TAX LAW

Mohammode D.
 CHAPTER ONE
INTRODUCTION TO PUBLIC FINANCE
1.1. The Meaning & Scope of Public Finance
• Public finance can be understood in terms of its characteristics
and constituents rather than in terms of what it directly is.
• Thus, it is generally described as the study of how government
finances itself, the study of government budget, relationship
between revenue and expenditure and their administration, and
the regulation of markets.
• Public finance in effect centers upon government financing and
spending in the performance of various state functions ranging
from socio-political to economic ones.
• A wider concept that incorporates taxation & other government
revenues, and government expenses.
• Also known as “public sector economics” or “public economics.”
• It is recent origin as a science,
• Broadness in scope
Scope of public finance wide-ranging –
government has role in many activities,
but focus will be on revenues and spending
• Dynamic and
• Greater affiliation to multiple disciplines,
It is an interdisciplinary science –coordinated
interplay among law, economics, financial
accounting and, of course, politics.
 Law: stipulates for the constitutional & legal basis
for public finance
 Economics: provides for theoretical &
philosophical foundations for public finance
 Financial accounting: harbors arithmetic &
mathematical difficulties by determining, for
instance, taxable bases, various tax rates and
liability, and auditing.
 Since public finance is manifestation of state’s
authority on financing policy through political
decision making it has a lot to do with Politics.
• All these have created a difficulty in ascribing to it
a specific, eternal & universally accepted meaning.
In lump sum
• The study of how governments collect and
spend money and real resources
• How do governments collect/spend money?
Positive analysis
• How should governments collect/spend
money? Normative analysis
• We are studying public finance in a market
economy
 1.2. Public Finance Vs Private Finance

Similarities
• Monetized
• Engaged in purchases, sales & other
transactions
• Production and exchange to saving and capital
accumulation
• The same problems and a similar set of
decisions to make: Scarce resource- the
ultimate end of satisfying wants
 Differences

• Deficit financing
• Manner of borrowing (forms and rates)
• Creation of legal tender
• operative economic guidelines
• long-term vs short-term plan.
 1.3. State Economic Role
How should a government function in an
economic sphere?
i. Mechanistic view –
• government is a contrivance created by
individuals to better achieve their individual
goals. Individual, not group, is at center stage.
• This is the traditional viewpoint taken by
public finance
• Individuals are paramount, government
created to meet the needs of individuals
• Big debate over importance of individual
freedom
• Two types of freedom:
– Freedom to do as you like
– Freedom not to suffer from activities of others
As society grows more crowded, second type of
freedom becomes more important
ii. Organic view of government
• Society is a natural organism
• Goals of society set by state
• Actions of individual are judged by the
contribution they make to the state
• “Ask not what your country can do for you;
ask what you can do for your country.”
• Ideology also matters
 What does ideology mean?
• It is all about the political economic position of the
government concerning government-market
relationship
•See the diagram
• Controversies about the proper role of the
government raise the fundamental questions
addressed by the branch of economics known as
public finance.

•The goal of public finance is to understand the

proper role of the government in the economy
1.4. Market Defects and the Economic Functions of the State

What are the assumption of perfectly

competitive market?
• Many buyers motivated by self-interest and
acting to maximize utility
• Many sellers motivated by self-interest and
acting to maximize profits in atomistic
industries and contestable markets
• Individual buyers and sellers unable to exert any
control over market price but are price takers
• Price serving as guidepost for decision making
• Presence of standardized (homogeneous)
products for substitution
• Absence of barriers to entry into and exit from
all product and factor markets
• Buyers and sellers fully informed of the terms
of all market transactions
• All resources held in private property with all
rights defined and assigned
• Prevailing laws and property rights fully
enforced through the state
The truth in the real world?
incessant and frequent market failure

• A market failure occurs when the invisible
hand pushes in such a way that individual
decisions do not lead to socially desirable
outcomes.
• Any time a market failure exists, there is a
reason for possible government intervention
into markets to improve the outcome
What are the instances of Market Failure/
Defect?
(a) Public Goods & services
• A public good is one that is nonexclusive (no one
can be excluded from its benefits) and nonrival
(consumption by one does not preclude
consumption by others.
• Once a pure public good is supplied to one
individual, it is simultaneously supplied to all.
• In the case of a public good, the social benefit of a
public good is the sum of the individual benefits.
• Not suitable for appropriation/ to the application
of the exchange model
• Certain types of goods called merit goods are
also to be provided by the government, or by
the market under strict governmental
regulation, though for slightly different reason
to that of public goods.
• Merit goods may be subject to the exchange
model, but they are so essential to the decent
life of the community that consumption is to
be increased at a reduced or zero cost.
(b) Externality Problem
An externality is a benefit or cost falling on a
party outside those responsible for the
investment
The spill over effects, or neighborhood or third-
party effects
(c) Monopolies
(d) Oligopoly
(e) Asymmetry in Information
(f) Lack of Capital, Presence of Huge Risk, Long-
term Projection of Profits
II. Economic Functions of the State
• (i) Allocation
• Public Provision
• The government can provide the good directly,
in order to potentially attain the level of
consumption that maximizes social welfare.
• Public Financing of Private Provision
• Governments may want to influence the level of
consumption but may not want to directly
involve themselves in the provision of a good.
• ii) Redistribution
• (iii) Stabilization
• Tax or Subsidize Private Sale or Purchase
• One way that the government can try to address failures in the private market is to
use the price mechanism, whereby government policy is used to change the price of
a good in one of two ways:
– 1. Through taxes, which raise the price for private sales or purchases of
goods that are overproduced, or
– 2. Through subsidies, which lower the price for private sales or purchases
of goods that are underproduced
• A tax incentive program uses a tax to create
incentives for individuals to structure their
activities in a way that is consistent with the
desired ends.
• Often the tax yields the desired end more
efficiently than straight regulation.
• Another way to handle a negative externality
is through a pollution tax or effluent fees.
• iv) Regulation
• Restrict or Mandate Private Sale or Purchase
• The government can directly mandate the
private sale of goods that are overproduced, or
restrict the private purchase of goods that are
underproduced
 CHAPTER TWO
FORMS OF REVENUE
• The term Public Revenue can Be
used in two senses.
• Narrow sense - it includes only those
sources of income of the government
which are described as revenue
resources. & are not subject to
repayment. E.g.:- tax, fee, fines etc.
• Wider sense – it includes all the
income and receipts of the
government irrespective of their
sources. E.g.:- loans raised by the
government which is to be repaid
• In Aggregate public income or the
public revenue is the income of the
government through all the sources.
 2.1. The Different Sources of Revenue

• Taxes
• Fees/Charges
• Loans
• Profits/Returns
• Money Creation/printing
• Donation/Aid
• Fines
• Stump duty
• Lottery
• Escheat
2.2. Classification of Revenue Sources

