South West corridor and outskirt of Addis Ababa has embraced a locality usually called Ayer Tena(meaning in Amharic the air in the locality is relaxant and good to health). It is one of the places where many merchants are living and running their business. The merchants were mouthing off unsubstantiated accusation that the new daily sales assessment imposed by the Ethiopian Revenues and Customs Authority (ERCA) has negatively affected their business. These businesspersons, who the writer had met by chance when dining at one restaurant, were drinking and fervently discussing the current talk of the town: the new tax assessment which, some say is `forceful imposition and retributive levy`.
One of the merchants said he was just struggling out and fledgling to stand on his own two feet, beyond loan and financial assistance from friends. I do not have enough seed money to start the business, however, he said, he managed to start up business as a devil may care. He swore he is still striving to introduce his inn to customers. But, he said, ERCA’s officers’ aggrandized assessment came all of a sudden to impinge on his business; seemingly throwing him aside from the frying pan in to the fire, he quipped.
He complained at first he was hardly earning any money although it’s been getting a bit better now. He estimates that he sells an average of 1500 birr a day.
According to him, his annual payment in taxes since he started business was affordable. However, after the assessment, he was responsible for paying fivefold in a yearly basis. The recent assessment that covered close to 150,000 businesses in the City has become one of the top and disgruntling agenda of the business community, mainly with traders who run Level C businesses.
The restaurateur said that he is not that far profitable and he is worried about the amount of tax he has to pay. The Authority told him his tax is based on the daily sales assessment and it is about 250,000 birr. According to him, assessors immediately reduced the amount by 70,000 when he told them that his restaurant had been open only for a year. Nevertheless, the restaurateur still strongly disagrees with the exorbitant amount he is being required to pay. He said he had filed his grievance to the branch office in the vicinity and even asked the Authority to reassess his daily transactions at the restaurant and rectify the amount of taxation imposed on him.
He says he believes in a bona fide mentality that he wants to pay adequate tax to the government since the money collected from customers is revenue used for undertaking national development projects. But, the assessment has to be made accurately based on tangible documents and thoroughly observation, he said. And now the tax required from him has not considered his payment capacity, which indeed infuriated him.
However, ERCA strongly dismissed their claim a mere allegation saying that the tax assessment is fair and it is calculated scientifically before being assigned. It explained that the tax is calculated via an annual estimate based on daily sales. From the given amount 90 percent is considered to be expenses and the remaining ten percent is taxed.
Needless to explain, tax is a compulsory contribution payable by an economic unit to a government without expectation of direct and equivalent return from the government for the contribution made. And there are many purposes of collecting revenue through taxes. It includes giving government power to allocate resources; to enable government to provide/support social development; to stabilize the economy; and to encourage optimal economic growth.
Taking in to account this very fact, the vast day-to-day operations of the tax Authorities cannot be free from disagreements emanating from routine contacts with the tax payer. As a result, the tax system of a given country should be able to come up with far-sighted grievance handling system, which needs to take in to consideration the rights and duties of taxpayers: taxpayers are in turn guaranteed against unfairness or error in the administration of taxes and have the right to appeal to competent and impartial authorities when he/she disagrees with the determination of the assessing officer.
Accordingly, when a tax payer is deprived of his right, he needs to get the chance, for instance, to fair trial; where he can defend his case using available evidences. This opportunity to be fairly treated may help a person develop a trust on the government’s decision; whether it is in his favor or not. This implies the due process of law and rights of taxpayers to be heard and enjoy fair trial.
This right should be well protected and respected since taxpayers are bulwarks of the national economy. If there happens any controversy, there are different institutional make ups to handle disputes between tax authorities and the taxpayers. But generally these cases could be entertained before administrative tribunals, regular courts or by alternative dispute resolution (ADR) mechanisms.
Farsightedly, the tax law in Ethiopia has put in place a three tier system to resolve tax related controversies. Tax complaints regarding administrative penalties and other tax liabilities can be brought before a review committee in the first stage. Tax assessment made by the Tax Authority is also appeal-able before the Tax Appeal Commission, and finally the decision of the Appeal Commission can be appealed in the regular court systems.
