Officials at the Ministry of Revenues are pleading with Parliament to enact new policies they argue are necessary to raise the country’s languishing tax-to-GDP ratio out of single digit territory.
Tesfaye Tulu, a state minister of Revenues, revealed the ratio stands at 7.02 percent during a nine-month performance report to Parliament earlier this week, down from 13.4 percent in 2015. It is also far lower than the 12.7 percent target set in the first Homegrown Economic Reform plan that ended in 2022.
The State Minister told MPs that tax collection is burdened by a lack of crucial policies, administrative inefficiency, and slow technology adoption.
“The first pillar that needs improvement is policy,” said Tesfaye.
Aynalem Negussie, minister of Revenues, conceded the ratio is falling but said her office is working to improve the situation. She called for an assessment of industries and sectors with high tax generating potential.
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“We have to identify the specific sectors we need to go after first,” said the Minister.
Aynalem attributes the declining tax-to-GDP ratio to illicit financial flows, the abuse of tax incentives and exemptions, and the loss of revenues from sectors that are presently tax exempt. The Minister alluded to agriculture, which has long enjoyed tax holidays and duty exemptions on as many as 500 types of machinery.
“Considering the wide range of this incentive, the tax collected from agriculture right now is insignificant,” said Aynalem.
The Minister argues the need for a policy that would enable her office to assess tax potential across economic sectors and collaborate with regional administrations to collect the taxes.
Ethiopia has registered considerable progress in tax collection over the last two decades, with revenues rising from 12.4 billion birr in 2005 to 165.3 billion birr in 2015, and close to 600 billion birr by the end of the 2022/23 fiscal year.
However, the growth of the country’s economic output has outstripped its tax collection over the same period. The tax-to-GDP ratio in 2005 was estimated to be 12.5 percent. It had shown little improvement by 2015, reaching 13.4 percent.
The ratio has been on a steep decline over the last few years, registering at an all-time low of 6.8 percent last year.
The first iteration of the government’s homegrown economic reform plan had ambitions to raise the ratio to 12.7 percent before it expired in 2022, but they proved unattainable due to weak tax enforcement mechanisms, low compliance levels, a large informal sector, limited capacity in tax administration and narrow tax bases, among other things.
The second reform plan scheduled to last until 2026 has similar ambitions but the underlying problems persist.
The nine-month performance report indicates the Customs Commission seized contraband valued at close to 12 billion birr since June, with import contraband accounting for two thirds. Still, members of the parliamentary standing committee for Planning, Budget and Finance Affair noted a 100 percent growth in the value of export-destined contraband seized this year, and a 34 percent increase in import contraband.
“We want an explanation for what the Ministry is doing to prevent contraband trade at its source,” said Desalegn Wodaje, head of the committee.
Desalegn asked Ministry officials to elaborate on the preventive measures being taken against illicit trade and the challenges encountered, as well as called for the Ministry to improve its collaborative efforts with regional administrations.
“We are well aware of classifications within the contraband system,” said Tesfaye Bambo, an MP. “A supposed legal illicit trade which is carried out with the support of government officials, and an illegal trade that is solely carried out by criminal actors.”
Debele Kabeta, Customs commissioner, told MPs that greed, a lack of foreign currency, and a lack of collaboration between government institutions has exacerbated illicit trade activity.
Debele emphasized the need for improved technological adoption in fighting contraband trade.
The Revenues Minister, on the other hand, praised the Commission’s achievements.
“We have employees who have lost their lives and others who have been disabled in their efforts to stop illicit trade,” said Aynalem. “We’re making progress.”
The standing committee reprimanded the Minister for what MPs say is insufficient follow up on the beneficiaries of tax and duty exemptions.
The report reveals the federal government forfeited close to 71 billion birr in tax revenues through the extension of tax-free privileges for basic needs commodities that are imported for market stabilization as well as on items that encourage investment.
“It’s a lot of money for the government to lose and not check up on whether the extended privileges have achieved the intended goals,” said Aynalem.
She admits there is a need for a review and update of follow up mechanisms, especially for beneficiaries nearing the expiry of their tax privileges.
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