitted by any proclamation.
13) Personal consumption expenses;
14) Salary, wages, and other personal emoluments paid to the partner, or proprietor of an
enterprise;
15) Expenses for maintenance or for other private purposes of proprietor or partner of the
enterprise;
16) Representation expenses in excess of 10% of the salary of employees.

VI) Declaration and Payment of Tax

The following is the procedures for the declaration of taxable income by taxpayers.
A) Taxpayers categorized as “A” are required to declare their taxable income within four
months from the end of the tax period
B) Those taxpayers who are categorized as “B” are required to declare their taxable
income within two months from the end of the tax period
C) Category “C” taxpayers shall declare taxable income between July 07 and August
each year
The taxable income of Category “C” taxpayers will be determined through a standard
assessment. It is a fixed amount of tax determined through the regulation (of Council of
Ministers), considering variations such as type of business, business size and location.

VII) Tax Exemptions: The following categories of income and entrepreneurs are
exempted from the payment of business income tax.
Income: Awards for adopted and suggested innovations and cost saving measures, public
awards for outstanding performance, and income specifically exempted by law
Entrepreneurs: Federal, National and Local Governments, and National Bank of
Ethiopia.

VIII) Tax Withholding:

On Import: Those taxpayers who import goods for commercial use are required to pay
3% of CIF (Cost, Insurance and Freight) of goods as tax withholding to the Customs
Authority.
On other specified transactions: 2% of the gross amount of payments. The withholding
agent shall transfer the amount withheld to the tax authority, within 10 days from the last
day of each month, in aggregate, indicating the TIN of the taxpayers from whom the tax
is withheld.
According to the Council of Ministers Regulation the following persons are required to
withhold tax of 2% from the payment that they make to the taxpayers:
i) Organizations having legal personality
ii) Private nonprofit organizations, and
iii) Nongovernmental organizations
The regulation states that, withholding will be applicable to the payment for the
i) Supply of goods for more than Br 10,000 in any one transaction;
ii) Rendering of services involving more than Br 500 in any one transaction or
service;
IX) Assessment of Tax: Assessment is a tax review by a tax official of the tax
declaration and information provided by a taxpayer and a verification of the arithmetical
and financial accuracy of the declared tax liability. Pursuant to the proclamation, each
taxpayer is required to furnish the tax authority with all information required for the
assessment of income tax.
The assessment of business income tax takes two forms:
A) Assessment by books of accounts, and
B) Assessment by estimation.
Assessment by books: this form of assessment is done based on the accounting records.
Since category A and B tax payers are required to maintain book of accounts, this form is
used for these categories.
Assessment by Estimation: Category C tax payers are not required to maintain books of
accounts. Hence, assessment on this category of tax payers is made based on estimation.
Category “C” tax payers should pay tax at a fixed rate on the income estimated by the
income tax [Link] assessors are assigned by the tax office to estimate the daily
sales of the taxpayers. Assessors estimate the daily sales and this daily sales are
converted to annual sales by multiplying by the number of working days. Assessment by
estimation can also be used for category A and B tax payers in the following conditions:
if the taxpayers keep no records, or
if the income tax authority does not accept the submitted books, or
if the taxpayer fails to declare tax within the time specified

X) Business Income Tax Rates: According to the income tax proclamation, the
following tax rates are used for computation of business income tax under Schedule “C”.
Taxable Income Per Year Marginal Tax
0 – 1,800 Exempted
1,801 – 7,800 Rate
10%
7,801 – 16,800 15%
16,801 – 28,200 20%
28,201 – 42,600 25%
42,601 – 60,000 30%
Over 60,000 35%
The following short cut method may be also applied:

Taxable income (annual) (In Birr)Tax liability (In Birr)

0 – 1800 Nil
1801 – 7800 TI x 10% - 180
7801 – 16800 TI x 15% - 570
16801 – 28200 TI x 20% - 1410
28201 – 42600 TI x 25% - 2820
42601 _ 60000 TI x 30% - 4950
60001 and above TI x 35% - 7950
(Where TI stands for Taxable Income)

