Network COLLEGE

ACCOUNTING AND FINANCE

LEVEL II

Unit of Competence: Develop Understanding of Taxation

Module Title: Develop Understanding of Taxation
LG Code: LSA ACF2 04 1221
TTLM Code: LSA ACF2 M09 0322

Introduction

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i. Descriptor
This TTLM Consists of unit describes regarding performance outcomes, skills and
knowledge required to correctly interpret and apply to understand the role of taxation
in the Ethiopian economy, including why and how tax is levied and collected, types of
taxes paid by business and individuals and its impact on investment choices.
Learning Outcomes:
At the end of this module trainees will be able to:
LO1.Identify and discuss the role of taxation in the Ethiopian economy
LO2.Identify and discuss direct tax
LO3.Identify and discuss indirecttax
LO4.Identify and discuss stamp duty tax
LO5.Manage tax liability
Identify and discuss the role of taxation in the
LO1 Ethiopian economy

Information Sheet – 1 The purpose of taxation

The purpose of taxation includes but is not limited to:
 financing government activity
 maintaining equity in the national economy
 promoting efficiency where markets fail to control pollution or health dangers
 social infrastructure
1.1THE WORD “TAX” DEFINED
The word tax can be defined meaningfully as any non-penal yet compulsory transfer of resources
from the private to the public sector, levied on the basis of predetermined criteria and without
receipt of a specific benefit of equal values, in order to accomplish some of a nation’s economic
and social objectives. To understand this definition consider several phrases in greater detail as
follows.
“Nonpenal”.
A tax should be distinguished from a criminal or civil penalty (or fine), at least in a crude way.
Nearly always, a penalty is devised solely to dissuade a person from engaging in some specific
act deemed detrimental to society. The major differences between a tax and a penalty are
i. The relative size of exaction demanded and

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 ii. The specific objective behind it.
The larger the exaction and the major restrictive the objective, the more likely that the exaction
should be classified as a penalty rather than a tax.
“Compulsory transfer of resources from the private to the public sector”
Since the definition specifies a compulsory transfer of resources, perhaps it is redundant to add
“from the private to the public sector”. Obviously no person or
group of persons acting privately can, in the absence of a legal debt, compelany other person to
transfer resources to him or her except under condition of duress.
This power of compulsion is restricted to the public sector that is to a sovereign government.
The phrase “from the private to the public sector” simply excludes the possibility of labeling as a
tax any intergovernmental transfer of funds. Thus, if the administrators of road use tax fund were
ordered by a higher governmental Authority to transfer funds to a general fund, the transfer
would not be a tax.
“Predetermined Criteria”
A tax may be distinguished from an outright confiscation of resources, because a tax is levied on
the basis of predetermined criteria and on a recurring basis. Predetermined criteria should make a
tax more equitable than confiscation. In free world countries, taxes must generally have a
socially acceptable result, since the government setting the tax criteria is itself subject to
expulsion without revolution Except during national crises, few countries have used outright
confiscation to achieve the nations nonmilitary objectives and no country has used it on a
recurring basis.
Information Sheet 1. 2 PRINCIPLE OF TAXATION
A tax system (that is, the set of all taxes) for achieving certain objectives chooses and adheres to
certain principles which are termed its characteristics. A good tax system therefore, is one of
which designed on the basis of an appropriate set of principles, such as equality and certainty.
Mostly, however, objectives of taxation conflict with each other and a compromise is
needed .therefore, usually economists select some important objectives and work out the
corresponding principles which the tax system should adhere to. The first set of such principles
was enunciated by Adam smith (which he called Cannons of Taxation)
Canons of Taxation
The four canons of taxation as prescribed by Adam Smith are the following:
(1) Canon of Equality

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 This canon proclaims that a good tax is that which is based on the principle of equality. In
other words subjects of every state ought to contribute towards the support of the
government, as nearly as possible, in proportion of their respective abilities, that is, in
proportion to the reserve which they respectively enjoy under the protection of the State.
It implies what the income which a person enjoys under the protection of the State,
should be taxed on the proportional rate of taxation. But modern economists do not agree
with Adam Smith. They advocate progressive taxation to observe the canon of equality.
In other words, they advocate progression should be the basis for imposing taxes.

(2) Canon of Certainty

This canon is meant to protect the tax payers from unnecessary harassment by the ‘tax officials’.
It implies that the tax-payer should be well informed about the time, amount and the method of
tax payment. According to Adam Smith, “the tax, which each individual is bound to pay, ought
to be certain and not arbitrary. The time of payment, the manner of payment, the quantity to be
paid, ought all to be clear and plain to the contributor and to every other person.” Adam Smith
was also of the view that the government must also be certain of the amount which it derives
from a particular tax. Thus this canon is equally important both for the individual and the state.
(3) Canon of Convenience
The third canon of Adam Smith is that of convenience. According to Adam Smith, “every tax
ought to be so levied at the time or in the manner in which it is most likely to be convenient for
the contributor to pay it.” In other words, taxes should be imposed in such a manner and at the
time which is most convenient for the tax-payer, i.e., the best time for the collection of land
revenue is the time of harvest. Similarly, taxes on rent of houses should be collected when it is
most convenient for the contributor to pay.
(4) Canon of Economy
The fourth canon is the canon of economy. This canon implies that the administrative cost of tax
collection should be minimum, i.e., the difference between the money, which comes out of the
pockets of people and that which is deposited in the public treasury, should be as small as
possible. Administrative cost of tax collection should be minimum because levying of a tax may
require a great number of officers, whose salaries may eat up the greater part of the produce of
the tax, and whose pre-requisites may impose another additional tax upon the people. Hence, the
administrative cost should be minimum.

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 In addition to the above four canons given by Adam smith, the following other canons
have been advanced by Basable and other economists
(5) Canon of Productivity
The canon of productivity advocated by Bastable implies that taxes should be productive. The
productivity of a tax may be observed in two ways. In the first place, a tax should yield a
satisfactory amount for the maintenance of a government. In other words, the tax should be such
that it procures a considerable amount of revenue for the expenditure of the government,
Secondly, the taxes should not obstruct and discourage production in the short as well as in the
long run.
(6) Canon of Elasticity
Bastable also laid stress on the principle of elasticity. The canon of elasticity implies that yields
of taxes should be increased or decreased according to the needs of the government. The
government may need funds to face natural calamities and other unforeseen contingencies. It
may need funds to finance a war or for development purposes. The government resources can be
raised quickly only when the system is elastic.
(7) Canon of Diversity
The canon of diversity put forward by Bastable implies that the tax system should be
diverse in nature. In other words, in a tax system, there should be all types of taxes so that
everyone may be called upon to contribute something towards the revenues of the state.
Thus, the governments should adopt multiple tax system.
(8) Canon of Simplicity
The canon of simplicity implies that a tax should easily be understood by the tax-payer,
i.e., its nature its aims, time, of payment, method and basis of estimation should be easily
followed by each tax-payer. In other words, the tax imposed on the tax-payers should be
so simple that they are able to guess easily the aim of its imposition and they are not
confronted with accounting, administrative or any other difficulties.
(9) Canon of Expediency
This canon implies that the possibilities of imposing a tax should be taken into account
from different angles, i.e. its reaction upon the tax- payers. Sometimes it is seen that tax
may be desirable and may be productive and may have most of the characteristics of a
good tax, yet the government may not find it expedient to impose it, for example,

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 progressive agricultural income tax, but it has not been imposed. So far in the manner it
should have been imposed
Information Sheet 1. 3 TAX OBJECTIVES
Initially, governments impose taxes for three basic purposes: to cover the cost of administration,
maintaining law and order in the country and for defense. But now government’s expenditure
pattern changed and gives service to the public more than these three basic purpose and it restore
social justice in the society by providing social services such as public health, employment,
pension, housing, sanitation and other public services. Therefore, governments need much
amount of revenue than before. To generate more revenue a government imposes taxes on
various types. In general objective of taxations are:
1. Raising revenue: to render various economic and social activities, a government needs
large amount of revenue and to meet this government imposes various types of taxes.
2. Removal of inequalities in income and wealth: government adopts progressive tax
system and stressed on canon of equality to remove inequalities in income and wealth of
the people.
3. Ensuring economic stability: taxation affects the general level of consumption and
production. Hence, it can be used as effective tool for achieving economic stability.
Governments use taxation to control inflation and deflation
4. Reduction in regional imbalances: If there is regional imbalance with in the country,
governments can use taxation to remove such imbalance by tax exemptions and tax
concessions to investors who made investment in under developed regions.
5. Capital accumulation
Tax concession or tax rebates given for savings or investment in provident funds, life
insurance, investment in shares and debentures lead to large amount of capital
accumulation, which is essential for the promotion of industrial development.
6. Creation of employment opportunities
Governments might minimize unemployment in the country by giving tax concession or
exemptions to small entrepreneurs and labor intensive industries.
7. Preventing harmful consumptions
Government can reduce harmful things on the society by levying heavy excise tax on
cigarettes, alcohols and other products, which worsen people’s health.
8. Beneficial diversion of resources

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 Governments impose heavy tax on non- essential and luxury goods to discourage
producers of such goods and give tax rate reduction or exemption on most essential
goods. This diverts produce’s attention and enables the country utilize to utilize the
limited resources for production of essential goods only.
9. Encouragement of exports
Governments enhance foreign exchange requirement through export-oriented strategy.
These provide a certain tax exemption for those exporters and encourage them with
arranging a free trade zones and by making a bilateral and multilateral agreement
10. Enhancement of standard of living
The government also increases the living standard of people by giving tax concessions to
certain essential goods.
Information Sheet 1. 4 Characteristics of a Good Tax System
(1) Tax is a Compulsory Contribution
A tax is a compulsory payment from the person to the Government without expectation of any
direct return. Every person has to pay direct as well as indirect taxes. As it is a compulsory
contribution, no one can refuse to pay a tax on the ground that he or she does not get any benefit
from certain public services the government provides.
(2) The Assessee will be required to pay Tax if is due from him
No one can be forced by any authority to pay tax, if it is not due from him. Suppose, if there is a
tax on liquor, the state can force an individual to pay the tax only when he drinks liquor. But, if
he does not drink liquor, he cannot be forced to pay the tax on liquor. Similarly, if an
individual’s income is below the exemption limit, he cannot be forced to pay tax on income. For
example individuals earning monthly salary below birr 150 can not be forced to pay tax on
income.
(3) Taxes are levied by the Government
No one has the right to impose taxes. Only the government has the right to impose taxes and to
collect tax proceeds from the people.

