SHASHEMENE, ETHIOPIA

December 2023/24

Prepared by: Darsema Asrat

 MODULE TITLE: Develop understanding Taxation

MODULE CODE: LSA ACF2 M09 0322

NOMINAL DURATION: 110 Hours

MODULE DESCRIPTION:

This module covers the competence required to understand the role of taxation in the Ethiopian economy, including
why and how tax is levied and collected, types of taxes paid by business and individuals and its impact on investment
choices.

LEARNING OUTCOMES :

At the end of the module the trainee will be able to:

LO1. Identify and discuss the role of taxation in the Ethiopian economy

LO2. Identify and discuss direct tax

LO3. Identify and discuss indirect tax

LO4. Identify and discuss stamp duty tax

LO5. Manage tax liability

Prepared by: Darsema Asrat

GENERAL INTRODUCTION
Taxation
Taxation is a system of raising revenue by a government through tax. It is a system of collecting money by a
government to finance the government operation
Tax
A tax is “a compulsory charge imposed by the Government without any expectation of direct return in benefit ". In
other words, a tax is a compulsory payment or contribution by the people to the Government for which there is no
direct return to the taxpayers. Tax imposes a personal obligation on the people to pay the tax if they are liable to
pay it.

History of Taxation
Objective of Taxation
 Raising Revenue  Creation of Employment Opportunities
 Removal of Inequalities in Income and Wealth  Preventing Harmful Consumption
 Ensuring Economic Stability  Beneficial Diversion of Resources
 Reduction in Regional Imbalances  Encouragement of Exports
 Capital Accumulation  Enhancement of Standard of Living
Characteristics of Taxation
A tax has the following characteristics:
 Tax is a Compulsory Contribution  Element of Sacrifice
 Benefit is not the Basic Condition  Regular and Periodical Payment
 Personal Obligation  No Discrimination.
 Common Interest  Wide Scope
 Legal Collection
Principle of Taxation
CANONS OF TAXATION: [

The Government requires funds for the performance of its various functions. These funds are raised through tax
and non-tax sources of revenue. Imposing tax on income, property and commodities etc. raises tax revenues. In fact,
tax is the major source of revenue to the Government. tax is a contribution from citizens for the support of the
Government.
Taxation is an important instrument for the development of economy of the country. A good tax system ensures
maximum social advantage without any hardship on taxpayers.
Taxation should be economical i.e. this should be much more than mere saving in the cost of collection. Undue
outlay on the official machinery of levy is but one part of the loss that taxation may inflict. It is a far greater evil to
hinder the normal growth of industry and commerce, and therefore to check the growth of the fund from which
future taxation is to come. Thus the canon of ‘Economy' is naturally sub-divided into two parts.
 ‘Taxation should be inexpensive in collection', and
 ‘Taxation should retard as little as possible the growth of wealth'.
It may also be remarked that there is a close connection between "Economy" and "Productivity", since the
former aids in securing the latter.

Direct and Indirect Taxes:

Direct Taxes:
Taxes are sometimes referred to as direct or indirect. The meaning of these terms can vary in different contexts,
which can sometimes lead to confusion. In economics, direct taxes refer to those taxes that are paid by the
person who earns the income. By contrast, the cost of indirect taxes is borne by someone other than the person
responsible for paying them.

Prepared by: Darsema Asrat

Indirect Taxes
Under indirect taxes, the impact and incidence fall on different persons. It is not borne by the person on whom
it is levied and can be passed on to others. For example, when the excise duty is levied on the manufacturer of
cement, he shifts the burden of tax to the consumers by raising the selling price. Here the impact of excise duty
falls on the manufacturer and the incidence on the ultimate consumers. The person who is required to pay the
tax does not bear its burden. Thus, indirect taxes can be shifted.
Identifying and Discussing the Role of Taxation in the Ethiopian Economy
Exploring and Discussing The Purpose of Taxation in the Ethiopian Economy at the Local, Regional and
Federal Level and How this Compares with other Countries
The purpose of taxation includes but is not limited to:
financing government activity
maintaining equity in the national economy
promoting efficiency where markets fail to control pollution or health dangers
social infrastructure
social services

