Tax perspectives

Yohannes Woldegebriel is the director of the Arbitration Institute at the Addis Ababa Chamber of Commerce and Sectoral Associations, a position he held since 2008. Prior to that, he also served at the Special Public Prosecutors Office since its establishment initially as Special Public Prosecutor and then as Assistant Chief Special Public Prosecutor. Later on, he also went on to serve at the Federal Ethics and Anti-Corruption Commission as coordinator of prosecutors and as head of the Legal Department and Customs Prosecutors at the Ethiopian Revenues and Customs Authority (ERCA). Yohannes is a law professional and holds LLB from Addis Ababa University (AAU). In due consideration to his experience working with the Ethiopian tax authority, Yohannes sat down with Asrat Seyoum of The Reporter to discuss issues that should be considered in any future amendment of the Ethiopian tax system and the relative tax burden that is born by the urban formal economic sectors and the potential areas for further expansion of the tax base in Ethiopia. His comments hereunder are purely on an individual capacity and that it has nothing to do with his current employer. Excerpts:              

The Reporter: To start off, in terms of overall power of taxation, is it the federal or regional government which has the largest tax base?

Yohannes Woldegebriel: When we assess the huge amount of taxes that are collected in the country, it is the federal government which has the largest tax base. It has a huge revenue source and the amount of tax and duties it collects largely goes to the federal treasury.

Regional states have the right to enact their own tax laws. What kind of tax laws are we talking about here?

Basically, there are limited instances of taxing power given to the states under the constitution. Within that limited territory the states are empowered to levy and collect taxes. But the principles of taxation would have to be in par with the principles of taxation that are applied in the whole country. There should be no room for any disparity or inconsistency with the principle of taxation we have at the federal government. Obviously, states have taxing power and that power is stipulated under the constitution.

Do you think the states are exercising the taxing power the constitution affords them?

I would say so. I mean, states are exercising their power to tax citizens and entities that are located within their territory. Their taxing power could be limited to a certain municipality area or territory.

How do you evaluate the capacity of properly collecting tax by the regional tax bureaus?

Data that I have seen indicate that the power of regional states to generate and collect taxes is not as huge as you may expect. My information regarding tax collection in regions and the amount of contribution these taxes have for the normal functioning of the states is not sufficient. They would have to always take the budget allocation from the federal government to such an extent that some of them are even unable to finance the running of the government bureaucracy. This is with the exception of the Addis Ababa City Administration which has been, I can say, self-sufficient in this regard. Regional states are not in a position to cover all their expenses to run their government let alone to carry out the development activities from the taxes they collect. They always rely on budget allocations, support and subsidies from the federal government.

In terms of agriculture taxation, what are the major rural taxation categories in effect at the moment?

The Addis Ababa Chamber of Commerce and Sectoral Association through its private sector development hub conducted a study on the contribution of tax in Ethiopia. That study has revealed a number of interesting findings. The research has demystified the blanket description regarding the tax contribution of various sectors in the country. This study utilized the documentations and the data that we collected from government offices and tried to analyze the facts. It attempted to aggregate the entire tax the country has and it also disaggregated the revenue the country collects from tax. The study tried to distinguish between different sectors as to their contribution to the national economy. In so doing, the research conducted clearly separated the agriculture sector from non-agricultural sectors. Accordingly, by disaggregating the revenue generated by the various sectors it has come to some sort of conclusion which has not often been disclosed by the public authorities whenever the contribution of tax is discussed. The study has disclosed a dramatic decline of the agricultural sector contribution to the national revenue in terms of tax. The agricultural sector’s burden of tax contribution has shown a dramatic decline particularly from 2004/05 fiscal year down to 0.1 percent. Ironically, this sector used to contribute close to nine percent of the country’s tax revenue during the previous regime. It came down from nine percent to five percent in 1998/99. It continued its dramatic decline and in 2007/08 it was only 0.1 percent. On the contrary, the non-agricultural sectors have shown an increase from 15 percent in 1998/99 to around 22 percent in 2003/04. The combined contribution of the industrial and service sector has reached around 22 percent on average in 2007/08 fiscal year. So, from this study it is interesting to see that despite the supposed growth of the agricultural sector and the multiplication of the so called millionaires of development patriots and the government allegation that the service sector, in particular, is not making a meaningful contribution to the tax revenue of the national economy, the fact is that this sector, together with the industrial sector, is the biggest contributor for the country’s tax revenue. I have heard that quite a number of officials always assert that the tax contribution of the country is less than ten percent and much lower than Sub-Saharan countries. This is a very deceptive statement since it does not make a distinction between the various sectors that are making tax contribution to the country. The technique we applied here in the chamber is that we relied on all government data and rather than making an aggregate figure of the entire tax contribution, we disaggregated the contribution of each sector for tax revenue of the country. This technique has helped us to determine which sector does and does not make a meaningful contribution to the country’s tax revenue. We have come to conclude that the agricultural sector is not making a meaningful contribution as it is expected or as has been proclaimed by various media and public officials.

The contribution of agriculture to the country’s tax revenue has always been low. Now you are saying that it has dramatically declined even further. But in terms of tax laws, do you see a significant change from the previous regimes?

