Ethiopia has long faced challenges in due course of effectively collecting tax revenue to fund vital public services and infrastructure development. With a growing population and increasing demands on the government’s budget, finding ways to strengthen the tax system has become a critical priority.
In assessing how best to collect taxes, it is important to keep in mind two primary objectives of tax administration: To apply the tax laws uniformly, to achieve maximum collection at minimum costs, and, to promote voluntary compliance by taxpayers.
One key area of focus should be expanding the tax base. Currently, Ethiopia’s tax-to-GDP ratio stands at around 12%, which is low compared to many other African countries. This suggests there is significant room to bring more individuals and businesses into the tax system. Improving taxpayer registration, cracking down on tax evasion, and formalizing the large informal sector could all help widen the tax base.
Streamlining tax administration is another important lever. Outdated and complex tax policies and procedures often create opportunities for avoidance and evasion. Modernizing tax IT systems, training tax officials, and simplifying compliance requirements could enhance efficiency and make it harder for taxpayers to slip through the cracks.
Transparency and accountability must also be prioritized. Implementing robust auditing and verification processes, publishing tax collection data, and cracking down on corruption can help build public trust and encourage voluntary compliance. Taxpayers are more likely to pay their fair share if they believe the system is fair and the funds are being used properly.
Finally, the government should consider expanding tax handles beyond the traditional income, sales, and excise taxes. Exploring new revenue sources like property taxes, capital gains taxes, and environmental taxes could diversify the tax mix and make the system more resilient.
Overhauling a nation’s tax system is never easy, but Ethiopia has a pressing need and significant potential for improvement. By taking a comprehensive, multi-pronged approach, the country can strengthen its fiscal foundations and generate the resources required to fulfill its development aspirations. Enhancing tax collection is a challenging but vital task for Ethiopia’s policymakers in the years ahead.
According to documents, tax collection progress in Ethiopia has shown some promising developments, but also faces ongoing challenges:
Ethiopia has seen a gradual increase in its tax-to-GDP ratio in recent years, rising from around 10% in the early 2010s to around 12-13% by the late 2010s.
However, this ratio remains relatively low compared to the sub-Saharan Africa regional average of around 15-17%.
The government has set ambitious targets to increase the tax-to-GDP ratio to 17-18% by 2025, but achieving this will require substantial reforms.
Ethiopia has made efforts to expand its tax base by registering more taxpayers, especially in the informal sector.
The number of registered taxpayers has grown from around 2 million in the early 2010s to over 3.5 million by 2020.
However, a significant portion of economic activity remains outside the formal tax system, limiting revenue potential.
The Ethiopian Revenues and Customs Authority (ERCA) had undergone some modernization efforts, such as deploying electronic tax filing and payment systems.
Training programs have been implemented to build the skills of tax officials, but capacity constraints persist, especially at the regional and local levels.
Coordination and information sharing across different tax agencies remains a challenge, hindering effective compliance monitoring and enforcement.
Tax evasion, under-reporting, and the large informal economy continue to be major impediments to improving tax collection.
The government has taken steps to enhance audit and investigation capabilities, but the scale of the problem remains significant.
Improving taxpayer services, simplifying compliance procedures, and fostering voluntary compliance are areas that require further attention.
Ethiopia has introduced some tax policy changes, such as adjusting tax rates and expanding the tax base.
However, there is room for more comprehensive tax policy reforms to align the system with national development priorities and international best practices.
Consistent and predictable tax policies can also help build taxpayer trust and encourage compliance.
Overall, Ethiopia has made progress in enhancing its tax collection efforts, sustaining and accelerating this progress will require a multi-pronged approach that addresses both administrative and policy-level challenges. Continued commitment to tax administration modernization, strengthening coordination, and implementing strategic tax policy reforms will be crucial for Ethiopia to achieve its revenue mobilization goals.
As it is understood, in the last three decades the governments tried their level best to alleviate poverty, through implementing various economic programs. To support the effort various infrastructures such as roads, rail ways, hydroelectric power dams, irrigation farming, Airports, industrial parks and other social service provision institutions are expanded. According to the official sources, the government has a lion share in spending finance for the construction of the infrastructures. With such endeavor two digits economic growth endorsed by International Financial Institutions witnessed.
According to the World Bank report, Ethiopia’s economy has shown significant progress and development over the past few decades, driven by various factors including economic reforms, infrastructure investments, and a growing young population. Here are some key aspects of Ethiopia’s economic progress:
Ethiopia has experienced robust economic growth, with an average annual GDP growth rate exceeding 10% over the last decade. This growth has been supported by investments in infrastructure such as roads, railways, and energy projects, which have facilitated economic diversification and industrialization.
Agriculture remains a crucial sector, employing a large portion of the population and contributing significantly to GDP. The government has implemented policies to improve agricultural productivity, such as providing subsidies for inputs and promoting modern farming techniques.
Ethiopia has pursued a strategy of industrialization, aiming to transform from an agrarian economy to a more diversified industrial base. Industrial parks have been established across the country to attract foreign investment, promote manufacturing, and create employment opportunities.
Infrastructure development has been a cornerstone of Ethiopia’s economic progress. Projects like the Grand Ethiopian Renaissance Dam (GERD) on the Blue Nile River and various road and railway projects have aimed to improve connectivity within the country and with neighboring regions.
Progress has been made in improving social indicators such as education and healthcare. The government has invested in expanding access to education and healthcare services, particularly in rural areas.
Despite these advances, Ethiopia faces challenges including inflationary pressures, corruption, political instability in some regions, and the need for continued economic reforms. Efforts are ongoing to address these challenges and create a more conducive environment for sustainable economic growth.
Ethiopia has actively sought foreign investment, particularly in sectors like manufacturing, agriculture, and infrastructure. Government incentives and the establishment of industrial zones have aimed to attract foreign capital and technology transfer.
The source of government derives finance from local and international sources. Its local income is levying tax while it obtains finance from bilateral and multilateral sources in the form of loan and grant. As mentioned above the government tax base as compared to other African countries it is tiny and its tax GDP ratio is small.
Therefore, enhancing the tax base is essential and so far the government has been taking various measures to broaden its tax bases and some encouraging results are obtained but as compared to the need it is insignificant.
Ethiopia is reach in natural resources such as arable lands, forest, surface and underground water, minerals, livestock and others but due to lack of sufficient finance, technology and skilled human resources, it is not exploited fully and its contribution to the economy is insignificant. In addition the underdevelopment of infrastructure such as roads and institutions pave the way for sizable number of livestock found its way to the neighboring countries market. As the result, the revenue that could be obtained through tax will be drained to the unknown destiny in the clandestine manner.
Due to the rampant corruption and irresponsible practices, other commodities particularly agricultural products and mines smuggled from Ethiopia to the outside world which again left the nation with no revenue generation. Had the commodities been exported in the formal channel, they would have been boosting the government coffer and more development projects would have been implemented. Therefore the ongoing measures that have been taken to broaden the tax base should be strengthened.
BY STAFF REPORTER
THE ETHIOPIAN HERALD FRIDAY 28 JUNE 2024
