Title: TAXATION OF SMEs IN ETHIOPIA
1TAXATION 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
2Agendas
- 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
3The 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
4- 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
5Constitutional 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.
6Ethiopian 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
7The 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
8Major 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.
9Category 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
10Position 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
11The position of registered SMEs in the Tax System
8
92
Total taxpayer 459621 Large taxpayer38807
12Ethiopian 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
13Tax 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
14Presumptive 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
15VALUE ADDED TAX
- The introduction of VAT focused on large
enterprises above a threshold of annual turnover
USD 50000
16Organization 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
17Tax 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.
18Operational 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
19Government 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,
20Government 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
21Governmental 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
22Governmental 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
23Governmental 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
24The 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
25Challenges
- 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
26Measures 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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