Schedule D: Taxation of Other Income

There are many types of income that need not be taxed for equity, efficiency and revenue
purposes. The income tax proclamation provides provisions to catch those sources of
income that do not fall under the three schedules discussed earlier: income from
employment, income from rental of building, and business income. The incomes that are
not included in these three schedules are many in type and nature and thus taxed at
different rates depending on their characteristic.
i) Royalty: Income from royalty is the payment received for the use of (or the right to
use) copyright, literary, artistic or scientific work; films or tapes for radio and TV
broadcasts; patent or trademark, design, model, plan, or secret formula; any industrial,
commercial, scientific equipment or experience, etc. The tax rate is 5%.The payer should
withhold and transfer to the tax office. If the payer resides abroad, the recipient is
responsible to make the payment.
ii) Income paid for Technical Services: This includes income received by residents for
services rendered outside Ethiopia. Any kind of expert advice and technical service will
come under the purview of the said income. The tax rate is 10% and which is withheld
and paid to the tax authority by the payer.
iii) Income from Game of Chance: This includes income from lottery and other chance
winning. The tax rate is 15%. Winning of less than Br 100 are not taxable. The payer
withholds tax and pays tax office within the time specified.
iv) Dividends Income: This includes dividend income received from share companies
and private limited companies. The tax rate is 10%. The payer deducts tax at source and
remits to the tax office like other Schedule “D” income tax.
v) Income from Casual Rental of Property: This category includes income received
from rental of land, building and other movable asset, which are not related to business
activities. The tax rate is 15% and tax is determined on the gross annual income and
declared and paid within the period specified.
vi) Income from Interest on Deposit: Interest received on deposit is taxed at 5% and the
amount of tax is withheld at source by the payer and transferred to the tax office.
vii) Gain on Transfer of Investment Property: Under this category, gain from transfer
of building held for business and factory office; and gain from transfer of shares of
companies are [Link] sale and transfer by way of gift are considered to determine
gain. Gain on building is taxable at 15% and that of shares is taxable at 30%. According
to the proclamation, gain on transfer of dwelling houses is free from tax. The tax
proclamation allows a set off loss on transfer of property gains of the same nature of the
current period and a carry forward of any remaining loss indefinitely to future years.
Declaration and Payment of Taxes on Schedule “D” Income: Taxes withheld at source
from Schedule “D” income are to be declared and paid within 15days from the end of
each month. Other taxes on Schedule “D” income are to be declared and paid within two
months from the end of the fiscal year.

