Yardstick international college

Postgraduate studies department of accounting and finance

Advanced taxation

Term paper on individual income tax or schedule A

Group members

NAME ID

Solomon Geremew ACFN (1)011/14

Biruk Atiso ACFN (1)013/14

Ermias Kifle ACFN (1)026/14

Gessesse Kelele ACFN (1)028/14

Frehiwot Abate ACFN (2)008/14

Sofya Yimer ACFN (1)028/14

Tegen Abuhay ACFN(1)019/14

Submitted to :

Mr. Kasu B. (Ass. Prof.)

September 2022
 Contents

1.0 Introduction

1.1 Definition of Tax

1.2 Types of tax

1.3 Scheduler versus Global income taxes

1.4 Definition of terms

1.5 Schedule ‘A’: Tax on Income from Employment

 Chapter one: Introduction

1.0 Introduction

Every government has two important sources of revenue. These are Tax sources, and Non-tax sources.
Non- tax source of public revenue includes fee charged for rendering certain services, Fines and
penalties which are the payments made for contravention of law, gift made by Individual, borrowing
of the money and Printing of paper money.

1.1 Definition of Tax

A tax is a compulsory charge or payment imposed by government on individuals or corporations. Tax

is defined as a compulsory contribution levied on persons, property, or businesses for the support of
government for economic and social operations. In other words, it is money paid to a government to
fund its programs and services.

1.2 Types of tax

There are different kinds of taxes but all of them can be placed in one of two large classes.
Taxes are either direct or indirect. Based on who is the impact and incidence body.

 DIRECT TAX

A direct tax is those which are paid entirely by those persons on whom they are imposed. Direct taxes
are those taxes which cannot be shifted to others”. Impact and incidence are imposed on single
individual.Tax on income from employment, Business profit tax,Tax on rental of building,Tax on
interest,Tax on dividend, Tax on income from Royalty ,Tax on income of rental of property ,Tax on
technical services, Agricultural income tax,and Land use tax are an example for direct tax.

 INDIRECT TAXES

Indirect taxes are taxes that are levied on consumption of goods and services and paid by legally
entitled individuals and business entities. It is a tax that incidence and impact are separate individuals.
Examples of indirect tax include turnover tax, excise tax, and value added tax and custom duty or
tariff
1.3 Scheduler versus Global income taxes

Two theoretical models exist for the structure of the personal income tax scheduler and Global. A
scheduler income tax is one in which separate taxes are imposed on different categories of income. A
global income tax is one in which a single tax is imposed on all income, whatever its nature.

In the benchmark scheduler system, gross income and deductible expenses are determined separately
for each type of income; in some cases, limited deductions or no deductions may be allowed. The
rates of tax applicable to each category of income are then applied to the taxable amount of the
income. The rates of tax may vary from category to category. Different procedures may apply to each
category of income for the reporting assessment, and collection of tax.

Some types of income may be taxable only through withholding; others may involve the filing of
returns. Scheduler systems used to be more widespread; a few countries still have such a system, or
one with substantial scheduler elements.

In the benchmark global system, there is no matching of particular types of income to the expenses
incurred to derive the income. All income and expenses are considered together to arrive at a single
net gain that is subject to tax. Thus, under a pure global system, the category of income is irrelevant.

1.4 Definitions of terms

Salary: Employees who are assigned by one working level is paid and does not include allowance and
benefits.

Practice: It is a paid allowance for bed, food and drinks and related cost when it comes to a employee
of transportation, the work and the workplace

Employer is a person who has employed an employee or who pays for the employer.

The employee involves: Consulting or temporary an organization, or temporary person in another

person / guardian and supervisor, including the organization and the responsibility in the
organization's leadership.

"Employer" means any government, personal or non-governmental institution, or continental or

continental or continental or continental or continental or continental organization that works for
graduating from higher education institution.
"User" means a student who attended the institution and training installation with the institutional
instructional institution

"Sharing Costs" means a system to share the cost of education and the government of the higher
education user and the government.