I do not think there has been a change in the tax amount paid by this sector. I do not think there has been any significant change in the tax structure introduced. As far as taxes on agricultural sector are concerned it is the same. And there has not been any discouraging tax structure imposed on the sector. Rather, it is a sector which has been very much encouraged. But I would suspect, the government and regional states are not doing well to ensure a proper collection of taxes from people engaged in the agriculture sector. I do not think the government collects tax from the sector in the most ferocious manner as it does in the urban service sector. Under the constitution, it is the responsibility of the states to collect taxes from land use and agricultural income. Despite reports of growth in the sector, there has not been a proportionate increase in tax contribution. Rather, our study shows the opposite is the case.

The sector is making a very negligible contribution to the tax revenue of the nation. I would think that this sector would have to contribute much higher. The number of people engaged in the agricultural sector is higher than any other sector. It is said that it is more than 80 percent of the population. Considering the number of people engaged in agriculture and the supposed growth of the sector, I would assume its contribution to the country’s tax revenue would be much higher than the other sectors.

Leaving the agricultural sector aside, under the country’s tax law income below 150 birr is exempt from employment taxation. Over the past 50 plus years, the income exempt from taxation showed an increase of only 30 birr. What considerations are taken before setting the income exempt from income tax?

In any country there is a minimum threshold that lawmakers determine which category of taxpayers should have to pay tax. Likewise in Ethiopia, since the adoption of a modern income tax legislation there has been a minimum threshold set under the law. It is a question of fairness and equity. To encourage people at low income threshold work hard and jump into the upper category so that they would make tax contribution to their country. You do not oblige people to pay tax when they are not in a position to make that kind of payment.

Is it really all about fairness? Because the minimum threshold benefits every employee.

When the law sets that this minimum threshold, then it applies to all income earners, not just those who earn 150 birr or less. The logic applies to everybody. I would think this threshold is very small nowadays. In fact, the inflation in the country has already consumed the significance of exempting 150 birr. Today the minimum salary of government and private organizations has already exceeded this minimum threshold. It is very much unrealistic to exempt this much amount in the present day Ethiopia. There should be concrete and practical steps to be taken by the government to exempt a much higher amount than the current minimum threshold. I would, for instance, argue that even 500 birr is much lower if the government considers it as a minimum threshold for income tax exemption. I would say, 1,000 birr should be the minimum threshold.

We have been hearing that there is a draft tax amendment proclamation including the administration aspect. What would you like to see included?

Basically, tax law is a dynamic law. It should change quite often with changes in situations of the income structure of the country. It has been more than ten years since the current income tax was adopted. It was adopted in 2002. It is very salutary to hear that the government is seriously considering revising the current income tax proclamation. But I would say that it is too late for the government to make an overall change on the tax structure of the country. The amendment the government is planning to introduce would have to cover other areas of taxes. For instance provisions relating to tax complaint handling. The tax complaint and grievance procedures need to be properly revised.

Many say that the government has to widen its tax base. Where is that potential? Where can the government expand the tax base to?

In my opinion, the demand for revenue of the government is increasing, the development works of the government are expanding from time to time, and obviously the government needs to get huge amounts of money from internal sources. It has been claimed that people engaged in certain sectors are getting huge amount of income and that their lives are improving. So, if there is concrete evidence [to back it up] as we are told time and again by public officials and the media, then those people in that sector are capable and they should be under legal obligation to support the government endeavor in its economic activities. In this regard, we have always been hearing and, to some extent, witnessing the development in the agriculture sector, the government would have to properly collect taxes from this sector.

We are also aware that the government has been encouraging people in urban areas through the so-called small and micro enterprises and many of them are said to have transformed to become medium level enterprises. In conformity to the growth of these sectors, the government would have to make proper collection of taxes from those people. It is not enough to talk about growth and development of various sectors of the society. Whenever there is any news of growth and development, then the sectors would have to make meaningful contribution to the economy of the country in terms of payment of taxes. Obviously, our country is developing but this development should be supported by the tax contribution. We cannot simply ignore to collect taxes and then declare that these people are getting richer.

Some say that the government has been innovative when it comes to expanding the tax base in urban areas by introducing, for instance, VAT in 2003 adding the tax burden on urban dwellers. How do you evaluate the tax burden of the urban taxpayer vis-à-vis taxpayers in the rural setting?

I do believe that tax offices are focusing in urban areas where there is a very easy and convenient infrastructure to collect taxes. Particularly taxes on income from employment. You give the responsibility of collecting to the employer and the employer collects the money and you impose whatever punishment. So, it is very easy and convenient. At the same time it is very difficult to go down to the rural areas and assess, levy and collect taxes. It is very difficult and there are huge expenses. Despite the growth that we are hearing in the rural areas, I do not think this is supported by an efficient tax collection system. There is also some ideological policy bias. It is true that Ethiopia is an agrarian state and many people are engaged in agriculture. The sector should be supported and encouraged. We need to earmark so much resource for the sector so that it becomes very much productive. But that sector must also contribute to the effort of the nation. You do not take so much in terms of tax from the urban dwellers and inject to the rural areas. Taxes should be collected in terms of fairness and equality.

How about the burden of tax on urban dweller vis-à-vis the service provided to it?

The service that is provided to the urban dwellers and the tax burden that are imposed on the business community, in my opinion, is unmatched. We as urban dwellers require various kinds of municipal services. This cannot diminish the huge contribution the government has made in terms of expanding the light railway, road and other transport facilities and so on. But at the same time, on the basis of the tax we pay we need a clean city with a very good sanitation, we need public toilets, green environment, an efficient justice system and public service that works in a manner that responds to the demand of an urban dweller. I would say the tax burden that we have and the service that we are getting are unmatched.