VAT, corporate tax stifles gov’t revenue

Sluggish performance in the direct and indirect tax categories, specifically the value added and corporate profit taxes, is said to have stifled the overall budget performance of the Ethiopia government during the current fiscal year.

According to the nine-month performance report, which was presented to the House of People’s Representatives on Tuesday, the tax collection activity was evaluated to be way below preceding years owing to a major shortfall in the VAT category in tune of 23 percent. Apart from that, turnover tax has also exhibited a 2.7 percent decline during the past nine months culminating in 2.2 percent decline in the overall indirect tax category.

The report presented by Abdulaziz Ahmed, Minister of Finance and Economic Cooperation (MoFEC), indicated that VAT on domestic products was observed to be unusually low during the nine-month period showing 23.4 percent decline or 2.5 billion birr reduction compared to the similar period last year. With three months remaining to the conclusion of the budget year, VAT on domestic products is barely 50 percent of the overall plan, the report said, signaling that it will be difficult to hit the target for the budget year. 

Turnover tax is much worse achieving only 43 percent of the target for the current fiscal year, the report stated. Also in the indirect tax category, excise tax on domestic products and tax on sells of stamp achieved only 59.3 percent and 50.2 percent of the goal set for the budget year.

On the other hand, the performance of the direct tax category stood at 71.9 percent. Overall, the tax authority collected net tax revenue of 91.4 billion birr during the period which will be used directly to finance budget spending that was endorsed for the fiscal year. This figure is less than 65 percent of the target set for the year, the report indicated. The budget spending for the year also stood at 65 percent of the overall target set for the fiscal year.

Nevertheless, on the backdrop of the shortfall in tax collection, Abdulaziz proposed yet again another ambitious budget for the upcoming fiscal year. According to the budget proposal tabled to the House this week, the federal government has proposed to spend around 274,373,200 billion birr during the fiscal year 20016/17. The draft budget is 13.7 percent or 50 billion higher than the current fiscal year budget.

According to the Minister, 68.8 billion birr is allotted for recurrent expenditure while 105.7 billon birr is slotted for capital spending. Similarly, 87.8 billion birr was reserved as subsidy for regional sates and 12 billion birr for Sustainable Development Goals (SDGs). Particularly, the document highlighted that the federal budget subsidy to regional governments will be distributed based on the newly approved regional budget subsidy formula that was recently approved by the House of Federation (HoF). According to the new formula, Oromia Regional State got the lion’s share of the regional subsidies, 28.5 billion birr, while Amhara and Southern regional states come in second and third with 20.4 billion and 17.6 billion birr. In terms of the support for SDGs, Oromia also tops the list 3.89 billion, Amhara close second with 2.7 billion and Southern third with 2.4 billion birr.    

According to the draft budget, the 274 billion spending is to be covered by the 214 billion birr revenue that would be mobilized during the fiscal year. Domestic sources remain the highest sources of revenue contributing some 198 billion birr of the overall 214.2 billion birr, document indicated. Furthermore, the domestic revenues will be carried by the domestic tax collection which is projected to be 170 billion in the budget year.

On the other hand, the non-tax category is projected to be 24 billion birr mainly relaying on revenue coming from dividend from Commercial Bank of Ethiopia, revenue from the National Bank of Ethiopia and privatizing state-owned enterprises.

Some 8.4 billion is targeted to be mobilized from more than dozens of international organization out of which the International Monetary Fund, International Cooperation for Injection and the World Bank will be the first top three financiers contributing 2.5 billion, 2.1 billion and 652 million birr respectively.

Similarly, a total of 5.5 billion birr worth grant assistance is expected from governments’ aid, in which Great Britain’s Department of Foreign Economic Cooperation and USAID, Canadian International Development Cooperation will contribute the first to financial aid amounting 1.932 billion, 1.911 billion and 373 million birr, respectively. Meanwhile, China is one of the least aid giving countries among these categories expected to pledge some 59.3 million birr.

All in all, the proposed budget is expected to run a deficit of 35 billion birr out of which two percent is expected to be financed through domestic borrowing, which Abdulaziz said will not be inflationary.