1.5 Schedule ‘A’: Tax on Income from Employment

A. Employment Income

Salary, wages, an allowance, bonus, commission, gratuity, or other remuneration received by an

employee in respect of a past, current, or future employment; The value of fringe benefits received by
an employee in respect of a past, current, or future employment;an amount received by an employee
on termination of employment, whether paid voluntarily, under an agreement, or as a result of legal
proceedings, including any compensation for redundancy or loss of employment, or a golden
handshake payment.

Employment income shall not include exempt income.

If an employer pays the employment income tax payable by an employee, in whole or part, without
withholding tax from the employment income of the employee, the amount of tax paid by the
employer shall be included in the employment income of the employee.

B. Tax Rate

The tax payable on income from employment shall be charged, levied and collected at the following
rates: It can be explained as follows

Schedule A

No Employment income (Income per month) Tax rate Deduction in birr

Over Birr To Birr % Birr

1 0 600 Exempt threshold

2 601 1650 10 60.00

3 1651 3200 15 142.50

4 3201 5250 20 302.50

5 5251 7800 25 565.00

 6 7801 10900 30 955.00

7 Over 10,900 ***** 35 1500.00

C. Other taxable incomes of employees

 Regarding tax payable on bonus/bonus and annual leave

Bonus / Bonus / Annual leave and similar payments are the benefits of 12 months, after
summing up and dividing by 12, after adding the results to the regular salary, the employment
tax will be calculated and the employment tax payment will be calculated by subtracting the tax
previously paid in the monthly salary and the tax difference of each 12 months will be
calculated by adding:.

 Bonus/Bonus Tax Payment:-

Example: -2 Mr. Ayele is employed by XYZ Company as the Senior Accountant of the
organization. The organization pays them a salary of 12,300 birr per month, and if they are paid
their monthly salary in the form of a bonus at the end of the year due to their effective work
performance in 2012, how much is the employment tax that Mr. Ayele will have to pay on the
bonus.

SOLUTION

 12,300/12= 1,025

 1025 +12,300 = 13,325.00

 13,325*35/100 -1500= 3,163.75

 12,300*35/100-1500=2,805

 3,163.75-2,805=355.75
355.75*12= 4,269.00

 Employment tax paid when annual leave is paid in exchange for money
Regarding annual leave, an employee of a private company who has served for one year will be given
16 days of annual leave, and an employee who has served for more than one year will receive an
annual leave with one working day added every two years.

Example:-3 Mr. Abebe is employed by XYZ Company, he has served the company for 28 years and is
paid a salary of 10,500 Birr. According to Mr. Abebe's request for the unused 30 days of annual leave
in 2011 to be exchanged for money, the bill was calculated and given to him in the last year.

How much employment tax will they pay on the cash they receive from their annual leave?

SOLUTION

 10,500/12= 875

 875+10,500=11,375.00

 11,375.00*35/100 -1500= 2481.25

 10,500*30/100-955=2,195

 2,481.25-2,195= 286.25

 286.25*12 = 3,435

 Payment or severance paid when an employee is dismissed according to the contract

Payment or severance paid when an employee is dismissed according to the contract According to the
contract, the payment or severance paid when an employee is dismissed will be based on the monthly
salary that the employee receives when he is dismissed. Accordingly, when the employee is
dismissed, his first salary will be paid in full, and 1/3 of his salary will be paid for the following years
of service.

Example:-4 Dr. Kebede is the manager of the company at YZ Company and during his stay in the
company, he was paid 30,500 birr per month. Dr. Kebede worked for 8 years according to his contract
and the company fired him.

How much should be paid to the dismissed individual when they are dismissed?

How much of the severance pay will they have to pay to the revenue authority as employment tax?

Answer:
Accordingly, the monthly salary of 30,500 Birr will be paid 100% for the first year, and
the monthly salary will be multiplied by 1/3 in the remaining years. Accordingly

 30,500 for the first year at 100%

 30,500*1/3*7 years = 71,166.67

 30,500 + 71,166.67 = 101,666.67

 101,166.67/30,500 = 3.32 months’ salary.