(4) Common Benefits to All

The tax, so collected by the Government, is spent for the common benefit of all the people. In
other words, when the government collects a tax, its proceeds are spent to extend common
benefits to all the people. The Government incurs expenditure on the defense of the country, on

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maintenance of law and order, provision of social services such as education, health etc. Such
benefits are given to all the people- whether they are tax-payers or non-taxpayers. These benefits
satisfy social wants. But the Government also spends on subsidies to satisfy merit wants of poor
people.
(5) No Direct Benefit
In the modern times, there is no direct relationship between the payment of tax and direct
benefits. In other words, there is absence of any benefit for taxes paid to the Governmental
authorities. The government compulsorily collects all types of taxes and does not give any direct
benefit to tax-payers for taxes paid. For example, when taxable income is earned by an
individual or a corporation, he or it simply pays the tax amount at the specified rate cannot
demand any benefit against such payment.
(6) Certain Taxes Levied for Specific Objectives
Though taxes are imposed for collecting revenue for the government to meet expenditure on
social wants and merit wants, certain taxes are imposed to achieve specific objectives. For
example, heavy taxes are imposed on luxury goods to reduce their consumption so that resources
are directed to the production of essential goods, such as cheaper variety of cloth, less costly
goods of mass consumption, etc. Thus, taxes are levied not only to earn revenue but also for
diversion of resources or saving foreign exchange. Certain taxes are imposed to reduce
inequalities of income and wealth.
(7) Attitude of the Tax-Payers
The attitude of the tax-payers is an important variable determining the contents of a good tax
system. It may be assumed that each tax-payer would like to be exempted from tax paying, while
he would not mind if other bears that burden. In any case, he would want his share to be within
the general level of tax burden being borne by others. In other words, it is essential that a good
tax system should appear equitable to the tax-payers. Similarly, overall burden of the tax system
is of equal importance. The attitudes of the tax-payers in this regard are influenced by a host of
other factors like the political situation such as war or peace, natural calamities like floods and
droughts, economic situations like prosperity or depression and so on.
(8) Good tax system should be in harmony with national objectives
A good tax system should run in harmony with important national objectives and if possible
should assist the society in achieving them. It should try to accommodate the attitude and
problems of tax-payers and should also take into consideration the goals of social and economic

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justice. It should also yield adequate revenue for the treasury and should be flexible enough to
move with the changing requirements of the State and the economy.
(9) Tax-system recognizes basic rights of tax-payers
A good tax system recognizes the basic rights of the tax-payers. The tax-payer is expected to pay
his taxes but not undergo harassment. In other words, the tax law should be simple in language
and the tax liability should be determined with certainty. The mode and timings of payment
should be convenient to the tax-payer. At the same time, a tax system should be equitable
between tax-payers. It should be progressive and burden of taxation should be equitable on all
the tax-payers.
Self Assessment Questions
1. What do you understand by the term tax? Define the term tax.
2. “The primary purpose of federal taxes may be significantly different from the primary
purpose of state or local taxes.” Discuss.
3. Is the price paid for postage more accurately classified as ‘price’/ beneficiary’s charge/ or
a “tax”? Explain your answer.
4. Mention the names of historical tax regimes in Ethiopia in the past 50 years?
5. Give the list of taxes that were charged during the Hailesellassie regime (1942-74 G.C)?
6. What are the powers and duties of the regional governments in transitional government
period?
7. Explain the sharing of revenue between the federal and regional governments during the
transitional period?
8. Explain about the sharing of revenue in the federal democratic republic of Ethiopia (1995
to date)
9. What do you understand by the term avoidance and evasion? Discuss.

LO2 Identify and discuss direct tax

 Ways that tax is collected includethrough regional and federal level taxes including:
 direct tax

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  Tax on Income from Employment / Personal Income Tax
 Business Profit Tax
 Tax on Income from Rental of Buildings
 Tax on Interest Income on Deposits
 Dividend Income Tax
 Tax on Income from Royalties
 Tax on Income from Games of Chance
 Tax on Gain of Transfer of certain Investment Property
 Tax on Income from Rental of Property
 Rendering of Technical Services outside Ethiopia
 Agricultural Income Tax
 Land Use Tax

Information Sheet – 2.1 Direct TAXES

Direct taxes are those taxes which are raid entirely by those persons on where they are imposed.
In other words, the immediate money burden is upon the person who pays the tax to the
authority. Direct taxes are those taxes which can not be shifted to others.
A direct tax is demanded from the very persons who, it is intended or desired, should pay it.
Thus if a tax is intended to be paid by the persons on whom it is a direct tax. Direct taxes as
those taxes which are based on the receipts of income. Thus income tax, tax on profits, capital
gains tax, property or wealth tax are direct
taxes. Those taxes which are levied immediately on the property and income of persons are
called direct taxes
Income Tax
Income tax is one of the taxes that is levied and collected by the federal government. This tax
Governed by income tax Proclamation No 286/2002.
Income tax is very important of direct tax. It is an important and most significant source of
revenue of the government. The government needs money to maintain law and order in the
country, safeguard the security of the country from foreign powers and promote the welfare of
the people. It is the foremost duty of the government to bring out welfare and development
programs which will bridge the gap between the rich and the poor. All this requites mobilization
of fund from various sources. These sources may be direct or indirect. Income tax being a direct

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tax is an important tool to achieve balanced socio economic growth by providing concessions
and incentives in income tax for various development purposes.
WHO IS LIABLE TO PAY INCOME TAX?
Every person whose taxable income for a month exceeds the minimum taxable limit is liable to
pay to the federal government income tax during the current month on the income of the
previous month at the rate in force.
WHAT IS INCOME TAX?
Income tax is a monthly tax levied in every month at the prescribed rates, on every person in
respect of his income for relevant previous month. The income is determined with reference to
the person’s residential status and the place of accrual or the receipt of income.
SCHEME OF TAXATION
Under the income tax proclamation, a person has to pay income tax on his income of a particular
month provided it exceeded a certain minimum limit prescribed in the proclamation. The total
income is computed on the basis of the residential status of the person.
3.3 SOURCE OF INCOME
Income taxable under this proclamation shall include, but not limited to:
A. income from employment
B. income from business activities
C. income derived by an entertainer, musician, or sports person from his personal activities
D. Income from entrepreneurial activities carried on by a non- resident through a permanent
establishment in Ethiopia.
E. Income from movable property attributable to a permanent establishment in Ethiopia.
F. Income from immovable property and appurtenances there to, income from livestock and
inventory in agriculture and forestry, right received from immovable property, is such
property is situated in Ethiopia.
G. Income from the alienation of property referred to in (E).
H. Dividends distributed by a resident company
I. Profit shares paid by a resident registered partnership.
J. Interest paid by national, a regional or local government or a resident of Ethiopia, or paid
by a non-resident through a permanent establishment that he maintains in Ethiopia.
K. Licence fees (including lease payments and royalties paid by a resident or paid by a non-
resident) through a permanent establishment that he maintains in Ethiopia.

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 Taxable income under direct taxes is categorized into different four schedules A,B,C and
D.
The above sources of income are grouped under the following four part of schedules:-

Information Sheet – 2.2 SCHEDULES OF INCOME

SCHEDULES OF INCOME
The proclamation provides for the taxation of income accordance with four schedules are as
follows:-
 Schedule ‘A’ income from employment
 Schedule ‘B’ income from rental buildings
 Schedule ‘C’ income from business
 Schedule ‘D’ income from other sources including:-
i. Royalties
ii. Income paid form services rendered outside of Ethiopia
iii. Income from games of chance
iv. Dividends
v. Income from casual rental of property
vi. Interest income
vii. specified non- business capital gains
Every person having income as defined above shall pay income tax in accordance with this
proclamation.
SCHEDULE ‘A’ INCOME: EMPLOYMENT INCOME
Any remuneration paid by an employer to his employee in consideration of his services is called
salary. It includes the values of fringe benefits provided by the employer. Any payment received
in cash or in kind in the source of employment by an individual is taxable. This provision is very
extensive and includes the following
 Salaries
 Allowances
 Bonus

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  Car benefits
 Housing benefits
Taxable income:- Every person driving income from employment is liable to pay tax on that
income at the rate specified in schedule A.
Tax rate:- The tax payable on income from employment shall be charged, levied and collected at
the following rates.
Schedule ‘A’
Employment income Tax rate (in %) Deduction
( Per month) (in Birr)
Over Birr To Birr
0 150 Exempt threshold __
151 650 10 15.00
651 1400 15 47.50
1401 2350 20 117.50
2351 3550 25 235.00
3551 5000 30 412.50
Over 5000 ∞ 35 662.50
According to the income tax proclamation, the employers have an obligation to which the tax
from each payment to an employee, and to pay to the tax authority the amount withheld during
each calander month. In applying the preceding, income attributable to the months of Nehassie
and pagumen shall be aggregated and treated as the income of one month.
Example
Ato Mulu received a salary of ETB 500.00 PM during the year January 2005. Compute the tax
liability and the amount received by him after the withholding of tax by the employer from his
salary.
Solution
Method 1
Given = 500.00 salary
= 150. 00 ____ free
500.00-150 =350.00x10% =35.00
Tax liability 35.00
Net Salary received Ato Mulu 500-35 = 465.00

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Method 2
Given = 500.00 salary
= (500x10) – 15.00
100
= 50 – 15= 35.00
Tax liability 35.00
Net salary received Ato Mulu = 500 -35= 465.00
EXEMPTED INCOMES
The following categories of income shall be exempt from payment of income tax hereunder
a. Income form casual employment:- Income from employment received by casual employees
who are not regularly employed provided that they do not work for more than one (1) month
for the same employer in any twelve
(12) Months period
b. Contribution or retirement benefits by employers:- Person contribution, provident fund
and all forms of retirement benefits contributed by employers in an amount that does not
exceed 15% of the monthly salary of the employee.
c. Reciprocity, Income from Employment:- Subject to reciprocity, income from employment,
received for services rendered in the exercise of their duties by
i. Diplomatic and consular representatives, and
ii. Other persons employed in any Embassy, legation, consular or mission of a foreign state
performing state affairs, who are national of that state and bearers of diplomatic passports or
who are in accordance with international usage or custom normally and usually exempted
from the payment of income tax.
d. Specifically Exempted Income:- Income specifically exempted from income tax by
i. Any law in Ethiopia, unless specifically amended or deleted by this proclamation
ii. International treaty or
e. Exempted Income by Regulations:- The council of ministers may be regulations exempt any
income recognized as such by this proclamation for economic administrative or social
reasons.

