CHAPTER SIX

ETHIOPIAN TAX SYSTEM

6.1. Direct Tax in Ethiopia
A Direct tax is a kind of charge, which is imposed directly on the taxpayer and paid directly to
the government by the persons (juristic or natural) on whom it is imposed. A direct tax is one
that cannot be shifted by the taxpayer to someone else. It‟s borne by person.

The Ethiopian Taxation system has two major categories: direct and indirect taxes. All tax types
in the Ethiopian tax system are described and explained as follows.

Direct tax includes

These are one type of taxes a company or individual pays directly to the government.

The following are the tax categories under the income tax proclamation No. 979/2016. Tax
payers are categorized according to their income levels.

1. Category A taxpayers:
 A body or any other person having annual gross income of ETB 1,000,000 or
more.
2. Category B taxpayer:
 A person, other than a body, having an annual gross income of ETB 500,000 or
more, but less than ETB 1,000,000.
3. Category C taxpayer:
 A person, other than a body, having an annual gross income of less than ETB
500,000.

The proclamation provides for the taxation of income in accordance with the following
schedules:

1) Schedule A, income from employment;

Employment income (per month) Birr Employment Deductions

income tax Rate

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 0 600 0 (Exempted) Nil

601 1650 10% 60

1651 3200 15% 142.5

3201 5250 20% 320.5

5251 7800 25% 565

7801 10900 30% 955

Above 10900 35% 1500
Determination of Employment Income

 Employment income shall include any payments or gains in cash or in kind

received from employment by an individual, including income from former
employment or otherwise or from 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, guest accommodations, etc.
 Exempted Incomes

Schedule ‘B’ Income: Income from Rent of Buildings under the Schedule „B‟ the basis of
charge is the rental income received from the property. That is, Income tax shall be imposed on
the income from rental of buildings. Every person deriving income from rent of buildings is
liable to pay tax on that income at the rate specified.

Schedule B

Total rental income (per year) Rental income tax rate Deductions

0 7200 0 Nil
7201 19,800 10 720
19,801 38,400 15 1710
38,401 63,000 20 3630

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63,001 93,600 25 6780
93,601 130,800 30 11,460
Above 130,800 35 18,000

 Actual rent for a month is birr 30,000

 He paid 15% of the actual rent received as land taxes and 3% as other taxes
 He spent birr 1/5 for maintenance of the building

Compute the taxable rental income and tax liability assume

A. Mr. X does not maintain any books of accounts in this regard

Schedule ‘C’ Income: Business Income Income Tax shall be imposed on the taxable business
income realized from entrepreneurial activity.

 Business means manufacture or purchase and sale of a commodity with a view to make
profit.
 It includes any trade, commerce or manufacture or any other adventure or concern in the
nature of entrepreneurial activity.
 It is not necessary that there should be a series of transactions in a business and it should
be carried on permanently.
 Taxable business income shall be determined per tax period on the basis of the profit and
loss account or income statement, which shall be drawn in compliance with the Generally
Accepted Accounting Standards, subject to the provisions of this Proclamation and the
directives issued by the Tax Authority.

Tax Rate

1) Taxable business income of bodies is taxable at the rate of 30 %.

2) Taxable business income of other taxpayers shall be taxed as the same as Schedule B.

Non-Deductible Expenses for business profit tax

 The cost of the acquisition, improvement,

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  An increase of the share of capital of a company or the basic capital of a registered
partnership;
 Voluntary pension or provident fund contributions over and above 15% of the monthly
salary of the employee.
 Declared dividends and paid-out profit shares;
 Damages covered by insurance policy;
 Punitive damages and penalties;
 The creation or increase of reserves, provisions and other special-purpose funds unless
otherwise allowed by this Proclamation;
 Personal consumption expenses

Deductible expenses of business profit tax

 Operating expenses
 Trading Stock
 Depreciation
 The acquisition or construction cost,

Example 1; Melat enterprise, unincorporated business has reported earnings before tax of
birr 80,000 at the tax year ended Sene 30, 2012.

Required

A. Determine the amount of business income tax?

B. Record necessary journal entries?

Schedule ‘D’ Income:

Other Incomes any income which is taxable under the Income Tax Proclamation but does not
find place under any of the remaining three Schedules of income (i.e., Schedules A, B and C)
will be taxable under this residuary Schedule “D” Other Incomes.

The following incomes shall be chargeable to income tax under the Schedule-D:

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1. Royalties The term “royalty” means a payment of any kind received as a consideration
for the use of ,or the right to use, any copyright of literary, artistic or scientific work,
including cinematography films and films or tapes for radio or television broadcasting,
any patent, trade work, design or model, plan secret formula or process, or for the use or
for the right to use of any industrial, commercial or scientific equipment, or for
information concerning industrial, commercial or scientific experience.
 It is taxable as follows: Rate of tax Royalties shall be liable to tax at a flat rate of flat rate
of 5% .