Taxation revenue may be used to provide:

assistance to business and farming education
cultural and artistic resources and support environmental protection
defence and border protection
essential infrastructure such as:
 roads  sport and recreation amenities
 transport systems  public housing
 public building
foreign representation and trade promotion for Ethiopia
health care
justice systems
public safety
scientific and other research
welfare, income and community support systems

Identifying and Discussing Direct Tax

Identifying and Discussing Key Terminology Used in Direct Taxation

Terminology used in taxation may include:

 interest on deposits  Assessment of Tax

 allowances  dividends
 assessable income  gross income
 capital gain/appreciation  Higher Education Contribution Scheme
 deductions  taxable income
 Exempt threshold  Tax Evasion
 Withholding tax

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Analyzing and Discussing the Various Ways that Tax is Collected and from Who

Ways that tax is collected include: through regional and federal level taxes including:
Direct tax
 Tax on Income from Employment /  Tax on Gain of Transfer of certain
Personal Income Tax Investment Property
 Business Profit Tax  Tax on Income from Rental of
 Tax on Income from Rental of Property
Buildings  Rendering of Technical Services
 Tax on Interest Income on Deposits outside Ethiopia
 Dividend Income Tax  Agricultural Income Tax
 Tax on Income from Royalties  Land Use Tax
 Tax on Income from Games of Chance
Indirect tax

 Turnover Tax  Value Added Tax

 Excise Tax  Customs Duty

Direct Taxes
These are one type of taxes a company or individual pays directly to the government. The following are
the tax categories under the income tax proclamation No. 979/2016. Tax payers are categorized
according to their income levels.
Category A taxpayers:
• A body or any other person having annual gross income of ETB 1,000,000 or more.
Category B taxpayer:
• A person, other than a body, having an annual gross income of ETB 500,000 or
more, but less than ETB 1,000,000.
Category C taxpayer:
• A person, other than a body, having an annual gross income of less than ETB 500,000.

The proclamation provides for the taxation of income in

accordance with the following schedules:
1) Schedule A, income from employment;
2) Schedule B, income from rental of buildings;
3) Schedule C, income from business;
4) Schedule D, other income;
5) Schedule E, exempt income.

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Schedule A employment Income Tax
Employment income Employment Deduction Tax computation
per month (I) income tax I = Employment income
(birr) rate EIT =Employment income tax
0 - 600 0 0 Exempt

601 - 1650 10% 60 EIT = I x 10% – 60

1651 - 3200 15% 142.5 EIT = I x 15% –142.50

3201 - 5250 20% 302.5 EIT = I x 20% –302.50

5251 - 7800 25% 565 EIT = I x 25% – 565

7801 – 10,900 30% 955 EIT = I x 30% – 955

More 10,900 10% 1500 EIT = I x 35% – 1500

A. Tax on Income from Employment / Personal Income Tax

Employment income tax refers to the tax imposed on employment income or income from employment of an
employee. It is the tax on earning/income of individuals, i.e, money or money’s worth that individual receive in
different ways from their employer.
Employment income is any benefits in cash or in kind received by an employee from the services rendered to
his/her employer. It includes
 Basic salary /wage/earning

Basic earning /salary are the basis for making other calculation in relation to earning Like Bonus, Severance
pay, overtime ..... etc.
 Allowance:- Additional monthly payment to the employee for one of the following Reason.
Position Allowance
i. position allowance: a monthly sum paid to an employee for bearing a particular office responsibility.
Example head of a particular department of division
ii. House allowance: a monthly allowance given cover housing costs of the individual employee when the
employment contract requires employer to provide housing but fails to do so
iii. Hard ship allowance: a sum of money given to an employee to compensate for an inconvenient
circumstance caused by the employer. For instance an expected transfer to a different and distant work
area or location. It is same times known as disturbance allowance.
iv. Desert allowance: a monthly allowance given to an employee because of assignment to a relatively hot
region.
v. Transportation (fuel allowance) : a monthly allowance to an employee to cover cost of transportation up
to the work place if the employer has committed it self to provide transportation service
vi. Cash indemnity Allowance : allowance paid for cashers to cover the risk of possible cash shortage cash
indemnity is used to cover Accidental shortage not intentional shortage,

