CHAPTER FOUR: ETHIOPIAN TAX SYSTEM

Chapter Objectives

After the completion of this chapter, the students will be able to:

  Know the income tax laws and practices

 Realize about consumption taxes
 Elaborate the stamp duties
 Understand foreign trade taxes
4.1. Structure of Ethiopian tax system and administration

Tax revenue is the vital governments‟ revenue in any world. The Ethiopian government collects
diversified type of tax from its citizens in order to fulfill public goods and services and improve
the living standards of the society. To do this, the government of Ethiopia delegated to one
government institution called Ethiopian Revenue and Custom Authority (ERCA) in order to
establish tax rules, regulations, and policies; administer and collect tax revenue to the
government. ERCA is established starting from at federal level up to the kebele level.

Powers and Duties of Tax Authority (Article-38)

The implementation and enforcement of this proclamation and of regulations issued hereunder
shall be the duty of the tax authority.

Notwithstanding anything to the contrary in any other law, the Tax Authority shall be
empowered to investigate any statements, records and books of account submitted by any
taxpayer at any time by
a) Sending duly accredited inspectors to the place of business or practice of the tax payer to
check same or any vouchers, stocks of other material items of the taxpayer;
b) requiring the taxpayer or any employee thereof who has access to or custody of any
information, records or books of account to produce the same and to attend during normal
office hours at any reasonably convenient tax office and answer any questions relating
thereof;
c) Requiring any person including municipality, Body, Financial Institution Department or
Agency of Federal or Regional Government to disclose particulars of any information or
transactions, including any lending or borrowing which it may have relating to the taxpayer

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 Confidentiality of Tax Information (Article-39)

The Tax Authority and all persons who are or have been its agents or employees shall maintain
the secrecy of all information except such information as are required by the Commercial Code
of Ethiopia to be published by trade gazette, on particular taxpayers received by them in an
official capacity, and may disclose such information only to the following persons:

i. Employees of the Tax Authority, for the purpose of carrying out their official duties;
ii. Law enforcement agencies, for the purpose of the prosecution of a person for tax violations;
iii. Courts, in proceedings to establish a person‟s liability for tax, penalties, or interest, or in any
criminal case;
iv. Tax authorities of a foreign country, in accordance with an international treaty to which
Ethiopia is a party.

Information concerning a taxpayer may be disclosed to another person with the taxpayer‟s
written consent.

Code of Conduct for Tax Authority Employees (Article-40)

1. Each employee of the Tax Authority shall

a. Be honest and fair, treating each taxpayer with courtesy and respect;
b. Apply the law, regulations and rulings to each case on the basis the objective facts in that
case, showing no partiality to members of his family or to friends;
c. Refrain from participating in any determination that will affect his or his spouse‟s tax
liability;
d. Where either a known family relationship or a business interest might influence any
determination he must, as an employee, make public (in the manner provided by
regulations) such relationship or interest;
e. Subject to Article 39 protect the confidentiality of any tax or duty information, and
f. Not solicit or accept any bribe or perform any other improper act relating to the duty to
determine or collect any tax.

No employee of the Tax Authority shall act as a tax accountant or consultant or accept
employment from any person preparing tax declarations or giving tax advice. Generally,
tax revenues in our country Ethiopia is collected by both federal and regional governments.

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 4.2. Income Taxes

 Income tax of Ethiopia is based on the new Income Tax Proclamation No. 286/2002 and
Income Tax Regulation No.78/2002.

 Income is defined as every sort of economic benefit including non-recurring gains in cash or
in kind, from whatever source directed and in whatever form paid credited or received.

 As per this proclamation, income is classified for income tax purposes according to its nature
and source.

 The classifications into which the income falls are known as Schedules. The income tax
proclamation classified income in accordance with its nature in to four schedules as follows:

4.1.1 Schedule „A‟ Income: Employment Income/personal income tax

 Any remuneration paid by an employer to his employee in consideration of his services is

called salary. It includes the value of fringe benefits provided by the employer.

 Every person deriving income from employment is liable to pay tax on that income at the
rate specified in Schedule A-Article 11.
Tax Rate (Article-11):
The tax payable on income from employment shall be charged, levied and collected at the
following rates:

Schedule A

Employment income (per month) Birr Employment income tax Rate Deductions
0 600 0 (Exempted) Nil
601 1650 10 60
1651 3200 15 142.5
3201 5250 20 302.5
5251 7800 25 565
7801 10,900 30 955
Above 10,900 35 1500

Determination of Employment Income (Article-12):

1) Employment income shall include any payments or gains in cash or in kind received from
employment by an individual, including income from former employment or otherwise or from
prospective employment.
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2) The type of taxable fringe benefits and the manner of their assessment shall be determined
by Regulations to be issued by the Council of Ministers.

3) Income received in the form of wages does not include representation and other similar
expenditures (on social functions, guest accommodations, etc.)