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f. Payments as Compensation:- Payments made to a person as compensation or a gratitude in
relation to
i. Personal injuries suffered by that person
ii. The death of another person.
The Obligations of the Employer in Relation to Employment Income
The following are the responsibilities of employer in relation to schedule “A” income, to
calculate income tax in accordance with the provisions and withheld tax unless the payment
made to the employee is tax exempt.
i. The obligations to withhold tax has priority overall other obligations to withhold
ii. The tax withheld by an employee is payable with in 30 days of the end of each
calander month.
iii. The payment shall be accompanied by a statement that shows details
iv. To issue a certificate to each employee for the amount of tax withheld
v. If an employer finds out that his employee has more than one employment income
and if he ascertains that the other employer have not aggregated said income, he shall
aggregate and withhold the tax there on
SCHEDULE ‘B’ INCOME: INCOME FROM RENT OF BUILDINGS
Taxable Income
Under the schedule ‘B’ the basis of charge is the rental income received from the property. That
is, income tax shall be imposed on the income from rental of
buildings. Every person deriving income from rent of buildings is liable to pay tax on that
income at the rate specified in schedule ‘B’.
Tax Rate:-
The tax payable on rented houses shall be charged, levied and collected at the following rates.
a. on income of badies thirty percent (30%) of taxable income
b. on income of persons according to the schedule ‘B’ her under
Schedule:- ‘B’

taxable Rental income from Tax Rate Deduction

Buildings (per year) (in %) (in Birr)

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 Over Birr To birr
0 1,800 Exempt threshold ___
1,801 7,800 10 180
7,801 16,800 15 570
16,801 28,200 20 1,410
28,201 42,600 25 2,820
42,601 60,000 30 4,950
Over 60,000 ∞ 35 7,950

DETERMINATION OF INCOME TAX RATE

1. Income form rental of building shall be computed as follows.
a. If the tax payer leased furnished quarters the amounts received attribute table to the lease of
furniture and equipment shall be included in income.
b. Sub-lessrs shall pay the tax on the difference between income from sub-leasing and the rent
paid to the lessor, provided that the amount received from the sub-lessor is greater than the
amount payable to the lessor.
c. The following amounts shall be deducted from income in computing taxable income
i. Taxes paid with respects to the land and buildings being leased; except income taxes and
ii. For taxpayers not maintaining books of account, one fifth(1/5) of the gross income received as
rent for buildings, furniture and equipment as an allowance for repairs, maintenance and
depreciation of such buildings, furniture and equipment.
iii. For taxpayers maintaining books of account, the express incurred in earning securing and
maintaining rental income, to the extent that the expenses can be proven by the taxpayer and
subject to the limitations specified by this proclamation deductible expenses include (but not
limited to) the cost of lease (rent) of land, repairs maintenance and depreciation of buildings,
furniture and equipment in accordance with proclamation as interest on banks loans,
insurance premiums.
2. The owner of a building who allows a lessee to sub-lease is liable for the payment of the tax
for which the sub-lessor is liable, in the event the sub-lessor failes to pay.
3. At the earlier of the time construction of a rental building is completed or when the building is
rented, the owner and the name, address, and tax identification number of the person(s)
subject to tax on income from rental of the building. The kebele administration has the

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 obligation to communicate this information or information obtained by the administrations
own initiative to the appropriate tax authority.
Illustration
1. Ato Belay has a house property in Addis. He has let out the house for the residential
purposes. The following are the details of the property let out.
i. Actual rent received birr 900 pm
ii. Fair rental value of the house birr 1200 pm
iii. He has paid 15% of the rent received as land taxes and 2% as others taxes to
the regional government.
iv. He spent birr 1560 for repairs of that house
v. He does not maintain any book of accounts in this regard.
Compute the income from house properly tax payable for the year 1996 – 97 E.C
Solution
Actual rent 900*12 months = 10,800.00
Land tax 10,800*0.15 = (1620.00)
Other taxes 10,800*0.02 = (216.00)
Repair 10,800*1/5 = (2160.00)
Income from house property 6,804.00

Taxable income = 6804.00 * 10 % tax rate = 680.40 Birr

= 680.40 Birr – 180.00 Birr
Tax payment = 500.40 Birr
2. Ato Amaha owns four houses. The details regarding which are as follows:-
i. The first house of the annual rental value of birr 4400 was occupied by him for his own
residence.
ii. The second house of the annual rental value of birr 5600 was let out at birr 400 pm. He paid
birr 600 as interest on money borrowed for the construction of the house, birr 80 as land tax
and birr 200 as insurance premium of the house.
iii. The third house is birr 1600 pm and its actual rent is 1400 birr pm. But in respect of this
house maintenance charge of birr 1600 per year including repaint charges.

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iv. The fourth house of which is birr 6000 par year was let out at 600 pm. It remained vacant for
4 months. The unrealized rent in respect of this house during the year was birr 1200, which
satisfies the conditions for claming this loss.
Find out the income from house property and tax payable for the year 1996-97 E.C
Solution
i. Not taxable
ii. Actual rent 400 x 12 = 4800.00
Land tax (80.00)
Interest (600.00)
Repair and maintenance 4800x1/5 (960.00)
Taxable income 3160.00
Taxable income 3160.00 birr x 10% Tax rate = 316.00 birr
316.00 birr – 180.00 birr = 136.00 birr
Tax payment = 136.00 birr
iii. Actual rent 1400 x 12 = 16,800.00
Repair & maintenance 16800 x 1/5 (3360.00)
Taxable income 13,440.00
Taxable income 13,440.00 birr x 15% Tax rate = 2016.00 birr
= 2016.00 birr – 570.00 birr = 1446.00 birr
Tax payment = 1446.00 birr
iv. Actual rent 600 x 8 = 4800.00
Repair & maintenance 4800 x1/5 = (960.00)
Taxable income 3840.00
Taxable income 3840.00 x 10% Tax rate = 384.00 birr
= 384.00 birr – 180.00 birr = 204.00 birr
Tax payment = 204.00 birr

. SCHEDULE ‘C’ INCOME: BUSINESS INCOME

Income tax shall be imposed on the taxable business income realized from entrepreneurial
activity. Business means manufacture or purchase and sale of a commodity with a view to make
profit. If includes any trade, commerce or manufacture or any other adventure or concern in the
nature of entrepreneurial activity. It is not necessary that these should be a series of transactions

18
in a business and it should be carried on permanently, nether repetition nor continuity of similar
transactions is necessary. Profit of an isolated transaction is also taxable under this schedule,
provided that it is a venture in the nature of business or trade. In this connection, it is important
that the intention of purchase or manufacture should be sell of a profit.
Taxable business income shall be determined per tax period on the basis of the profit and loss
account or income statement. Which shall be drawn in compliance with the generally accounting
standards, subject to the provisions of this proclamation and the directives issued by the tax
authority?
Tax Rate
1. Taxable business income of bodies is taxable of the rate 30%.
2. Taxable business income of other tax payers shall be taxed in accordance with the
following schedule C.
Schedule ‘C’
Taxable business income/ Tax rate Deduction
net profit per year (in %) (in Birr)
Over Birr to Birr
0 1800 Exempt Threshold ___
1801 7,800 10 180
7801 16,800 15 570
16,801 28,200 20 1,410
28,201 42,600 25 2,820
42,601 60,000 30 4,950
∞ 35 7,950
Over 60,000
DEDUCTIBLE EXPENSES
In the determination of business income subject to tax in Ethiopia, deductions shall be allowed
for expenses incurred for the purpose of earning, securing and maintaining that business income
to the extent that the expenses can be proven by the tax payer and subject to the limitations
specified by this proclamation.
The following expenses shall be deductible from gross income in calculating taxable income.
 The direct cost of producing that income, such as the direct cost of manufacturing,
importation, selling and such other similar costs.

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 General and administrative expenses connected with the business activity
 Premiums payable on insurance directly connected with the business activity
 Expenses incurred in connection with the promotion of the business inside and outside
the country, subject to the limits set by the directive issued by the minister of revenue.
 Commissions paid for services rendered to the business provided that
a. Said services were in fact rendered
b. the amount paid corresponds to normal rates paid for similar services by other persons
or bodies similarly situated.
 Sums paid as salary, wages or other emoluments to the children of the proprietor or
member of the partnership shall only be allowed as deduction if such employees have the
qualifications required by the post.
 In the case of a business located and operating in Ethiopia as the branch, subsidiary or
associated company of a business located and operating abroad, no payment of any kind
made to the having or associated company of the business in Ethiopia shall be accepted
as deduction unless:-
a. the payment in question was made for service actually rendered and
b. Said service was necessary for the business and could not be performed by the persons or
bodies or by the business itself at a lower cost.
 If the income tax authority has reason to consider that the total amount of salaries
and other personal emoluments payable to the manager of a private limited
company is exaggerated it may reduce paid amount for taxation purpose of the
limit which, in view of operation of the company appears justifiable, either by
disallowing
 The payments made to more than one manger of in any other way which may be
just and appropriate.
 In computing taxable income, the above listed expensed could be deducted from
gross income. If some conditions are met, the proclamation also allows such
expenses as depreciation, bad debts, interest expense and donation and gifts which
is covered separately in this section as deductible expenses.