4.3.2. Consumption Taxes

Value Added Tax

I) Meaning
VAT is a transaction tax collected on goods and services at all stages of production and
distribution. Tax is collected on the value added at each stage of the value chain. The
collection of VAT begins with importers or producers and ends with the retailers. The
amount of VAT collected from a transaction at different stages of distribution will be
equal to the total amount of sales tax collected from one stage of the distribution on that
taxpayer against tax payable by him on sales.
The VAT Proclamation No. 285/2002 which has replace the sales and excise tax
proclamation No.68/1993 is a consumption tax which is levied and paid as Value Added
Tax at a rate of 15%. VAT is levied on taxable transactions. The tax base is the value of
the imported or locally produced goods.
II) Value Added Tax (VAT) Rates
The Ethiopian VAT system is invoice based and operates on the destination principle,
where goods and services are taxed in the country of consumption and not of origin. As
indicated in Article 7 and 8 the tax has two main rates with exemptions that ultimately
determine liability to tax. These rates are standard rate, which is at 15%, and zero rate,
which is 0%.
a) Standard Rate at 15%
Goods and services applicable to the zero rate and exempt are specifically provided for in
the proclamation with the standard rate being applicable to all supplies so excluded. That
means all goods and services other than those specified as being exempt or liable at the
zero rate are liable to VAT at the standard 15% rate. It would not be feasible to compile a
definitive of the coverage of the 15% rate. In general the Value Added Tax rate of 15%
would be levied on the value of:
 Every taxable transaction by a registered person. A taxable transaction is a supply
of goods or a rendering of services in Ethiopia in the course or furtherance of a
taxable activity, other than an exempt supply.
 Every import of goods, other than an exempt import ; and
 An import of services
VAT on Imported Goods and Services
Article 14 and 15 are about the time and value of imports. As indicated in the
proclamation all goods imported into Ethiopia are liable to VAT at a standard rate of 15%
unless the imported goods are zero-rated and exempted. As far as the payment is
concerned the importer is liable to the payment of the tax at the point of clearing the
goods in the Customs Department of Ethiopian Custom Authority no matter whether the
goods are imported for private or business purposes, and whether or not the importer is
registered for Value Added Tax.
The value on which an importer will have to pay VAT at importation is determined by
adding the CIF (cost, insurance and freight) duty, the custom duty, and all cost of any
service- supplied incidental to the delivery of the goods. The Ethiopian Custom Authority
will give the basis of value for VAT purposes.
Computation of VAT
The computation of the VAT liability from the manufacturer to the final consumer is
presented as follows.
Manufacturer Birr Tax
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
Total VAT paid to ERCA Br 960
b) Zero - Rating
As discussed earlier in VAT zero-rated goods or services are business transactions, which
VAT is chargeable at 0%. In effect zero-rated means no VAT is charged. However, from
tax perspective zero rate supplies are taxable supplies although no tax is charged and the
value of these supplies forms part of the taxable turnover for registration purposes. Goods
and services, which attract the zero rate of VAT, include:
i) The exports of goods or services. However,
 Goods are treated as exported from Ethiopia if the goods are delivered to or made
available at an address outside Ethiopia as evidenced by documentary proof from
Ethiopian custom Authority acceptable to the ERCA/ VAT
 Services are treated as exported if the services are supplied for use or
consumption outside Ethiopia as evidenced by documentary proof from Ethiopian
Custom Authority acceptable to the ERCA/VAT.
ii) The rendering / supply of transportation or other services directly connected with
international transport of goods or passengers, as well as the supply of lubricants and
other consumable technical supplies taken on board for consumption during international
flights.
iii) International transport of goods or passengers occurs where the goods or passengers
are transported by road, rail, water or air and also transportation must be:
 From a place outside Ethiopia or another place outside Ethiopia where the
transport or port of the transport is across the territory of Ethiopia, or
 From a place outside Ethiopia to a place in Ethiopia
 From a place in Ethiopia to a place outside Ethiopia
iv) The supply of gold to the National Bank of Ethiopia.
v) A supply by a registered person to another registered person in a single transaction of
substantially all of the assets of a taxable activity or an independent functioning part of a
taxable activity as a going concern, provided a notice in writing signed by the transferor
and transferee is furnished the Authority within 21 days after the supply takes palace and
such notice includes the details of the supply.
III) VAT Exemptions
The supply of certain goods and services is exempt from VAT. Exemption from VAT
means that the persons engaged in the exempt activity are not liable for VAT on their
receipts and are not entitled to a credit or deduction for VAT borne on their purchases. In
another word the suppliers of exempted goods and services are not permitted to charge
VAT and do not get credit for input VAT on purchases for the exempt goods and
services. If it makes taxable and exempt supplies it cannot reclaim the VAT paid on
purchases of such exempt supplies. However, if a business makes only exempt supplies it
cannot be registered for VAT as it is out of the tax system.
The goods and services that are exempted from VAT as indicated in Art 8 of the
proclamation are:
 The sale, transfer or lease of immovable property, except for the following:
 The sale or transfer of hotel or holiday accommodation;
 The sale or transfer of newly constructed residential properly, unless the
properly has been occupied as a residence for at least two years.
 The rendering of financial services. Financial services means:-
 Granting, negotiating and dealing with loans, credit guarantees, and any
security for money, including management of loans, credit or credit guarantees
by the grantor.
 Transactions concerning deposits and current accounts, payments, transfers,
debts, cheques and negotiable instruments other than debt collection and
factoring;
 Transactions relating to share, stocks, bonds, and other securities other than
custody services;
 Management of investment funds.
 The supply or import of national or foreign currency (except for that used for
numismatic purposes) and of securities.
 The import of gold to be transferred to the National Bank of Ethiopia
 The rendering by religious organizations of religious or church-related services,
 The rendering of medical services,
 The rendering of educational services provided by educational institutions, as well
as child care services for children at pre-school institutions,
  The 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 purpose of rehabilitation after natural disasters, industrial
accidents, and catastrophes,
 The supply of electricity and water,
 The supply of goods for the official use of diplomatic missions,
 Post office operations and the provision of public transport permits and license
fees.
Difference between Zero-Rated and Exempt Supplies
It is necessary to identify the difference between exemption and zero-rating. These terms
appear to have the same meaning, but only to the extent that both exempt and zero-rated
supplies do not attract what is referred to as a positive rate of VAT. That is both mean
that there is no VAT charged on the supply, so what is the difference? To the final
consumer there is very little difference as no VAT will be charged to them, but to a
business the difference is very important. Dealing in taxable supplies, including zero rate
supplies allows a business to reclaim input tax; dealing in exempt supplies does not.
Because zero-rated supplies are taxable supplies, a VAT registered business dealing in
making only zero-rated supplies is still entitled to reclaim input tax on purchases made
(supplies received). This means that most suppliers dealing in only zero-rated supplies
will have input tax, which exceeds their output tax, and they will claim for refund from
ERCA. Because exempt supplies are not taxable supplies, a business dealing only in
making only exempt supplies is not entitled to register for VAT. This means that this
business will have no opportunity to reclaim input tax on purchases (supplies received).