Exempted Incomes (Article-13)

The following categories of income shall be exempt from payment of income tax hereunder:

(a). Income from casual employment: income from employment received by casual
employees who are not regularly employed provided that they do not work for more than one(1)
month for the same employer in any twelve(12) months period;

(b). Contribution of retirement benefits by employers: pension contribution, provident fund

and all forms of retirement benefits contributed by employers in an amount that does not exceed
15 % (fifteen percent) of the monthly salary of the employee;

(c). Reciprocity, income from employment: subject to reciprocity, income from employment,
received for services entered in the exercise of their duties by:
(i) Diplomatic and consular representatives, and

(ii) Other persons employed in any Embassy, Legation, Consulate or Mission of a foreign state
performing state affairs, who are national of that state and bearers of diplomatic passports or
who are in accordance with international usage or custom normally and usually exempted from
the payment of income tax.

(d) Specifically, exempted income: income specifically exempted from income tax by:
i. any law in Ethiopia, unless specifically amended or deleted by this
Proclamation;
ii. International treaty; or
iii. An agreement made or approved by the Minister.
(e) Exempted income by regulations: The Council of Ministers may by regulations exempt
any income recognized as such by this Proclamation for economic, administrative or social
reasons.
(f) Payments as compensation: payments made to a person as compensation or gratitude in
relation to:
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 (i) Personal injuries suffered by that person;

(ii) The death of another person.

4.2.2. Schedule „B‟ Income: Income from Rent of Buildings

Under the Schedule „B‟ the basis of charge is the rental income received from the property.
That is, Income tax shall be imposed on the income from rental of buildings. Every person
deriving income from rent of buildings is liable to pay tax on that income at the rate specified
in Schedule B-Article 15.
The tax payable on rented houses shall be charged, levied and collected at the following rates:

(a) if the lessor or owners are bodies , they pay thirty percent (30%) of taxable income,

(b) On income of persons according to the Schedule B (hereunder) Schedule –B

Schedule B
No Taxable income from rental of building Tax rate Deduction in birr
(Income per year)
Over Birr To Birr % Birr
1 0 1,800 Exempt threshold
2 1,801 7,800 10 180
3 7,801 16,800 15 570
4 16,801 28,200 20 1410
5 28,201 42,600 25 2820
6 42,601 60,000 30 4950
7 Over 60,000 ***** 35 7,950

Determination of Income Tax Rate (Article-16)

1) Income from rental of building shall be computed as follows:

(a) If the tax payer leased furnished quarters the amounts received attributable to the lease of
furniture and equipment shall be included in income.

(b) Sub-lessors shall pay the tax on the difference between income from sub-leasing and the
rent paid to the lessor, provided that the amount received from the sub-lessor is greater than the
amount payable to the lessor.

(c) The following amounts shall be deducted from income in computing taxable income:

(i) Taxes paid with respect to the land and buildings being leased; except income taxes; and

(ii) for taxpayers not maintaining books of account, one fifth (1/5) of the gross income received
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as rent for buildings furniture and equipment as an allowance for repairs, maintenance and
depreciation of such buildings, furniture and equipment;

(iii) for taxpayers maintaining books of account, the expenses incurred in earning, securing, and
maintaining rental income, to the extent that the expenses can be proven by the taxpayer and
subject to the limitations specified by this Proclamation, deductible expenses include (but are
not limited to) the cost of lease (rent) of land ,repairs , maintenance, and depreciation of
buildings, furniture and equipment in accordance with Article 23 of this Proclamation as well as
interest on bank loans, insurance premiums.

2) The owner of a building who allows a lessee to sub-lease is liable for the payment of the tax
for which the sub-lessor is liable, in the event the sub-lessor fails to pay.

3) At the earlier of the time construction of a rental building is completed or when the building is
rented, the owner and the builder are required to notify the administration of the kebele in
which the building is situated about such completion and the name, address, and tax
identification number of the person (or persons) subject to tax on income from rental of the
building. The Keble administration has the obligation to communicate this information or
information obtained by the administration‟s own initiative to the appropriate tax authority.
Example: Mr. X has a building that is available for rent in year 2012. The following are the
details of the property lease out

 He has let out for twelve months

 Actual rent for a month is birr 30,000

 He paid 15% of the actual rent received as land taxes and 3% as other taxes
 He spent birr 10,000 for maintenance of the building
Depreciation
Schedule
Type Year Original Cost Addition Total Cost

building 201 3,000,000.0 - 3,000,000.0

2 0 - 0
Equipment 201 150,000.0 - 150,000.0
2 0 - 0
Computer & accessory 201 100,000.0 60,000.0
- 160,000.0
2 0 0 0
Required: Compute the taxable rental income and tax liability assume
A. Mr. X does not maintain any books of accounts in this regard B.
Mr. X has maintained books of accounts
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Solution (A):
Annual rental income (birr 30,000*12 months) ---------------------------------------360,000
Less: allowable deductions
Land tax (lease) (15% of 360,000) -----54,000
Other taxes (3% of 360,000) ------------10,800
Maintenance (1/5 of 360,000) ----------72,000 (136,800)
Taxable rental income……………………………………………………………. 223,200
Tax liability = (Taxable income x Tax rate)- deduction
= Birr (223,200 x 35%)-18,000