NON-ALLOWABLE EXPENSES

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 All those expenses which are not wholly or exclusively incurred for the business activity
are not allowable deductions from gross income. Therefore, in computing taxable income
the following expenses should be added back, only if the taxpayer has deducted them in
determining the business income
i. Capital expenditure:- the cost of acquisition, improvement, rental and
reconstruction of depreciable assets.
ii. Additional investment:- an increase of the share capital of a company or the
basic capital of a registered partnership
iii. Declared dividends and paid out project shares
iv. Voluntary pension or provident fund contributions over and above 15% of the
monthly salary of the employee.
v. Damages covered by insurance policy
vi. Interest in excess of the rate used between the national Bank of Ethiopia and
the commercial banks increased by two (2) % points
vii. Punitive damages and penalties
viii. The creation or increase of reserve, provisions and other special purpose funds
unless otherwise allowed by the proclamation.
ix. Income tax paid on schedule “C” income and recoverable value added tax
(VAT)
x. Representation expenses over and above 10% of the salary of the employee
xi. Personal consumption expenses
xii. Expenditures exceeding the limits set forth by the proclamation or regulations
xiii. Entertainment expenses “Entertainment” means the provision of food,
beverages, tobacco, accommodation, amusement, recreation or hospitality of
any kind to any person whether directly or indirectly.
xiv. Donation and gift other than those permitted by regulation.
xv. Sum paid as salary, wages or other personal emoluments to the proprietor or
partner of the enterprise. Expenditure for maintenance or other private
purpose of the proprietor or partner of the enterprise.
xvi. Losses that are not connected with or not arising out of the activity of
enterprise.
LOSS CARRY FORWARD

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A business is said to have made loss when the total expenses incurred by the business during a
fiscal year are greater than the total income generated in by the business the same year. Loss
carry for ward is a procedure when by a loss incurred in one tax period is carried forward to the
next tax period to be deducted from the available profit. If any loss carry forward is one of the
several changes introduced
by new tax law. The importance of the loss carry forward provision to a company is that it
preserves valuable cash which otherwise would have to be paid out in
Taxes. Such funds are retained in the business and can be used for working capital and/or
expansion of the business. A business, which has alternative profit and loss years of about the
same dimension, would pay no tax at all.
Example:- Computation of business profit tax
Business net profit per year / Taxable income = 70,500.00 Birr
Business profit tax = 70,500 * 35% tax rate
= 24,675.00 Birr
= 24,675 – 7950 (deduction fee)
Tax payment = 16,725.00 Birr
In the determination of business income subject to tax in Ethiopia, deductions would be allowed
for expenses incurred for the purpose of earning, securing, and maintaining that business income
to the extent that the expenses can be proven by the tax payer.
 SCHEDULE ‘D’ INCOME: OTHER INCOMES
This is the last residuary schedule of income. Any income, which is taxable under the income tax
proclamation but does not find place under any of the remaining three schedules of income (i.e.
schedules A,B and C) will be taxable under this residuary schedule ‘D’ other incomes.
The following income shall be chargeable to income tax under schedule ‘D’.
INCOME FROM ROYALTIES:-
The term “royalty” means a payment of any kind received as a consideration for the use of or the
right to use, any copyright of literary, artistic or scientific work, including cinematography firms
and fims or tapes for radio or television
Broadcasting, any patent, trade work, design or model, plan secret formula or process, or for
information concerning industrial, commercial or scientific experience it is taxable as follows:-
Rate of Tax:-

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Royalties shall be liable to tax at of a flat rate of 5 (five) %. The with holding agent who effects
payment shall withhold the foregoing tax and account to the tax authority. Within 15days of the
end of each calendar month. When the payer resides abroad and the recipient is a resident, the
recipient shall pay tax on the royalty income with the time limit set out.
This tax is a final tax in lies of a net income tax.
3.8.2. INCOME FROM RENDERING OF TECHNICAL SERVICES
The term ‘technical service’ means any kind of expert advice or technological services rendered.
All payments made in consideration of any kind of technical services rendered outside Ethiopia
to resident persons in any form shall be subject to tax.
Rate of Tax
It is taxable at a flat rate of 10%. This tax is a final tax in lieu of income tax.
The amount of tax shall be withheld and paid to the tax authority by the payer.
INCOME FROM RENTAL OF PROPERTY
Every person deriving income from the casual rental of property (including any land, building, or
moveable asset) not related to a business activity taxable.
This type of income is subject to tax a flat rate 15% of the annual gross income.. This income
from rental of movable and immovable property is derived by a person not engaged in regular
trade.
This tax is a finale tax in lieu of anet income tax.
 INCOME FROM GAMES OF CHANCE
This form of income is derived from winning at games of chance (lotteries tom bolas, and other
similar activities). This income is subject to tax at the rate of 15%, except for winnings of less
than 100 Birr. The payer must withhold or collect the tax and account to the tax authority.
This tax is a final tax in lieu of income tax
 INTEREST INCOME ON DEPOSITS
This includes income derived from interest on deposits. Interest income will be taxed at the rate
of 5% and the payer must withhold the tax and account to the tax authority.
This tax is a final tax in lieu of income tax
INCOME FROM DIVIDENDS
The taxable income received in the form of dividend from a share company or withdrawals of
profits from a private limited company. Dividend income is subject to tax at the rate of 10%. The
withholding agent (payer) shall withhold or collect the tax and account to the tax authority.

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This tax is a final tax in lieu of income tax.
GAIN ON TRANSFER OF CERTAIN INVESTMENT PROPERTY
Income tax shall be payable on gains obtained from the transfer (sale or gift) of property at the
following rates:-
a. Building held for business, factory, and office 15%.
b. Shares of companies 30%
Self Assessment Question
1. How the taxable income shall be determined? What is income tax? And who is
liable to pay income tax?
2. What types of income are exempted from payment of income tax under schedule
“A”, “B”, “C” and “D”?
3. List the tax pates applicable for schedule “A”, “B”, “C” and “D” income?
4. What expenses are allowed for determination of business income?
5. List any five Non-Deductible expenses for determination of business income.
6. What are the main examples of schedule “D” income?
7. Who is the tax agent for any tax collected from royalty income?
8. What is the maximum tax payment a person or a body makes from dividend
income?
9. Explain the provisions relating to ‘Loss carry forward’ in the income tax
proclamation?
10. In what fundamental way do the deductions allowed individual tax payers differ
generally from the educations allowed corporate tax payer? What forces explain
this difference?
Exercise
1. Ato Amaha has developed on interactive VCD titled ‘Mother beautiful’! and sold the
rights to the XYZ company based at USA and received a royalty of 100,000 Ethiopian
birr.
A. Who is the withholding agent?
B. Who is liable to pay tax to the tax authority?
C. How much is the tax to be paid to the tax authority?
D. In the above case, if the XYZ Company is based of Ethiopia, the above answer
would be different?

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2. Ato Assefa has received on expert advice on the manufacturing process of the sugar from
the ABC Company based at Cuba and paid a compensation of 250,000 Ethiopian birr.
A. Who is the withholding agent?
B. Who is liable to pay tax to the tax authority?
A. How much is the tax to be paid to the tax authority?
3. Ato Alem has won a lottery price of 50,000 Ethiopian birr from the notional lottery
administration
Required
A. Who is the withholding agent?
B. Who is liable to pay tax to tax authority?
C.How much is the tax to be paid to the tax authority?
D If the amount is just 90 Ethiopian birr. Then how the above answer would change?
4. W/t Meseret is a shareholder holding 100 shares of 1000 ethiopian birr each in Dashen
Bank SC. Dashen Bank declared a dividend of 20% to the shareholders?
Required
A.Whether the above transaction is a taxable transaction?
B. If the answer to the above is yes, who is the withholding agent?
C.Who is liable to pay tax to the tax authority?
B. How much is the tax to be paid to the tax authority?
5. W/ro Aster has rented her building to Ato Yilma at a gross monthly rent of 8000
Ethiopian birr
Required
A. Whether the above transaction is a taxable transaction?
B. If the answer to the above is yes, who is the withholding agent?
C. Who is liable to pay tax to the tax authority?
D. How much is the tax to be paid to the tax authority?
6. Ato Alem has deposited 20 million Ethiopian birr in commercial bank of Ethiopia at 6%
per annual rate interest.
Required
a. Whether the above transaction is a taxable transaction?
b. If the answer to the above is yes, who is the withholding agent?
c. Who is liable to pay tax to the tax authority?

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 d. How much is the tax to be paid to the tax authority?
2. Ato Alemasged is an employee of the New Millennium college as an instructor and his
gross salary is earned 2722.00 birr per manth of April 2006, Ato Alemasged had a part
time class in Mekelle university and earned 1278.00 birr.
Based on the above information calculate
A. Income tax for the month of April 2006.
B. Net income earned for the manth of April 2006.
C. Who is liable to pay tax to the tax authority?
LO3 Identify and discuss indirect tax

 Ways that tax is collected include:through regional and federal level taxes including:
 indirect tax
 Turnover Tax
 Excise Tax
 Value Added Tax
 Customs Duty
Information Sheet – 3.1 INDIRECT TAXES
Indirect tax is a tax the burden of which may not necessarily be borne by assesses. Indirect taxes
can be shifted or passed on to other persons. Indirect taxes are taxes on commodities. These are
custom duties, excised cuties, save tax etc.
Indirect taxes are those which are demanded from one person in the expectation and intention
she/he shall indemnify himself/herself at the expense of another.
Thus, if it is intended that the amount of tax should be collected from other persons by those on
whom it is imposed, such a tax is an indirect tax.
TURNOVER TAX
The turnover tax would be payable on goods sold and services rendered by persons not registered
for value added tax. The rate of turnover tax is
 2% on goods sold locally
 For services rendered locally
2% on contractors, grain mills, tractors and combine-harvesters
10% on others

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The base of computation of the turnover tax is the gross receipts in respect of goods supplied or
services rendered. A person who sells goods and services has the obligation to collect the
turnover tax from the buyer and transfer it to the tax authority. Hence, the seller is principally
accountable for the payment of the tax.
In accordance with the turnover tax proclamation No 308/2002. The following would be
exempted
 Sale or transfer of dwelling used for a minimum of two years or the lease of a dwelling
 Rendering of financial services
 Supply of national or foreign currency and of securities
 Rendering by religious organizations of religions or other related services
 Supply of prescription drugs specified in directives issued by the relevant government
agency, and the rendering of medical services
 Rendering of educational services provided by educational institutions
 Supply of goods and rendering of services in the form of humanitarian aid,
 Supply of electricity, kerosene and water.
 Provision of transport
 Permits and license fees
 Supply of goods or services by a workshop employing disabled individuals (if more than
60% of the employees are disabled)
 Supply of books

NOTIFICATION OF CHANGES
A registered taxpayer is required to notify the tax authority:
 Any change in the name, address, place of business constitution, or nature of the
principal taxable activity or activities of the person
 Any change of address from which, or name in which, a taxable activity is carried by the
registered person, within 21 days following such change.
TAX EVASION
A person who evades the declaration or payment of tax, commits an offence and in addition to
any penalty may be prosecuted and be subject to a term of imprisonment of not less than five (5)
years. . Value Add Tax and Excise Tax

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Overview
VAT and Excise Tax are among the taxes that exist in the tax system. The Federal Government
has issued VAT Proclamation No. 285/2002 and Excise Tax Proclamation No. 307/2002. This
section deals with these taxes.