 30,500*35/100-1500*3 = 9,175*3= 27,525

 30,500*0.32 = 9,760

 9,760*30/100-955 = 1,973.00

 27,525 1,973 = 29,498 the final severance pay will be employment tax.

Calculation of overtime pay

No Time/Date/ Payment status

1 From 12 am to 4 pm In regular hours, the payment is multiplied by 1.5

2 From 4 pm to 12 am In regular hours, the fee is multiplied by 1.75

3 Overtime worked on a day off per In regular hours, the payment is multiplied by 2
week

4 Overtime on holidays In regular hours, the payment is multiplied by 2.5

The overtime pay received by the employee during the month is added to the monthly salary and the
gross income is taxed according to Table "A".

Example: 5 If the professional who is paid 15,000 birr per month works 20 hours per month overtime
on a weekly holiday.
How much is the overtime pay?

How much will be the employment tax to be paid?

Solution

The calculation formula

 Daily salary = monthly salary/for 30 days

 Hourly rate = daily wage / hours worked in a day

The calculation formula

 Daily Salary = 15,000/30 = 500

 Hourly rate = 500/8 = 62.5

Calculation of tax

 The number of hours worked at a profit x the wage earned per hour x productivity

 20 X 62.5 X 2 = 2,500

 15,000 2,500 = 17,500

 17,500 x 35% -1,500 = 4,625.00 will be a tax

D/ Exemptions

The following categories of income are exempt from payment of income tax or are excluded
from income in arriving at taxable income.

(a) 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) Pension contribution, provident fund and all forms of retirement benefits contributed by
employers in an amount that does not exceed 15% (fifteen percent) of the monthly salary of the
employee;
(c) 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, Consulate 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) Income specifically exempted from income tax by:

(I) any law in Ethiopia, unless specifically amended or deleted by the income Proclamation;

(II) International treaty; or

(III) An agreement made or approved by the Minister.

(e) Payments made to a person as compensation or gratitude in relation to:

(I) Personal injuries suffered by that person;

According to the Income tax regulation the following items are exempted from Employment income
Tax.

 Amounts paid by employers to cover the actual cost of medical treatment of employees

 Allowance in lieu of means of transpiration granted to employees under contract of

employment

 Hardship allowance

 Amounts paid to employees in reimbursement of traveling expense incurred on duty

 Amounts of traveling expense paid to employees recruited from elsewhere than the place of
employment on joining and completion of employment, or in case of foreigners traveling
expense form or to their country, provided that such payments are provided by the contract of
employment.

 Allowance paid to members and secretaries boards of public enterprises and public bodies as
well as to members and secretaries of study groups set up by federal or regional government
  Income of persons employed form domestic duties

 The tax authority is empowered to determine the amount of payment specified by numbers II,
IV and V above.

C) Determination of Employment Income

Employment income shall include any payments or gains in cash or in kind received form
employment by an individual including income from former employment or otherwise or form
prospective employment.

The type of taxable fringe benefits and the manner of their assessment shall be determined by
regulations to be issued by the council of ministers.

Income received in the form of wages does not include representation and other similar expenditures
(on social functions, quest accommodations, etc.).

The determination of employment income involves a series of steps and requires such as in puts as
taxable income and the use of relevant and appropriate tax rates.

The determination of taxable income, on the other hand, requires identifying categories of income that
are exempted from the payment of tax from these taxable under the law.

Methods of calculation of employment income tax:

 Deduction method

 Short cut and most widely used method

Examples, Assume Mr. Ayele earn an amount of birr 11,000 subjected to income tax, his
employment income tax is calculated using deduction method as follow:

Income tax= (Gross taxable income * tax rate)-Deductions.

Income tax= 11,000*35%- 1500.00

=3850-1500.00

=2350.00

 Progression Method

 Calculated for each layer of tax bracket by multiplying the given rate under schedule A.
Reference
 Tax law teaching material prepared by Yohannes Mesfin and Sisay Bogale,2009
 Income tax Proclamation number 979/2008

 Regulation number 409/2009