1. Adam Smith’s Classification

Revenue From The People
Includes Tax Revenue.
Revenue From The State Property
Includes Revenue From The Public
Enterprises.
2. Bastable’s Classification
Revenue Received By the
Government through Various State
Functions.
Include fee and Prices(Administrative
Revenue).
Revenue Received By the State By its
Own Capacity
includes the revenue received by
imposing tax(Tax Revenue)
3. Prof. Adam’s Classification
Direct Revenue
 Derivative Revenue
Anticipatory Revenue
Direct Revenue ;This category
includes all the income which the state
derives from public enterprises like
Rail, Road, Post & Telegraph etc
Derivative Revenue; The Income
Derived From the Public is Grouped
Under This Category. Example: Taxes,
Fees, Fines Penalties etc.
Anticipatory Revenue; It includes
4. Seligman’s Classification
 Gratuitous Revenue
 Contractual Revenue
Compulsory Revenue
Gratuitous Revenue it is a revenue which is
received by the state without any cost.
Example: Gifts
Contractual Revenue it is a revenue
received by the state as a result of the sale
of commodities and services by the
government to the people.
Compulsory Revenue
compulsory revenue are those revenues
which are derived by the government in the
form of tax, fee, fine etc
5. Dalton’s Classification
 Tax
Price
Tax; tax is a compulsory charge
imposed by public authority.
 Price Prices are paid voluntarily by
private persons, who enters into
contracts with authorities.
6. Prof. Findlay Shirras Classification.
• Tax Revenue
• Non – Tax Revenue
• Tax Revenue; Revenue Earned By the
State by imposing tax.
• Non – Tax Revenue’; Revenue earned
by the state from other than the tax
source.
7.Taylor’s Classification
• Gifts and Grants
• Administrative Revenue
• Commercial Revenues
• Taxes
Gifts and Grants – Financial assistance
provided by one government to another.
Example: central Government Grant-in-Aid
to State governments to perform some
functions.
 Administrative Revenue; Revenue received
by the state by performing administrative
functions. Example: Fees, Fine, Penalty etc.
 Commercial Revenue: revenues received
by the government in the form of prices
paid for government produced goods and
services
 Taxes; Taxes are the compulsory payments
to government without any exceptions.
 Taylor’s Classifications of public revenue is
most logical and scientific and seems to be
quite useful from the practical point of
view.
8.Prof. J K Mehta’s Classification
• Tax
• Fee
• Duty
Tax when the object is to obtain
money for the finance of services
(production of goods included), the
levy should be regarded as tax.
Fee a levy, which has the object of
discouraging the consumption of
goods and services performed by the
state has been called as fee.
Duty if the object is to discourage the
production or the use of commodities
produced by private agencies or
functions performed by such agencies,
the levy has been called as Duty
i) Public Revenue and Public Receipts
• Public Revenue : is regarded as a narrower
concept and excludes borrowings, income
from the sale of government assets and
income from money printing.
• “public receipt” is a broad phrase and includes
receipts from all sources, regardless of the
manner of their acquisition.
ii) Revenue Receipts and Capital Receipts
• Revenue receipts: encompass current receipts and
running expenses of the government.
• refers to sources that are routine or repetitive in
nature.
• can be further broken down to tax revenue and
non-tax revenue.
• Capital receipts: cover items which are basically of
a non-repetitive and non-routine feature and which
can change government’s financial liabilities or
assets.
• Recovery of debts due to the government,
donations, gifts, and contributions to the
government are also included under this sub-
 iii) Quasi-Private and Public Revenue

• outlined by the famous Scottish economist Adam

Smith.
• ultimately will have two features: fees and taxes.
• quasi-private revenue refer to those sources the
government collects from its private activity
• “public revenue” revenue items the government
levies on and collects from its subjects through
the exercise of its sovereignty.
• The straightforward instance of this sub-division is
taxation.
 iv) Patrimonial and Derived Revenue

• Patrimonial revenue: is the original

(traditional) type of revenue and refers to the
case where the state obtains the revenue from
its own activities such as management of
lands and forests.
• derived revenues –introduced later on in time
in history, which are collected by the
government from its subjects without direct
reciprocal government service. The principal
forms are taxes.
 CHAPTER THREE
TAXATION IN GENERAL
 3.1. Meaning of Taxation

Taxation:-
• refers to a charge levied by state on the property or
labor of a citizen in order to provide for the public
expenses.
• is a part of wealth of individuals which the authority of
the state, province or municipality appropriates in order
to provide funds for addressing collective interests.
• is only an advance payment to obtain protection for
social order.
• is an exchange in which the state gives services.
• is the price we pay for civilization.
 How do you see these definitions?
• A more precise definition of tax is that “tax is a compulsory
contribution of the wealth of a person or body of persons to the
government.”
(i) Tax is a compulsory levy
• The consent of the taxpayer is not part of the bargain.
• Any voluntary contribution is not tax proper. All elements of the
tax are determined by the governmental process independently of
the taxpayer.
(ii) Tax is a contribution: non quid pro-quo
• It is a sacrifice in which there is no quid pro-quo.
• The absence of a quid pro quo means that there is no expectation
of direct and definite benefit in return for the payment of a tax.
• The possible benefits received by taxpayers from the government
are not related to or based on their being taxpayers.
(iii) Taxation affects wealth
forced labor, goods or things or commodities. Or currency terms,
 Hugo Dalton,
• “a tax is a compulsory contribution imposed by a
public authority, irrespective of the exact amount of
service rendered to the tax payer in return, and not
imposed as a penalty for any legal offence.”
• Again to emphasize the compulsory element in tax
the author states, “a tax, by definition, is a payment,
in return for which no direct and specific quid pro
quo (give and take) is rendered to the payer.”
Note the following points in relation to the above
discussion:
• The mere existence of compulsion does not make a levy
a tax; there also must not be a quid pro quo
relationship. Compulsoriness and absence of quid pro
quo are cumulative requirements.
• Tax distinguished from the price/charge/fee
• There are also compulsory payments to the state which
involve a quid pro quo relationship; a betterment levy vs
tax.
• Fines are compulsory and do not involve a quid pro quo,
and to that extent they may be confused with taxes.
are neither prices nor charges nor taxes.
 So how can we distinguish fine from taxes?
• The “intention test” distinguishes fines from taxes.
The intention of the government in imposing fines is
not the derivation of revenue, rather the curbing of
offences or conducts unwelcoming to the
community.
3.2. History of Taxation
• Reading Assignment
I. World History
A. Ancient Time
• In the ancient civilizations of Palestine, Egypt, Assyria and
Babylonia, individual property rights did not exist.
• The king was the sole owner of everything in his domain.
• The king could simply force individuals to work for him to earn
income in the form of food from their lands and precious
metals from their mines.
• If this income did not meet the king’s demands, he might lead
his armies into neighboring countries to confiscate their
property as tribute
• They would also resort to taxing their own people over some
• The first known system of taxation was in ancient Pharaohic
Egypt around 3000-2800 BC; a biennial tour of the kingdom,
collecting tax revenue from the people.
• Under Ptolemaic dynasty, a later long-lived kingdom in ancient
Egypt, poll taxes (taxes on every adult at the same rate) were
the major source of state revenue.
• The government of ancient city-state of Athens relied for
revenue on publicly owned silver mines, tribute from
conquered states, a few customs duties, and voluntary
contributions from citizens.
• In times of war, the Athenians imposed a tax referred to as
eisphora.
• They were used to refund tax.
• Athenians also imposed poll taxes, known as metoikion, only on
foreigners (people who did not have both an Athenian Mother
and Father) and slaves, and made failure to pay a capital crime.
• In the early years of the Roman republic all Roman
citizens paid a poll tax.
• However, Roman military victories brought in so
much foreign tribute that the government
exempted citizens from this tax in the 2nd century
BC.
• More than hundred years later, Caesar Augustus, a
Roman emperor considered by many to be the most
brilliant tax strategist of the Roman Empire,
introduced land and inheritance taxes.
• Augustus Caesar particularly instituted an
inheritance tax to provide retirement funds for the
military.
B. Medieval Period
• Taxation varied from region to region.
• Europeans were subject to many forms of taxation,
including land taxes, poll taxes, inheritance taxes, tolls
(payments for the use of bridges, roads, or seaports),
and miscellaneous fees and fines.
• Many people paid taxes in the form of money or crops
directly to the local lord whose land they farmed.
• The medieval period was characterized by an agricultural
society under a feudalist mode of production.
• In the realm of taxation the period was known for tax
imposition on the peasantry generally by a triple-tier
separately acting authority comprising central kingdom,
local lords, and church.
• scutages (payments that a knight – a man of high social
rank who had duty to fight for his king – made in lieu of
military service)
• aids were monetary payments made by a vassal to an
English feudal lord.
• An annual land tax, called Danegeld
• Danegeld was replaced by a tax called carucate which was
collected only on plowed ground.
• The Roman Catholic Church was a major tax collector
during the Middle Ages as the tithe, a compulsory payment
of one-tenth of a person’s harvest and livestock.
• The church also collected various fees, fines, and tolls.
• Following urbanization urban centers collected revenues
using taxes on property as well as sales taxes on certain
items.
C. Taxes in Modern Period
• Feudalism faded and strong centralized states
emerged in Europe.
• States relied heavily on revenues generated by the
king’s own estates and by taxes on land.
• In England, the power of parliament grew steadily
and the kings and queens had to convene it
frequently to obtain money. In 1689 the English Bill
of Rights guaranteed that the king could not tax
without the parliament’s consent
• By the 18th century, England started imposing various
taxes on transactions. Taxes on imported goods
(tariffs) assumed great importance, as did taxes on a
• In 1799, Britain enacted the first national income
tax
• The first progressive income tax – which imposed a
greater tax burden on people with higher incomes –
was introduced in Prussia (part of present day
Germany) in 1853.
• Half a century later other countries introduced
progressive income taxation in subsequent decades,
including Britain in 1907, the United States in 1913,
and France in 1917.
• Although income taxes generated little revenue at
first, today they play major role in all modern tax
systems.
II. Taxation in Ethiopia
• Taxation co-exists with a state as the latter heavily relies on taxes for
existence. The Ethiopian state is no exception in this regard though there
is no recorded evidence as to what type and how taxes are levied, and for
that evidence is there, the tax system is extremely traditional and
oppressive.
• Different systems of taxes prevailed under the different regimes
 The ancient taxation:- could be associated with Aksumite Kingdom and is
similar in essence to the system in renowned ancient regimes elsewhere
on the world.
• kings resorted to compulsory tributes from conquered peoples and
kingdoms, and traditionally compelled subjects to provide compulsory
services to the kingdom.
• Certain particular types of taxes are also believed to have been levied by
the Aksumite. There were taxes on crops, livestock and livestock
products such as butter, milk and wool.
• Taxes on hunting such as ivory, on honey, and on handicraftsmen were
also imposed.
 Ethiopia beginning from the Middle Ages up to nearly the late first-half of
the 20th century:- was characterized by a sort of political decentralization
and the tax regime during this period was corollary of this political
tradition.
• Taxation was operated on two levels: at the provincial or regional level by
the respective rulers and at the centre by the power of the “king of kings”.
• Thus, one can easily see the excessive burden on the peasantry as the same
people were subject to payment for the maintenance of both provincial
and imperial authorities.
• The payment of tax was in kind;
• Although agricultural taxes were the major traditional taxes, there were
also other taxes imposed on non-agricultural activities such as taxes on
minerals (salt), on handicraftsmen such as carpenters, blacksmiths,
weavers and tanners.
• Taxes on imports and exports
• The taxes were paid at several stages besides those paid to the emperor
and the provincial rulers. The taxpayers were required to make payment to
local rulers, not to mention compulsory service to the various hierarchical
rulers.
• The Gult and Rest systems
• In addition, the (Ethiopian Orthodox) church simultaneously
imposed a proportion (usually a tenth) of payment, the
tithe (traditionally called asrat), on the same produce.
Modern taxation:- associated with the transformation and
centralization made by Emperor Haile Sellassie I in the
1940’s onwards.
• Not only did the emperor abolish the serfdom landholding
system of feudalism but eliminated regional ruling along
with their taxation powers and centralized political and
fiscal powers.
• Uniform tax legislations were enacted and in kind taxation
was totally left out.
• Taxes were levied on income, property, customs, and
business. Specific laws on excise taxes and customs duties
 The derg :-(a military committee) took state power and
proclaimed the official adoption of the socialist politico-economic
ideology.
• The proclamation entailed several eminent changes in the tax
system: some tax laws became obsolete and were replaced by
new ones, others were amended, and new ones were introduced.
• widespread nationalization of urban and rural lands as well as
extra houses
• Thus, land tax, tax on rental income (income from rents of land
and buildings) were abrogated. Health and education taxes were
also rescinded.
• The socialist influence called for the amendment of some of the
tax laws of the time.
• The rate of taxes on income was vigorously raised so that it had a
negative impact on the private accumulation of wealth. Income
tax law was amended to incorporate other sources of income such
as dividends, royalties and receipts from winning games of chance.
• Agricultural income tax and rural land use fee law
were issued.
• The regime was notorious for its surtax law
superimposed on payrolls and business profits.
• Some other fiscal measures were also taken later
on: a law was enacted for the payment of tax on
income from petroleum operations and mining, and
new sales and excise taxes were imposed.
• In general, a strongly centralized tax system that
aimed at discouraging and ultimately eliminating
private ownership of public resources was the
hallmark of the socialist regime.
1991 till now:- Liberalized market was followed by a
reform in the tax regime.
• Involves reduction in the rate of taxation and variation of
income structure.
• Followed by many tax laws
• Sales and excise taxes and customs duties were
reintroduced
• The taxation of capital gains was introduced for the first
time.
• Agricultural income tax and rural land use fee were
assigned to the regional governments
• The existing tax structure is the result of the revenue and
expenditure assignment made after the adoption of a
federal setting as proclaimed in the 1995 Constitution of
 3.3. Theories of Taxation
• Theories of taxation deal with the justifications for
imposing tax as a duty in a given country.
A. Expediency Theory
What do you think is the essence of this theory?
• According to this theory in the choice of various tax
proposals, the authorities need not consider various
economic or social objectives or the effects of a tax
system.
• What they have to take into account is whether that
tax proposal is practicable.
• Therefore, for this theory, taxes must be imposed if
B. Socio-Political Theory
• German economist Called Adolph Wagner.
• It is not the expediency but final social and political objectives,
which should be the deciding factors in designing our tax system.
• It did not believe in individualistic approach to a problem. It
always looked at the problem in its social and political context
and made efforts to find an appropriate solution thereof.
• Accordingly, a tax policy should not be designed to serve the
needs of the individual members of the society. It should be used
for the benefit of the society in so far as it is possible.
• In other words, Wagner was advocating a modern welfare
approach to the entire problem of evolving and adopting a tax
policy.
• He particularly favored the idea of using taxation as an important
means of causing reduction of income inequalities in society. In
order to attain this purpose, he stated that all small incomes
C. Benefits Received Theory
• The burden of tax must be imposed in proportion to the
benefits received by a taxpayer from the expenditure
incurred by the government, financed from tax receipts.
• In other words, it means, the relationship between the
taxpayer and the state runs in quid pro quo terms. It is
basically an exchange relationship.
• In this theory, the problem of reducing the income
inequalities is ignored.
• This approach does not also consider the possible use of
the tax policy for achieving economic growth or
economic stability in the country.
• The theory considers only the way in which the goods
and services should be supplied and financed by the
D. Cost of Service Theory
• This approach emphasizes on the semi-commercial
relationship between the state and the taxpayers to a
greater extent.
• The implication is that the taxpayers are not entitled to any
benefits from the state and if they do receive any, they
must pay the cost thereof.
• In this approach, the state is asked to give up its basic
protective and welfare functions unless the taxpayers are
able to directly cover the costs.
• It thoroughly enables the government to recover the cost
of services and therefore, this approach, unlike the benefits
received one, specifically implies a balanced budget policy.
• We notice that the defects of this approach are very similar
to those of the benefits-received approach.
E. Ability to Pay Theory
• This theory considers the tax liability in its true form-a
compulsory payment to the state without quid pro quo.
• It does not assume any commercial or semi-commercial
relationship between the state and the citizens.
• It is based on the broad assumption that those who
possess income or wealth should contribute to the
support of public functions according to their relative
abilities.
• The obligation to pay tax to the government is taken as a
social or collective responsibility although the questions
of ‘who shall pay and in what amount’ is necessarily an
individual one.
• Those who have the means to pay should pay and those
3.4. Incidence and Shiftability of Taxation
• The previous section was devoted to the broad
theoretical aspects that may have to be used for
designing a tax system in which the resulting burdens
are distributed among members of the society.
• A statutorily liable economic unit for the payment of
a tax may collect a part or whole of the tax from
others because each economic unit is related to
others through various economic transactions.
• There are three terms used to describe the
corresponding concepts, which are nevertheless
interrelated, in the process of tax shifting: impact,
incidence, and effects of a tax.
A. The impact of a tax
• refers to the tax’s first point of contact with the
taxpayers.
• It is the immediate or original place of the tax and it
falls upon those who bear the legal responsibility of
paying the tax to the authorities.
• It is a general reference to those who have the
statutory liability of paying the tax to the
government.
• Refers to the case of persons bearing the initial
financial burden of paying the tax on their income
or wealth.
B. Incidence of a tax
• Incidence of a tax is its final resting place,
where the ultimate burden lies.
• It falls upon those economic units which
finally bear the money burden of a tax and
which are not able to pass it on to others.
• In other words, incidence lies upon that final
source from which the tax money comes.
• Eg:- Consumers in sales taxes, excise taxes and
customs duties
• Any particular tax is likely to be borne by a large
number of economic units.
• The task of shifting is also likely to pass through
several stages so that the final burden gets well
scattered.
• when there is shifting (as is in the majority of
cases), the money burden of a tax can be shifted,
partially or fully, only through the instrumentality
of price variations.
• Tax shifting can be demonstrated by a comparison
of the statutory incidence and economic incidence
points of a tax. If the two points are the same, the
burden rests ultimately where it initially falls, and
tax shifting, i.e. transference of the tax burden
C. Effects of a tax
• Effects of a tax are the responses of taxpayers and the
economy and their results.
• The effects stand apart from both the impact and
incidence of the tax both conceptually and analytically.
• All about the resultant responses and changes in the
economy.
• The effects could result from the fact of tax imposition
itself – at first instance – and they could also follow
from the process of shifting its incidence – at final
instance.
• For example, the minimum effects of a tax at its
imposition will be the reduction in the disposable
income (income for use by the beneficiary) of the
taxpayers, and if the tax is shifted, at least some prices
• Effects of a tax can be both beneficial and harmful.
• The harmful effect is the burden of that tax. Such a burden
would have two dimensions: money burden and real
burden.
• The money burden:- is the reduction in the disposable
income of the taxpayers. This is either direct in reference to
the amount of tax being paid to the authorities (equal to
the tax collection) or indirect in reference to the additional
expenses incurred by the taxpayers in the course of
discharging their tax responsibilities, as where a taxpayer
might have to go to the treasury to deposit the tax amount
due and incur some expenses on conveyance and transport.
• The real burden:- refers to effects of a tax in terms of
increasing unemployment, reduced production, etc. It is
equal to the loss of welfare to the taxpayers and the
Forward and Backward Shifting
• A tax may be shifted either through a sale
transaction or through a purchase transaction,
inducing change in price in both cases.
A. forward shifting incidence:- occurs through
increase in prices in a sale transaction, as when a
producer, selling products, collects a portion of the
tax imposed from customers and shifting a portion
of the tax burden forward along the channel of the
product’s transaction.
• It involves the transfer of tax burden to a consumer
of a good through the rise in the price of the
economic good in a product market.
B. Backward shifting:- occurs as a result of a decrease
in prices in purchase transactions, as when a
producer obtains the reduction of the purchase price
of raw materials from the supplier in compensation
of his tax liability, shifting the tax backward along the
transaction channel.
• In other words, backward shifting involves the
transfer of tax burden to owner of a factor of
production through reduction in the price of the
productive resource in a factor market.
• It is not a necessity that a tax must be shifted only
forward or backward. It can shift partly in each
direction, depending on the sales or purchases
transactions involved and the market forces at work
 3.5. Classification of Taxation
• Based on burden of a tax
• Based on the relationship between the tax
base and the tax rate
• Based on tax amount determinants
• Based on number of taxes in the economy
• Based on the number of tax type against a
product
• Based on sources of taxes
3.5.1. Direct and Indirect Taxes
• It is classification on the basis of the possibility of shifting the
incidence
 Direct tax:
• if the taxpayer who has the statutory responsibility also bears
the final burden of paying it , the ultimate burden falls on the
very person on whom the tax is legally levied.
• there is a coincidence of impact and incidence
• Income taxes (both personal and corporate), inheritance tax, gift
tax and property tax
 Indirect tax:
• the incidence falls somewhere else (if the burden is shifted)
• the burden is shifted to somebody else who is not legally
required to pay the tax and the tax is imposed on a taxpayer in
the expectation and intention that he shall indemnify himself at
the expense of another person. Sales taxes and excise taxes.
• In the case of direct taxes ability is determined
with direct reference to the taxpaying ability
of the taxpayer,
• while in the case of indirect taxes such an
ability is assessed indirectly with regard to the
purchaser rather than the seller.
 Merits and Demerits of Direct Taxes
I. Merits
• They provide the most acceptable measure of
ability to pay.
• Hence, they are better instruments of social and
economic justice.
• Canon of certainty is meaningfully applied to
them. Because direct taxes enable the
government to know the exact tax amount paid by
each person.
• As direct they are, their knowability by taxpayers
gives them the power to inculcate civic
responsibility into the minds of citizens.
II. Demerits
• with the awareness of tax liability they create
on the taxpayers, suffer simultaneously from
evasion.
• They entail the necessity of detailed
assessment. As their imposition is very
meticulous, they entail higher cost of levying.
• are levied at the cost of violating the canon of
convenience. There is no payment in
installments, in bits.
 Merits and Demerits of Indirect Taxes