This section generally will discuss about VAT and Excise Tax. In particular, we will study about
the imposition of VAT and Excise Tax. We will also study the subject matters over which VAT
and Excise Tax are imposed and the rates applicable over the various subject matters that are
taxable. Finally we will discuss the implementation and enforcement of the tax.
Objectives:
After having completed the study of this section, you will be able to:
 discuss imposition of VAT and Excise Tax
 identify exempted items
 explain the subject matters that are taxable
 describe the tax rates applicable to taxable subject matters
 explain the implementation of the taxes

Information Sheet – 3.2 Value Added Tax

1) Introduction
In order to minimize the complexity of tax administration, to enhance taxpayer compliance and
to encourage investment, Government of Ethiopia has launched a tax reform program. One of the
most important outcomes of the reform was the introduction of VAT (Value Added Tax) by the
replacement of sales tax.
VAT is a transaction tax collected on all goods and services at all stages of production and
distribution. Tax is collected on the value added at each stage. Value Added is the difference
between the sales and the value of purchases at that stage. The collection of VAT begins with
importers or producers and ends with the retailers. The amount of VAT collected from a
transaction at different stages of distribution will be equal to the total amount of sales tax
collected from one stage of the distribution on that taxpayer against tax payable by him on sales.
The VAT Proclamation No. 285/2002 which has rescinded and replace the sales and excise tax
proclamation No.68/1993 and which has come into force as of January 2003 is a consumption

28
tax which is levied and paid as Value Added Tax at a rate of 15% of the value of every import of
goods, other than an exempt import and an import service render in Ethiopia for a person
registered in Ethiopia for VAT or any resident legal person by a non resident person who is not
registered for VAT in Ethiopia.

A taxation transaction is as supply of goods or a rendition of services in Ethiopia in the course or

furtherance of a taxable activity other than an exempt supply. On the other way a taxable activity
is any activity, which is carried on continuously, or regularly by any person in Ethiopia, or partly
in Ethiopia, whether or not for a pecuniary profit that involves, in whole or in part, the supply of
goods or services to another person for consideration. For VAT purposes the sale or disposal of
goods, or the rendering of services is called supplies.

2) Value Added Tax (VAT) Rates

The Ethiopian VAT system is invoice based and operates on the destination principle, where
goods and services are taxed in the country of consumption and not of origin. As indicated in
Article 7 and 8 the tax has two main rates with exemptions that ultimately determine liability to
tax. These rates are standard rate, which is at 15%, and zero rate, which is 0%.
a) Standard Rate at 15%
Goods and services applicable to the zero rate and exempt are specifically provided for in the
proclamation with the standard rate being applicable to all supplies so excluded. That means all
goods and services other than those specified as being exempt or liable at the zero rate are liable
to VAT at the standard 15% rate. It would not be feasible to compile a definitive of the coverage
of the 15% rate. In general the Value Added Tax rate of 15% would be levied on the value of:
 Every taxable transaction by a registered person. A taxable transaction is a supply of
goods or a rendering of services in Ethiopia in the course or furtherance of a taxable
activity, other than an exempt supply.
 Every import of goods, other than an exempt import ; and
 An import of services
VAT on Imported Goods and Services
Article 14 and 15 are about the time and value of imports. As indicated in the proclamation all
goods imported into Ethiopia are liable to VAT at a standard rate of 15% unless the imported

29
goods are zero-rated and exempted. As far as the payment is concerned the importer is liable to
the payment of the tax at the point of clearing the goods in the Customs Department of Ethiopian
Custom Authority no matter whether the goods are imported for private or business purposes,
and whether or not the importer is registered for Value Added Tax.

The value on which an importer will have to pay VAT at importation is determined by adding
the CIF (cost, insurance and freight) duty, the custom duty, and all cost of any service- supplied
incidental to the delivery of the goods. The Ethiopian Custom Authority will give the basis of
value for VAT purposes.
An importer, if he is registered for VAT can claim VAT refund on imported goods if the
imported goods are for taxable business purposes and not for private use. To ask for a VAT
claim, however, the importer must obtain a copy of the Customs Bill of Entry certified by
Ethiopian Custom Authority as to the amount of VAT paid.
VAT is also paid on services imported from abroad. If the supplier of the service conducts
business in Ethiopia and is registered for Value Added Tax then VAT will have to be paid. If the
service is supplied by a foreign who is not registered for VAT in Ethiopia, then the imported, if
is registered for VAT in Ethiopia, must account for the VAT at the time the service is completed,
or when the invoice is received from the foreign supplier.
Computation of VAT
The computation of the VAT liability from the manufacturer to the final consumer is presented
as follows.
Manufacturer Birr Tax
Purchases of raw materials Br 2,000
VAT paid on raw material (15% x 2,000) 300
Cost of the material to the manufacture 2,300
Sells to the wholesaler the finished goods 4,000
VAT (4,000 X 15%) 600
Total selling price 4,600
VAT liability of the manufacturer (600-300) Br 300

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Wholesaler
Sells to the retailer at a price 5,600
VAT (5,600 X15%) 840
Total selling price 6,440
VAT liability of the wholesaler (840-600) 240

Retailer
Sells to the final customer at a price 8,400
VAT (8,400 X 15%) 1,260
Total selling price 9,660
VAT liability of the retailer (1,260 – 840) 420
Total VAT paid to FIRA Br 960

b) Zero - Rating
As discussed earlier in VAT zero-rated goods or services are business transactions, which VAT
is chargeable at 0%. In effect zero-rated means no VAT is charged. However, from tax
perspective zero rate supplies are taxable supplies although no tax is charged and the value of
these supplies forms part of the taxable turnover for registration purposes. Remember from the
explanation given earlier that if a business makes zero-rated supplies, it does not charge VAT on
sells but can reclaim full input tax credit (VAT paid on purchases) related to its zero rated
supplies from VAT Administration Office, hereinafter to as FIRA / VAT.
Goods and services, which attract the zero rate of VAT, include:
i) The exports of goods or services. However,
 Goods are treated as exported from Ethiopia if the goods are delivered to or made
available at an address outside Ethiopia as evidenced by documentary proof from
Ethiopian custom Authority acceptable to the FIRA/ VAT
 Services are treated as exported if the services are supplied for use or consumption
outside Ethiopia as evidenced by documentary proof from Ethiopian Custom Authority
acceptable to the FIRA/VAT.

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ii) The rendering / supply of transportation or other services directly connected with
international transport of goods or passengers, as well as the supply of lubricants and other
consumable technical supplies taken on board for consumption during international flights.
iii) International transport of goods or passengers occurs where the goods or passengers are
transported by road, rail, water or air and also transportation must be:
 From a place outside Ethiopia or another place outside Ethiopia where the transport or
port of the transport is across the territory of Ethiopia, or
 From a place outside Ethiopia to a place in Ethiopia
 From a place in Ethiopia to a place outside Ethiopia
iv) The supply of gold to the National Bank of Ethiopia.
v) A supply by a registered person to another registered person in a single transaction of
substantially all of the assets of a taxable activity or an independent functioning part of a taxable
activity as a going concern, provided a notice in writing signed by the transferor and transferee is
furnished the Authority within 21 days after the supply takes palace and such notice includes the
details of the supply.
3) VAT Exemptions
The supply of certain goods and services is exempt from VAT. Exemption from VAT means that
the persons engaged in the exempt activity are not liable for VAT on their receipts and are not
entitled to a credit or deduction for VAT borne on their purchases. In another word the suppliers
of exempted goods and services are not permitted to charge VAT and do not get credit for input
VAT on purchases for the exempt goods and services. If it makes taxable and exempt supplies it
cannot reclaim the VAT paid on purchases of such exempt supplies. However, if a business
makes only exempt supplies it cannot be registered for VAT as it is out of the tax system.
The goods and services that are exempted from VAT as indicated in Art 8 of the proclamation
are:

 The sale, transfer or lease of immovable property, except for the following:
 The sale or transfer of hotel or holiday accommodation;
 The sale or transfer of newly constructed residential properly, unless the
properly has been occupied as a residence for at least two years.
 The rendering of financial services. Financial services means:-

32
  Granting, negotiating and dealing with loans, credit guarantees, and any
security for money, including management of loans, credit or credit
guarantees by the grantor.
 Transactions concerning deposits and current accounts, payments, transfers,
debts, cheques and negotiable instruments other than debt collection and
factoring;
 Transactions relating to share, stocks, bonds, and other securities other than
custody services;
 Management of investment funds.
 The supply or import of national or foreign currency (except for that used for numismatic
purposes) and of securities.
 The import of gold to be transferred to the National Bank of Ethiopia
 The rendering by religious organizations of religious or church-related services,
 The rendering of medical services,
 The rendering of educational services provided by educational institutions, as well as
child care services for children at pre-school institutions,
 The supply of goods and rendering of services in the form of humanitarian aid, as well as
import of goods transferred to state agencies of Ethiopia and public organizations for
purpose of rehabilitation after natural disasters, industrial accidents, and catastrophes,
 The supply of electricity and water,
 The supply of goods for the official use of diplomatic missions,
 Post office operations and the provision of public transport permits and license fees.

Difference between Zero-Rated and Exempt Supplies

It is necessary to identify the difference between exemption and zero-rating. These terms appear
to have the same meaning, but only to the extent that both exempt and zero-rated supplies do not
attract what is referred to as a positive rate of VAT. That is both mean that there is no VAT
charged on the supply, so what is the difference? To the final consumer there is very little
difference as no VAT will be charged to them, but to a business the difference is very important.
Dealing in taxable supplies, including zero rate supplies allows a business to reclaim input tax;
dealing in exempt supplies does not.

