Ethiopia's-Tax-Dilemma

Ethiopia’s Tax Dilemma

Balancing Revenue Goals with Business Sustainability

In Ethiopia, the recent recognition of loyal taxpayers shines a light on the government’s efforts to enhance tax compliance amid ambitious fiscal goals. This recognition should make taxpayers feel appreciated and valued. However, as the country implements significant tax reforms to generate additional revenue, concerns arise from the business community regarding the fairness and impact of these changes, particularly on small enterprises. EBR’s Eden Teshome explores the dual perspectives surrounding Ethiopia’s tax landscape, highlighting the achievements celebrated during the recognition ceremony and the challenges businesses grapple with, such as increasing tax burdens and a complex regulatory environment.

In a country striving to boost its tax revenue amid ambitious fiscal goals, Ethiopia’s recent tax compliance recognition ceremony highlighted achievements and underlying challenges in its taxation landscape. While the government celebrates model taxpayers, voices from the business community present a more complex picture of the country’s tax administration system.

During the ceremony, Prime Minister Abiy Ahmed emphasized that paying taxes is more than just a legal obligation; it reflects trustworthiness and civic responsibility. He stated, “Trust begins with the individual, and fulfilling tax obligations contributes to the greater good of society.” The Prime Minister assured taxpayers their contributions would be used wisely, reinforcing the government’s pledge to invest in projects that benefit all citizens.

The Ethiopian government honoured exemplary taxpayers in a high-profile ceremony, acknowledging their contributions to the nation’s development. However, this celebration comes at a crucial time when the country implements significant tax reforms to support its nearly ETB trillion budget for the upcoming fiscal year.

While necessary for the country’s economic development, these reforms have raised concerns among small businesses about coping with the increased tax burden. Finance Minister Ahmed Shide, during his recent budget proposal presentation to lawmakers, outlined plans to raise an additional ETB 92.5 billion through various tax reforms. These reforms include amendments to current value-added tax (VAT) and excise tax laws and the introduction of new taxes such as property and green levies.

Despite the recognition of loyal taxpayers, the government faces significant challenges in its tax collection efforts. “The government is expected to undertake tax reforms for various reasons, including boosting tax revenue, addressing loan repayments, and responding to pressure from international lenders like the IMF,” states Atlaw Alemu (PhD), an assistant professor of economics at Addis Ababa University. The Ministry of Revenue reported achieving ETB 512.82 billion in tax revenue for the 2023/24 fiscal year, falling short of its target of ETB 529.3 billion. Nevertheless, this figure represents a substantial increase from the previous year, with direct taxes and non-tax sectors showing significant growth. Minister of Revenue Aynalem Nigussie attributed this improvement to implementing modern tax administration systems and enhanced compliance efforts supported by advanced technologies and awareness campaigns.

Atlaw, on the other hand, emphasizes the need for balanced approaches to achieving government revenue targets. “While increasing tax revenue is crucial for development, we need to implement realistic strategies that don’t alienate small businesses,” he states, highlighting the delicate balance between revenue collection and business sustainability. Legal advisor Birhanu Beyene points out the importance of protecting business rights during tax enforcement: “Businesses need a clear understanding of their rights when interacting with tax authorities, especially during audits or enforcement actions.”

The government’s ambitious plans include broadening the tax base by incorporating previously untaxed sectors, including e-commerce activities under VAT collection. Business lawyer Tetemke Yohannes stresses the need for clarity in these new regulations: “Understanding primary legal obligations for tax compliance is crucial for businesses to operate effectively within the law.”

The Ethiopian government initially allocated ETB 971 billion for the 2024/25 fiscal year, with tax revenue projected to contribute 51.7%. This substantial reliance on tax revenue highlights the critical role of efficient and equitable tax administration.

Subsequently, the House of People’s Representatives approved an additional ETB 582 billion, bringing the total budget to over ETB 1.55 trillion. The government argues that this shows its commitment to stimulating economic recovery and the funding of essential subsidies. Three hundred ninety-three billion birr is allocated for regular expenditure, 70 billion birr for capital projects, and 119 billion birr for expenditure adjustments. Close to one hundred billion of the additional budget will come from additional tax collections. Indeed, the government has also revised its revenue target from 612.7 billion to close to one trillion after the macroeconomic reform took place.

Chairperson of the House of People’s Representatives Planning, Budget, and Finance Standing Committee, Desalgen Wedaje, expressed the government’s unwavering commitment to meeting the revenue plan set for the 2024/25 fiscal year. He made this statement when reflecting on the 971 billion budget proposal in July, in the presence of Prime Minister Abiy Ahmed and Finance Minister Ahmed Shide. He emphasized that the budget was formulated based on the medium-term development and investment plan and the objectives of the second Home-Grown Economic Reform Plan.

The decision to float the Birr in July 2024 led to a significant devaluation, with the exchange rate rising from ETB 58 to ETB 125 per US dollar by December 10. This currency devaluation has triggered price increases for various commodities.

To mitigate the impact of these price hikes and stabilize the market, the government has implemented a subsidy program to support low-income citizens. The increased budget allocation is intended to fund these subsidies and alleviate the financial burden on vulnerable populations. However, this inevitably pushes the tax to be collected from every business, including small business activities.