No doubt, the current confrontation and embattlement with level C tax payers has given a big lesson to the Authority to revise its system of tax collection, administration and assessment. Crucially, the lesson will also be extended to offer tax education and enhance the awareness of tax payers to properly understand about the benefit of paying taxes, rights and duties of tax payers and the mandates of the Authority as well.
Whatever the case, the amount of tax revenue will grow with time as Ethiopia has big potential of taxation. A case in point, there are more than 1.6 million civil servants and over all 2.6 million employees who work in private companies and non-governmental organizations (according to documents confirmed by Central Statistical Agency-CSA).Hence, this huge number of civil servants combined with the millions of business community can help the country harvest big chunk of tax money.
However, currently, employees of public and private institutions are paying more taxes than what small taxpayers are contributing on an annual basis. This happened contrary to the very fact that many small businesses are assumed to have the capacity to earn many-fold gains than average employees who are genuinely paying their taxes; a look at the tax account of the city administration witnesses that 20 billion Birr in tax was collected in the just-ended fiscal year, of which 37 percent was from employment tax (and category C taxpayers contribute below 20 percent of the total tax revenue).
Tangibly, employees pay higher than C type taxpayers who may earn more owing to many deductions made possible to them in the tax law. Even worse, some allegations are surfacing that there are millionaires and rich individuals who are illegally manipulating and exploiting the opportunity of being categorized under C type of tax payer (due to difficulty to keep sufficient records and properly levy taxes evidenced by documents).
ERCA uses a presumptive taxation method for category C taxpayers, with a gross annual income of less than 500,000 Birr, according to the new income tax proclamation. This is done, as category C or (micro) taxpayers are not expected to keep books of recorded accounts, like the other two taxpayer groups (therefore, it is very difficult for the Authority to trace the exact amount of transactions of these businesses and the respective taxation).
On the other hand, some experts said that Addis Ababa Chamber of Commerce and Sectoral Association was not invited to join the assessment process. And it has added its own to escalate inefficiency and confrontation with the current assessment. They said the assessment may not be comprehensive without the involvement of all independent observers such as the Chamber. Some even forwarded lambasting remarks that absence of the Chamber in the assessment process has helped the Authority to weigh matters of tax assessment in its favor.
However, other experts reject this view that no matter how least organizations are involved, the government by itself is responsible and trustworthy to its citizens and nation knows how to levy taxes in a responsible and transparent manner. The Authority judiciously understands how to implement the principles of taxation as being applied by the whole world; the principle of equality, certainty, flexibility, buoyancy, diversity and economy, among others.
Whatever said and done, the controversy is natural as governments want to collect more tax to cover their domestic expenses and cope up with nation’s economic need, contrary to traders who are inclined to hide taxable items and reduce their amount of taxation (even want to evade taxation, use tax planning and still some day dream absence of taxation entirely, typically reflecting backwardness and irresponsibleness of uncivilized business community).
Currently, one of the predominant tasks of the country is broadening its network of collecting taxes and expanding its tax bases. In this regard, up until the previous year, the tax ratio to gross domestic product (GDP) of the country was 13.5 percent, five percent lower than the Sub-Saharan average. Taking this very fact in to consideration, the Authority is aggressively working to scale up the ratio to 17 percent in the coming three years.
Nation believes that strengthening appropriate system of tax assessment and putting in place broader network of levy is crucial to development. Accordingly, during GTP II, nation has aimed at maintaining its budget deficit at manageable level through widening its base of taxation. To this end, the government will continue implementing on-going tax reforms program including strengthening tax administration and tax collection at all levels. Moreover, institutional capacity of customs offices will be further enhanced eyed at mobilizing more resources to finance GTP-II. The Authority said it will strive to widen the base and horizon of taxation and generate sufficient money used to undertake national projects eyed at poverty alleviation.