TAXATION OF SMEs IN ETHIOPIA

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TAXATION OF SMEs IN ETHIOPIA
Presentation Paper for ITD Conference Rwanda,
Kigali April 2009
Mr. Mamo Abdi Advisor of DG on Tax Affairs
Ethiopian Revenues Custom Authority
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Agendas

• Overview about Ethiopia
• Ethiopian Tax Reform And Its Impact on SMEs
• Taxation of SMEs in the country
• Government Intervention In SMEs
• Challenges associated with SMEs
• Measures to consider

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The Countrys Overview

• Ethiopia is a land locked country situated in the
  horn of Africa
• Eritra,Sudan,Kenya,Somalia,Djibuti bounders it
• With a population of 76.9 million occupying an
  area of 1.12 million sq km
• 85 of the population live on agriculture

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• Political Administration
• Federal structure of administration with three
  layers of government
• The central/Federal government
• Regional states-9 2 chartered cities,
• Local administrative centers-550 major districts
  6 sp. districts

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Constitutional Power of Regional States

• Regional states establish their own democratic
  government
• Each region has its apex regional council,
• The councils implement their mandate through an
  executive committee and regional sectoral
  bureaus.

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Ethiopian Tax System

• Each Reginal state has a power of taxation withen
  its own jurisdiction,
• Each State has its own outonomus tax
  administration
• The central government has one head quarter with
  17 tax centers in the country

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The Tax System

• Federal government administers and collects taxes
  from incorporated taxpayers , public enterprises
  and from centrally owned property
• Regional States administers and collect taxes
  from individual business and from regionally
  owned property
• Revenue sharing is in placed in the system of
  tax administration

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Major Types of Taxes

• Income tax
• Value Added Tax with single rate
• Turnover tax (2 for goods,10 for services
• Excise Tax (levied on 19 products)
• Agricultural income tax land use fee based on
  plot of land product yield.

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Category Of Taxpayers

• Taxpayers are categorized based on their annual
  turnover
• Class A gt USD 50000
• Class B gt USD 10000lt USD50000
• Class C lt USD 10000

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Position of SMEs in the Tax system

• The level of the economy determines the
  segmentation of business into SMEs
• In Ethiopia all businesses with annual turnover
  of less than USD 50000 are grouped into SMEs

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The position of registered SMEs in the Tax System
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92
Total taxpayer 459621 Large taxpayer38807
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Ethiopian Tax Reform And Its Impact on SMEs

• The basic components of Ethiopian Tax Reform
  Program
• Tax Policy and Legislation
• Presumptive Taxation
• VALUE ADDED TAX
• Tax Payer Identification Number (TIN) and
  automation
• Organization and Tax Payers' Education
• Operational Programs Systems, Procedures and
  manuals

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Tax Policy and Legislation

• The overhauling of the tax laws caused rapid
  growth in the number of SMEs in the country.
• The rise in the level of income over which tax
  is levied exempted quiet a number of SMEs from
  tax
• The laws avoided frequent filling requirements
  with regard to small and medium enterprises
  (C-class businesses)
• The decrease in tax rate enabled SMEs to be
  strong in saving and shift relatively to higher
  class

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Presumptive Taxation

• The implementation of standard assessment
  simplified the way to comply with the tax
  obligations with regard to SMEs
• Avoided a number of complicated procedures and
  made transparent method of levying tax liability

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VALUE ADDED TAX

• The introduction of VAT focused on large
  enterprises above a threshold of annual turnover
  USD 50000

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Organization and Tax Payers' Education

• The organizational reform of the tax
  administration provided opportunity to SMEs
• Avoid spending long time to settle tax liability
  only in one center
• file the tax centers close to their location
• Pay taxes to banks any time
• Obtain basic information through different mass
  medias

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Tax Payer Identification Number (TIN) and
automation

• SMEs benefited from automation of the tax system
• The availability of TIN that enabled good service
  delivery and avoidance of the archaic handling of
  taxpayer profile
• SMEs could take no long time to settle tax
  liability in the tax center, queues were avoided
  during filling time.

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Operational Programs Systems, Procedures and
manuals

• The reform of operational programs systems
  procedures and manuals provided opportunities to
  SMEs
• Obtain good service delivery
• Avoid excess bargaining with the tax Authority
• Meet easily the legal requirements

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Government Intervention Of SMEs

• The government focuses on the Development
  Strategy of National Micro and Small Businesses,
  because
• SMEs are mainly labor intensive, and thus absorb
  a large number work force,
• SMEs are established by small size capital,
• SMEs absorb both skilled and unskilled labor and
  reduces the increasing trend of unemployment,
• Utilize simple technology,

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Government Intervention

• Mainly utilize domestic raw materials,
• Females and youth enjoy employment opportunities
• Produces inputs for medium and large enterprises
• They play a vital economic role in the economy in
  general

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Governmental Intervention

• With this understanding, Federal and Regional
  governments
• Organize youths, women to engage in different
  business fields and provide training to start up
  with business
• Organize street vendors and supply areas for
  trade centers
• Enable specially organized SMEs take part in
  government contract of delivering services

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Governmental Intervention

• Enable them to easily obtain licenses and meet
  other legal requirements.
• Provide them with credit facility
• Facilitate market opportunity
• Promote cultural interest on labur

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Governmental Intervention

• Constant reduction of Tax Rate For SMEs
• The tax rate for corporate is 30
• The majority of SMEs pay taxes in presumptive
  scheme with the margin of 10-30 ,This is the
  latest reduced maximum tax rate declined from 76
  to 30 in Ethiopia

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The outcome of Gov- intervention

• A rapid increase of formal and informal SMEs in
  all spheres
• Reduced tax rate
• Increase the number of volunteer of SMEs entering
  the tax net
• 7 of SMEs come into the tax net annually

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Challenges

• Despite a number of support extended by the
  State, SMEs in the informal sector do not
• Voluntarily join the tax system
• Inadequate awareness program due to capacity
  constrain with regard to The tax Authority
• Limited capacity to have full access of
  enterprises and their transactions
• Few incentive mechanism and low degree of
  sustainability
• Poor focus on developing Tax culture from the
  grass root

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Measures to consider

• special focus on SMEs as they are the initial
  bases for any compliance and economic development
• Make any incentive mechanism to attract to come
  into the formal system
• Avoid relatively high tax rate and certain
  municipal imposition (charges and fees)
• Avoid any actions that causes compliance cost
• Wage sustained awareness program
• Provide training how to improve compliance and
  management of books of account with regard to tax
  laws and regulation

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• THANK YOU!