Tax Laws in Ethiopia

In Ethiopia there are two forms of tax. These are indirect and direct taxation.

Direct Tax in Ethiopia

In accordance with proclamation No 286/94 any individual whose permanent residence is in Ethiopian, needs to pay tax from the income he gets within Ethiopia or abroad. If the man isn’t a resident of Ethiopia his earnings that have its origin in Ethiopia also must pay tax. This is direct taxation, which someone pays from any income he receives.

  1. The one who has permanent home address; or
  2. If the person has a place in Ethiopia he often resides in; or
  3. If the person is an Ethiopian citizen but resides abroad for the purpose of councilor office, diplomatic or for some other similar purposes; and
  4. If the individual was present for 183 days in Ethiopia within 12 months eternally or other manner, the law regards him as an Ethiopian resident and imposes him a responsibility of paying tax against any income he receives.

According to Art 8 Proclamation No 286/94, there are particular kinds of income that are treated under direct taxation. These are:

  1. Income from Employment
  2. Income from lease of home
  3. Income from business( trade) actions
  4. And others

Under we can find some sources of income such as:

  • Income From Rent of Patent and Copyright
  • Income From Winning Lottery
  • Income From Share in Company Etc

Thus, any employed person needs to pay tax out of his salary based on table Some of the proclamation. Employers should deduct the right tax from the wages of the employees and should submit to the tax authority.

In precisely the exact same manner an income from lease of a house is treated under direct taxation. If the income is from authorized persons, the owner should pay 30 percent of the income if it’s from a person, it needs to be paid based on table B of the proclamation No 286/94.

Income tax will impose on taxable business income realized from entrepreneurial activity.

If the tax is from an individual it’ll be taxed according to table ‘c’ of proclamation 286/02:

  1. An income from an income that comes from rent of copyright will be liable to tax at a flat rate of 5%.
  2. Income from hindering technical services will be taxed at a flat rate of ten percent.
  3. Income from games (e.g. Lottery) shall be subjected to taxation at the rate of 15%.
  4. Any person who derives an income from dividends from a share company will be subject to taxation at the rate of 10%.
  5. Income from Lease of property (any land, building or movable asset) not related to a business activity shall be taxed on the yearly gross income at the rate of 15%.
  6. Every individual deriving income from interest on deposits will pay tax at the rate of 5 percent.

These are a few sources of income which ought to be treated under direct taxation. The execution of this tax proclamation will be the obligation of the tax authority.

Indirect Tax in Ethiopia

Indirect tax is a type of tax where the taxpayer collects it from the clients indirectly rather than from his own income. This implies, the tax money comes from the consumers. The taxpayer adds selling price on the product or service that he renders so that the clients may pay the tax . There are three types of indirect taxation:

  • Value Added Tax (VAT)
  • Turnover Tax; and
  • Excise Tax.

In accordance with Proclamation No 285/94 the following persons are bound to pay VAT are the registered payers or the Person Who should be registered for VAT:

  • Registered, according to Art 17, means one That voluntarily registered for VAT;
  • The Person Who should be enrolled is a person who carries on taxable activity and is not enrolled, if the individual:- in the end of any period of 12 calendar months created during this period, taxable transaction to the total value of which exceeded 500,000 birr; or
  • At the start of any period of 12 calendar months there are reasonable grounds to anticipate that the complete value of taxable transactions to be made by the person during this period will exceed 500,000 birr. The rate of VAT is always 15% of their income.

When we come to turn over tax these persons are liable for payment of TOT based on Art 3 of proclamation. No 308/95 for products and services that they market in Ethiopia for value added tax will pay turnover tax unless exempted under Article 7. The exemptions are as follows.

  • The transfer or sale of duelers employed for a minimum of two years, or the rental of a dueling;
  • The rendering of financial support;
  • The supply of foreign or national currency and of safety;
  • The rendering by religious organizations of spiritual or at her associated series;
  • The rendering by religious organizations of spiritual or at her associated series;
  • The source of prescription drugs specified in directives issued by the relevant government agency and the renderings of medical providers;
  • The rendering of instructional services provided by educational institutions, and child care providers for children at preschool association;
  • The Distribution of goods and rendering of services in the form of humanitarian aid
  • The source of electricity, kerosene and water;
  • The provision of transportation;
  • Permits and permit fees- the source of books; and
  • The supply of goods or services by an employee shop employing disabled individuals if more than 60 percent of the workers are disabled. The minister of finance and economic growth may, by directive, exempt other products and services so an income from each merchandise treated under turnover , if they’re sold within Ethiopia, shall be taxed by 2% and services rendered in Ethiopian like building, miles and tracker providers shall be taxed 2% for any other services that the tax will be 10%.

Obligations of Taxpayers in Ethiopia

Any citizen should pay his tax in time. This includes:

  • If He’s bound by law to have enrolled accounts he must do the same and
  • He must notify his earnings timely.
  • If the citizen is an employer that he should withhold the right amount tax from the employees and pay to the tax authority.
  • Every taxpayer, when requested by the tax authority, has an obligation:- to give information.
  • To submit documents and records.
  • If necessary to demonstrate the inventory record for the authority when requested.

Tax Penalties in Ethiopia

There are two kinds of penalties which entail if the individual does not comply with his duty of tax payment:

(1) Administrative penalty; and

(2) Criminal penalties.

The administrative penalty includes the sale or seizure of a tax payer’s property and pays the tax. The criminal punishment includes imprisonment and fines.

Financial services in Ethiopia: