Push To Broaden Tax Base Sparks Concerns Over Implementation, Fairness

Ethiopia’s push to expand its narrow tax base has drawn criticism from legal experts and private sector actors who say the effort is disproportionately burdening existing taxpayers while leaving the informal economy largely untouched.

Tax base expansion, a cornerstone of the government’s ongoing macroeconomic reforms, was a central topic at the Ethiopia Finance Forum conducted this week. The event, organized to mark one year since the reforms kicked off last July with the currency floating, took place at  the Commercial Bank of Ethiopia headquarters in Addis Ababa.

Debate over the government’s approach to expanding the tax base flared during a panel discussion on the country’s investment environment that featured the minister of revenue, the customs commissioner, other senior officials, and representatives from the private sector.

Though officials insist that the goal is to ensure every eligible taxpayer contributes their fair share, participants argued that the current approach lacks institutional capacity, legal clarity, and practical incentives to bring new actors into the tax net.

Eyasu Girma, a tax and finance advisor attending the Forum, noted the government’s rhetoric about widening the tax base contrasts sharply with reality.

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“From the government side, there is a direction that says we must broaden the tax base.

However, what is actually happening is not about bringing in new taxpayers into the tax administration system, but rather increasing the burden on the existing taxpayers,” he said. “What is being done to bring new taxpayers into the system?”

A participant with a long history in the fuel trade accused the government of pressuring the

tax-compliant trader to pay higher and additional taxes rather than expanding its reach to those operating outside the system.

“Why does the system not expand and enforce a mechanism to control traders—like those in Merkato and elsewhere—who operate outside the tax framework and do not pay value-added tax?” he asked.

Aynalem Nigussie, minister of Revenue, responded to these concerns by stating that efforts to broaden the tax base should not be misconstrued as a scheme to overburden compliant contributors.

“Broadening the tax base does not mean unjustly and unnecessarily overburdening the already compliant taxpayers. Rather, to the extent possible, everyone should contribute fairly based on their capacity and appropriate benchmarks,” she told participants.

The Minister asserted that the government’s objective is not to raise revenue by placing excessive pressure on those who are already paying taxes. However, she conceded that systemic challenges, notably in monitoring informal and unregistered economic activities, persist.

“Our capacity to properly control informal or unregistered transactions is still far from where it needs to be,” said Aynalem. “As citizens, whenever we purchase a service or goods, our compliance with indirect taxes—especially value-added tax—is extremely low.”

She noted that VAT compliance, especially among consumers, remains “very low” despite the rise of digital payment systems.

Aynalem disclosed that over 16 billion Birr in digital transactions were recorded, yet their contribution to tax revenue remains negligible. To address these gaps, the government plans to introduce a minimum tax regime tailored to small and medium enterprises (SMEs) in a bid to streamline compliance and broaden inclusion, she told participants.

The federal government envisions collecting more than 1.09 trillion Birr from taxes to finance its record 1.9 trillion Birr budget for the new fiscal year. Direct taxes on income, profits, and capital gains are expected to contribute just over 260 billion Birr, while indirect taxes, including VAT, excise, and turnover taxes, are slated to raise another 258 billion Birr.

Targets for VAT on domestically manufactured goods and services alone account for over 203.7 billion Birr, disproportionately borne by registered and formal sector actors.

Members of the private sector who attended the forum argued that this heavy reliance on formal businesses and individuals underscores the urgent need to expand the tax net to include Ethiopia’s vast informal economy.

The mismatch between tax policy and execution was a recurring theme throughout the forum. Many private sector representatives voiced frustration over unclear regulations.

“The tax laws in Ethiopia are extremely complex. When viewed collectively across ministries, they are very difficult to read and understand. That’s why this issue is being raised. At the same time, we say we are opening up to foreign investment. But in my role as a tax advisor, I receive a range of inquiries from foreign investors,” Eyasu said. “When there is tax transparency and predictability, it encourages investment. In our country, however, the law is often one thing, while the implementation from the top to the bottom is entirely different.”

Legal experts noted that punitive tax audits and excessive penalties further discourage voluntary compliance and risk alienating emerging businesses rather than integrating them into the tax net.

“The discussion around expanding the base must go hand-in-hand with fairness, transparency, and ease of compliance,” one participant noted.

As the government eyes higher revenues to fund its fiscal obligations and development priorities, experts state that genuine tax base expansion—not pressure on the usual subjects—is the only sustainable path forward.