2. Income from Rendering of Technical Services The term “technical service” means any
kind of expert advice or technological service rendered.
 All payments made in consideration of any kind of technical services rendered outside
 It is Taxable at a flat rate of 10%.
3. Income from Games of winning a Chance every person deriving income from winning
at games of chance (for example, lotteries, tom bolas, and other similar activities) shall be
subject to tax. Rate of tax: It is Taxable at the rate of 15% except for winnings of less
than 100 Birr.
4. Dividends every person deriving income from dividends from a share company or
withdrawals of profits from a private limited company shall be subject to tax under Rate
of tax: It is Taxable at the rate of 10%
5. Income from Rental of Property Every person deriving income from the casual rental
of property (including any land, building, or moveable asset) not related to a business
 It is Taxable at the rate of 15%. This tax is a final tax in lieu of a
net income tax.
6. Interest Income on Deposits every person deriving income from interest on deposits
shall pay tax. Rate of tax: It is Taxable at the rate of 5%)
6.2.Indirect tax in Ethiopia
Indirect Taxes The main types of indirect taxes are VAT, customs duty, excise and turn
over taxes.
1. VAT A person who carries out a taxable activity is required to file an application for
VAT registration if the total value of taxable transactions, at the end of any 12

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 calendar months period, exceeds ETB 1 million or there are reasonable grounds to
believe that the taxable transactions of the coming 12 months exceed the threshold.
2. Turnover tax (TOT) Turnover tax is an equalization tax imposed on persons not
registered for value-added tax to allow them to fulfill their obligations and enhance
fairness in commercial relations and complete the coverage of the tax system, among
other objectives. This tax is, therefore, applicable to small taxpayers who do not meet
the VAT registration threshold of turnover of ETB 1,000,000 per year. Turnover tax
rates The turnover tax shall be:
 2% on goods sold locally.
 For services rendered locally:
 2% on contractors, grain mills, tractors and combine harvesters.
 10% on others. Excise tax Excise tax is imposed on selected
goods that are:
 Luxury goods and basic goods that are in inelastic demand.
 Hazardous to health and that are a cause of social problems.
3. Excise tax will be applicable on 19 groups of items and 378 goods. The tax rate
ranges from 5% to 500%.
 Excisable value in respect of goods produced locally, ex-factory selling price
excluding VAT, cost of excise stamps and the cost of returnable containers.
 The customs value of the goods plus the amount of customs duty payable
(whether paid or not). Time of payment Excise tax on excisable goods shall be
payable:
 When imported at the time of clearing the goods from the customs area;
 When produced locally, not later than 30 days from the date of production.
4. Customs duty Duty means a charge levied and collected on any imported and
exported goods in accordance with the Customs Tariff Regulations and the
International Convention on the Harmonized Commodity Description and Coding
System:
 Regular customs tariff ranges from 10%–35% depending on nature of goods
imported.

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  Special customs tariff applicable to goods produced in and imported from the
Common Market for Eastern and Southern Africa (COMESA) member
countries is 10% less; i.e. 4.5% to 31.5%.
 Other taxes like VAT and excise tax are levied on imports at the same rate as
domestic transactions.
5. Sur tax It is an additional 10% tax that is applicable on imported goods except for
fertilizers, petroleum and lubricants, motor vehicles for freight, passengers and
special purpose motor vehicles, aircraft, spacecraft, and parts thereof, and capital
(investment) goods
6. Pension contribution it is applicable to private organizations‟ employees who are
salaried persons employed in a private organization for not less than 45 days for a
definite or indefinite period or a piece of work, including managerial employees.
The contributions payable to the Private Organizations Pension Fund shall, based on
the employee‟s salary, be:
• By the employer, 11%;
• By the employee, 7%
7. Withholding Tax All bodies and specified sole proprietor businesses are required to
deduct withholding tax on domestic transactions at a rate of 2% of the value of the
transaction and remit to the tax authority monthly. The threshold subject to
withholding tax is ETB 3,000 for purchase of services and ETB 10,000 for purchase
of goods. The withholding tax rate on suppliers that fail to provide a TIN and valid
trade license is 30%. The amount of tax withheld is deductible from the tax payable
by the supplier at the end of the year.
The tax authority refunds excess withholding tax, paid over and above the tax payable
for the year, to the supplier.
8. Stamp Duty Twelve types of documents are chargeable with stamp duty at varying
rates based on the nature of the documents. No instrument chargeable shall be
admitted in evidence for any purpose by any person unless such instrument is
stamped.