IV) Registration Requirements

The VAT proclamation provides rules relating to registration for VAT purposes. It
describes who is obliged to register, who may not register, procedures for registration etc.
Thus, there are two types of VAT registration: obligatory and voluntary.
Obligatory Registration
A person is obliged by law to register if one is doing any business, which is likely to have
taxable turnover in 12 months exceeding Br 500,000. Thus to know whether a person
must register for VAT it is sufficient to consider the business turnover for the past 12
months. If during the past 12 months its gross sales exclude tax exceeds Br 500,000 then
it has to register for VAT. Besides, if one reasonably expects that during the next 12
months the total value of taxable supplies excluding tax is likely to exceed Br 500,000
then the person needs to register for VAT.
The turnover is calculated on an ongoing basis. Two periods need to be considered-the
past 12 calendar months and the next 12 calendar months on a month-by-month basis.
There is the need to estimate at the end of each trading calendar month the total value of
taxable goods and services supplied by all the business for the past 12 months. Where the
total exceeds Br 500,000 then there is the requirement to register for VAT. If a person is
required to register for VAT and has not applied to be registered, the Tax Authority may
register the person on its own initiative and send the registered person the certificate.
Voluntary Registration
A person may voluntarily apply for registration even if his annual turnover is below Br
500,000. However, application for voluntary registration can be made only if the person
regularly supplies or renders at least 75% of his goods and services to registered persons.
Voluntary application for VAT registration can be rejected by the tax authority if the
applicant has no fixed address or does not keep proper accounting records, has no bank
account, has previously been registered for VAT but failed to perform his duties under
the VAT law.
V) Record Keeping
The VAT regulation requires that a VAT registered trader must keep full and true records
of all business transactions that affect or may affect his or her liability to VAT. In
general, the following records are required to BE kept.
a) VAT Account
VAT Account: is a records of all supplies and purchases made and received and a
summary of VAT for each period covered by the VAT Returns. It consists of a tax
payable portion and a tax allowable portion. The tax payable portion comprises a total of
the output tax due for the prescribed accounting period and any correction to the tax
payable portion of a previous return which may be corrected on the current return. The
tax allowable portion comprises the total of the input tax allowable to the taxable person
for that prescribed accounting period. This includes any permitted correction of tax
allowable portion of previous returns, and any other adjustments required.
b) Records of Purchases
The records of purchases should distinguish between purchases of goods intended for
resale and goods or services not intended for resale in the ordinary course of business.
The record should show the date of the purchase invoice and a consecutive number (in
the order in which the invoices are filed), the name of the supplier, the cost exclusive of
VAT and amount of VAT shown. Purchases at each rate must be recorded separately.
Purchase record should be divided into three separate accounts:
 Local purchases and the VAT thereon
 Imports and the VAT thereon
 All other purchases, including exempt, zero-rated purchases and purchases from
suppliers who are not registered for VAT where the person will not have been
charged any VAT.
One must also retain and file separately the following in order of date
 Original tax invoices including simplified invoices received from local suppliers,
including original debit and credit notes received from the suppliers.
 Certified copies of Customs import entries
 Purchases invoices received for all other purchases
c) Record of Sales
In general, the record of sales must include the amount charged in respect of every sale to
a registered person and a daily entry of the total amount charged in respect of sales to
unregistered persons, distinguishing in all cases between taxable transactions liable at
each different rate of VAT (including the zero rates) and exempt transactions. All such
entries should be crossed-referenced to relevant invoices, cash register tally rolls,
delivery notes, etc. A balanced cashbook is essential for trouble-free operation of VAT.
Sales record should be divided into three separate accounts:
 Taxable sales at the standard rate and the VAT thereon, or VAT charged there
from,
 Taxable sales at the zero rate
 Exempt sales
Like purchase records one must also retain & separately file the following in order of sale:
 Copies of tax invoices, including simplified invoices related to one‟s taxable sales,
and copies of any debit or credit notes issued to one‟s customers. If one is using
cash accounting or a small trader scheme one must keep a daily record of his gross
taking at the standard rate.
 Copies of invoices of goods sold at zero-rate or a daily record of the value of one‟s
sales at zero-rate if using cash accounting or a small trader scheme.
 Copies of invoices of exempt goods sold or a daily record of the value of all
exempt sales of using cash accounting or a small trader schemes.
d) Cash Records
All records of one‟s cash transaction must be retained including cashbooks, petty cash
vouchers, all account books, and records of daily takings records.
e) Other Records
Stock and manufacturing records must be maintained if appropriate to the business.
Discounts or reductions made or received, and affecting the amount charged, should be
recorded in the same manner as purchases and sales. Besides copies of Debit and Credit
Notes issued should be separately filed from Debit and Credit Notes received. They
should all be filled in order of date. Since export is zero-rated and VAT refund can be
claimed on input tax, the exporter is required to maintain such records as a certified copy
of the Customs Export entry, a purchase order from or contract with the foreign customer,
a copy of the invoice issued to the foreign customer, evidence of transportation from
Ethiopia in the form of copies of transit documents, such as airway bills, shipping bills or
road or rail transit documents.
In addition to the records stated above VAT registered persons whose turnover exceeds
Br 500,000 per annum must retain the following:
 Orders and delivery notes
 All business correspondence
 Appointment and job books
