Newsletter 14 /Best Practices

It's recognized throughout the developing world, including Ethiopia, that economic development and effective partnership between government and the private sector are the key elements that will lead to reduction of poverty. While it is acknowledged that external financial assistance by donor agencies and countries is beneficial, economic development must be the main engine of growth and source of revenues to support the Government's vision.

Given the mobility of capital, governments are faced with the challenge of creating an enabling environment to encourage foreign and expanded local direct capital investment.

Although there are several factors that investors take into account in making decisions, the existence of modern tax system and administrations that are favorable to the business sector are becoming key considerations.

The government of Ethiopia in its effort to bring about rapid and sustainable economic development which is essential to meet the Millennium Development Goals (MDGs) has given due emphasis to increase tax revenue. Currently, in Ethiopia the ratio of tax revenue is about 13 percent, and revenue collected and public enterprise pay is 80 percent.

Archives indicate that the history of tax collection in Ethiopia dates back to over six decades, it was the Federal Inland Revenue Authority (FIRA) which was engaged in the business of collecting taxes.

Collecting tax also has a fair share in the history of Ethiopia for over the centuries, sometimes revolving around more powerful local chieftains at other times around a more organized central government.

A reference is made to that piece of legislation on establishing an indirect taxation on unit within the former Ministry of Finance in 1943.

Many agree that the history of modern taxation in Ethiopia began with the measure taken in the aftermath of war of liberation.

Despite the fact that various measures were taken for the taxation system to stand on its feet, until very recently its contribution to the national economy was minimal for three decades even after its institutionalization.

The tax authority was too weak to be up to its challenges owing to the limited man power and public awareness during the Imperial regime and teachings of tax accounting principles of a socialist economy under the Dergue. The tax authority failed to be a reliable partner in financing its annual budget. The government remained the largest tax payer and tax collector.

With the demise of the Dergue 15 years ago, the market economy prevailed and the government began to take a series of measures so that the taxation system could contribute to the overall socio-economic development of the country.

The government recognizing the need to overhaul the tax legislation and to strengthen the administration capacity of the Federal Inland Revenue Authority and the regional tax administrations, initiated the Revenue Sector Reform Programme as one of the key components of its National Capacity Building programme. The reform measures are designed to encourage local and direct foreign investment and to increase tax revenue.

During the restructuring of the Ethiopian Government in 2001/2002, the Revenue Board was upgraded to a Ministry of Revenue coordinating three institutions: the Federal Inland Revenue Authority /FIRA/, the Ethiopia Customs Authority the National Lottery Administration. This measure is considered as a step forward to transform the revenue collection system. The restructuring also indicates the commitment of the government to put its house in order.

After its restructuring the ministry has registered a remarkable growth. According to Yezina Worku, Public and International Relations Department Head with the Ministry, the Ministry has undergone reforms in its organizational structure to meet its indispensability for the economic development of Ethiopia.

Measures are also being taken under the Civil Service Reform Programme to improve service delivery, which include the provision of timely and accurate information on the application of overpayments, on the top of the success achieved in implementing checking and clearance of imported goods in a single day.

As regards the Tax Income proclamation that was enforced, 40 years back, with a view to overhaul the whole system, a new tax legislation has been introduced. For example, the Value Added Tax /VAT/ was introduced in 2003 to replace the Sales Tax. The VAT proclamation provides exemption for basic necessities and domestic transportation and zero-rating to encourage export and investment. Up until May 2006, 17,223 tax payers were registered for VAT. The enhanced functionality of this system includes the automatic computation of penalties and interest that apply to tax payers who fail to comply with VAT.

No.	Region/municipality	Number of pay	Percent	Category
1	Addis Ababa	11,258	65.37	1
2	Amhara	787	4.57	4
3	Oromia	2,702	15.69	2
4	Tigrie	624	3.96	3
5	Southern people nations and nationalities	1,199	6.96	3
6	Afar	39	0.23	10
7	Harare	121	0.70	8
8	DireDawa	271	1.57	6
9	Benishangule Gumuz	26	0.15	11
10	Gambela	43	0.25	9
11	Somali	153	0.89	11
	Total	17,223	100

Since the 1993 fiscal year, revenue from tax, customs and non -tax revenues have shown remarkable increment. In 1993 the revenue was 1782.23 million birr. However, in 2005 this has grown to 9,735.27 million birr. This implies that in the past 13 years the average revenue has grown by almost 16 percent.

The Ministry identifies tax payers and has introduced a dependable, Tax-payer Identification Number (TIN). The TIN system supports the Ministry's objectives of administering the tax law equitably and fairly and ensuring all taxpayers contribute their share of tax revenue.

Through the conduct of an extensive consultation on process with the stakeholders, comprehensive taxpayer education and information programs, and an effective tax payer registration programme, commendable progress has been registered over the past few years.

The government believes that tax levied on the tax payers is instrumental for the development of the nation. And so far encouraging result is registered in this regard. It would undoubtedly be important to keep the trend continue unabated.

However, international experiences show that it takes probably more than a century to have perfect, accurate, reliable and paper- based revenue system. In the past few years Ethiopia has started streamlining the taxation system with some success registered. As a self-reliant revenue collection and administration is crucial in achieving economic development, commitment to enhancing reforms in the sector is the only guarantee for success.