Urgent: The Need to Revise the Income Tax Rate, Threshold in the Country Featured

Footballers in France will hope for a winning strike of a different kind this December when they protest over a controversial super tax levied by the socialist government. Back in 2012, the now French President, François Hollande campaigned for the election promising to tax top earners with 75Pct income tax. The 75Pct tax rate was initially to be paid by those earning over EUR one million a year. After protests by top French executives and prominent personalities such as Gérard Depardieu, a French actor, film-maker, businessman and vineyard owner, the government changed the law so that it would be payable by the companies offering such salaries. This show cases how far progressive tax rate can go.

The history of taxes could be said to be as old as human history. In the 10 AD, Emperor Wang Mang of the Xin Dynasty in present day China instituted an income tax at the rate of 10pct, for professionals and skilled labor. In 1188 Henry II declared taxes on income and demanded each layperson in England be taxed a tenth of their personal income and moveable property to raise money for the Third Crusade. Similarly the US federal government imposed its first personal income tax of 3Pct on all annual incomes over USD800 in 1861 in order to help pay for its war effort in the American Civil War.

In Ethiopia though it is difficult to find a written document on exactly when taxation on income was introduced, evidences show that a sort of income tax had been put in place during the reign of Emperor Zerayakob in the 15th Century. Citizens used to make contributions to the monarch in the form of cattle and agricultural products. Later during the reign of Emperor Menelik II, a declaration that peasants pay one tenth of their produce in kind as taxes for military wages was put into practice.

LevelEmployment IncomeTax Rate (%)Deduction in Birr
From Birr To Birr
1 Upto 150   Exempted (non-taxable) None
2 151 650 10 15
3 651 1400 15 47.5
4 1401 2350 20 117.5
5 2351 3550 25 235
6 3551 5000 30 412.5
7 Above 5000 35 662.50

The first modern taxation system however was introduced during the reign of Emperor Hailesillassie I, when Personal and Business Income Tax Law No. 62/1944 was enacted in 1944. Subject to the provisions of this Proclamation every person or organization having income shall pay income tax thereon. This proclamation has been amended consequently through the years.

The currently in use Income Tax Proclamation No. 286/2002 which has been effective since 2002 was an amended version of a previous one. This amended proclamation which levies a progressive employment income tax rate of maximum 35Pct, just 5Pct lower than the previous, has been implemented without revision for over a decade. The proclamation exempts only incomes below ETB150 from taxes. This is in spite of the fact that the over all performance of the country’s economy and income rate of employees has both shown significant change over the years. With the huge inflationary pressure in the country, the situation has created unnecessary burden on low end earners, who are already struggling to carve a living with their eroded incomes. 

In the past ten years Ethiopia has registered an average of 10.6Pct GDP growth per year, and the per capita income has reached 550 USD in 2012 from a mere 100 USD ten years ago according to the World Bank. The country has also seen unprecedented inflation of an average 20.74Pct every year from 2006 until 2013, reaching an all time high of 64.20 percent in July  2008. With these major phenomena the income of people, especially working in non governmetal organizations and in the private sector, has grown accordingly. A Five thousand birr salary that used to be considered as among the top wages a decade ago has now become an average salary for BA degree holders employed in the private sector. Yet the income tax rate has not been adjusted accordingly.  

Sintayehu Daba works in one of the public owned financial institutions and sees his income sliced to pay income tax. But he is not happy with this, especially by the rate of tax he pays. He earns ETB6,381 a month, yet the tax rate he pays is as equal as those who are paid more than ETB20,000. “In a country which applies a progressive taxing system which implies higher taxes on higher incomes,  the rate that I pay is not fair in contrast to what others pay who are highly paid” Sintayehu told EBR. “Government should adjust the income tax rates when inflation and salary scales change” he adds. 

In Ethiopia the progressive tax rate stops at 35Pct, levied on people with incomes of more than ETB 5,000. This means people who are paid ETB 20,000 and those who earn say, ETB 7, 000 a month are subjected to the same rates. With their meager income of an average salary of around ETB 1,500, this is more acute on civil servants.   

