Finance Ministry to determine new tax thresholds and requirements
A proclamation tabled to Parliament this week proposes the application of value added tax (VAT) to several goods and services that had previously been exempt in order to protect low-income segments of the population. The proposal comes as the government struggles with tax revenues and the country’s tax-to-GDP ratio falls to new lows of seven percent.
The draft looks to subject utilities such as electricity, water, telecom services, transport, and e-commerce, among others, to the 15 percent VAT rules that have reigned over the last two decades. It also proposes to raise the VAT registration threshold to two million birr for businesses.
Experts behind the legislation argue the draft aims to correct gaps and loopholes in the old VAT proclamation. It exempts some services and businesses, including financial deposits, loan collection, shares, bonds, securities, investment fund management, and pension funds, from the tax. Sharia-related businesses and some bank service fees are also exempt, according to the draft.
Transactions involving properties that have been in use for at least two years will also be exempt. However, insurance services, barring life and health policies, are to be included.
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Transportation service providers will also be obliged to pay VAT under the new rules if lawmakers ratify the draft. It proposes to exempt only public transport providers and vehicles with fewer than eight seats from the tax, but operators of three-wheel rickshaws (bajaj) will also be part of the VAT base.
“Though it is necessary to be cautious that transport costs fuel inflation and cost of living, it is wrong to exempt all transport means from VAT,” reads the draft.
It looks to reverse exemptions for utilities like electricity and water for citizens whom the government determines are capable of paying the tax.
“Water and electricity were exempt from VAT under the assumption of protecting low-income communities from income pressure. However, based on assessment, it is the higher income population segment that uses more water and electricity. And this segment can afford to pay VAT for water and electricity,” reads the document submitted to Parliament.
It discloses that the Ministry of Finance will introduce a directive that will oblige people with income above a certain threshold to pay VAT on their utilities, while lower income segments will be exempt.
Following final inputs, lawmakers are expected to ratify the new VAT proclamation in the near future.
E-commerce transactions are also included in the new VAT bill. This includes transactions through online providers such as Google Play, Apple’s App Store, Amazon, and others. If the e-commerce firms behind these services are not registered in Ethiopia, the business or entity that operates on their behalf will be obliged to pay the taxes in their stead, according to the draft.
Any Ethiopia based entity or business that receives foreign services or product supplies worth more than one million birr annually must also pay the tax.
The rules also apply to telecom services provision.
“Collecting VAT from telecom services has been very difficult,” reads the draft. “It’s been decided that the telecom provider shall add the VAT on its prices and collect it from end users. Hence, instead of telecom agents, the service provider itself shall collect the tax.”
The draft obliges users to pay VAT in Ethiopia for roaming services and charges, where an Ethiopian registered SIM card is utilized abroad. It claims the decision was made based on international practices.
Another controversial issue stated in the bill relates to VAT on tourism services. It states that as long as a tourism service is provided in Ethiopia, VAT will have to be paid in Ethiopia.
“There’s no need to think of the tourism service as an export item,” reads the document.
During the drafting of the new bill, operators in the tourism industry argued that VAT should not be calculated based on total expenditures from foreign tourists but on the final income that tour businesses have collected. Foreign tourists typically spend a large portion of their budget on hotels, restaurants, and other services, leaving tour operators to make do with what is left over. The bill, however, looks to calculate VAT based on total expenditures.
The new bill also mandates all VAT registered entities to pay the taxes they collect every 30 days instead of the three months allotted by the existing rules.
It enables businesses and entities that conduct taxable transactions of at least one million birr annually to register voluntarily for VAT. Though it is lower than the two million mandatory VAT registration threshold proposed by the draft, the authorities hope the new rule will make it easier for VAT registered businesses to transact with non-registered ones.
The Ministry of Finance is expected to issue a directive outlining the new VAT registration requirements.
The draft also outlines a number of goods and services that will continue to enjoy VAT exemptions. These include agricultural products such as fertilizer, pesticides, and slaked lime. Prescription medicine, medical equipment, and educational materials are also on the exemption list, among a slew of others. Goods and services donated or supplied by nonprofits and religious organizations will also be exempt.
Exemptions will apply to the import of goods by diplomatic institutions, fertilizers, gold to be transferred to the central bank, prescription medicines, and other goods and commodities imported by entities and businesses registered for duty-free privileges and tax holidays.
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