I. Merits
• are hidden in the prices of goods and services
& not felt by the taxpayers.
• accompanied by less chance of evasion.
• They are less inconvenient b/c the taxpayer,
still, can choose not to pay the tax by choosing
not to consume.
• Indirect taxes are flexible. Their rates and
coverage can be quite selective and can be
modified more readily to suit the occasion.
II. Demerits
• violates vertical equity in taxation; negates
ability-to-pay principle & unfair to the poor.
• They feed inflationary forces. Indirect taxes
begin by adding to the sale prices of taxed
goods reducing the value of the money.
 3.5.2. Ad valorem and Specific Taxes
• This classification is based on determinant of the tax amount,
i.e., its value or quantity
Ad valorem: The tax amount is to be determined according to the
value of the item being taxed.
• Direct taxes are virtually ad valorem taxes. Eg: Income Tax
• Sales taxes, for example, are ad valorem b/s the tax is imposed
based on how much the amount of sale in money terms is.
Specific Taxes: it is imposed per item,
• the numerical quantity of the taxable item itself is considered;
• when the tax is levied on per unit basis, the unit of
measurement of the taxable item (such as bottles, packages,
quintals, etc) would be considered. Excise taxes are mostly
specific
The advantage of an ad valorem tax
• the tax automatically gets hinged on to the
value of item and would move along with its
value.
• Equitable: it accommodate changes in price
• Higher revenue at time of inflation
Demerits
• Possibility of evasion
• Uncertain revenue
• Inconvenient
o Specific taxes on their part are easy to levy and
convenient to collect.
 3.5.3. Proportional, Progressive and Regressive Taxation

• based on the numerical relationship between a tax base and the

rate applied to that base.
• proportional taxation: the tax liability increases in the same
proportion as the increase in the taxable item.
• While the total tax due increases in absolute terms as the taxable
item increases, the rate remains unchanged
• progressive taxation : with increasing income, the tax liability
increases per unit of the taxable item increased.
• the rate rises as the base rises
• regressive taxation characterized by falling tax liability as a
proportion of income with increase in income, even if the absolute
tax liability may increase – the rate diminishes as the base increases.
 What do you think are the advantages & disadvantages of
proportional, progressive & regressive taxation?
 3.5.4 Single & Multiple Taxation

