Enough with Narrow Business as Usual Approaches

In modern economies, keeping tax rates at reasonable levels is uncompromised, because of its significance in promoting the development of the private sector, creation of a transparent economy, and the formalization of businesses. The reality is different in Ethiopia. Tax is usually misunderstood as an instrument to increase government revenues, even at the expense of businesses’ survival, with the latest being the excise tax bill introduced by the government last month.

The draft proclamation, which targets increasing tax revenues from excise taxes by as much as ETB30 billion, will levy an average of 160Pct ‘sin tax’ on items deemed eligible by government; not all luxurious. The bill will impose a high excise tax on the sale price of items, including bottled water, beer, tobacco, salt, sugar, old vehicles, slightly used tractors, and personal care items. The bill has also shifted the burden of excise tax from producers and importers to end consumers, a move in contrast to most African countries and the country’s existing practice.

No doubt, as Prime Minister Abiy Ahmed (PhD.) said, some of the items, including tobacco and vehicles aged seven years and older listed under the new excise tax bill, need to be discouraged for their adverse impacts on health and the safety of citizens. The criteria, however, used to select health and environmental risk items are not justified. Only the tax imposed on old cars—as much as 500Pct—seems reasonable. Even this can be achieved, if it is coupled alongside incentives for domestic car makers. Bottled water, salt, sugar, tractors and similar items listed in the draft are neither luxury, nor risky and price inelastic.

Deeply analysing the bill, it is visible that the motive of the government is not citizens’ health and environment, but rather focused more on collecting revenues, in spite of the hurt to businesses and exacerbating inflation already draining the pockets of consumers. In fact, none of the numerous reasons government mentioned for the revision of the excise tax is rational. That is why officials of the finance, revenues and trade ministries, who have been running rush-time discussions on the draft, have only confused the public and private sector further as they lack the foundation from which to convince.

Officials boldly argue there is no change, ‘in real terms’, when the base for calculation is changed from the factory cost to the selling price. This is utterly false and the ugly truth is that transferring the burden of excise with exaggerated rates seriously affects the end consumer. Implementing such measures at a time when the cost of living is galloping is not convincing, nor fair.

Of course, government’s bottom-line argument, though arguable, is that the economy is fast growing but tax revenue is comparatively lagging. The significant portions of the population living on urban and rural safety net programs testify that the economic growth is not consumer driven but government investment in infrastructure.

The mass population has been struggling to afford basic items, while a small segment affiliated to the past government has shot to the middle-income circle. The government further fails to apprehend the unintended and intended impacts of the draft on employment rates and per capita income. Obviously, government’s current move to double its excise tax collections affirms once more its method of attempting tax revenue increases is by grabbing the low hanging fruit rather than modernizing the tax regime and formalizing the underground economy. Government must stop increasing tax rates on taxpayers in the tax net, but rather cast a larger net and build capacity to garner volunteered compliance.

It must be understood that the tax the government collects from the new excise tax is much lower than the economic activity the country loses as a result of the tax. The tax regime also needs to modernize its price and tax assessment methodologies and provide efficient and convenient tax compliance services for the private sector by deploying modern technologies. Only the development of a modernized, robust and predictable tax system can expand the tax base. It is costly, but helpful for the long term.

9th Year • Jan.16 – Feb.15 2020 • No. 82