= Birr 60,120

Solution (B): Depreciation Schedule

1. For building 300,000 x 0.05=15,000

2. For Equipment 15,000 x 0.20= 3,000
3. For computer 16,000 x 0.25 = 4,000

Annual rental income (birr 30,000*12 months) --------------------------------------- 360,000

Less: allowable deductions
Land tax (15% of 360,000) ----------54,000
Other taxes (3%of 360,000) ---------10,800
Maintenance ---------------------------10,000
Dep Expense Building----------------15,000
Dep Expense Equipment-------------3,000
Dep Expense computer---------------4,000----------------------------------------- (96,800)
Taxable rental income……………………….……………………………………... 263,200
Tax liability = (Taxable income* Tax rate) - Deduction
= (Birr 263,200 x 35%) - 18,000
= Birr 74,120
4.2.3. Schedule „C‟ Income: Business Income
Income Tax shall be imposed on the taxable business income realized from entrepreneurial
activity. Business means manufacture or purchase and sale of a commodity with a view to make
profit. It includes any trade, commerce or manufacture or any other adventure or concern in the
nature of entrepreneurial activity. It is not necessary that there should be a series of transactions
in a business and it should be carried on permanently. Neither repetition nor continuity of
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similar transactions is necessary. Profit of an isolated transaction is also taxable under this
Schedule, provided that it is a venture in the nature of business or trade. In this connection, it is
important that the intention of purchase or manufacture should be sell at a profit.

Taxable business income shall be determined per tax period on the basis of the profit and loss
account or income statement, which shall be drawn in compliance with the Generally Accepted
Accounting Standards, subject to the provisions of this Proclamation and the directives
issued by the Tax Authority.

Tax Rate
1) Taxable business income of bodies is taxable at the rate of 30 %.

2) Taxable business income of other taxpayers shall be taxed in accordance with the following
Schedule C.

Total Business Income (per year) Birr Business income Deductions

Tax
rate
0 7200 0 Nil
7201 19,800 10 720
19,801 38,400 15 1710
38,401 63,000 20 3630
63,001 93,600 25 6780
93,601 130,800 30 11,460
Above 130,800 35 18,000
1. Deductible and non-deductible expenses

Non-Deductible Expenses for business profit tax

1) The following expenses shall not be deductible:

(a) The cost of the acquisition, improvement, renewal and reconstruction of business assets that
are depreciated pursuant to Article 23 of this Proclamation;

(b) An increase of the share of capital of a company or the basic capital of a registered
partnership;

(c) Voluntary pension or provident fund contributions over and above 15% of the monthly
salary of the employee.
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(d) Declared dividends and paid-out profit shares;

(e) Interest in excess of the rate used between the National Bank of Ethiopia and the commercial
banks increased by two (2) percentage points.

(f) Damages covered by insurance policy;

(g) Punitive damages and penalties;

(h) The creation or increase of reserves, provisions and other special-purpose funds unless
otherwise allowed by this Proclamation;

(i) Income Tax paid on Schedule C income and recoverable Value-Added Tax;

(j) Representation expenses over and above 10% of the salary of the employee;

(k) Personal consumption expenses;

(l) Expenditures exceeding the limits set forth by this Proclamation or regulations issued
hereunder.

(m) Entertainment expenses;

(n) Donation or gift.

2. Notwithstanding the provisions of Sub-Article (1) (n) of this article, the Council of Ministers
may by Regulations allow donations or gifts provided for public use to be deducted.

3. Interest paid to shareholders on loans and advances shall not be deductible to the extent that
the loan or advances in respect of which the interest paid exceeds on average during the tax
period four times the amount of the share capital. This sub-

Article does not apply to banks and insurance companies.

4. In the case of bodies other than companies, Sub-article (3) above shall apply as if for the
reference to share capital there were substituted a reference to basic capital.
Deductible expenses of business profit tax
1. Operating expenses
In the determination of business income subject to tax in Ethiopia, deductions shall be allowed
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 for expenses incurred for the purpose of earning, securing, and maintaining that business
income to the extent that the expenses can be proven by the taxpayer and subject to the
limitations specified by this Proclamation.
2. Assets eligible for Depreciation
Assets eligible for Depreciation are (i) Building, Plant and machinery (iii) Furniture.
1) In the determination of taxable business income, the owner of the business assets may deduct
depreciation for business assets.

2) Fine art, antiques, jewellery, trading stock and other business assets not subject to wear and
tear and obsolescence shall not be depreciated.

3) The acquisition or construction cost, and the cost of improvement, renewal and
reconstruction, of buildings and constructions shall be depreciated individually on a straight-
line basis at five per cent (5%).

4) The acquisition or construction cost, and the cost of improvement, renewal and
reconstruction, of intangible assets shall be depreciated individually on a straight-line basis at
ten percent (10%)

5) The following two categories of business assets shall be depreciated according to a pooling
system at the following rates:

(a) Computers, information systems, software products and data storage equipment: twenty-
five (25%).