• In single taxation, a tax system comprises only

one tax; in multiple taxation, numerous types of
taxes are there.
What are the merits & demerits? Which one is
advisable?
3.5.5. Single-stage & Multi-stage Taxation
• Based on the number of points or stages of tax
collection involved in a certain type of tax.
• If a tax is imposed at multiple stages in a
production and distribution channel, it is
regarded as a multi-stage tax.
• If however a tax is imposed at and collected
from only one point irrespective of changes in
hands through transactions, it would be a
single-stage tax
 What are the merits & demerits? Which one
is advisable?
Based on sources of taxes. How?
 3.6. Purposes and Functions of Taxation

i) Financial Objectives
ii) Macroeconomic Objectives: allocative, redistributive
and stabilization
• The allocation objective refers to the production and
provision of public goods and services, which needs
financing through taxation.
• Redistributive objective aims at reduction of income
and wealth inequalities through the adoption of
progressive taxation, among other things.
• It requires the imposition of heavy tax on the rich,
lighter tax on the relatively poor, and negative tax on
the very poor.
 Negative taxation means transferring wealth to the
poor through subsidization.
Stabilization is the objective to keep stable level of
price and employment through the use of various
instruments including taxation, as seen earlier.
iii) Miscellaneous Functions
• Enhancement of Capital Formation
• Promotion and redirection of Private Investment
• To reduce Regional imbalances
• Utilization of Scarce Resources for the Production
and Provision of more Essential Goods
• Realization of Import Substitution and
Encouragement of Exports
• Discouraging the Consumption of Harmful Products
 3.7. Principles of Taxation

• Basic terms and concepts

• Subject of taxes: “taxpayer”
• Object of taxes: “tax base”
• “Tax rate” : percentage
• Buoyancy: tax increase b/c of growth in the tax
base.
• It is the result of change in tax base beyond legal
amendment.
• Elasticity of tax: increase due to extension of its
legal coverage or a revision of its rate.
• It is the result of legislative amendment.
 Canons of Taxation
(1) Canon of Equality:
• “[t]he subjects of every state ought to contribute
towards the support of the government as nearly
as possible in proportion to their respective
abilities.”
• Smith’s equality embodies double element:
 that all subjects who can pay must contribute and
 that their contribution is based on their ability in
relation to others.
• In other words, what Smith asserted was not
equality in payment of all subjects in absolute
terms, but rather in relative terms
(2) Canon of Certainty:
• “[a] tax which each individual is bound to pay ought
to be certain, and not arbitrary. The time of
payment, the manner of payment, the quantity to be
paid ought all to be clear and plain to the
contributor and to every other person.”
• The canon of certainty relates primarily to tax laws
and their administration.
• It is to protect the taxpayers from unnecessary
harassment by and discretion of the “tax officials”
regarding when, how and how much to pay.
• If the laws are vague and not plain to taxpayers on
this regard, it is likely that rampant corruption
breads. As compared to mass inequality, minor
uncertainty entails graver consequences.
(3) Canon of Convenience:
• “[e]very tax ought to be levied at the time and
place convenient for the contributor to pay.”
• The tax system should avoid placing an
uncomfortable burden on the taxpayer.
(4) Canon of Economy:
• “[e]very tax ought to be so contrived as both to
take and keep out of the pocket of the people as
little as possible over and above what it brings into
the public treasury.”
• The essence of this canon is the minimization of
the cost of collection of the tax.
• It also should not impose unnecessary additional
(5) Canon of Fiscal Adequacy (Productivity):
• It is about deriving enough revenue through taxes
so that there won’t be a resort to deficit financing.
• It depends on the nature of the tax itself, the tax
base and the tax rate.
(6) Canon of Buoyancy:
• The tax revenue should have an inherent tendency
to increase along with an increase in national
income, even with the rates and coverage of taxes
remaining unchanged.
• The canon requires the sensitivity or responsiveness
of the tax to the changing realities of the economy
(7) Canon of Diversity (Variety)
• “very few sources for the public treasury” is risky
because
 the government will be financially crippled.
 This is also likely inequitable as between different
sections of the society, violating Smith’s principle of
equality.
• All the same, too much multiplicity should also be
avoided because it leads to unnecessary cost of
collection and violates the canon of economy.
• Hence, a compromise should be made between
dependence on too small variety of taxes and too
many of them, opting for the optimum combination.
(8) Canon of Neutrality:
• espouses that a tax system should be free from
biases and should leave economic behavior as
nearly unaffected as possible.
• A tax should not create any inflationary or
deflationary (distortionary) effects upon the
economy.
• There should be no introduction of subsidies
into the tax system, and tax concessions and
preferences should be avoided.
• Neutrality requires a comprehensive definition
of base incorporating economic units across all
sectors of the economy and lower rates
(9) Canon of Flexibility:
• This somehow implies the principle of
elasticity.
• Flexibility shows the possibility to revise the
tax structure with respect both to its coverage
and rates to suit the changing requirements of
the economy and the treasury.
(10) Canon of Simplicity:
How can we differentiate this cannon with
cannon of certainty?
• while the latter largely refers to the plainness
and ascertainment in advance to the taxpayers
of the time, mode and quantity of payment, the
canon of simplicity is concerned with the tax
system as a whole to be free from too much
complications.
• The tax law should not be proclaimed in a way
that makes it difficult to understand and
administer;
• it should deny rooms for interpretation and
 CHAPTER FOUR
THE ETHIOPIAN LEGAL SYSTEM OF TAXATION: AN
OVERVIEW OF BASIC TAX CHARACTERISTICS
• Current tax laws of Ethiopia are results of various
transformations.
• Governments, whatever form they may assume, are
dependent on taxation.
• But the nature and content of taxation may vary
depending on the type of government structure and
ideology.
• The 1995 Constitution is the molder which accredits two
tiers of government system (Fiscal Federalism).