 Annual accounts-including income statement and balance sheet
 Bank statements and paying in records.
f) Retention of Records by Taxable Persons
A taxable person must retain all books, records and documents relevant to the business,
including invoices, credit and debit notes, receipts, accounts, cash register tally rolls,
vouchers, stamped copies of customs entries and other import documents and bank
statements, and computer-stored information. These business records must be preserved
for ten years from the date of the latest transaction to which they refer.
VI) Cancellation of VAT Registration
A person who has registered for VAT may cancel his or her registration by arrangement
with ERCA/VAT. Reasons for De-registration include:
 If the business ceases trading permanently
 If the business is sold
 When the value of taxable supplies falls consistently below the VAT registration
threshold. In this case Art 19 (2) states that a registered person may apply to have his
registration for VAT cancelled at any time after a period of three years of the date of
his most recent registration for VAT if the registered person‟s total taxable
transactions in the period of 12 months then beginning reasonably are expected to be
not more than Br 500,000
 If he or she has been registered in error, or he or she has ceased to be a taxable person
A registered person must notify FIRA/VAT in writing in order that the VAT registration
number may be cancelled promptly. The cancellation of VAT registration takes effect at
the time the registered person ceased to make taxable transactions or, if the registered
person has not ceased to do so, at the end of the accounting period during which the
person applies to the Authority for cancellation of VAT registration. If a person‟s
registration for VAT is canceled, the Authority is required to remove the person‟s name
and all other details from the VAT register and the person is required to return the issued
certificate of registration.
VII) Accounting for VAT
a) When VAT becomes payable
Article 26 of the proclamation requires that every VAT registered trader must, by the end
of the month following each month, furnish to the Authority on the prescribed form
(VAT Return) a true and correct return for the period showing the amount of VAT due by
him or her and the amount of VAT deductible by him or her. Every month he/she has to
fill in details of the supplies made and received in that period and pay the total owed to
ERCA/VAT, or claims a further credit or repayment of tax as the case may be VAT on
taxable imports is collected by the Ethiopian Customs Authority.
b) Amount of VAT Payable
The amount of tax payable (the VAT liability) for any month by a person who is
registered or is required to register is the difference between the amount of tax charged
on taxable transactions (output tax) and the amount of tax creditable (input tax).
For any return month if output tax exceeds the input tax, a payment must be made to
Authority when submitting a return. Likewise for any return period if the allowable input
tax is greater than the output tax, the amount of the excess is normally repayable to the
taxable person by the Authority. Therefore, to determine the VAT liability of a taxpayer,
it is necessary to understand the meaning of input tax and output tax.
Output Tax
Output tax in relation to a taxable person is the tax on taxable supplies, which he makes
(i.e. his sales). The supplier will be liable to VAT either at the standard rate (currently
15%), or the zero rate (0%). This is the VAT a person charges his customer.
The output tax becomes due at the time of supply but in practice is accounted for and
paid by reference to tax returns completed for prescribed accounting periods.
Input Tax
Many of the things a person buys will carry a VAT charge, but if a person is registered
for VAT he can normally claim a credit for the VAT charged on business purchases and
expenses. This is his input tax. It includes not only the VAT on purchases of raw
materials or on goods purchased for resale, but also the VAT on things like:
 Office equipment for the business,
 Commercial vehicles used in the business for the carriage of goods,
 The telephone bill ( for the business)
 Payments for services in connection with the business ( e.g. Accountants‟ or
Lawyers‟ fees)
Input tax is the VAT incurred by a taxable person on goods or services supplied to him
provided the goods or services, acquisition or importation are for the purpose of any
business carried on, or to be carried on, by him. The effect of the above is that VAT
cannot be reclaimed on goods and services, which are not used for business purposes. For
instance, it does not include VAT paid on goods or services for someone else‟s business
or VAT on private purchases, such as furnishings for the home of the business owner.
VAT charged in these circumstances is not considered as input tax. There are also some
purchases that cannot be allowed as credit for input tax. These are:
 passenger automobiles, unless the business is dealing in or hiring such
automobiles;
 The repair and maintenance of passenger automobiles unless the business is
dealing in or hiring such automobiles;
 Entertainment unless the business is in an entertainment business .
VIII) VAT Refund
As said earlier for any return period if the allowable input tax is greater than the output
tax, the amount of the excess is normally repayable to the taxable person by the Authority
as a tax refund. According to Article 27, if at least 25% of the value of a registered
person‟s taxable transactions for a month is taxed at a zero rate, the Authority will refund
the amount of VAT applied as a credit in excess of the amount of VAT charged for the
month within a period of two months after the registered person files an application for
refund, accompanied by documentary proof of payment of the excess amounts.
In the case of other registered persons, the amount of VAT applied as a credit in excess of
the amount of VAT charged for the month is to be carried forward to the next five
months and credited against payments for these months, and any unused excess
remaining after the end of this five-month period will be refunded by the Authority
within a period of two months after the registered person files an application for refund,
accompanied by documentary proof of payment of the excess amounts.
If a registered person is entitled to a refund but if the Authority does not pay the refund
by the specified date, the Authority will pay to the person entitled, interest set at 25%
(twenty five percent) over and above the highest commercial lending interest rate that
prevailed during the preceding quarter.

