Ethiopian tax system and Incme tax

The tax system in Ethiopia is not only meant to raise revenue for current expenditures but
also aims at directing economic agents to the development goals foreseen by the government
through the incentive schemes embedded within the prevailing tax laws. If the investments are of
high priority in-terms of the country‟ s overall development goals, then they are entitled to better
tax incentives like tax holidays and the vice versa if otherwise. By doing so the government can
direct the allocation of resources into areas of its priority.
Through the tax system, government can protect domestic industries from competing imported
goods through levying high tariff on the later. Taxation is also used for non-fiscal purposes such
as reducing the inequalities in income distribution; encouraging certain industries and
discouraging others depending on how useful and appropriate they are at that particular
economic stance. Hence, some of the specific purposes of taxation in Ethiopia can be
summarized as follows:
 Financing government activity
 Maintaining equity in the national economy
 Promoting efficiency where markets fail to control pollution or health dangers
 Social infrastructure
 Social services
Major Types of Taxes existing in Ethiopia
1.1 Direct Taxes
1.1.1 Tax on Income from Employment / Personal Income Tax
Every person deriving income from employment is liable to pay tax on that
income at the rate specified in Schedule ‘A’as follows:
Schedule ‘A’
Employment Income(per month) Tax Rate (in %) Deduction(in Birr)
over Birr to Birr
0 -150 Exempt threshold
151 -650 10% 15.00
651 -1 400 15% 47.50
1 401 -2 350 20% 117.50
2 351- 3 550 25% 235.00
3 551 -5 000 30% 412.50
over 5 000 35% 662.00
The following categories of income shall be exempt from payment of personal
income tax:
􏂷 Income from employment received by casual employees who are not regularly employed
provided that they do not work for more than one month for the same employer in any twelve
months;
􏂷 Pension contribution, provident fund and all forms of retirement benefits contributed by
employers in an amount that does not exceed 15% of the monthly salary of the employee;
􏂷 Subject to reciprocity, income from employment, received for services rendered in the
exercise of their duties by diplomatic and consular representatives, and other persons
employed in any Embassy and who are national of that state and bearers of diplomatic passports;
􏂷 Payments made to a person as compensation or a gratitude in relation to personal injuries
suffered by that person or death of another person;
􏂷 Amounts paid by employers to cover the actual cost of medical treatment of employees;
􏂷 Allowances in lieu of means of transportation granted to employees under contract of
employment;
􏂷 Hardship allowance;
􏂷 Amounts paid to employees in reimbursement of traveling expenses incurred on duty;
􏂷 Amounts of travelling expense paid to employees recruited from elsewhere than the place of
employment on joining and completion of employment or in case of foreigners travelling
expenses from or to their country, provided that such payments are made pursuant to specific
provisions of the contract;
􏂷 Allowance paid to members and secretaries of board of public enterprises and public bodies as
well as to members and secretaries of study groups set up by the Federal or Regional
Government;
􏂷 Income of persons employed for domestic duties.
1.1.2 Business Profit Tax
This is the tax imposed on the taxable business income / net profit realized from entrepreneurial
activity. Taxable business income would 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
generallyaccepted accounting standards. Corporate businesses are required to pay 30% flat rate
of business income tax. For unincorporated or individual businesses the business income tax
ranges from 10% - 35%.
Unincorporated or individual businesses are taxed in accordance with the following schedule
below:
Schedule ‘C’
Taxable Business Income / Net Profit per year Tax Rate (in %) Deduction (in Birr)
over Birr to Birr
0 1,800 Exempt threshold
1,801 7,800 10% 180.00
7, 801 16,800 15% 570.00
16, 801 28, 200 20% 1410.00
28, 201 42,600 25% 2520.00
42, 601 60,000 30% 4950.00
Over 60, 000 35% 7950.00
The following expenses shall be deductible from gross income in calculating
taxable income:
􏂷 The direct cost of producing the income, such as the direct cost of manufacturing, purchasing,
importation, selling and such other similar costs;
􏂷 General and administrative expenses connected with the business activity;
􏂷 Premiums payable on insurance directly connected with the business activity;
􏂷 Expenses incurred in connection with the promotion of the business inside and outside the
country, subject to the limits set by the directive issued by the Minister of Revenue;
􏂷 Commissions paid for services rendered to the business;
􏂷 Sums paid as salary, wages or other emoluments to the children of the proprietor or member
of the partnership shall only be allowed as deduction if such employees have the qualifications
required by the post.
The following categories of income would be exempted from payment of business income tax:
􏂷 Awards for adopted or suggested innovations and cost saving measures;
􏂷 Public awards for outstanding performance;
􏂷 Income specifically exempted from income tax by the law in force in Ethiopia, by
international treaty or by an agreement made. Penalty for understatement of tax:
􏂷 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% of the understatement or
50% if the understatement is considered substantial. The understatement is considered substantial
if it exceeds 25% of the tax required to be shown on the return or 20,000 Birr;
􏂷 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:
A taxpayer who fails to pay tax liability on the due date is subject to:
􏂷 A penalty of 5% of the amount of unpaid tax on the first day after the due date has passed; and
􏂷 An additional 2% of the amount of tax that remains unpaid on the first day of each month
thereafter.