(b) All other business assets: twenty percent (20%).

6) In each category as referred to in Sub-Article (5), the rate of depreciation specified in that
Sub-Article shall be applied to the depreciation base of the category.

7) The depreciation base shall be the book value of the category as recorded in the opening
balance sheet of the tax period:

(a) Increased by the cost of assets acquired or created and the cost of improvement, renewal
and reconstruction of assets in the category during the tax period.

(b) Decreased by the sales price of assets disposed of and the compensation received for the
loss of assets due to natural calamities or other involuntary conversion during the tax period.

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 8) If the depreciation base does not exceed Birr 1,000 the entire depreciation base shall be a
deductible business expense.

9) If a revaluation of business assets takes place, no depreciation shall be allowed for the
amount of the revaluation.

10) In determination of taxable business income a deduction is permitted in respect to each

category of business assets for the maintenance and improvement expenses of business assets
belonging to that category for the actual amount of then expenses, but not in excess of twenty
percent (20%) of the depreciation base of the category at the end of the year. Any actual
expenses exceeding this twenty percent (20 %) shall increase the depreciation base of that
category.
3. Transfer of Business Assets (Article-24)
i. When assets used in a business are sold, exchanged, or otherwise transferred, gain or loss is
recognized on the transfer.
ii. Transfers of business assets among companies which are parties to reorganization are not
treated as a disposal of the property.
iii. The value of business assets held by a company or companies which are parties to a
reorganization is the same as the value of such assets immediately before the reorganization.
Similarly, the balance value of any depreciation categories shall be carried over.
iv. „reorganization” means:
a) a merger of two or more resident companies;
b) the acquisition or takeover of fifty percent (50%) or more of the voting shares and fifty
percent (50%) or more of all other shares by value of a resident company solely in
exchange for shares of a party to the reorganization;
c) the acquisition of fifty percent (50%) or more of the assets of a resident company by
another resident company solely in exchange for voting participations with no preferential
rights as to dividends of a party to the reorganization;
d) A division of a resident company into or more resident companies; or

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4. Bad Debts (Article 25):

In the determination of taxable business income, a deduction shall be allowed for a bad debt
if the following conditions are met:

a) An amount corresponding to this debt was previously included in the

income;
b) The debt is written off in the books of the taxpayer;
and c) Any legal action to collect the debt is not
recoverable.
5. Special Reserves for Finance Institutions (Article 26):

In the determination of taxable business income of finance institutions, a deduction shall be

allowed for special (technical) reserves in accordance with the directives issued by the
National Bank of Ethiopia; the business income, however, shall be increased by amounts
drawn from such reserves.

Example 1; Melat enterprise, unincorporated business has reported earnings before tax of birr
80,000 at the tax year ended Sene 30,2012.

Required

A. Determine the amount of business income tax?

B. Record necessary journal entries?

Solutions:

Business income tax = (80,000 x 10%) -720

= 8,000-720

= 7,280

To record recognition of income tax expense;

Income tax expense ……………………7,280

Income tax payable ………………………. 7,280

To record payment of tax;

Income tax payable……………. 7,280

Cash …………………………………… 7,280

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 4.2.4. Schedule „D‟ Income: Other Incomes
Any income which is taxable under the Income Tax Proclamation but does not find place
under any of the remaining three Schedules of income (i.e., Schedules A, B and C) will be
taxable under this residuary Schedule “D” Other Incomes.

The following incomes shall be chargeable to income tax under the Schedule-D:

a. Royalties (Article- 31)

The term “royalty” means a payment of any kind received as a consideration for the use of ,or
the right to use, any copyright of literary, artistic or scientific work, including cinematography
films and films or tapes for radio or television broadcasting, any patent, trade work, design or
model, plan secret formula or process, or for the use or for the right to use of any industrial,
commercial or scientific equipment, or for information concerning industrial, commercial or
scientific experience. It is taxable as follows:

Rate of tax
Royalties shall be liable to tax at a flat rate of flat rate of 5%
1. The amount of tax shall be withheld and paid to the Tax Authority by the payer. That is the
withholding Agent who effects payment shall withhold the foregoing tax and account to the
Tax Authority within the time limit set out in this Proclamation.
2. Where the payer resides abroad and the recipient is a resident, the recipient shall pay tax on
the royalty income within the time limit set out in this Proclamation This tax is a final tax in
lieu of a net income tax.
b. Income from Rendering of Technical Services (Article- 32)

The term “technical service” means any kind of expert advice or technological service
rendered. All payments made in consideration of any kind of technical services rendered
outside Ethiopia to resident persons in any form shall be liable to tax under this Article- 32

Rate of tax: It is Taxable at a flat rate of 10%. The amount of tax shall be withheld and paid
to the Tax Authority by the payer

c. Income from Games of winning a Chance (Article- 33)

Every person deriving income from winning at games of chance (for example, lotteries, tom
bolas, and other similar activities) shall be subject to tax.

