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TAXATION OF SMEs IN ETHIOPIA

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Title: TAXATION OF SMEs IN ETHIOPIA


1
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
2
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

3
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

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

5
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.

6
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

7
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

8
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.

9
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

10
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

11
The position of registered SMEs in the Tax System
8
92
Total taxpayer 459621 Large taxpayer38807
12
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

13
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

14
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

15
VALUE ADDED TAX
  • The introduction of VAT focused on large
    enterprises above a threshold of annual turnover
    USD 50000

16
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

17
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.

18
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

19
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,

20
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

21
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

22
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

23
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

24
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

25
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

26
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

27
  • THANK YOU!
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