Turnover Tax

Turnover represents the total sales income from supply of goods and services. In order
to be taxable, turnover from taxable supplies will only be considered. As stated earlier,
taxable supplies are those supplies of goods and services for which turnover tax is levied
as per the turnover tax proclamation. It is the base for the imposition of turnover tax.
Currently, taxpayers categorized as „B‟ and „C‟ as per income tax proclamation No.
286/2002 and who are not required to register for VAT come under the purview of
turnover tax. Turnover tax, in the country, is computed as per the Turnover tax
Proclamation No. 308/2002.

It would rather be difficult to know the actual turnover of all the suppliers especially
when traders do not have the habit of keeping books of accounts. Not only that, as we
studied, the income tax proclamation allows category „C‟ taxpayers pay tax even in the
absence of books of accounts. This may create difficulty in determining the exact amount
of turnover of those traders. Turnover tax of category „B‟ taxpayers is computed based on
the books of accounts, as it is compulsory to maintain books by them.

As a solution to this problem, the sales turnover of category „C‟ is estimated in

accordance with the estimation technique used for income tax computation. As you
know, for income tax purposes, the daily estimated sales of taxpayers is converted to
annual sales by the use of total days that the taxpayers do their normal operations. The
same amount of turnover is used both for income tax and turnover tax purposes.

Rates of Turnover Tax

The supplies of category „B‟ and „C‟ taxpayers (turnover taxpayers) are not taxed at the
same rate as that of value added tax. A less rate than the VAT rate is used for this
purpose. Taxpayers, who are not registered for VAT, collect tax at the following rates by
charging the amount on the price of taxable goods and services they supply.
a) On goods sold locally: 2%
b) On services rendered locally:
 Contractors, grain mills, tractors, and combine harvesters: 2%
 Others: 10%
Base of Computation
The turnover determined for income tax purposes form the basis for turnover tax
determination. To make it clear, turnover tax is determined on the gross receipts that the
suppliers receive from the supply of goods and rendition of services. All persons, who are
not registered for VAT but supply goods or render services, except those who are not
required to pay tax, are required to collect tax from the customers on their gross receipts
and transfer it to the tax authority.
Tax Exempt Supplies
All the goods and services supplied in the country are not subject to VAT. Likewise,
there are some supplies that are exempt from paying turnover tax. While determining the
turnover for tax purposes, these items are excluded. The following transactions which are
exempt from VAT are also exempted from payment of turnover tax.
  Transactions such as sale, transfer or lease of dwelling house; rendering of
financial services;
 Supply of national or foreign currency and securities;
 Rendering of church related services by religious organizations;
 Supply of drugs (specified by Ministry of Health);
 Rendering of educational and child care services;
 Supply of humanitarian services as humanitarian aid;
 Supply of electricity, kerosene and water;
 Provision of transport;
 Permits and license fees;
 Supply of goods and services of a workshop where more than 60% of the
employees are disabled;
 Supply of books and printed materials; and
 Any other items specified through a directive issued by the Minister of Finance
and Economic Development.
Assessment of Turnover Tax
The Tax Authority determines turnover tax based on the books and records submitted by
category „B‟ taxpayers. However, if the authority finds that there exists an
understatement of tax declaration, it makes an assessment of its own. Similarly, in
situations where the taxpayer does not keep records or the submitted records are
unacceptable, the assessment is made by the tax authority on the basis of information
about the market price of goods and services. If the market price of a particular item is
not available, the market price of similar goods (and services) will be used for this
purpose.