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Because zero-rated supplies are taxable supplies, a VAT registered business dealing in making
only zero-rated supplies is still entitled to reclaim input tax on purchases made (supplies
received). This means that most suppliers dealing in only zero-rated supplies will have input tax,
which exceeds their output tax, and they will claim for refund from FIRA. Because exempt
supplies are not taxable supplies, a business dealing only in making only exempt supplies is not
entitled to register for VAT. This means that this business will have no opportunity to reclaim
input tax on purchases (supplies received)
4) Registration Requirements
The VAT proclamation provides rules relating to registration for VAT purposes. It describes who
is obliged to register, who may not register, procedures for registration etc.
a) Taxpayers
As indicated in article 3 the following persons are taxpayers:
 A person who is registered or is required to be registered. A person who is registered is a
taxpayer from the time the registration takes effect. A person who is not registered, but
who is required to be registered, is a taxpayer from the beginning of the accounting
period following the period in which the obligation to apply for registration arose.
 A person carrying out taxable import of goods to Ethiopia, with respect to such import;
 A nonresident person who is not registered for VAT in Ethiopia and renders services in
Ethiopia for any person registered in Ethiopia for VAT or any resident legal person.

b) Option to Register
According to section 5 of the proclamation “any person” (to be defined later ) conducting a “
commercial enterprise” ( to be defined later) or intending to conduct a commercial enterprise
may apply to be registered for VAT. However, if the taxable turnover of the enterprise that is
gross income for 12 calendar months exceeds or is likely to exceed Birr 500,000, the person
conducting the enterprise must register for VAT with FIRA / VAT
Turnover related to exempt supplies as listed in the law is not to be included in the total for
deciding if VAT registration is compulsory. The term any person for purposes of VAT
registration includes sole proprietor, company, partnership, estate of the deceased, trust,
incorporated body or unincorporated body, and club or association. The term a commercial
enterprise refers to any business of whatever nature and it includes examples such as ordinary
business (e.g. shop, contractors, manufactures, wholesales, etc), trades and professions (e.g.

34
builders, engineers, accountants, lawyers, etc), and activities of non-profit making bodies (e.g.
societies, associations, sporting clubs, etc).
Thus, there are two types of VAT registration: obligatory and voluntary.
Obligatory Registration
A person is obliged by law to register if one is doing any business, which is likely to have
taxable turnover in 12 months exceeding Br 500,000. Thus to know whether a person must
register for VAT it is sufficient to consider the business turnover for the past 12 months. If
during the past 12 months its gross sales exclude tax exceeds Br 500,000 then it has to register
for VAT. Besides, if one reasonably expects that during the next 12 months the total value of
taxable supplies excluding tax is likely to exceed Br 500,000 then the person needs to register for
VAT.
The turnover is calculated on an ongoing basis. Two periods need to be considered-the past 12
calendar months and the next 12 calendar months on a month-by-month basis. There is the need
to estimate at the end of each trading calendar month the total value of taxable goods and
services supplied by all the business for the past 12 months. Where the total exceeds Br 500,000
then there is the requirement to register for VAT. If a person is required to register for VAT and
has not applied to be registered, the Tax Authority may register the person on its own initiative
and send the registered person the certificate.

Voluntary Registration
A person may voluntarily apply for registration even if his turnover is below Br 500,000 of
business activity. However, application for voluntary registration can be made only if the person
regularly supplies or renders at least 75% of his goods and services to registered persons.
Voluntary application for VAT registration can not necessarily result in acceptance by the
FIRA/VAT.
FIRA/VAT can also refuse to register any person who has no fixed address or business, who
does not keep proper accounting records, who has no bank account, and who has previously been
registered for VAT purposes but failed to perform his duties under the VAT law. If voluntary
registration is disallowed by FIRA/VAT, it must notify the applicant with explanation on the
reasons for the refusal.
5) Record Keeping

35
The VAT regulation requires that a VAT registered trader must keep full and true records of all
business transactions that affect or may affect his or her liability to VAT. The records must be
kept up to date and must be sufficiently detailed to enable a trader to accurately calculate liability
or repayment and also to enable the Authority to check the calculations, if necessary. In general,
the following records are required to kept.
a) VAT Account
A VAT registered person is required to keep records of all supplies and purchases made and
received and a summary of VAT for each period covered by the VAT Returns. This record is
called a “VAT Account”. A VAT account contains information that is entered on ones VAT
return. It consists of a tax payable portion and a tax allowable portion. The tax payable portion
comprises a total of the output tax due for the prescribed accounting period and any correction to
the tax payable portion of a previous return which may be corrected on the current return. The
tax allowable portion comprises the total of the input tax allowable to the taxable person for that
prescribed accounting period. This includes any permitted correction of tax allowable portion of
previous returns, and any other adjustments required. The information can be retained in an
account book, or on computer.
Where for any return period the output tax exceeds the input tax, a payment must be made to
Authority when submitting a return. Where for any return period the allowable input tax is
greater than the out put tax, the amount of the excess is normally repayable to the taxable person
by Authority.
b) Records of Purchases
The records of purchases should distinguish between purchases of goods intended for resale and
goods or services not intended for resale in the ordinary course of business. The record should
show the date of the purchase invoice and a consecutive number (in the order in which the
invoices are filed), the name of the supplier, the cost exclusive of VAT and amount of VAT
shown. Purchases at each rate must be recorded separately. Purchase record should be divided
into three separate accounts:
 Local purchases and the VAT thereon
 Imports and the VAT there on
 All other purchases, including exempt, zero-rated purchases and purchases from suppliers
who are not registered for VAT where the person will not have been charged any VAT.

36
One must also retain and file separately the following in order of date
 Original tax invoices including simplified invoices received from local suppliers,
including original debit and credit notes received from the suppliers.
 Certified copies of Customs import entries
 Purchases invoices received for all other purchases
c) Record of Sales
In general, the record of sales must include the amount charged in respect of every sale to a
registered person and a daily entry of the total amount charged in respect of sales to unregistered
persons, distinguishing in all cases between taxable transactions liable at each different rate of
VAT (including the zero rates) and exempt transactions. All such entries should be crossed-
referenced to relevant invoices, cash register tally rolls, delivery notes, etc. A balanced cashbook
is essential for trouble-free operation of VAT. Sales record should be divided into three separate
accounts:
 Taxable sales at the standard rate and the VAT thereon, or VAT charged there from,
 Taxable sales at the zero rate
 Exempt sales
Like purchase records one must also retain and separately file the following in order of sale:
 Copies of tax invoices, including simplified invoices related to one’s taxable sales, and
copies of any debit or credit notes issued to one’s customers. If one is using cash
accounting or a small trader scheme one must keep a daily record of his gross taking at
the standard rate.
 Copies of invoices of goods sold at zero-rate or a daily record of the value of one’s sales
at zero-rate if using cash accounting or a small trader scheme.
 Copies of invoices of exempt goods sold or a daily record of the value of all exempt sales
of using cash accounting or a small trader schemes.
d) Cash Records
All records of one’s cash transaction must be retained including cashbooks, petty cash vouchers,
all account books, and records of daily takings records.
e) Other Records
Stock and manufacturing records must be maintained if appropriate to the business. Discounts or
reductions made or received, and affecting the amount charged, should be recorded in the same
manner as purchases and sales. Besides copies of Debit and Credit Notes issued should be

37
separately filed from Debit and Credit Notes received. They should all be filled in order of date.
Since export is zero-rated and VAT refund can be claimed on input tax, the exporter is required
to maintain such records as a certified copy of the Customs Export entry, a purchase order from
or contract with the foreign customer, a copy of the invoice issued to the foreign customer,
evidence of transportation from Ethiopia in the form of copies of transit documents, such as
airway bills, shipping bills or road or rail transit documents.
In addition to the records stated above VAT registered persons whose turnover exceeds Br
500,000 per annum must retain the following:
 Orders and delivery notes
 All business correspondence
 Appointment and job books
 Annual accounts-including income statement and balance sheet
 Bank statements and paying in records.f) Retention of Records by Taxable Persons
A taxable person must retain all books, records and documents relevant to the business, including
invoices, credit and debit notes, receipts, accounts, cash register tally rolls, vouchers, stamped
copies of customs entries and other import documents and bank statements, and computer-stored
information. These business records must be preserved for ten years from the date of the latest
transaction to which they refer.
6) Cancellation of VAT Registration
A person who has registered for VAT may cancel his or her registration by arrangement with
FIRA/VAT. Reasons for De-registration include:
 If the business ceases trading permanently
 If the business is sold
 When the value of taxable supplies falls consistently below the VAT registration
threshold. In this case Art 19 (2) states that a registered person may apply to have his
registration for VAT cancelled at any time after a period of three years of the date of his
most recent registration for VAT if the registered person’s total taxable transactions in
the period of 12 months then beginning reasonably are expected to be not more than Br
500,000
 If he or she has been registered in error, or he or she has ceased to be a taxable person
A registered person must notify FIRA/VAT in writing in order that the VAT registration number
may be cancelled promptly. The cancellation of VAT registration takes effect at the time the

38
registered person ceased to make taxable transactions or, if the registered person has not ceased
to do so, at the end of the accounting period during which the person applies to the Authority for
cancellation of VAT registration. If a person’s registration for VAT is canceled, the Authority is
required to remove the person’s name and all other details from the VAT register and the person
is required to return the issued certificate of registration.
7) Accounting for VAT
a) When VAT becomes payable
Article 26 of the proclamation requires that every VAT registered trader must, by the end of the
month following each month, furnish to the Authority on the prescribed form (VAT Return) a
true and correct return for the period showing the amount of VAT due by him or her and the
amount of VAT deductible by him or her. Every month he/she has to fill in details of the supplies
made and received in that period and pay the total owed to FIRA/VAT, or claims a further credit
or repayment of tax as the case may be VAT on taxable imports is collected by the Ethiopian
Customs Authority.
b) Amount of VAT Payable
The amount of tax payable (the VAT liability) for any month by a person who is registered or is
required to register is the difference between the amount of tax charged on taxable transactions
(output tax) and the amount of tax creditable (input tax).