 Transportation allowance  Deseret (Bad Climate) allowance

 Position allowance  Education allowance
 Housing allowance  Telephone allowance
 Hardship (disturbance) allowance  Uniform allowance
 Bonus
Computation of Employment income Tax on Bonus
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 Determine the amount of Bonus to be paid for the employee and calculate the monthly tax amount using
the basic salary I,e divide the Bonus Amount in the 12 Month because Bonus is paid for outstanding
performance that employees achieved in the year however if the employee have service duration of less
than 12 month the amount of the bonus should divide to the number of the month in which the employee
service in the year

 Overtime
Over Time Rate
I. For Overtime work performed between (6A.M) and (10P.M), a worker shall be entitled to be
paid at the rate of 1.25 ( times his/her regular hourly rate. Overtime Rate = 1.25 X Ordinary
Hourly Rate
II. For Overtime work performed between (10 P.M) and (6A.M), a worker shall be entitled to be
paid at the rate of 1.5( times his/her regular hourly rate. Overtime Rate = 1.5 X Ordinary Hourly
Rate
III. For Overtime work performed on weekly rest days, a worker shall be entitled to be paid at the
rate of two (2 times his/her regular hourly rate. Overtime Rate = 2X Ordinary Hourly Rate
IV. For Overtime work performed 0n a public holiday, a worker shall be entitled to be paid at the rate
of 2.5( times his/her regular hourly rate. Overtime Rate = 2.5 X Ordinary Hourly Rate Ordinary

Hourly Rate

Example 01
W/ro Lemlem earned an amount of birr 5,275 subjected to income tax. Calculate her income tax
Earning X Tax Rate(%) = Income Tax
5,275X35%-662.5 = br, 1,183.75
Example 02
Calculate income Tax for the following workers
a) Jitu br. 140 c) Ali br. 960 e) Feyisa br. 3270
b) Jidha br. 600 d) Feyine br. 2150 f) Bedasa br. 4790

Schedule B, income from rental of buildings;

The taxable rental income is the gross amount of rental income minus a range of allowable expenses
necessarily incurred, including: expenses related to repairs and maintenance; depreciation of the building;
furniture and equipment costs; interest expenses; and insurance premiums.
Rental income tax is levied on an annual rather than monthly basis. For individual and unincorporated
business landlords, the tax rates and bands are the annual equivalent of the monthly ones used in
employment income tax
Rental income tax is a tax imposed on income derived from rental of residential or business buildings.
Taxable rental income is income from rental of buildings on which income tax is payable. It is the base for
calculating rental income tax.
The computation of Rental income tax for this who do not have an obligation to maintain Book of account
and for theses who maintain Bok of account category A and B tax payer.
In computing The Taxable rental income for a tax payer of a Taxpayer who does not maintain Book of
account a deduction (Rental Expenses) shall be allowed for the following amount.

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 A) Any fees and charges but not income tax levied by a state or City Admonition in respect of the Land
or Building Lease and paid by the Taxpayer during the year.
B) An amount Equal to fifty percent (50%) of the gross rental Income Derived by tax payer as an
allowance for the repair maintenance and Depreciation of the building, future and equipment.
In computing the taxable Rental income for a tax payer who maintains Book of account. A depreciation
shall be allowed for any expenditure to the extent necessarily incurred by the tax payer in driving rental
income and paid during the year including.
a. The cost of the lease of land on which the building is situated.
b. Repair and maintenance.
c. Depreciation of the building furniture and equipment.
d. Interest and insurance premiums.
C) Fees and charges but not income tax levied by a state or city Administration in respect of the land or
building Leased.

Corporations are taxed 30% flat rate.