Rate of tax: It is Taxable at the rate of 15% except for winnings of less than 100 Birr.

a. The payer shall withhold or collect the tax and account to the Tax Authority in the manner

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 provided in Article 67.
b. This tax is a final tax in lieu of income tax.

d. Dividends (Article- 34)

Every person deriving income from dividends from a share company or withdrawals of profits
from a private limited company shall be subject to tax under Article 34.

Rate of tax: It is Taxable at the rate of 10%

1. The withholding Agent shall withhold or collect the tax and account to the Tax Authority.
2. This tax is a final tax in lieu of income tax.

e. Interest Income on Deposits (Article- 36)

As per Article 36, every person deriving income from interest on deposits shall pay tax.
Rate of tax: It is Taxable at the rate of 5%
1) The payer shall withhold the tax and account to the Tax Authority in the manner provided
in Article 67.
2) This tax is a final tax in lieu of income tax.

f. Gain on Transfer of Certain Investment Property (Article- 37)

Income Tax shall be payable on gains obtained from the transfer (sale or gift) of property
described in this Article at the following rates:
Rate of tax
a) building held for business, factory, office 15% (fifteen percent)
b) shares of companies 30% (thirty percent)
1) Gains obtained from the transfer of building held for residence shall be exempt.
2) The basis for computation of gains obtained from the transfer of properties described in this
Article shall be determined by Regulations to be issued by the Council of Ministers.
3) Any exchange of shares in a resident company which is a party to a reorganization – as
defined in Article 24(4) – in exchange for share in another resident company which is also a
party is not a disposal of the shares.

4) The value of the shares given in exchange under Sub-Article (4) shall be equal to the value
of the original shares.
5) Loss on the transfer of such property shall be recognized and be available to offset gain

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 subject to the following limitations:
(a) Loss on transfers under this Article may be used to offset gain on transfers under this Article,
but may not be used to offset any other income or gain.

Unused losses may be carried forward indefinitely.

(b) No loss shall be recognized on transfer to associates within the meaning of Article 2(4).

6) Any person authorized by law to accept, register or in any way approve the transfer of capital
assets shall not accept, register or approve the transfer before ascertaining that the payment of
the tax has been duly affected in accordance with this Article.
Unexpected profit tax: this type of profit may be obtained arbitrary rather than the effort of
the taxpayers and the tax rate will be specified based on the nature of the profit by the minister

Entertainment income tax: this type of tax is obtained from those foreign business firms that
render entertainment services like football, series film, and so on. The tax rate is 10% of the
taxable income.

4.2 Consumption Taxes

Taxes that are categorized under consumption taxes are VAT, TOT and Excise tax which
are discussed below
4.3.1. Value-Added Tax (VAT)

VAT is a tax on consumer expenditure. It is collected on business transactions and imports.

A taxable person can be an individual, firm, company, as long as such a person is required
to be registered for VAT.

Most business transactions involve supplies of goods or services. VAT is payable if they are:

 Supplies made in Ethiopia;

 Made by a taxable person;
 Made in the course or furtherance of a business;
 Are not specifically exempted or zero-rated.

The Value Added Tax would be levied at the rate of 15% of the value of:

Every taxable transaction by a registered person;

Every import of goods, other than an exempt import; and
Import of services.

A person who carries on taxable activity and is not registered is required to file an application
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for VAT registration with the Authority if:

 At the end of any period of 12 calendar months the person made , during that period, taxable
transactions the total value of which exceeded 500,000 Birr; or
 At the beginning of any period of 12 calendar months there are reasonable grounds to
expect that the total value of taxable transactions to be made by the person during that
period will exceed 500,000 Birr.

Registration procedure:
 A person applying to register for VAT is required to do so in such a form as is established
by the implementation directives issued by the Ministry of Revenue;
 When a person carrying out taxable transactions files an application to be registered for
VAT, the Authority is required to register the person in the VAT register, and to issue a
certificate of registration within 30 days of the registration;
 A person registered for VAT is required to use his taxpayer identification number on all
VAT invoices, and on all tax returns and official communications with the Authority.

There is a VAT invoice prepared by the Ministry of Revenue containing the following
information:
o Full name of the registered person and the purchaser, and the registered;
o Person‟s trade name, if different from the legal name;
o Taxpayer identification number of the registered person and the purchaser;
o Number and date of the VAT registration certificate;
o Name of the goods shipped or services rendered;
o Amount of the taxable transaction;
o Amount of the excise on excisable goods;
o Sum of the VAT due on the given taxable transaction;
o Issue date if the VAT invoice, and
o Serial number of the VAT invoice.

The registered person is required to issue the VAT invoice to the purchaser of goods or
services upon the supply or rendering, but not later than 5 days after the transaction.

Record Keeping Requirement

A registered person or any other person liable for VAT under the proclamation shall maintain
for 10 years in Ethiopia:

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 Original tax invoices received by the person;
Copy of all tax invoices issued by the person;
Customs documentation relating to imports and exports;
Accounting records; and
Any other records as may be prescribed by the Minister of Revenue by directive.