Category „C‟ taxpayers (who are not required to keep records as per proclamation
286/2002) pay a presumptive turnover tax. The total turnover for this purpose is
determined as per income tax proclamation 286/2002. The provisions of the same
proclamation are also followed for the preparation and delivery of assessment
notification.

The tax authority examines the statements and records submitted by taxpayers and have
the power to investigate the details of the same at any time by sending inspectors to the
taxpayers‟ premises. The tax office may also require the custodian of documents,
vouchers, and stock to come in person and provide the information if required. If it is
necessary to gather information, the tax authority may contact other government offices
for the purposes of tax determination. Objections to assessment can be made by giving
appeal to Appeal Commission by depositing 50% of tax assessed.

When a taxpayer changes the name of business, address, place of business, constitution,
or nature of the main taxable activity, it should be notified to the tax authority within
21days of doing so.

Tax Period
The Turnover Tax law provides two different tax periods for category „B‟ and category
„C‟ taxpayers. The tax period of category „B‟ taxpayers is three-month period
commencing from the first day of the Ethiopian fiscal year (or if the tax authority
permits, the first day of the Gregorian calendar). The tax period for category „A‟
taxpayers who are not obliged to register for VAT would one month.

The tax period of Category „C‟ is the Ethiopian fiscal year. Note that, for category „C‟,
the tax period for business tax and turnover tax remains the same. At the end of „Sene‟ 30
every year, taxpayers must be ready for the payment of both the taxes.

Computation of Turnover Tax

The computation of turnover tax is straight forward. The gross receipt is multiplied by the
tax rate either 2% or 10% so as to determine the turnover tax liability of the turnover
taxpayer.
Excise Taxes
I) Meaning
Excise taxes are taxes levied on particular products and services, typically with
discriminatory intent. Sometimes, they refer to the profits of fiscal monopolies. Excise
taxes are also called selective sales taxes. In most countries, a large share of excise
revenue comes from tobacco products, alcoholic beverages, and petroleum products,
which are the traditional excisable commodities. Excises are also levied on a variety of
other items such as motor vehicles, soft drinks, sugar, cement, entertainment, insurance,
and consumer luxuries.
II) Imposition of Excise Tax
The excise tax of the country is imposed with three objectives in mind: to improve
government revenue, to improve equity by imposing tax on luxury goods and basic goods
which are demand inelastic, and to discourage the consumption of goods that are
hazardous to health and which causes social problems. The current excise tax is governed
by excise tax Proclamation No 307/2002. This Proclamation is divided into seven
sections and thirty-eight articles. The summary of the articles is given below.
III) The Rate, Base and Payment of Excise Tax
The excise tax is paid on imported as well as locally produced goods listed in the table
below at the stated rate. For locally produced goods the excise taxes computed based on
the production cost (excluding depreciation cost) of the goods, whereas for imported
goods the tax base will be cost, insurance and freight (C.I.F.).
As far as payment of excise tax is concerned, excise tax on locally produced goods will
be paid by the producer not later than 30 days from the date of production. For imported
goods the tax is to be paid by the importer at the time of clearing the goods from Customs
area.
The schedule attached to the proclamation provides the following list of goods that shall
be liable to excise tax when either produced locally or imported and the rates at which
they are taxed.
Table 9 Goods Liable to Excise Tax

S/NO. Type of Product Excise Tax Rate (%)

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 Powder 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 10
length or width (except Mosquito net and 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 10
Gramophone, radio, or sound receivers &reproducers
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
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

Every taxpayer is required to maintain books of accounts and supporting documents in

accordance with proper accounting principle and in a manner acceptable to the Tax
Authority and submit every 30 days to the Tax Authority, in a form, which is supplied by
the Authority, a declaration containing such information that is necessary for proper
collection of the tax. Any taxpayer is subject to administrative penalty if he fails to
comply with the requirements stated in this proclamation.
A person who fails to file a timely return is liable for a penalty equal to 5% of the amount
of tax underpayment (which is the difference between the tax required to be shown on the
return and the amount of tax paid by the due date) for each month (or portion thereof)
during which the failure continues, up to 25% of such amount. The penalty under for
such late filling is limited to Br 50,000 for the first month (or portion thereof) in which
not return is filed. However, this penalty cannot be smaller than Br 10,000 and 100% of
the amount of tax required to be shown on the return, whichever is lower.
In addition to the penalty 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 at 25% over and above the highest commercial lending interest rate
that prevailed during the preceding quarter.
Illustration: Lem Sugar Factory incurs the following costs and expenses for the
production of sugar in the month of Sene 1996.
Raw material used ………………………………… Br 1,200,000
Labor used ………………………………………… 80,000
Repair and maintenance of factory machinery … 16,000
Utility expenses (Applicable to production Dept.).. 36,000
Required: Compute excise tax for the month
Solution:
Total cost of production = Br 1,200,000+80,000+16,000+36,000
= Br 1,332,000
Excise tax rate 33%
Excise Tax Br 439,560
 4.3.3. Stamp Duties

