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Ethiopia eyes new tax reforms to power its near trillion-birr budget for upcoming fiscal year

Finance Minister Ahmed Shide (Photo: HoPR/Facebook)

Addis Abeba – With the proposed federal budget nearing one trillion birr for the upcoming fiscal year, the government is preparing to introduce new tax categories and broaden the tax base with the goal of generating an additional 92.5 billion birr in tax revenue.

Days after the endorsement by the Council of Ministers, the budget proposal for the forthcoming fiscal year 2024/25 was presented to lawmakers on 11 June, 2024.

The proposed budget comes with hefty government spending amounting to 971 billion birr.

Of the total budget, 283 billion birr has been allocated for capital expenditure, 451.3 billion birr for recurrent spending, 222.7 billion birr to subsidize regional states, and 14 billion birr for the implementation of Sustainable Development Goal projects.

During his budget proposal presentation to lawmakers yesterday, Finance Minister Ahmed Shide detailed plans to raise the extra 92.5 billion birr needed.

These plans involve amending current value-added tax (VAT) and excise tax laws, as well as instituting new taxes like property and green levies.

The federal government aims to finance the substantial budget expenditure by collecting 502 billion birr in tax revenue.

In addition, it foresees obtaining 61.4 billion birr from non-tax avenues, such as capital income, and expects further income of 49 billion birr in the form of grants (external assistance).

The budget deficit, totaling 358.5 billion birr, is anticipated to be primarily covered through local borrowing (90%), with external loans filling the remainder.

Nevertheless, the government expects tax revenue to be the principal source of income, making up 51.7% of the total budget for the upcoming fiscal year.

Following deliberations on the draft budget proclamation, members of parliament referred the bill to the Planning, Budget, and Finance Standing Committee for further examination (Photo: HoPR)

During the presentation of the budget proposal to legislators yesterday, Minister Ahmed articulated the rationale behind the necessity of implementing these tax reforms.

He noted that government revenue has been adversely affected in recent years mainly due to conflict and instability, the destruction of industries, and the discontinuation of budgetary support from development partners, among other factors.

The Minister further highlighted a concerning trend: a growing mismatch between targeted tax collection and actual revenue generation.

As outlined in the budget documentation submitted to lawmakers, the federal government aimed to collect 440.2 billion birr in tax revenue in the current fiscal year. Within the initial nine months of the fiscal year, 71.2% of this target amount (equivalent to 313.9 billion birr) has already been collected.

Taking this into consideration, the Ministry of Finance projects that the total tax revenue collection for the year is anticipated to reach up to 92.5% of the yearly plan. Consequently, there remains an outstanding 33 billion birr from the designated tax revenue yet to be collected.

During the budget speech, Minister Ahmed also attributed the decline in federal tax revenue to the increasing share allocated to regions from the joint tax revenue.

According to the budget document, in the first nine months of the current fiscal year, the shared tax revenue collected by the federal government and transferred to the regions reached 54.3 billion birr. This represents a 26% increase compared to the same period in the previous fiscal year.

To rectify the obstacles, he proposed VAT amendments aimed at broadening the tax base by including previously untaxed goods and services. Notably, e-commerce activities are anticipated to fall under the scope of VAT collection.

Having secured the endorsement of the Council of Ministers, this draft bill has now been submitted to the House of Peoples’ Representatives for their consideration and final approval.

“We anticipate this bill to be enacted and take effect at the beginning of the coming year,” Minister Ahmed conveyed to lawmakers.

Furthermore, the government intends to revise the existing excise tax regulations. This revision is expected to involve adjustments to tax rates for specific products, such as alcohol.

In the upcoming fiscal year, a new tax called the green tax will be introduced. This specialized tax system will target vehicles with the dual goals of increasing tax revenue and reducing carbon emissions from vehicles.

Another tax scheduled for implementation in the upcoming fiscal year is the property tax, which seeks to standardize property taxation nationwide.

According to a decision by the House of Federation and the House of Peoples’ Representatives in January 2023, regional administrations and municipalities will be authorized to collect designated property taxes.

Nevertheless, some legislators have raised doubts about the viability of achieving the targeted tax revenue, especially with the introduction of new tax categories and the expansion of the tax base amid ongoing instability in different regions.

They stressed the importance of prioritizing the restoration of stability as a key step toward meeting this objective.

Other lawmakers expressed worries about the potential wastage of financial resources due to corruption and mismanagement. One member of parliament pointed out that enhanced revenue collection would be insufficient without “ensuring accountability and transparency in budget allocation.” AS

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