Administrative Penalties

The following penalties are imposed for violations of the VAT Proclamation:

 Where any person engages in taxable transactions without VAT registration where VAT
registration is required; 100% of the amount of tax payable for the entire period of
operation without VAT registration;
 Where any person issued incorrect tax invoice resulting in a decrease in the amount of
tax or increase in accredit or in the event of the failure to issue a tax invoice; 100% of the
amount of tax for the invoice or the transaction;
 Where a person who is not registered for VAT issues a tax invoice ; a penalty of 100% of
the tax which is indicated in the tax invoice and is due for transfer to the budget but has
not been transferred; and

 Where a person fails to maintain records required; 2,000 Birr for each month or portion
thereof that the failure continues.

A person who fails to file a timely return is liable for a penalty equal to 5% of the amount of
tax underpayment for each month (or portion thereof) during which the failure continues, up
to 25% of such amount. The penalty is limited to 50,000 Birr for the first month (of portion
thereof) in which no return is filed. 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. The interest is set at 25% over and above the highest commercial lending
interest rate that prevailed during the preceding quarter. The following types of supplies of
goods (other than by way of export) or rendering of services, as well as the following types of
imports of goods are exempt from payment of VAT:

 Sale, transfer or the lease of a used dwelling;

 Rendering of financial services;
 Supply/import of national/foreign currency and of securities;
 Import of gold to be transferred to the National Bank;
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 Rendering of religious organizations or church services;
 Import or supply of prescription drugs specified in directives issued by Minister of
health, rendering of medical services;
 Educational services provided by educational institutions, or child care services for
children at pre-school institutions;
 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 the
purpose of rehabilitation after natural disasters, industrial accidents, and catastrophes;
 Supply of electricity, kerosene, and water;
 Goods imported by the government, organizations, institutions or projects exempted
from duties and other import taxes to the extent provided by law or by agreement;
 Supplies by the post office authorized under the Ethiopian Postal Services Proclamation,
other than services rendered for a fee or commission;
 Provision of transport; Permits and license fees;
 Supply of goods or services by a workshop employing disabled individuals if more than
60 % of staff are disabled;
 Import or supply of books and other printed materials.
Example: Assume you bought a product that has original cost (price purchase from supplier)
Br. 10,000;
Required: Calculate the VAT amount and Net price of the product.
Solution:
Tax amount (liability) = (Original Cost x VAT rate)/100
= (10,000 x 15)/100 = Br. 1,500
Net price = Original Cost + tax Amount
= 10,000 + 1,500 = Br. 11,500.

4.3.2. Turnover Tax

The Turnover Tax would be payable on goods sold and services rendered by persons not
registered for Value Added Tax. The rate of Turnover Tax is

o 2% on goods sold locally;

o for services rendered locally: 2% on contractors, grain mills, tractors and combine-
harvesters; 10% on others.
The base of computation of the Turnover Tax is the gross receipts in respect of goods supplied
or services rendered. A person who sells goods and services has the obligation to collect the
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Turnover Tax from the buyer and transfer it to the Tax Authority. Hence, the seller is
principally accountable for the payment of the tax. In accordance with the Turnover

Tax Proclamation No. 979/2016, the following would be exempted:

Sale or transfer of dwelling used for a minimum of two years, or the lease of a dwelling;
Rendering of financial services;
Supply of national or foreign currency and of securities;
Rendering by religious organizations of religious or other related services;
Supply of prescription drugs specified in directives issued by the relevant government
agency, and the rendering of medical services;
Rendering of educational services provided by educational institutions;
Supply of goods and rendering of services in the form of humanitarian aid;
Supply of electricity, kerosene and water;
Provision of transport;
Permits and license fees;
Supply of goods or services by a workshop employing disabled individuals (if more than
60% of the employees are disabled);
Supply of books.

Assessment of the Tax

 If after review by the Tax Authority, it appears that a person has understated his tax
obligation, the Authority can issue an additional assessment;
 If, for any reason, the books of account are unacceptable to the Tax Authority, or if the
tax payer fails to submit same when requested by the Authority, or if no books of account
and supporting documents are maintained, the Tax Authority would assess the tax on the
basis of information available;
 A presumptive turnover tax would be payable by Category “C” tax payers who are not
required to keep records. The base for the presumptive turnover tax would be the total
turnover used as base for the income tax;
 The assessment made would be prepared in an assessment notification and be delivered to
the taxpayer;
 If the Authority makes an additional assessment and within 30 days of notice the person
assessed does not pay the additional assessment or appeal the assessment the person is in
default;
 If the Tax Authority fails to assess the tax and notify the taxpayer of the amount still due
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 within five years from the date of declaration and payment of the tax by the taxpayer the
tax so paid would be final and conclusive. In case where the taxpayer has not declared his
income or has submitted a fraudulent declaration, no time limit provided in any other law
shall bar the assessment of the tax by the Tax Authority.
4.3.3. Excise Tax
It is believed that this tax should be imposed on luxury goods and basic goods, which are
demand inelastic. It is also believed that imposing the tax on goods that are hazardous to health
and which are causes to social problems will reduce the consumption thereof.