Rental income Rental Income Deduction Tax computation
per year (I) tax rate I = Rental income
RIT = Rental
income tax
0–to 7 200 0 0 Exempt
7 201–19 800 10% 7200.00 RIT = I x 10% – 720

19 801–38 400 15% 1710.00 RIT = I x 10% – 1710

38 401–63 000 20% 3630.00 RIT = I x 10% – 3630

63 001–93 600 25% 6780.00 RIT = I x 10% – 6780

93 601–130 800 30% 11460.00 RIT = I x 10% – 11460

More 130 800 35% 18000.00 RIT = I x 10% – 18000

Illustration
Illustration suppose w/ro taytu has rented her building in April 2014 E.c. for the for monthly rent of birr
20,000 and lease on land paid to A.A city Administration during the year was Birr 6,000 in addition she was
category C tax payer.
Required:
Compute the annual rental income tax of abeba for the year ended April 2014.
Solution
Gross rental income ………………………………………. 20,000 * 12 = 240,000
Less Allowable deduction
Lease on land ………………………………………………… (6,000)
Repair maintenance and Depreciation
(50% of the Gross rental income ……………………… 0.5 * 240,000 = 120,000
Taxable Income ……………………………………………….. 22,560 . .. .. . …(120,000-6000=114,000*0.3-11,640

Illustration
Suppers abay plc has related his building fund in A.A arada sub city for the monthly rental of birr 120,000
in July 2011 e.c. the company also provide the following financial information in the relation to the
building.

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Cost leases paid on land ……………………………………………………….. …………..12,000
Book value of the building at the end o f for the fourth year …………………6,000
Insurance premiums paid on the building…………………………………………… 30,000
Outstanding loss taken for construction (at 9.5% interest) ……………………2,000,000 birr
Wage of building administrator and cleaning Expense ………………………70,000
Required:
Compute the rental income tax paid at the end of the year 2011 and journalize the rent income tax at
July 2011
Solution
Gross rental income ……………………………………………………….. (120,000 * 12) ………..1,440,000
Less allowable deduction
Leases paid on land ……………………………………………………….. 12,000
Depreciation expense on building 300000
0.5 * 6,000,000
Insurance premium ………………………………………………………..30,000
Interest expense (0.95 * 2,000,000) …………………………… 190,000
Wages and General expense ………………………………………………70,000…………………(602,000)
Taxable income ………………………………………………………..……………………………………… 838,000
Scince the tax payeris body the rental income tax rate applied is 30%

Schedule C, income from business;

Business income tax, or business profit tax is the tax imposed on taxable business income (profit) realized from
entrepreneurial activity. It is charged on the profit of business enterprises on the activities arising each accounting
period or tax year. At the end of each tax year or accounting period, business income tax payers submit an income
tax return (tax declaration form) to the Tax Authority which shall contain true information about the income (profit)
earned by the business tax payers.
The taxable business income of a taxpayer for the year shall be the total business income of the taxpayer for the year
reduced by the total deduction allowed the tax law.
I. Allowable Deduction
 Direct cost of producing the income.
 General and administrative expense.
 Depreciation expense computed in Accordance the income tax regulation
 Bad debt expense.
 Insurance premium payable on the insurance
 Expense incurred for the promotion of business
 Commission paid for service rendered
 A loss on the disposal of a business asset
 Representation expense
 Medical expense lease payment for the business asset held

The business income tax rate applicable to a body is 30%.

Business income Businessl Income Deduction Tax computation
per year (I) tax rate I = business income
BIT = Businessincome tax
0–to 7 200 0 0 Exempt
7 201–19 800 10% 7200.00 RIT = I x 10% – 720

19 801–38 400 15% 1710.00 RIT = I x 10% – 1710

38 401–63 000 20% 3630.00 RIT = I x 10% – 3630

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 63 001–93 600 25% 6780.00 RIT = I x 10% – 6780

93 601–130 800 30% 11460.00 RIT = I x 10% – 11460

More 130 800 35% 18000.00 RIT = I x 10% – 18000

Example 01
coca enterprise, unincorporated business has reported earnings before tax of birr 90,000 at the tax year ended
Hamle 30, 20014. Determine the amount of business income tax
Earning X Tax Rate(%) = Income Tax
90,000 X 25% - 6780 = br, 15,720
.
Schedule D Tax Rate
This is the last and residuary Schedule of income. Any income which is taxable under them Income Tax Proclamation
but does not find place under any of the remaining three Schedules of income (i.e., Schedules A, B and C) will be
taxable under this residuary

