Confusion on Excise Tax

Excise taxes are commonly referred as indirect taxes. Because they are a type of narrow based taxes, they can be collected by the government in several instances, during production or distribution, as opposed to direct taxes such as personal and profit tax, which are imposed on individuals and companies. Excise taxes are also levied on specific commodities such as luxury goods, whose demand remain unchanged irrespective of their prices. In a bid to reduce consumption, products like tobacco, which are believed to have a health impact on society are subjected to such taxes. By the same token, businesses are obliged to pay excise taxes when they import products such as alcoholic drinks, tobacco, and electronic products, or produce similar types of products, locally. The cost of production and importation, insurance, and freight costs are taken into consideration when an excise tax is levied. According to the law, excise tax is required to be paid no later than 30 days after the item is produced.

Globally, excise taxes are the major sources of revenue for governments. Of course, the growing dependency on personal, sales and value added taxes overshadows the importance of excise tax. Yet, excise tax still plays a relatively major role. For instance, direct taxes constitute about 37.5Pct of the tax total tax revenues collected in Ethiopia, whereas indirect taxes constitute 62.5Pct of the revenues. Likewise, between 55Pct and 60Pct of the indirect taxes comes in the form of value added tax while excise tax contributed 19.2Pct, as per the latest report of the central bank.

Although it has been more than eight decades since excise tax was introduced in Ethiopia, there is still disagreement between the Ethiopian Revenues and Customs Authority (ERCA) and excise tax payers over the implementation of tax rules and regulations. The major source of the disagreement emanates from the basis of excise tax computation.

According to the tax proclamation amended and approved by the Parliament in 2016, the basis for excise tax computation is the total cost of the product for items manufactured locally and CFI value in case of imported goods. But there is no clear framework to come up with the final cost of locally produced items and imported goods. As a result, the issue is a point of contention between tax payers and ERCA.

As a tax consultant, I witnessed similar problems for a long time. In fact, I have been in a series of quarrels with officials of ERCA when presenting the financial statements of clients. A case in point is the experiences of local manufacturing industries, whose products are subjected to excise tax. The manufacturers have repeatedly voiced their concern over the computation of their costs of production because ERCA included expenses incurred for packaging material such as labeling and gluing while calculating the total cost of production.

Many manufacturing industries and professionals disagree with the decision of the Authority arguing such expenses should be treated as sales and distribution expenses, which come after the item is produced. Thus, they should not be included while calculating the cost of production.

These manufacturing industries further argue that considering packaging expenses as cost of manufacturing and subsequently levying excise tax increases their cost of production. This makes their products more expensive than similar products, which are imported and available in the local market.

Including packaging costs also exposes manufacturers to double taxation, which is against the law of the country. Although excises taxes are levied on the final product by taking their total costs into consideration, ERCA is levying taxes when the raw materials are imported as well on the final products of the manufacturers. This exposes manufacturers to unfair competition with imported goods, which are taxed once when they come into the country. The lack of clear framework, in addition, exposes businesses and the nation to corruption.

To avert this, many professional and tax advisories has been suggesting solutions, but to no avail. Yet, there is no better solution other than deciding the basis for computation of excise tax based on ad valorem principle expressed as fixed percentage of the value of the product and quantity of the product. The other is adopting a specific tax approach where a fixed amount of excise tax is levied irrespective of the quantity or volume of the products. These help to avoid the confusion and quarrels.

6th Year . May 16 – June 15 2018 . No.61