For any return month if output tax exceeds the input tax, a payment must be made to Authority
when submitting a return. Likewise for any return period if the allowable input tax is greater than
the output tax, the amount of the excess is normally repayable to the taxable person by the
Authority. There fore, to determine the VAT liability of a taxpayer, it is necessary to understand
the meaning of input tax and output tax.
Output Tax
Output tax in relation to a taxable person is the tax on taxable supplies, which he makes (i.e. his
sales). The supplier will be liable to VAT either at the standard rate (currently 15%), or the zero
rate (0%). This is the VAT a person charges his customer. It is only the registered person who
will charge VAT in the course of affecting his supplies.
The output tax becomes due at the time of supply but in practice is accounted for and paid by
reference to tax returns completed for prescribed accounting periods.
Input Tax

39
Many of the things a person buys will carry a VAT charge, but if a person is registered for VAT
he can normally claim a credit for the VAT charged on business purchases and expenses. This is
his input tax. It includes not only the VAT on purchases of raw materials or on goods purchased
for resale, but also the VAT on things like:
 Office equipment for the business,
 Commercial vehicles used in the business for the carriage of goods,
 The telephone bill ( for the business)
 Payments for services in connection with the business ( e.g. Accountants’ or Lawyers’
fees)
Input tax is the VAT incurred by a taxable person on goods or services supplied to him provided
the goods or services, acquisition or importation are for the purpose of any business carried on,
or to be carried on, by him. The effect of the above is that VAT cannot be reclaimed on goods
and services, which are not used for business purposes. For instance, it does not include VAT
paid on goods or services for someone else’s business or VAT on private purchases, such as
furnishings for the home of the business owner. VAT charged in these circumstances is not
considered as input tax. There are also some purchases that cannot be allowed as credit for input
tax. These are:
 passenger automobiles, unless the business is dealing in or hiring such automobiles;
 The repair and maintenance of passenger automobiles unless the business is dealing in or
hiring such automobiles;
 Entertainment unless the business is in the business of providing entertainment
Where exempt supplies are made, it may not be possible to recover all input tax incurred. Input
tax should normally be claimed on the VAT return for the period during which the supplier’s tax
point occurs or, for imported goods, in the period during which the date of importation takes
place. The tax point will be shown on a supplier’s invoice. If unable to make a claim for input
tax in the proper period (e.g. because the necessary evidence is not received in time) input tax
may normally be claimed in a later period. Input tax cannot be reclaimed unless a valid invoice
or other document is held. The taxpayer must have an original copy of a Tax Invoice including a
simplified Tax Invoice, or Certified Customs Import Declaration or warehousing Entry to
substantiate a claim for input tax credit. If input tax can be reclaimed in full, the amount to be
claimed is that shown on the tax invoice received from the supplier.
8) VAT Refund

40
As said earlier for any return period if the allowable input tax is greater than the output tax, the
amount of the excess is normally repayable to the taxable person by the Authority as a tax
refund. According to Article 27, if at least 25% of the value of a registered person’s taxable
transactions for a month is taxed at a zero rate, the Authority will refund the amount of VAT
applied as a credit in excess of the amount of VAT charged for the month within a period of two
months after the registered person files an application for refund, accompanied by documentary
proof of payment of the excess amounts.
In the case of other registered persons, the amount of VAT applied as a credit in excess of the
amount of VAT charged for the month is to be carried forward to the next five months and
credited against payments for these months, and any unused excess remaining after the end of
this five-month period will be refunded by the Authority within a period of two months after the
registered person files an application for refund, accompanied by documentary proof of payment
of the excess amounts.
If a registered person is entitled to a refund and the Authority is satisfied that the person has
overpaid tax, then if the Authority does not pay the refund by the specified date, the Authority
will pay the person entitled to the refund, interest set at 25% (twenty five percent) over and
above the highest commercial lending interest rate that prevailed during the preceding quarter.
9) Administrative Penalties
It is stated that a registered person should comply with the tax proclamation. However, if he
violates the tax rule and engages himself in criminal activities a wide variety of penalties may be
exacted for non-compliance with VAT Proclamations. The main penalties are as follows.
When a person engages in taxable transactions without VAT registration where VAT registration
is required he will be required to pay 100 percent of the amount of tax payable for the entire
period of operation without VAT registration;
When a person issues incorrect tax invoice resulting in a decrease in the amount of tax or
increase in a credit or in the event of the failure to issue a tax invoice he will be required to pay
100 percent of the amount of tax for the invoice or on the transaction.
When a person who is not registered for VAT issues a tax invoice he will be required to pay a
penalty of 100 percent of the tax which is indicated in the tax invoice. When a person fails to
maintain records required under the proclamation he will be required to pay Br 2,000 for each
month or portion thereof that the failure continues.

41
Normally a person who fails to file a timely return is liable for a penalty equal to 5 percent of the
amount of tax underpayment for each month (or portion thereof) during which the failure
continues up to 25 percent of such amount. An underpayment of tax is the difference between the
tax required to be shown on the return and the amount of tax Paid by the due date. For this
violation the penalty is limited to Br 50,000 for the first month (or portion thereof) in which no
return is filed. In any event the penalty may not be less than the smaller Br 10,000 and 100
percent of the amount of tax required to be shown on the return.
If any amount of tax is not paid by the due date, the person liable is obliged to pay interest on
such amount for the period from the due date to the date the tax is paid. The interest rate is set at
25 percent over and above the highest commercial lending interest rate that prevailed during the
preceding quarter.
In connection with VAT, different offences may be committed by individuals. These offences
include tax evasion, declaring false and misleading statements, obstruction of administration,
failure to notify a change in name, address, etc, unauthorized tax collection, aiding, abetting,
conspiring with others to commit violation of the Proclamation, etc. In view of this in addition to
the above monetary penalties, section 12 of the Proclamation provides that any form of tax
offence is a violation of the criminal law of Ethiopia and will be charged, prosecuted, and
appealed in accordance with Ethiopia criminal procedural law.
Information Sheet – 3.3 Excise Taxes

1) Introduction
Excise taxes are taxes levied on particular products and services, typically with discriminatory
intent. Sometimes, they refer to the profits of fiscal monopolies. Excise taxes are also called
selective sales taxes. In most countries, a large share of excise revenue comes from tobacco
products, alcoholic beverages, and petroleum products, which are the traditional excisable
commodities. Excises are also levied on a variety of other items such as motor vehicles, soft
drinks, sugar, cement, entertainment, insurance, and consumer luxuries.
2) Imposition of Excise Tax
The excise tax of the country is imposed with three objectives in mind: to improve government
revenue, to improve equity by imposing tax on luxury goods and basic goods which are demand
inelastic, and to discourage the consumption of goods that are hazardous to health and which
causes social problems. The current excise tax is governed by excise tax Proclamation No

42
307/2002. This Proclamation is divided into seven sections and thirty-eight articles. The
summary of the articles is given below.
3) The Rate, Base and Payment of Excise Tax
The excise tax is paid on imported as well as locally produced goods listed in the table below at
the stated rate. For locally produced goods the excise taxes computed based on the production
cost (excluding depreciation cost) of the goods, whereas for imported goods the tax base will be
cost, insurance and freight (C.I.F.).
As far as payment of excise tax is concerned, excise tax on locally produced goods will be paid
by the producer not later than 30 days from the date of production. For imported goods the tax is
to be paid by the importer at the time of clearing the goods from Customs area.
The schedule attached to the proclamation provides the following list of goods that shall be liable
to excise tax when either produced locally or imported and the rates at which they are taxed.
Type of Product Excise Tax Rate (%)
1. Any type of sugar (in solid form)
excluding molasses ………………………………………………. 33
2. Drinks
2.1 All types of soft drinks (except fruit juices) ………… 40
2.2 Powder soft drinks ……………………………………. 40
2.3 Water bottled or canned in a factory ………………… 30
2.4 Alcoholic Drinks
2.4.1 All types of beer &stout …………………….. 50
2.4.2 All types of wine …………………………….. 50
2.4.3 Whisky ……………………………………… 50
2.4.4 Others alcoholic drinks ……………………… 100
3. All types of pure Alcohol ………………………………………. 75
4. Tobacco &Tobacco Products
4.1 Tobacco Leaf …………………………………………… 20
4.2 Cigarettes, cigar, cigarillos, pipe tobacco, snuff and
Other tobacco products ……………………………….. 75
5. Salt ……………………………………………………………… 30
6. Fuel-super Benzene, Regular Benzene, Petrol, Gasoline
and other Motor Spirits …………………………………………. 30

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7. Perfumes and Toilet Waters …………………………………….. 100
8. Textile and Textile products
8.1 Textile fabrics, knitted or woven of natural silk,
rayon, nylon, wool, or other similar materials ……. 10
8.2 Textile of any type partly or wholly made from cotton,
which is gray, white, dyed or printed, in pieces of
any length or width (except Mosquito net and of
“Abudgedid”) and including blankets, bed sheets,
Counterpanes, towels, table clothes and similar articles 10
8.3 Garments……………………………………………………. 10
9. Personal adornments made of gold, silver or other materials ……... 20
10. Dish washing machines of a kind for domestic use ……………….. 80
11. Washing machines of a kind for domestic purposes ………………. 30
12. Video decks …………………………………………………………….40
13. Television and Video Cameras ……………………………………….. 40
14. Television broadcast receivers whether or not combined with
Gramophone, radio, or sound receivers &reproducers ………… 10
15. Motor passenger cars, Station Wagons, Utility cars and
Land Rovers, Jeeps, Pickups, similar vehicles (including
motorized caravans), whether assembled together with their
appropriate initial equipment:
15.1 Up to 1,300 C.C. ……………………………………….. 30
15.2 From 1,301 up to 1,800 C.C. …………………………. 60
15.3 Above 1,800 C.C. ……………………………………… 100
16. Carpets …………………………………………………………… 30
17. Asbestos and Asbestos products ………………………………………. 20
18. Clocks and watches …………………………………………………… 20
19. Dolls and toys ………………………………………………………… 20
Every taxpayer is required to maintain books of accounts and supporting documents in
accordance with proper accounting principle and in a manner acceptable to the Tax Authority
and submit every 30 days to the Tax Authority, in a form, which is supplied by the Authority, a
declaration containing such information that is necessary for proper collection of the tax. Any

44
taxpayer is subject to administrative penalty if he fails to comply with the requirements stated in
this proclamation.

A person who fails to file a timely return is liable for a penalty equal to 5% of the amount of tax
underpayment (which is the difference between the tax required to be shown on the return and
the amount of tax paid by the due date) for each month (or portion thereof) during which the
failure continues, up to 25% of such amount. The penalty under for such late filling is limited to
Br 50,000 for the first month (or portion thereof) in which not return is filed. However, this
penalty can not be smaller than Br 10,000 and 100% of the amount of tax required to be shown
on the return, whichever is lower.
In addition to the penalty if any amount of tax is not paid by the due date, the person liable is
obliged to pay interest on such amount for the period from the due date to the date the tax is paid
at 25% over and above the highest commercial lending interest rate that prevailed during the
preceding quarter.
Illustration
Lem Sugar Factory incurs the following costs and expenses for the production of sugar in the
month of Sene 1996.
Raw material used ………………………………… Br 1,200,000
Labor used ………………………………………… 80,000
Repair and maintenance of factory machinery … 16,000
Utility expenses (Applicable to production Dept.).. 36,000
Required: Compute excise tax for the month
Solution:
Total cost of production = Br 1,332,000
Excise tax rate 33%
Excise Tax Br 439,560

Summary
VAT and Excise Tax are among the taxes that exist in the federal tax system. The Federal
Government has issued VAT and Excise Tax Proclamations.

