Operators Decry VAT Obligation On Ailing Tourism Sector

Finance Ministry leaves tax exemption petitions to cabinet

The Tour Operator Association has demanded that the tourism sector, considered an export industry, should be exempted from paying value added tax (VAT) and excluded from the upcoming VAT proclamation.

The appeal came during a discussion session on the upcoming tax legislation with the parliamentary standing committee for Planning, Budget and Finance earlier this week.

The president of the Association called on the government to support tourism as part of its economic reform agenda, and argued that imposing VAT on tour operators would further strain the already struggling sector.

“Imposing VAT on tour operators will increase the cost of services, making it difficult to attract tourists,” said the head of the lobby group. Highlighting Ethiopia’s previous standing of 122nd out of 140 countries in the World Economic Forum Tourism and Travel rankings, he expressed concern that the country’s current situation might push it out of competition in 2024. He estimated it could take five to 10 years for Ethiopia to re-establish itself in the international tourism market.

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The draft looks to charge tour operators VAT for the activities and services that their customers take part in while moving around the country.

Fikresilassie Admase, a representative from another tour operators association, echoed the calls for tax exemption, suggesting the adoption of a ‘tour operator margin skim system’ used in other countries instead. He emphasized that the tourism sector generates valuable foreign currency for the country and should be nurtured rather than taxed.

MPs also deliberated on plans to impose taxes on utilities such as electricity and water, as well as on digital financial transactions.

The draft proclamation proposes to set a threshold for tax-free electricity use, whereby households that go over the limit would be taxed based on how many extra kilowatts of power they have consumed. The experts who prepared the draft argue this provision aims to alleviate the financial burden on low-income households.

Wasihun Abate, an advisor to the Ministry of Finance, said the goal is to grow government tax revenues without burdening low income individuals and households. Accordingly, fintech providers such as Telebirr and its peers will be exempt from taxes while other financial service providers such as Eth-switch will be required to pay VAT.

The tax will also apply to transport service providers, with the exception of three-wheeled vehicles (bajaj).

The discussions also touched on the taxation of services provided from outside the country. The proclamation proposes that tech-linked business-to-business services will be subject to reverse taxation, where the company registered in Ethiopia will bear the burden of taxes. It also looks to oblige foreign companies that provide services to consumers in Ethiopia to register here and pay taxes.

The draft places VAT obligations on the premiums paid on life insurance products.

Eyob Tekalign (PhD), a state minister for Finance, told MPs the goal was to raise VAT contribution to government tax revenues to at least four percent. He also said the Ministry had taken a step back from its responsibilities in the approval of tax exemption requests.

“The Ministry has the power to grant tax exemptions, but its decisions have been altered and reversed by other institutions. Therefore, we believe any decision relating to tax exemptions should be carried out by the Council of Ministers from here on,” said Eyob.