 Focus
• The Ethiopian constitutional principles of taxation
• Certain features of federal tax legislations in Ethiopia
 4.1. Constitutional Principles of Taxation
• For a meaningful and operative federalism,
there are certain general principles of fiscal
power allocation that may significantly differ
from those of unitary systems.
• Article 95: the central government and the
states are to share revenue taking the federal
arrangement into account.
• Articles 96 and 97 distributes exclusive powers
of taxation to the federal government and to
the states respectively.
• Article 98: concurrent powers of taxation over
certain jointly held taxable units.
• Article 99: requires constitutionally
undesignated tax sources to be made explicit
through decision by the joint session of the
two Federal Houses.
• Article 100 of FDRE Constitution contain
important guidelines /basic principles/ of
taxation in a federal governmental
arrangement in Ethiopia. [which is our focus]
A. Principle of relatedness
 Both states and the federal government, in
exercising their tax powers, are supposed to ensure
any tax they are going to levy and collect is related
to the source of the revenue taxed [100(1)].
 It is all about tax jurisdiction.
B. Principle of legality
 Both levels of government to ensure that the tax is
determined following “proper
considerations”[Ibid]. “proper considerations”
probably include concern for neutrality of the tax,
the ability to pay of subjects and equitable
distribution of material resources of the
community, among other things.
C. Principle of Commensurability:
 the commensurability of taxes (in terms of
both rate and base) with services the taxes
help deliver.[100(2)]
 It reveals the intention of fiscal adequacy for
the government to finance its activities.
• It intends to prohibit any appropriation
through taxation in excess of the amount
necessary to deliver services for the common
good even if there still remains an amount in
the economy available for taxation.
• protect private interests from over-taxation
D. Principle of adverse impact limitation
 Both levels of government in the federation must
ensure that taxation does not adversely affect
their relationship.[100(2)]
• It advocates for vertical harmony of tax structure
between the federal and state administrations
and, by inference, horizontal harmony of tax
system among the states as well.
E. Principle of inter-jurisdictional immunity from
taxation:
 Urges for the exemption from taxation of property
belonging to one level of government by the other
unless it is a profit-making enterprise.[ Art 100(3)]
 4.2. Fiscal federalism and revenue sharing
under the Ethiopian Constitution
Art 96 : Exclusive tax power of the federal
government
• Custom duties, taxes & other charges on imports &
exports
• Income tax on employees of the federal gov’t &
international organizations
• Income, profit, sales & excise taxes on Enterprises
owned by the federal gov’t
• Income & winnings of national lotteries & other games
of chance
•
• Taxes on income of houses & properties
owned by the federal gov’t. Rents ???
• Fees & Charges relating to licenses issued &
services rendered by organs of the fed. Gov’t
• Taxes on monopolies
• Fed. Stump duties
 Art 97: State Power of Taxation
• Income taxes on employees of the state & private
enterprises
• Fees for land usufractuary
• Taxes on the incomes of private farmers & their
cooperative associations
• Profit & sales taxes on ind’l traders within their territory
• Taxes on income from transport services rendered on
interior water bodies
• Taxes on income derived from private houses &other
properties within the state. Rent on houses & other
properties
• Profit, sales, excise & personal income taxes
on income of enterprises owned by states
• Taxes on income of small scale minnings
• Fees & Charges relating to licenses issued &
services rendered by them
• Royalties for use of forest resources
Art 98: Concurrent Power of Taxation
• Profit, sales, excise & personal income taxes on jointly
established enterprises
• Taxes on profits of companies & on dividends due to
shareholders
• Taxes on income of large scale mining
Art 99: Undesignated tax power
• የኢፌዲሪ 2ኛው የህዝብ ተወካዮችና የፌዴሬሽን ምክር ቤቶች 2ኛ
ዓመት የስራ ዘመን 2ኛ የጋራ ስብሰባ ቃለጉባዔ፣ሚያዚያ3/1994
ዓ.ም.፣አዲስ አበባ፣ ገጽ2-6
Can you list instances?
What about VAT?
How would you explain Scope of the taxation
• Not limited to taxation
• Include revenues other the taxes
• Include both levying & collecting
How do you see division of taxation power
with division non tax power? Appreciate the
difference
4.3. Ethiopian tax laws: organization and
characteristics
4.3.1. Direct Taxes
A. Income Tax
• Levied & collected by both the federal & regional
gov’ts on case by case basis
• Agricultural income tax
• Federal Income Tax Proclamation No. 979/2016
i. Schedule A: Employment income tax
• Always progressive Art 11
ii. Schedule B: Rental income tax
• Progressive on ind’ls Art 14 (2)
• Proportional on bodies 30% Art 14(1)
iii. Schedule C: Business income tax
• Progressive on ind’ls Art 19 (2)
• Proportional on bodies 30% Art 19(1)
iv. Schedule D: Other income tax
• Art 51 ff
v. Schedule E: Exempted income
• Art 65 ff
B. Property tax
C. Stump Duties
4.3.2. Indirect Taxes
A. VAT
• Only by the federal government
• የኢፌዲሪ 2ኛው የህዝብ ተወካዮችና የፌዴሬሽን ምክር ቤቶች 2ኛ
ዓመት የስራ ዘመን 2ኛ የጋራ ስብሰባ ቃለጉባዔ፣ሚያዚያ3/1994
ዓ.ም.፣አዲስ አበባ፣ ገጽ2-6
 Is it Constitutional?
• But regional governments are delegated
• Avoid cascading effect of sales tax
• Supply of registered persons
• Threshold: annual turnover more than 1million birr
• Regular tax rate:15%
• Exempted transaction
•
B. ToT
• Applicable on suppliers not registered for VAT
• Both by the federal & regional governments
• Known for having cascading effect
• Regular tax rate
 Goods: 2%
 Services 2% & 10%
• Exempted transaction
• Zero rating not applied
C. Customs duty
• Only by the federal government
• Basically aimed at:-
 Discouraging importation
 Protecting infant domestic industries
 Generating revenue to the government
• Hence, it is known to be huge & exaggerated
• Targeted on imports only
D. Excise Tax
• Imposed on unwanted & luxurious products &
demand inelastic supplies
• Imposed on imported & domestically
produced supplies
Certain Features Enshrined in Federal Tax Legislations

• A taxpayer is left to himself to make a self-

assessment and self-declaration of the tax due to
the government from him. High likely to evade
their tax liability if left to self-declare and self-
estimate.
• Self-executing tax liens and judgments; once the
tax authority has final judgment in its favor, there
is no need to go to the court as it is authorized to
enforce its rights by itself. It particularly exercises
the power of sale and foreclosure.
• Anti-avoidance and anti-abuse rules. The tax
system must protect itself from tax planning
by eliminating loopholes in the tax rules.
• Presumptive income taxation. This procedure
applies in the exceptional case where reliable
self-estimation by taxpayers is unlikely
 CHAPTER FIVE
LAW OF INCOME TAXATION IN ETHIOPIA
• Income tax is a typical form of direct taxation.
• Have a direct reference to the ability to pay of
the taxpayer.
• The government of Ethiopia considerably
relies on income taxation.
• By income taxation, we are referring to both
individual and corporate sources. See Art 3
• But, the extent of their liability and the
specific circumstances under which they pay
the tax may differ. See Art 3, 14, 19 …
• Income Tax Proclamation No.286/2002
• Proclamation No. 608/2008 income tax
amendment Proclamation
• Proclamation No 693/2010-income-tax-
amendment-proclamation
• Regulations No.78/2002
• Contain both substantive and procedural rules
of income taxation in Ethiopia
• Repealed by the Federal Income Tax
Proclamation No.979/2016
• And Income Tax Administration Proclamation
No. 983/2016
5.1 Some Basic Elements of Income Taxation
(a) Tax Jurisdiction

• The issue is closely tied to the principal tax policy

question “where does tax liability arise?”
• Governments compete with each other one way or
another for the right to collect taxes.
1. Personality Approach: Link with taxpayers
• Australia, New Zealand and large number of European
countries generally adopt the residence test pursuant
to which residents are obliged to pay tax wherever
they get the income even if they may not be citizens.
• The U.S. and the Philippines, adopted nationality
principle pursuant to which citizens are obliged to pay
tax wherever they go even if they may not be
residents.
2. Territoriality Approach: Link with the source
• Some others follow the source principle, i.e.
territorial approach
What about the approach in Ethiopia?
• See Art 7 of the proc.
• It seems hybrid of both residence and source
principle.
What does residence mean?
• Art 5(1)
• Individuals Art 5 (2,3 & 4)
• Bodies Art 5 (5 & 6)
• Permanent establishment Arts 4
• It is only citizen-residents in foreign Ethiopian
offices that are subject to Ethiopian tax jurisdiction.
See Art 5 (2)b. Why?
What does source of income mean?
• See Art 6
• The adoption of different principles of tax
jurisdiction by different countries may give rise to
problems of double taxation or tax avoidance.
• Bilateral and unilateral ways of overcoming such
double taxation.
• Art 7 of the previous proclamation recognizes a
foreign tax credit on tax a resident has paid on his
foreign source income.
(b) Taxpayers
• The determination of “taxpayer” answers the
principal tax policy question “who pays the
tax?”
• While individual taxation is as old as taxation
itself, corporate taxation is discovered later on
with the juridical science’s innovation.
• The Ethiopian tax statute (the Proclamation)
identifies both human beings and juridical
persons as taxpayers. See Arts 3 & 2(22)
• Thus, the three categories of taxpayers are
• Category A, B & C
(c) Definition of Income
• The answer to “what to tax?” is income, but here
we need to answer the more specific question
“what income to tax?” or determine what taxable
income is.
• Article 2(14) & (19), respectively.
• This definitional provision appears to be wide,
capturing all income in cash or in kind. The
expression “whatever source derived” is perhaps
the best indicator of the wider scope of income’s
meaning for the purpose of the tax statute.
• But this same expression has much to do with the
schedular system.
• The specificity of the schedules is not co-
extensive with the apparently broad net stretched
by the phrase “from whatever source derived”.
(d) Schedular vs Global Income Tax System
• Distinction is usually drawn between what are
called schedular tax system and global system.
• Schedular income taxation involves the
arrangement of separate schedules (that specify
tax brackets and tax rates) for different kinds of
income.
• A person deriving income from different sources
would thus be taxed subject to dissection of his
income to various compartments.
• Hence, the schedular income taxation can be
regarded as income specific rather than
taxpayer specific.
• The global income tax system, on the other
hand, treats all income of a person as a single
whole and taxes it as one unit for the specific
tax period.
• Ethiopian income tax adopts the schedular
method.
• The Proclamation recognizes four schedules
(A, B, C & D)
5.2. Income Taxation under the Various Schedules