Objectives of Levying Excise Duty

Excise duty is a duty levied on commodity produced with in the country for sale or consumption
within the country. The basic objectives of excise duties are given below:

1. Raising revenue for economic growth

2. Discouraging consumption of non-essential goods
3. Discouraging consumption of certain essential goods
4. Levy of duties where direct taxation is not possible
5. Curbing inflationary trends in the economy
6. Promotion of small scale industries
7. Proper allocation of scarce resources
8. Provide assistance to industries in distress
9. Encouragement of exports
10. Equitable distribution of income and wealth
11. Recouping losses arising from assistance and subsidies to specified industries.

The excise tax would be imposed on goods imported or either produced locally in accordance
with Excise Tax Proclamation No.1186/2020.

The base of computation of Excise Tax is the fair value of production for goods produced
locally and goods imported.
Obligations of the taxpayer:
 Maintaining books of accounts and supporting documents in accordance with proper
accounting principles and in a manner acceptable to the Tax Authority;
 Submit every 30 days to the Tax Authority, in a form which would be supplied by the
Authority, a declaration containing the necessary information for the proper collection

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 of the tax;
 Comply fully with the requirements of inspection of his premises by the delegates of
the Tax Authority;
 Immediately communicate to the Tax Authority the type and address as well as the
commencement and termination date of his business;
 Pay in full the tax due within 30 days from the date of termination where such business
is terminated.
4.4. Stamp Duty

The following instruments shall be chargeable with stamp duty:

 Memorandum and articles of association of any business organization, cooperative or

any other form of association;

 Award; Bonds; Warehouse bond;

 Contract and agreements and memoranda;
 Security deeds;
 Collective agreement;
 Contract of employment;
 Lease, including sub-lease and transfer of similar rights;
 Notarial acts;
 Power of attorney;
 Documents of title to property.

Time and Manner of Payment1) The stamp duty would be paid:

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(attorney) 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 Birr 50 would be effected by affixing stamp of appropriate value to the

instrument;
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 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.

Tax rate

S.no Instruments chargeable Basis of Rates of Stamp

. with stamp duty Valuatio Duty
1 Memorandum and articles of association of n
any business organizations, or any
association: Flat Br.350
upon 1st execution Flat Br.100
2 upon any
Memorandum andsubsequent
articles ofexecution
association of
cooperatives:
 upon 1st execution Flat Br.35
 upon any subsequent execution Flat Br.10
3 Award On value 
determinable
value;
1%
4 Bonds On value 
1%un
5 Contracts and agreements and Flat Br determinable
5
Memoranda value; Br 35
6 Security deeds On value 1
7 Collective agreement:
 on 1st execution Flat Br. 350
 on any subsequent execution Flat Br. 100
8 Contract of employment Salary 1%
9 Lease including sub-lease and On value 0.5 %
transfer thereof
10 Notarial act Flat Br 5
11 Power of attorney Flat Br 35
12 Register title to property On value 2%

Penalty
Any person
 Executing or signing, otherwise than as a witness, a document chargeable with stamp duty
without the same being stamped,
 Who, with intent to defraud the appropriate payment of duty, conceals facts bearing on the
true nature of any instrument, shall be liable on conviction to a fine not less than Birr 25,000
and not exceeding Birr 35,000 and to rigorous imprisonment for a term not less than 10
years and not more than 15 years.
 Any person who: Appointed to sell stamps or stamped papers, disobeys regulations issued
under this proclamation; or

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 Not so appointed, sells or offers for sale stamps or stamped papers; shall be liable on
conviction to a fine not less than Birr 5,000 and not exceeding Birr 20,000 and to rigorous
imprisonment for a term not less than 5 years and not more than 10 years.
Exemptions
 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.
4.5. Custom Duties (Import and Export taxes)

Customs taxes, also known as tariff duties, are classified into import duties and export duties.
Import duties are imposed on imported articles and are collected from the importers at the time
foreign goods enter the country. Import duties may be levied to

(a) discourage the import of particular commodities which compete with locally produced
goods - such import duties are called protective duties; and
(b) to raise revenue for the Government - known as revenue duties.
But it should be remembered that even protective duties will bring in revenue for the
Government. The protective tariff duty will generally be at a high rate so as to impose a price
disadvantage upon the imported goods.
4.6. Categories of Taxpayers

Taxpayers are classified into the following three major categories:

1) Category “A “Taxpayers
2) Category “B” Taxpayers
3) Category “C” Taxpayers
1. Category “A “Taxpayers
This category of taxpayers includes:
a) Any company incorporated under the laws of Ethiopia or in a foreign country;

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b) Any other business having an annual turnover of Birr 1,000,000 or more.
Category “A “taxpayers are required to submit to the Tax Authority, at the end of the year, a
balance sheet and a profit and loss statement and the following details:
a) Gross profit and the manner in which it is computed;
b) General and administrative expense;
c) Depreciation expense; and

d) Provisions and reserves.

In addition, these taxpayers should register with the Tax Authority the type and quantity of
vouchers they use before having such vouchers printed.