Stamp duty is another form of taxation basically imposed on the services given to
individuals through affixing seals. Stamp is an official mark or seal placed on a document
especially to indicate that a requirement tax has been paid. Thus, stamp duty is a tax
raised by requiring stamps sold by the government to be affixed to designed documents,
which form one kind of revenue to the government‟s treasury.
As can be easily understood from the preamble of stamps duty proclamation proc. No.
110/1998, it has became necessary to amend the stamp study levied on documents in a
manner which would contribute to the development of art, the activities of financial and
the transfer of capital assets; thus it was appropriate to come up with new legislation so as
to strengthen the means of raising revenue from different bases of taxes.
Bases of Stump Duty
As mentioned above, stamp duty is imposed on instruments (documents) that are required
to bear a physical stamp. An instrument as per Art 2(5) of stamp duty proclamation is a
written document by which any right or obligation is or purports to be created, recorded,
transferred, extinguished or by which its scope is limited or extended. Art 3 of the stump
duty proclamation exhaustively lists instruments chargeable with stamp duty in the
following manner:
 Memorandum and articles of association of any business organization cooperative
or any other from of association.
 award
 bonds
 ware house bond
 contractor agreements and memoranda thereof
 security deeds
 collective agreement
 contract of employment
 Lease, including sub-lease and transfer of similar rights
 natural acts
 power of attorney
 documents
Table 10 Rate of Stamp Duty
No. Instruments chargeable Basis of Rates of
with Stamp Duty Valuation Stamp Duty
1 Memorandum and articles of
association of any business
organizations, or any association:
a) upon 1st execution flat Birr 350
b) upon any subsequent execution flat Birr 100
2 Memorandum and articles of
association of cooperatives
a) upon 1st execution flat Birr 35
b) upon any subsequent execution flat Birr 10
3 Award on value a) determinable value 1%
b) undeterminable value Birr 35
4 Bonds on value 1%
5 Warehouse bond on value
6 Contracts and agreements and flat Birr 5
memoranda
7 Security deeds on value 1%
8 Collective agreement
a) on 1st execution flat Birr 350
b) on any subsequent execution flat Birr 100
9 Contract of employment salary 1%
10 Lease including sub-lease and on value 0.5 %
transfer thereof
11 Notarial act flat Birr 5
12 Power of attorney flat Birr 35
13 Register title to property on value 2%
Time and Manner of Payment
1) The stamp duty would be paid:
 On memorandum and articles of association, before or at the time of registration;
 on awards, before or at the time of issuance of the award;
 on contracts or agreements, before or at time of signature;
 on leases or sub-leases, before or at the time of signature;
 on notarial acts, at the time of issuance;
 on security deeds, before or at the time of signature;
 on documents of title to property, before or at the time issuance is effected.
2) The payment of stamp duty
 Under Br 50 would be effected by affixing stamp of appropriate value to the instrument;
 when the stamp duty exceeds Birr 50 or where the type and nature of instrument so
requires, the Federal Government Revenue Board may by directive provide;
 that stamp duty be paid by means other than affixing stamp.
3) Whoever executes or receives an instrument bearing an adhesive stamp shall at the
time of execution cancel the same, so that it cannot be used again.
Exemptions from Stump Duty
 The Ministry of Revenue may for good cause grant exemption from payment of
stamp duty;
 Public bodies on which the Federal Government of Ethiopia Financial Administration
Proclamation No. 57/1996 applies shall be exempt from payment of stamp duties;
 Goods imported for sale by traders having import license shall be exempt from
payment of stamp duty when first registered in the name of the trader;
 Documents may be exempted from the payment of stamp duty in accordance with
international agreements and conventions approved by the Government;
 Subject to reciprocity, the Minister may grant embassies, consulates and missions of
foreign states exemption from payment of stamp duty;
 Share certificates shall be exempt from stamp duty payable on the register of title of
property.