1.1.3 Tax on Income from Rental of Buildings
This is the tax imposed on the income from rental of buildings. If the taxpayer leased furnished
quarters, the amounts received attributable to the lease of furniture and equipment would be
included in the income and taxed. The tax payable on rented houses would be charged at the
following rates:
􏂷 On income of bodies 30% of taxable income
􏂷 On income of persons according to the following schedule
next page:
Taxable Income from Rental of Buildings (per year) Income Tax Payable (in %) Deduction
(in Birr)
over Birr to Birr
0 1,800 Exempt threshold
1, 801 7, 801 10% 180.00
7, 801 16, 800 15% 570.00
16, 801 28, 200 20% 1410.00
28, 201 42, 600 25% 2820.00
42, 601 60, 000 30% 4950.00
over 60, 000 35% 7950.00
1.1.4 Tax on Interest Income on Deposits
Every person deriving income from interest on deposits shall pay tax at the rate of 5%. The
payers are required to withhold the tax and account to the Tax Authority.
1.1.5 Dividend Income Tax
Every person deriving income from dividends from a share company or withdrawals of profits
from a private limited company shall be subject to tax at the rate of 10%. The withholding agent
shall withhold or collect the tax and account to the Tax Authority.
1.1.6 Tax on Income from Royalties
‘Royalty income’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. Royalties income shall be liable to tax at a
flat rate of 5%. The withholding agent who effects payment shall withhold the foregoing tax and
account to the Tax Authority. 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.
1.1.7 Tax on Income from Games of Chance
Every person deriving income from winning of games of chance (e.g., lotteries, tombolas, and
other similar activities) shall be subject to tax at the rate of 15%, except for winning of less than
100 Birr. The payer shall withhold or collect the tax and account to the Tax Authority.
1.1.8 Tax on Gains of Transfer of Certain Investment Property
This is the tax payable on gains obtained from the transfer (sale or gift) of building held for
business, factory, office, and shares of companies. Such income is taxable at the following rates:
􏂷 Building held for business, factory, and office at the rate of 15%;
􏂷 Shares of companies at the rate of 30%.
Gains obtained from the transfer of building held for residence shall be exempted from tax
provided that such building is fully used for dwelling for two years prior to the date of transfer.
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 effected.
1.1.9 Tax on Income from Rental of Property
The taxable income under this category is income derived from casual rental of property
(including any land, building, or moveable asset) not related to a business activity. This type of
income is subject to tax at a flat rate of 15% of the annual gross income.
1.1.10 Rendering of Technical Services Outside Ethiopia
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 at a flat rate of 10% which shall be withheld
and paid to the Tax Authority by the payer. The term “technical service”means any kind of
expert advice or technological service rendered.
1.1.11 Agricultural Income Tax
According to Proclamation No. 152 of 1978 individual farmers and agricultural producer-
cooperatives earning up to Birr 600 per annum are required to pay 10 Birr. The tax rates on every
additional income vary from 10% to 89% for income above 600 Birr.
In line with the economic policy and structural set up of the Federal Democratic Republic of
Ethiopia, the former tax on income from agricultural activities and the land use rent was revised
in 1995. Since income tax from this source is allocated to Regional States in consonance with the
provisions of the new constitution of 1994, each Regional State is entitled to issue a
Proclamation providing for such a tax and rent.
Accordingly, the Oromia Regional State has promulgated Proclamation No. 8/1995 that revised
agricultural income tax rates schedule and rural land use fee. As for the payment of income tax
from agricultural activities other taxpayers, except state farms, shall pay at the following rate.
Agricultural Income Tax per Proclamation No. 8/1995, Oromiya
No. Annual Taxable Income Tax Rate
1 up to 1,200 Birr 15
2 1,201 - 5,000 5%
3 5,001 - 15,000 10%
4 15,001 - 30,000 20%
5 30,001 - 50,000 30%
6 over 50,000 40%
A state farm shall pay 40% of the taxable income it realizes from its agricultural activities.
Income from agricultural activities is said to be determined by estimating the price, in the area,
of the crop before harvest. If the crop is sold, the price declared shall be the basis for the
assessment of income.
1.1.12 Land Use Tax
According to Proclamation No. 77/1976 and No. 152 /1978 individual farmers, who are not
members of producer’s cooperatives, are required to pay a land use fee of Birr 10 per hectare per
annum. Whereas government agricultural organizations are paying 2 Birr per hectare per annum.
Presently regional states have their own land use rent systems. For instance, according to the
Proclamation No. 8/1995 of Oromiya, rural land held for agricultural activities is subject to land
use rent payment on annual basis. The annual land use rent payable by a farmer shall be Birr 10
for the first hectare and Birr 7.50 for each extra hectare of land. Meanwhile statefarming
enterprises shall pay Birr 15 for each hectare of their land holdings.