Any printing press before printing vouchers of taxpayers shall ensure that the type and quantity
of such vouchers is registered with the Tax Authority. Note

(1) the tax declaration period for category „‟A‟‟ taxpayers are after 4 months of the end of the
fiscal period; i.e., up to Tikmet 30.

(2) The amount tax will be assessed based on books of accounts.

2. Category “B” taxpayers

Unless already classified in category “A”, any business having an annual turnover of over Birr
500, 000 and less than Birr 1,000,000 would be classified under Category “B” taxpayers. This
category of taxpayers should submit to the Tax Authority only profit and loss statement at the
end of the year.
Note: (1) the tax declaration period for category „‟B‟‟ taxpayers is after 2 months of the end of
the fiscal period; i.e., up to Pagume 5 or 6
(2) The amount tax will be assessed based on books of accounts.

3. Category “C” Taxpayers

Unless classified in Categories “A” and “B”, those businesses whose annual turnover is
estimated up to Birr 100, 000 are classified under this category of taxpayers.
Note: (1) the tax declaration period for category „‟C‟‟ taxpayers is after 1 month of the end of
the fiscal period; i.e., Hamle 30.
(2) The amount of tax will be assessed by estimation.

4.7 Tax penalty

Penalty for Late Filing or Non-Filing (Article-86): [ A taxpayer who fails to file a timely tax
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declaration is liable for a penalty equal to:

(a) 1,000 Birr for the first thirty (30) days (or part thereof) the declaration remains unfilled);

(b) 2,000 Birr for the next thirty (30) days (or part thereof) the declaration remains unfilled);

(c) 1,500 Birr for each thirty (30) days (or part thereof) thereafter that the declaration remains
unfilled.

Penalty for Understatement of Tax (Article-87)

1) If the amount of tax shown on a declaration understates the amount of tax required to be
shown, the taxpayer is liable for a penalty in the amount of 10% (ten per cent) of the
understatement or 50% (fifty per cent) if the understatement is considered substantial in
accordance with Sub-Article (2) of this Article).

2) The understatement is considered substantial if it exceeds the smaller of the following two
amounts:

(a) twenty-five percent (25%) of the tax required to be shown on the return; or
(b) 20,000 Birr.
3) The penalty shall continue to apply until, the Appeal Commission or a Court, as the case
may be, shall have rendered its final decision.

Penalty for Late Payment (Article-88)

A taxpayer who fails to pay tax liability on the due date is subject to:

(a) a penalty of 5% (five percent) of the amount of unpaid tax on the first day after the due date
has passed: and

(b) an additional 2% (two percent) of the amount of the tax that remains unpaid on the first day
of each month thereafter.

Penalty for Failure to keep Proper Records (Article-89)

1. The taxpayer shall be liable for a penalty of 20% of the tax assessed if he failed to keep
proper books of account, records, and other documents regarding a certain tax year.

2. If the Tax Authority finds that a taxpayer has failed for two consecutive tax year, to keep
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 proper books of account, records, and other documents:

(a) the licensing authority shall forthwith suspend the taxpayer‟s license on notification by the
Tax Authority;
(b) if in a subsequent year, the Tax Authority again finds that the taxpayer has failed to keep
proper books, records and documents, the licensing authority shall revoke the taxpayer‟s
license on notification by the Tax Authority;

(c) A finding by the Tax Authority that the taxpayer‟s failure justifies notification of the
licensing authority for purposes of suspension or revocation of the taxpayer‟s license shall for
all purposes of this Proclamation be treated as an assessment and notification may not be sent
to the licensing authority until the Tax Authority‟s finding is final.
Penalty for Failure to Withhold Tax (Article-90)
1) A withholding agent who fails to withhold tax in accordance with this Proclamation is
personally liable to pay to the Tax Authority the amount of tax which has not been withheld,
but the withholding agent is entitled to recover this amount from the payee.
2) The tax withholding liability imposed by this Proclamation shall be treated as a tax liability
for purposes of any Article providing taxpayers with the right to contest the amount of tax due
or to recover tax paid.
3) In addition to any amount for which a withholding agent is liable under Sub Article (1), an agent who
fails to withhold tax in accordance with this Proclamation shall be liable for a penalty of 1,000 Birr
for each instance of failure to withhold the proper amount.

4) A penalty of Birr 1,000 is imposed on the following individuals:

(a) a manager who knew or should have known of the failure described in Sub Article (1);

(b) a chief accountant or another senior officer who is responsible for supervision or control of
withholding procedures and who knew or should have known of the failure described in Sub-
Article (1), or whose improper supervision failed to prevent it.

Penalty for Failure to Meet TIN Requirements (Article-91)

Taxpayers failing to meet the requirements for TIN are subject to the following penalties:

1. a withholding agent who makes a payment to a person who has not supplied a TIN is required
to withhold thirty percent (30%) of the amount of the payment.

2. A taxpayer who has not supplied the TIN to the withholding agent, in addition to what is
stipulated under Sub-Article (1) of this Article is liable to pay a fine of 5,000 Birr or the amount
of the payment, whichever is less
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