Small business owners have expressed concerns about the increasing tax burden in the face of slowing business activities. The government’s push for higher revenue collection has sparked debates about the fairness of tax assessment methods and their impact on business sustainability. A retailer in the electronics industry, who wished to remain anonymous, shared frustrations about inefficiencies in the tax payment process.

This retailer also conveyed a sense of disillusionment regarding the government’s commitment to using tax revenues for public benefit, mentioning that many recent projects prioritize media attention over genuine benefits to businesses and society. This perception creates a barrier to motivation for paying taxes, as companies expect to see tangible improvements in infrastructure and services in return for their contributions.

Aynalem Niguse, Minister of Revenues, acknowledged the challenges faced by the government in achieving its tax collection targets. These challenges include widespread tax evasion, inefficient tax collection systems, and a need for more transparency in the use of tax revenues. She emphasized the importance of reducing corruption and modernizing tax collection systems to create a more transparent and efficient process. The Prime Minister echoed this sentiment, stating that a transparent and equitable tax system is crucial for the benefit of all citizens, urging the need for continued reform in Ethiopia’s tax collection system.

The government’s focus on modernizing tax systems is reflected in its efforts to enhance compliance through technology. The Assistant Professor of Economics at AAU also noted that while technology can improve operational efficiency and streamline processes, its effectiveness depends on the government’s genuine commitment to transparency and public trust. “Without addressing the underlying issues of mistrust, technological advancements alone may not yield the desired outcomes,” he remarked. However, the government’s efforts in this direction should make the citizens feel optimistic about the future of tax collection.

In addition to recognizing loyal taxpayers, the government has launched initiatives to improve business compliance. The Ministry of Revenue and Customs Commission has worked closely with various stakeholders to implement a tax and customs law compliance initiative. This campaign ensures better implementation of tax processes across business activities, ultimately contributing to improved revenue collection.

The Prime Minister’s commitment to using tax revenues responsibly is essential for rebuilding public trust. By ensuring that tax contributions are directed towards vital public goods and national projects, the government can demonstrate its dedication to transparency and accountability. This commitment is crucial for fostering a positive relationship between the government and its citizens, which is necessary for achieving sustainable economic growth.

Commendable achievements and significant challenges mark Ethiopia’s journey toward a more effective and equitable tax system. While the recent recognition of loyal taxpayers serves to celebrate compliance and promote civic responsibility, it simultaneously highlights the pressing need for reform in the face of growing concerns from the business community. As the government seeks to enhance revenue through ambitious tax reforms, striking a balance between fiscal objectives and the sustainability of small businesses remains critical. The path forward will require ongoing dialogue between tax authorities and taxpayers, ensuring transparency and fairness in tax administration. Ultimately, by addressing the legitimate concerns of its citizens and demonstrating the responsible use of tax revenues, the government can foster a culture of compliance that supports economic growth and rebuilds public trust in the system.

Indeed, Ethiopia, like many developing nations, faces a persistent challenge: balancing its urgent need for revenue generation with the imperative to foster a sustainable business environment. While increased tax collection is crucial for financing public services and infrastructure development, it is also essential to tread the issue carefully to avoid stifling economic growth and discouraging investment.

A robust tax system is undoubtedly essential for a nation’s progress. It provides the fiscal resources necessary to fund education, healthcare, and other critical public goods. Moreover, a well-structured tax system can promote fairness and equity by ensuring everyone contributes their fair share. However, excessive taxation can have detrimental effects on businesses, particularly small and medium-sized enterprises (SMEs). High tax burdens can erode profitability, hinder growth, and discourage entrepreneurship. This can lead to job losses, reduced economic activity, and lower overall tax revenue.

Therefore, the Ethiopian government must strike a delicate balance between revenue generation and business sustainability. To achieve this, the government can deploy a combination of strategies.

Firstly, the government should focus on improving tax administration. Streamlining processes, reducing bureaucratic hurdles, and enhancing transparency can help. The government can encourage voluntary compliance and minimize tax evasion by making tax compliance more straightforward and efficient.

Secondly, the government should consider targeted tax incentives to stimulate specific sectors of the economy. These could include tax breaks or reduced tax rates for emerging industries or small businesses that create jobs and contribute to export growth.

Thirdly, ensuring that tax policies are equitable and progressive is crucial. Higher-income individuals and businesses should bear a more significant tax burden. However, in the present scenario, small and medium-sized companies pay the same profit tax. In contrast, with the collaterals they have accumulated over the years, big companies have wide avenues to access finance for their businesses. Progressive taxation can help reduce income inequality and promote social justice.

While increased tax revenue is essential for Ethiopia’s development, how it is collected should support, rather than hinder, business growth. By implementing reforms that balance the needs of the government with the interests of businesses, Ethiopia can create a sustainable and prosperous future. EBR


13th Year • December 2024 • No. 136

Author

Eden Teshome

Editor-in-Chief of Ethiopian Business Review (EBR). She can be reached at eden.teshome@ethiopianbusinessreview.net


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