Land use rent is to be collected between the 1st of Hidar and the 30th of Miazia of the year.

1.2 Indirect Taxes

1.2.1 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
􏂷 2% on goods sold locally;
􏂷 for services rendered locally: o 2% on contractors, grain mills, tractors and combine-
harvesters; o 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 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. 308/2002, 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.
Notification of Changes
A registered taxpayer is required to notify the Tax Authority:
􏂷 Any change in the name, address, place of business, constitution, or nature of the principal
taxable activity or activities of the person;
􏂷 Any change of address from which, or name in which, a taxable activity is carried on by the
registered person, with in 21 days following such change.
Tax Evasion
A person who evades the declaration or payment of tax, commits an offence and in addition to
any penalty may be prosecuted and be subject to a term of imprisonment of not less than five (5)
years. 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 rate is set
at 25% over and above the highest commercial banks lending interest rate that prevailed during
the preceding quarter.
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 there of) during which the failure continues, up to 25%
of such amount. The penalty is limited to 50, 000 Birr for the first month in which no return is
filed
1.2.2 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.
Rate of Excise tax: The excise tax would be imposed on goods imported or either produced
locally in accordance with the following schedule, given in Excise Tax Proclamation No.
307/2002.
Goods to be liable to Excise Tax (produced locally or imported)
Ser. no. Type of Product Excise Tax Rate 40%-100%
Any type of sugar (in solid form) excluding molasses
Drinks: - Textile fabrics, knitted or woven of natural
- All types of soft drinks (except fruit juices) silk, rayon, nylon, wool or other similar
- Powder soft drinks materials
- Water bottled or canned in a factory - Textile of any type partly or wholly made
Alcoholic Drinks: from cotton, which is grey, white, dyed or
- All types of beer + stout printed, in pieces of any length or width
- All types of wine (except Mosquito net and Abudgedid)
- Whisky and including, blankets, bed-sheets,
- Other alcoholic drinks counterpanes, towels, table clothes and
3All types of pure alcohol similar articles
Tobacco + tobacco products - Garments
- Tobacco leaf Personal adornment made of gold, silver or
- Cigarettes, cigar, cigarillos, pipe tobacco, other materials
snuff and other tobacco products Dish washing machines of a kind for
Fuel-Super Benzene, Regular Benzene, domestic use
Petrol, Gasoline and other Motor Spirits Washing machines of a kind for domestic
30% purposes
Perfumes and toilet waters 100% Video decks
Textile and textile products Television and video cameras
Television broadcast receivers whether or caravans), whether assembled, together
not combined with gramophone, radio, or with their appropriate initial equipment:
sound receivers and reproducers Carpets
Motor passenger cars, StationWagons, Asbestos and asbestos products
utility cars, and Land Rovers, jeeps pickups, Clocks and watches
similar vehicles (including motorized Dolls and toys
The base of computation of Excise Tax is the cost of production for goods produced locally;
where as for goods imported the base of computation would be the cost of production, insurance
and freight costs.
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 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. Regarding goods imported the Tax Authority can sell such goods where the tax in
respect of them is not paid within six months from the day of deposit within the premises of
government warehouse, or in the case of perishable goods.
Notification of Change
Every taxpayer should notify the Tax Authority of:
􏂷 Any change in the name, address, place of business, constitution, or nature of the principal
taxable activity or the activities of the person;
􏂷 Any change of address from which, or name in which, a taxable activity is carried on by the
taxpayer, with in 5 days of the change occurring.
Tax Evasion
A person who evades the declaration or payment of tax, commits an offence and in addition to
any penalty may be prosecuted and be subject to a term of imprisonment of not less than five (5)
years. 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 rate is set at 25% over and above the highest commercial banks lending interest rate that
prevailed during the preceding quarter.
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 there of) during which the failure continues, up to 25%
of such amount. The penalty is limited to 50, 000 Birr for the first month in which no return is
filed.
1.2.3 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, Most business transactions involve supplies of goods
or services.
VAT is payable if they are:
􏂷 Supplies made in Ethiopia;
􏂷 Made by a taxable person;
􏂷 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 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:
􏂷 Full name of the registered person and the purchaser, and the registered;
􏂷 Person’s trade name, if different from the legal name;
􏂷 Taxpayer identification number of the registered person and the pur
􏂷 Name of the goods shipped or services rendered;
􏂷 Amount of the taxable transaction;
􏂷 Amount of the excise on excisable goods;
􏂷 Sum of the VAT due on the given taxable transaction;
􏂷 Issue date if the VAT invoice, and
􏂷 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:
􏂷 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.chaser;ompany, as long as such a person is required to be registered for VAT.
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;
􏂷 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.
1.2.4 Customs Duty
Any good imported or exported would be subject to:
􏂷 Payment of duties and taxes according to the tariff of Harmonized Commodity Description and coding
system;
􏂷 Payment of duties and taxes according to the preferential tariff rate where goods are imported from the
preferred country;
􏂷 Payment of duties and taxes at the rate in force on the day the declaration of the goods are presented to,
and accepted by the customs office.