• Schedule A, B, and C income taxes are all

progressive when taxpayers are individuals.
• Schedule D “other income” category applies a flat
tax rate.
5.2.1. Schedule A Taxation: Employment Income Tax
• Arts 10-13 of the Proc. & Arts 3 and 4 of the
Regulation.
• Existence of an employment r/p & whether
income is derived from the employment are the
two prerequisites. See Art 10
 i. Existence of employment r/p
• Article 2(12): Employee Vs Independent Contractor
ii. Whether income is derived from the employment
• Can be tested by determining that the income is received
by the employee in consideration of his services.
• Art 12(1)
• Exemptions:
• Art 13(a) (cum 2(12)(a)), “casual employees,”
• Art 13(c) diplomatic & consular representatives
• Art 3(g) of Regulations domestic workers
• Art 13(b) and 13(f)
• Article 12(3)
• article 12(2) delegates to CM Cum Art 3 of Regulation.
 Tax Rates: Schedule A
Employment income Income Tax
(per month) payable
Over Birr To Birr
0 150 exempt threshold
151 650 10
651 1400 15
1401 2350 20
2351 3550 25
3551 5000 30
Over 5000 35
• Gross income  ExclusionsExemptions = Taxable
Income;
• Taxable Income × Tax Rate = Tax Due.

0-150Birr → 150 × 0% = 0 tax;

151-650 Birr → 500 Birr × 10% = 50 Birr tax;
651-1400 Birr → 750 Birr × 15% = 112.50 Birr tax;
1401-2350 Birr → 950 Birr × 20% = 190 Birr tax;
2351-3550 Birr → 1200 Birr × 25% = 300 Birr Tax;&
3551-5000Birr →1500 Birr × 30% = 450 Birr
Thus, Tax Amt = 50+112.50+190+300+450= 1102.50 Birr
5.2.2. Schedule B Tax: Taxation of Rental Income

• Schedule B applies to a specific type of business

income (i.e rental income). See Art 14
• Rental income refers to all forms of income derived
from rental of residential or business buildings.
Tax Rate
• (a) on income of bodies thirty percent (30%) of
• taxable income,
• (b) on income of persons according to the
Schedule B See Art 15
Calculation
• Furnished Quarters & buildings Art 16 (1)a
• Sub-leasing Art 16(1)b
• Deductible expenses Art 16(1)c
 5.2.3. Schedule C Tax Structure: Business Income Tax

• Chapter I’s Section IV (articles 17-30) under the

Proclamation and whole of Part IV (articles 8-14) of the
Regulations.
i. scope
• It is imposed on business income realized from
entrepreneurial activity. Art 17
• Schedule C apparently faces competition with both
Schedules B and D
• The regularity of business resolves the competition
Schedule C might have with Schedule D as trading activities
within the definition given by the Commercial Code would
fall under Schedule C even though the name of the activity
• If the income is irregular, the name of the income
determines where it falls, & it is usually Schedule D
• But, regularity of business does not enable us to
resolve the competition between schedules B and C
because this factor is common to both schedules.
• Rather, the source of income would be of much
help: if a person derives rental income from regular
building rental activity, then it is subject to Schedule
B tax, and if the person derives income by regularly
engaging in other commercial activities than the
rental of buildings then it falls under Schedule C.
ii. Taxable Income
• Taxable income under Schedule C comes by after a
series of deductions are made. Art 18
iii. Rules of Deductibility: General
• Tax cannot be imposed on gross income, at least for
the purposes of Schedule C tax, because business
entails expenses and the financial sacrifices. Art 20,
22, 23, 25,26, 27, 28
• However, not all expenses are deductible. Art 21
• Some expenses are non-deductible: B/c they are not
in fact related to the business income, they are
personal in nature, they are special capital
expenditures
iv. Exemptions: See Art 30
V. Tax Rate: See Art 19
 5.2.4. Schedule D Tax: Taxation of “Other Income”
• Section V under Chapter I (articles 31-37)
Proclamation and Part 5 (articles 15-17) Regulation.
• Even though the titular wording of the law is
apparently general and appears to be inclusive of
numerous other taxes, Schedule D tax is limited to
seven (7) specific types of income.
• These incomes do not have a relationship that
would normally put them in the same schedule.
• They are taxed at different tax rates, varying from
5% to 30%.
• No deductions or exclusions are allowed to them, except
on investment gains.
• Thus, the gross income is considered as the taxable
income.
• It recognizes and applies a flat tax rate as opposed to a
progressive tax rate.
I. Royalty Tax Art 31
II. Taxation of Income from Rendition of Technical Services
Art 32
III. Taxation of Income from Games of Chance Art 33
IV. Dividend Tax Art 34
V. Taxation of Income from Rental of Property Art 35
VI. Tax on Interest Income Art 36
 5.3. Procedural Aspects of Income Taxation in Ethiopia

• Nearly the whole of Chapter Two (that

contains eleven sections) of the Proclamation
is devoted to these issues, except the last
section (Section XI which covers transitory
provisions).
• Likewise, Part VI of the Regulations (that runs
from article 18 to 25) along with the Schedule
of presumptive tax attached at the back of the
Regulations deals with these procedural
matters.
 5.3.1. Tax Accounting Principles

• The maintenance of proper accounting books

is a general requirement for tax purposes.
• This duty is particularly imposed on what are
called Category “A” and Category “B”
taxpayers
• Section III of Chapter Two of the Proclamation
(articles 58-63)
 5.3.2. Declaration, Assessment and Payment of Tax under the
Various Schedules
I. Declaration
• The declaration of employment income tax is carried out
generally under articles 51(4) and 65 of the Proclamation by
employer as “withholding agent” (article 2 (8)).
• Self-declaration by employee is required, however, in the case of
an employee working for several employers and for employer
having diplomatic immunity (article 65(4)).
• The declaration for most of Schedule D incomes is similarly not
made in principle by the taxpayer, i.e. recipient of the income.
(article 54(3) (4)) It is legally undertaken by the payer of the
income who qualifies as a withholding agent pursuant to article
2(8). See also articles 31(2)), 32(1), 33(2), 34(2), and 36(2).
• Here also self-declaration by the taxpayer is exceptionally
required: article 67(1). see also articles 35, 37& 31(3)).
• Incomes under Schedules B and C are reported to the tax
authority through self-declaration by the taxpayer. article
66(1)
• Both the Proclamation (articles 66(1) and 68) and the
Regulations (article 18) recognize three categories of
Schedule B and Schedule C income taxpayers, labeled by
the alphabets “A”, “B” and “C”.
• Category “A” taxpayers should declare their income within
four months from the end of their “tax year” (article 66(1)
(a)), and Category “B” taxpayers within two months (art.
66(1)(b)).
• Category “C” taxpayers have the obligation to declare their
income within a fixed month period each year, i.e. from 7th
day of July to 6th day of August. Articles 22(1) of the
Regulations and 68(2) of the Proclamation
 II. Assessment
• Comes immediately next to the declaration of income
• Assessment of employment income tax is made by the
employer (the withholding agent) unless the tax authority
disapproves it
• Assessment for Schedule D income categories is made
following similar procedures
• Tax assessment for Schedules B and C is in principle made by
the taxpayer (self-assessment) which is final unless
disapproved of by the tax authority for amended assessment
with a view to correct errors in self-assessment
• The tax liability of Category “C” taxpayers, on the other hand,
is determined by what is termed by the law as standard
assessment
 III. Assessment notification:
• Articles 72 and 73 of the Proclamation
IV. Payment:
• Articles 74-76 of the Proclamation
5.3.3. Collection & Enforcement
• Tax authority’s self-executing tax liens and judgments
(articles 77-83).
5.3.4. Tax Dispute Resolution
• The hierarchy for the resolution of tax complaints
lodged by taxpayers is dealt with in Section X of the
Proclamation (articles 104-116).
• The tax law envisages both administrative and judicial
organs for undertaking the task of review over tax
• The administrative appellate hierarchy
comprises of the Review Committee and the
Tax Appeal Commission (TAC).
• The Review Committee is an appellate organ
within the Tax Authority, and is accountable to
the head of the Tax Authority.
• TAC is a quasi-judicial body but independent
of the Tax Authority.
 CHAPTER SIX
INDIRECT TAXES IN ETHIOPIA
 6.1. Value Added Tax
6.1.1 Background and Definition
• France is credited with first implementing VAT in 1955.
• Spread through Europe, South America and parts of Africa in the
1960s and 1970s.
• A general consumption tax assessed on the value added to
goods and services.
• It is a consumption tax because it is borne ultimately by the final
consumer.
• Applies, in principle, to all commercial activities involving the
production and distribution of goods and the provision of
services.
• “VAT is a tax assessed at each step in the production of a
commodity based on a value added at each step by the
difference between the commodity’s production cost and its
How does the tax work?
The classic ingredients of VAT are:

