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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. Agendas. Overview about Ethiopia Ethiopian Tax Reform And Its Impact on SMEs Taxation of SMEs in the country

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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 Country’s 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 ofTaxes

  • 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 > USD 50000

  • Class B > USD 10000< USD50000

  • Class C < 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

8%

92%

Total taxpayer 459621

Large taxpayer=38807


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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