Martha Tsegaye (name changed) works in one of the branches of Commercial Bank of Ethiopia as a customer service manager. She earns ETB10,759 in addition to other benefit packages. “I think the tax I pay to the government is my obligation as citizen; if we have to give a better future to our children we have to change our country and these taxes help in doing so” she told EBR. Though she has no complains about the income tax deductions from her salary she wonders why taxes are levied on benefits such as allowances. Her husband, a professor at a university pays taxes with similar rates as she pays, while his salary is less than half of hers. “It is not fair” she reflected. “I don’t understand why the government does not push the tax rates up ward in the salary hierarchy, with the changing salary scale in the economy.” This should be done in a way that will exempt people with very low incomes to ease their economic burden. To the banker, it is better if the government could further levies higher taxes on those who are enjoying high income.

The need to revise the existing tax system in general and the decade old income tax proclamation seems to have gained the attention of the government at the moment. “It is quite understandable for citizens to raise the concern with the situation we have in the country where salaries are increasing significantly” a senior official at the Ministry of Finance and Economic Development (MoFED) reflected. The official, who requested to stay anonymous, stated that the Ministry is now preparing a Term of Reference (TOR) to identify team of consultants who will undertake a study as to how the country can develop a taxing system and tax rates which are “consistent and accepted by all”. The outcome of the study will be used to amend the current income tax proclamation, the official concluded.

CountryMaximum Income Tax RateCorporate (Profit) Tax RateSales Tax / VAT Rate
Australia 45 30 10
Botswana 25 15 or 25 10
China 45 25 17
Denmark 51.5 25 25
Ethiopia 35 30 15
Kenya 30 30 16
Nigeria 25 30 5
Russia 13 20 18
South Africa 40 28 14
United Kingdom 50 28 17.5
France 40 33.33 19.6
Global Average 24.99 29.4 15.61

Although the outcome of the study will remain to be seen in the future, officials at Ethiopian Revenues and Customs Authority (ERCA) foresee that the revision of the income tax proclamation will not happen anytime soon. 

 “There may be different thoughts and arguments about the rates of the income tax but the government has no plan to make any changes at least in the GTP period,” says Sisay Bahiru Planning and Performance Monitoring director at ERCA.  To make any change in the tax rates levied on employment taxes, the government will first make a “cost benefit analysis” adds Sisay. The authority has hired a consultant to make a revenue potential study and based on the results of the study “we will see if amendment will be needed” he added.

Total wage and salary income taxAlthough there are complaints on the need to resize the income tax proclamation by many, there are reports which indicate that only government employees are paying income taxes properly. Income tax from employees in the private sector and nongovernmental organizations aren’t collected properly due to the lack of institutional capacity of enforcement at ERCA. 

The contribution of employment income tax to the total tax revenue of the country is significant. Last year alone about ETB11.5 billion, 10Pct of the total ETB113 billion revenues collected by the authority was collected from employment income tax.

Although the income tax collected in Ethiopia has witnessed a steady increase over the past several years, the ration that it accounts to the total tax collected by ERCA is too small compared to other countries experiences. For instance in South Africa, the income tax has been the backbone of the country’s tax revenues providing between 55Pct and 60Pct of revenues over a 25 year period [1981-2008], a 2008 study conducted by Graham Glenday, professor of public policy at Duke University in the United States reveals. This could be attributable to the situation that the base of the South African tax system is broader than the case in Ethiopia, which has a large proportion of its citizens engaged in the informal economy where the tax system has not yet reached them.

In any case, in light of the increasing salary rates in most professions and the high inflationary situation the economy has undergone over the past decade, the current rate of income tax in Ethiopia remains to be unrealistic at the moment. This has put citizens who are at the lower ladders of salary scale at a disadvantage, especially civil servants. A new income tax scale that puts the reality on the ground in to consideration should be designed and put in to practice. This new scale should make incomes below at least ETB650 a month (around USD one per day) tax-exempted and adjust the whole scale upwards accordingly, experts recommend. The highest rate can go as high as 40Pct as in the case of South Africa, for those who earn monthly incomes of more than ETB 15,000, who are growing in number these days. This will compensate the tax income that the government may loss while exempting low wage earners. In the process the government will be able to increase the amount of money that gets in to the hands of low wage earners and civil servants with stagnated salaries, whose real income has been eroded by years of inflation, without major salary increment.

2nd Year . December 2013 . No.10


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