• The tax is charged on certain transactions such

as the sale of goods, the provision of services,
and other types of supplies.
• Such businesses do not incur the cost of the tax
- they simply ensure that it is charged when they
supply a commodity (collecting the tax on behalf
of the Revenue) and claiming a credit from the
Revenue for tax paid on their business inputs.
• Specified supplies are charged at the rate of 0%
or are exempt from the tax.
 6.1.2. Advantages & Disadvantages of VAT
Advantages
• (a) It avoids cascading effect of a tax (Tax on Tax)
• (b) It is a more comprehensive and equitable tax system:
collected by the government from all sectors
• (c) It reduces the possibility of tax evasion
• (d) Neutrality in Resource Allocation: Regardless of the
number of stages of production and distribution, VAT is
collected at each stage.
• (e) It improves productivity: a firm has to pay tax even
though it runs into loss.
• (f) It promotes capital investment and saving: - VAT is a
consumption tax
•
Disadvantages
• (a) It is regressive in nature: - A straightforward single rate
VAT with a few exemptions would tax lower income groups
(the poor) more heavily than the higher income groups
(the rich).
• (b) It requires advanced economic structure: - The proper
implementation of VAT system requires organized and
advanced financial and economic structure owing to its
complexity.
• (c) It puts additional burden on tax authority: - In VAT
system, the manufactures, wholesalers and retailers have
to fulfill various legal formalities in the form of maintaining
various records, accounts, books, etc.
• (d) It is uneconomical: - VAT system involves high cost of
administration, assessment, verification, collection, etc.
6.1.3. VAT in Ethiopia
• Ethiopia introduced (VAT) in 2002 as a replacement to
the sales tax by Proc. No. 285/02 &Reg. No. 79/02.
• Amendment Proc. No. 609/2008
A. Taxpayers: Art 3 of Proc.
• (a) A person [Art. 2(12)] who is registered or is
required to register for VAT;
• (b) A person carrying out a taxable import of goods to
Ethiopia;
• (c) A non-resident person who without registration for
VAT renders service in Ethiopia for any person
registered in Ethiopia for VAT or any resident legal
person (Article 3(1), (a)-(c)-cum Article 23 (1) and (2))
B. Taxable Activities : Art 6
• But repealed by Art 2(3) proc. No. 609/08 as
 “Taxable activity” means any activity whether or not
carried on continuously or regularly by a registered
person;
 in Ethiopia, or
 partly in Ethiopia
Whether or not for pecuniary profit, that involves or is
intended to involve, in whole or in part, the supply of
goods or services to another person for consideration.
See also explanations in Article 4 of the VAT Regulations
• Not all supplies of goods and service are taxable.
Exempted supplies stated under article 8
 C. Registration for VAT
• Obligatory Registration: Article 16
• Voluntary Registration: Article 17
D. Classification of VAT Rate
• For VAT administration purposes, transactions are
classified as taxable and exempted. Taxable supplies are
further sub-classified into standard-rated and zero-rated
ones.
Standard-rated Transactions
• VAT is charged at a standard rate of 15% of the value of
supply.
• All taxable supplies other than zero-rated and exempted
supplies are standard-rated supplies. Article 7(1)
Zero-rated Supplies: Article 7(2)
• A taxable transaction that is taxed at zero
percent tax rate.
– Export of goods and services
– The rendition of transportation or other services
connected with international goods or passengers,
as well as the supply of lubricants, consumption,
during international flights.
– The supply of gold to the National bank of
Ethiopia.
– Transfer of a business from one registered person
to another registered person as going concern.
Exempt Transactions
• Non-taxable transactions in the sense that no
VAT is charged whether they are imported or
supplied locally.
• No refund of input VAT; the VAT paid on
purchase (input VAT) is considered as part of
the cost of the purchase to the supplier, and
the supplier is treated as the final consumer.
D. Reverse Taxation/Reverse Charge
• Article 23
E. Tax Invoice and VAT Records
• Art 22 & art 37 respectively
• obligation to maintain for 10 years in Ethiopia:
- original tax invoice received by the person,
- a copy of all tax invoices issued by the person
- Customs documentation relating to imports and
exports by the person
- accounting records; and
- Any other records as may be prescribed by the
ministry of revenue by directive.
F. Administrative & Criminal Penalties for
Violation of the VAT Proclamation
• Art 45-59
G. Dispute Settlement
• Art 40-44
 6.2. Turnover Tax

• Indirect tax imposed not on the value added but on

the total turnover/sales value of goods & services.
• A family of sales tax imposed on consumptions
Raisons de etre’
• administrative feasibility
• equalize and enhance fairness in commercial
relations
• make complete the coverage of tax system so as to
increase government’s revenue from taxation
• allow VAT non-registered persons fulfill their
obligation.
 In Ethiopia Proclamation No.308/2002
A. Scope Art 3 cum 7
• Imposed on goods supplied & services rendered locally by
persons not registered for
B. Tax Base Art 5
• levied and paid on taxable turnover of taxable transactions by
taxable persons who are not registered for VAT
C. Tax Rate Art 4
• Goods sold locally are subject to 2%
• Locally rendered services are subject to two kinds of tax rates:
• those relating to contractors, grain mills, tractors and
combine-harvesters are subject to 2%
• Other services(such as consultancy, auditing, advertisement,
legal advice, etc) is 10% of the tax base.
• Duties and rights/powers of both taxpayers and tax
authority with respect to the proper administration
of the tax. Articles 6 & 8-11
• Collection & enforcement powers of the tax
authority are provided under articles 12-17.
• Articles 18-22 legislate on appellate procedures for
complaint disposition,
• Articles 23 and 24 are about administrative
penalties
• Criminal activities that relate to TOT and their
prosecution as well as disposition is given under
articles 25-35
6.3. Excise Tax
• applicable not on all kinds of goods rather on
selected goods, Indirect selective sales tax
• imposed on luxury goods and basic goods
which are demand inelastic.
• also applicable to goods which are hazardous
to health and public wellbeing as “sin taxes”.
• Sometimes, the tax rate is raised to more than
100% so much so that the goods are not
encouraged to be imported or produced
locally.
 In Ethiopia Proclamation No.307/2002

A. Scope Art 3
• about 19 major goods
B. Tax Base Art 5
C. Tax Rate Art 4
• duty of taxpayers article 8, and
• articles 9-11 state the powers that the tax
authority
• Ibid TOT
6.4. Customs Duty
• A tax imposed on imported or exported goods
• FDRE Constitution has explicitly given the federal
government the power to levy and collect customs
duties owing to their international character
• Proclamation No. 587/2008 has merged the
Ethiopian Customs Authority with Ministry of
Revenue and the Federal Inland Revenue Authority
and established the Ethiopian Revenues and
Customs Authority.
• The Customs Proclamation No. 622/2009 has also
many important provisions concerning customs
duty