45
VAT is imposed on every taxable transaction by a registered person, every import of goods,
other than an exempt import and an import of services as provided in Article 23.
VAT is imposed at 15% of the value of every import of goods, other than an exempt import and
an import of services as provided in Article 23 unless the transaction is exempt or zero-rated.
When the transaction is exempt, no tax is imposed on it. If however the transaction is taxable, the
rate could be a standard one .i.e. 15% or it could be zero-rated.
As was mentioned earlier there is excise tax which is imposed on certain goods. This tax is
imposed with a view to reduce the consumption of certain goods that are hazardous to health and
goods which are causes to social problems. Similarly this tax is also imposed on luxury goods
and goods which are demand inelastic. The excise tax proclamation gives a list of the type of
taxable goods and the rate at which they are taxed.
Like in the case of other tax legislations, VAT and Excise Tax legislations lay down rules on the
administration and enforcement of these taxes. In this respect a number of obligations are
imposed on taxpayers and other persons. The Tax Authority is required to administer these taxes.
Information Sheet – 3.4 CUSTOMS DUTY

Any goods imported or exported would be subject to

 Payment of duties and taxes according to the tariff of Harmonized commodity description
and Coding System.
 Payment of duties and taxes according to the preferential tariff rate where goods are
imported from the preferred country.
 Payment of duties and taxes at the rate in force on the day the declaration of the goods are
presented to and accepted by the customs office.
Duty paying value
The duty paying value of any import or export goods shall be the actual total costs of the goods.
DUTY PAYING VALUE OF IMPORTS
1. For the purpose of customs the duty paying value for imported goods would be the sum
of the transactions values, freight cost and insurance premium that is paid to deliver the
goods upto a prescribed customs port.
2. Transaction values and other related costs given by a supplier who is associated in
business with the importer shall be considered genuine unless the given price is
influenced by their relationship.

46
 3. Where a document which show the correct freight cost up to the first customs part is not
produced or the document produced is rejected by the authority, the freight cost of
identical goods transported at or about the
4. same time with the same means of transport would be taken to calculate the cost of
freight
5. Goods imported without insurance coverage or transported under insurance coverage but
the bill produced is rejected by customs, the insurance cost paid for identical goods
transported at or about the same time with the same means of transport would be taken to
calculate the cost of insurance.
6. To determine the accurate value of the goods the following additional costs shall be
considered
a. commission and brokerage costs incurred by the buyer
b. cost of container and cost of packing the goods be it for labor or material
c. value of goods and service supplied by the buyer free of charge or at reduced cost, to
the extent that such value has not been included in the price actually paid or payable
d. royalties and license fees related to the goods that is paid directly or indirectly by the
buyer
e. loading, unloading and handling charges paid up to the port of importation
7. Where documents necessary to determine duty paying value of the goods are not
presented, or rejected by the Authority, the transaction value of identical goods imported
from the same country at or about the same time shall be taken to determine the value of
the goods.
8. Where the value of the goods cannot be determined the transaction value of similar goods
imported from the same country at or about the same time shall be taken to determine the
value of the goods.
DEDUCTIBLES FROM IMPORT VALUE
1. The following adjustment costs shall be deducted from import value
a. Costs for damages in routes
b. Costs for damages in customs warehouse
2. When it is requested and agreed upon by the customs office to destroy or dispose any
dangerous goods deposited in the warehouse, the goods shall be destroyed or disposed at
the presence of customs officer and other

47
Officials concerned, and the values of the goods destroyed or disposed should be deducted
proportionally from the duty paying value of the goods.
For customs purpose the value of export goods shall be the transaction values of the goods and
the cost of transaction up to the port of exit.
CUSTOMS CONTROL
For the implementation of the objectives of customs, the following goods shall be under the
supervision and control of customs.
 Imported goods from the time at customs port until the completion of customs
formalities and received by the importer
 Goods under drawback procedure from the time of drawback claim until exportation
 Goods of export from the time they entered into customs port until the completion of
customs formalities and be exported
 Goods entered into customs warehouse until removed from the warehouse
 Goods in transit, from the time their movement is allowed until the completion of transit
procedure
 Goods found with out owner, abandoned, forfeited or contraband goods until they are
sold or disposed otherwise.
The customs authority would be responsible for the damage on goods under its control and
supervision caused by its employees while discharging their official duties

DUTY FREE PRIVILEGE

Ethiopians enjoying duty free privilege are classified based on the special rank, responsibility,
mission and the length of their stay in abroad people in these classification goods imported
without paying duties and taxes.
Self Assessment
1. What is the distinguished between direct taxes and indirect taxes?
2. What do you understand about turnover tax? Explain different rate of
turnover tax that is imposed on the supply of goods and service
3. Mention at least five exempted items from turnover tax?
4. What do you understand about excise tax? Explain different rate of excise
tax imposed on the produced locally and imported?

48
 5. What do you understand about values Added tax?
6. What is the difference between values added tax (VAT) and added (VA)?
Explain clearly.
7. What is zero rating?
8. Discuss the difference between VAT exemption and zero rating.
Work out Qustions
1. In sene 1999 E.C New Millennium Share Company, with head office in Addis Ababa,
purchased items with a total invoice price before VAT of birr 300,000 from a VAT
registered business in Ethiopia. New Millennium exported 60% of the items to a firm in
U.S.A with a selling price of birr 270,000. The remaining 40% of the items were sold in
the domestic market with a selling price of birr 220,000.
Required:-
Determine New Millennium Company’s total VAT liability for the month of sene 1999 E.C
2. Assume that ABC Company is not registered for VAT. In the year ended sene 30, 1999
E.C, the company’s out put total birr 128,000 and it has inputs costing birr 40,000. plus
VAT at 15% rate
Required:-
How much profit does the company make for the year if the company registered for VAT
voluntarily?

LO4 Identify and discuss stamp duty tax

 Ways that tax is collected includethrough regional and federal level taxes including:
 Stamp duty tax: instruments shall be chargeable with stamp duty include:
 Memorandum and articles of association of any business
 organization, cooperative or any other form of association;
 Award; Bonds; Warehouse bond;
 Contract and agreements and memoranda;
 Security deeds;
 Collective agreement;
 Contract of employment;
 Lease, including sub-lease and transfer of similar rights;

49
  Notarial acts;
 Power of attorney;
Documents of title to property.
Information Sheet – 4.1 Stamp duty tax

The following instruments shall be chargeable with stamp duty

 Memorandum and articles of association of any business organization cooperative or
any other form of association
 Award, Bonds, warehouse bound
 Contract and agreements and memoranda
 Security deeds
 Collective agreement
 Contract of employment
 Lease, including sub-lease and transfer of similar rights
 Notarial acts
 Power of attorney
 Documents of title to property

TIME AND MANNER OF PAYMENT

1. The stamp duty would be paid
 On memorandum and articles of association, before or at the time of registration
 On awards, before or at the time of issuance of the award
 On contracts or agreements, before or at time of signature
 On leases or sub-leases, before or at time of signature
 On notarial acts, at the time of issuance
 On security deeds, before or at the time of signature
 On documents of title to property, before or at the time issuance is effected.
2. The payment of stamp duty
 Under Birr 50 would be effected by affixing stamp of appropriate value to the
instrument

50
  When the stamp duty exceeds Birr 50 or where the type and nature of instrument so
requires, the federal government revenues board may by directive provide.
 That stamp duty be paid by means other than affixing stamp
3. Whoever executes or receive an instrument bearing an adhesive stamp shall at the time of
execution cancel the same, so that it cannot be used again.
RATE OF STAMP DUTY
The stamp duty on each instrument to be charged, levied and collected at the following rates:-
Basis of Rates of stamp Duty
S.No Instruments chargeable with valuation
stamp Duty
1 Memorandum and articles of association of
any business organizations, or any
2. Memorandum and articles of association of
cooperatives
3.8. upon 1st execution Flat Birr 35
3.9. upon any subsequent execution Flat Birr 10
3 Award On value a. determinable values 1
%

4 Bonds On value 1%
5 Warehouse Bond On value 1%
6 Contracts and agreement and memoranda
thereof Flat Birr 5.00
7 Security deeds On value 1%
8 Collective agreement
a. on 1st execution Flat Birr 350.00
b. on any subsequent execution Flat Birr 100.00
9 Contract of employment Salary 1%
10 Lease including sub-lease and transfer there On value 0.5%
of
11 Notarial act Flat Birr 5.00
12 Power of attorney Flat Birr 35.00
13 Register title to property On value 2%

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EXEMPTIONS OF STAMP DUTY
 The ministry of revenue may for good cause grant exemption from payment of stamp
duty.
 Public bodies on which the Federal government of Ethiopia financial administration
proclamation No 57/1996 applies shall be exempt from payment of stamp duties
 Goods imported for sale by traders having import license shall be exempt from payment
of stamp duty when first registered in the name of the trader.
 Share certificates shall be exempt from stamp duty payable on the register of title of
property.
 Documents may be exempted from the payment of stamp duty in accordance with
international agreements and conventions approved by the government.
 Subject to reciprocity, the minister may grant embassies, consulates and missions of
foreign states exemption form payment of stamp duty.
RIGHT TO APPEAL
Persons dissatisfied with the decision of the federal inland revenue Authority is respect of the
amount of stamp Duty may, within 21 days from the date of notification of the decision rendered
in writing, make an appeal against the decision to the Federal High court.
Self Assessment
1.What is stamp duty? Explain different rate of stamp.
LO5 Manage tax liability

 tax payers can determine their tax liability by:assessing income:

 capital gains  investment
 employment  rental property income
 foreign
 assessing deductions:
 allowable medical expenses and health insurance rebates
 capital losses
 dependent rebates
 gifts and donations
 rental property expenses
 tax offsets

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  work related clothing expenses
 work related education expenses
 work related travel expenses
 zone and overseas forces allowances
 lodging returns and paying governments:
 land tax where applicable
 payroll tax (rate varies by jurisdiction and depends on size of payroll so many small
business operators are exempt)
 stamp duty on:
 hire purchase agreements
 insurance polices
 leases and mortgages
 motor vehicle purchases
property transfer

 claiming interest on early payments that may be possible for certain tax categories such as:
 income tax
 Higher Education Contribution Scheme
 amended assessments of earlier years
paying interest on overdue amounts

Self Assessment
1. List down the methods of determine the tax liabilty?
2. What does it meant byproperty transfer?

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