Tax item Description rate

A payment of any kind received as a consideration for the use of ,or the right to
use, any copyright of literary, artistic or scientific work, including
cinematography films and films or tapes for radio or television broadcasting,
Royalty any patent, trade work, design or model, plan secret formula or process, or for 5%
the use or for the right to use of any industrial, commercial or scientific
equipment, or for information concerning industrial, commercial or scientific
experience
Income from The term “technical service” means any kind of expert advice or technological
Rendering of service rendered. 10%
Technical Services
Income from Every person deriving income from winning at games of chance (for example, 15%
Games of Chance lotteries, tom bolas, and other similar activities) shall be subject to this tax
Dividend Every person deriving income from dividends from a share company or 10%
withdrawals of profits from a private limited company shall be subject to this
tax
Income from Every person deriving income from the casual rental of property (including any 15%
Rental of Property land, building, or moveable asset) not related to a business activity taxable
under Schedule B shall pay tax on the annual gross income.
Interest Income on every person deriving income from interest on deposits shall pay tax 5%
Deposits

Schedule E Tax rate

This schedule contains income items that are exempted from taxation. Following is a list that includes some of the
exempted income items under Schedule E:
 Pension contribution, provident fund and all forms of retirement benefit contributed by the employers in an
amount that does not exceed 15% of the employee’s monthly salary;
 Payments made to a person as compensation or gratitude in relation to personal injuries suffered by the
person or the death of another person;
 Amounts paid to employers to cover the actual cost of medical treatment of employees;

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  Allowance in lieu of means of transportation granted to employees under contract of employment to the
extent of the amount to be determined by the tax authority. Currently, transportation allowance is the lower
of ETB 2,200 or 25% of the employee’s salary;
 Hardship allowance;
 Reimbursement of travelling expenses incurred on duty to the extent of the amount to be determined by the
tax authority;
 Travelling expenses paid to employees recruited from elsewhere than the place of employment;
 Food and beverages provided for free to an employee by an employer conducting a mining, manufacturing
or agricultural business;
 Salary paid to domestic servants;
 Maintenance or child support payments

Indirect Tax
The main types of indirect taxes are VAT, customs duty, excise and turn over taxes.
A) VAT
A person who carries out a taxable activity is required to file an application for VAT registration if the total value
of taxable transactions, at the end of any 12 calendar months period, exceeds ETB 1 million or there are
reasonable grounds to believe that the taxable transactions of the coming 12 months exceed the threshold.
B) Turnover tax (TOT)
Turnover tax is an equalization tax imposed on persons not registered for value-added tax to allow them to fulfil
their obligations and enhance fairness in commercial relations and complete the coverage of the tax system,
among other objectives. This tax is, therefore, applicable to small taxpayers who do not meet the VAT
registration threshold of turnover of ETB 1,000,000 per year.
C) Turnover tax rates
The turnover tax shall be:
 2% on goods sold locally.
 For services rendered locally:
 2% on contractors, grain mills, tractors and combine harvesters.
 10% on others.
D) Excise tax
Excise tax is imposed on selected goods that are:
 Luxury goods and basic goods that are in inelastic demand.
 Hazardous to health and that are a cause of social problems.
Excise tax will be applicable on 19 groups of items and 378 goods. The tax rate ranges from 5% to 500%.
 Excisable value in respect of goods produced locally ,ex-factory selling price excluding VAT, cost of
excise stamps and the cost of returnable containers.
 The customs value of the goods plus the amount of customs duty payable (whether paid or not).
E) Customs duty
Duty means a charge levied and collected on any imported and exported goods in accordance with the Customs
Tariff Regulations and the International Convention on the Harmonized Commodity Description and Coding System:

o Regular customs tariff ranges from 10%–35% depending on nature of goods imported.
o Special customs tariff applicable to goods produced in and imported from the Common Market for Eastern
and Southern Africa (COMESA) member countries is 10% less; i.e. 4.5% to 31.5%.
o Other taxes like VAT and excise tax are levied on imports at the same rate as domestic transactions.
F) Sur tax
It is an additional 10% tax that is applicable on imported goods except for fertilizers, petroleum and lubricants,
motor vehicles for freight, passengers and special purpose motor vehicles, aircraft, spacecraft, and parts thereof, and

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capital (investment) goods. The Ministry of Finance is authorized to increase or decrease the list of goods exempt
from surtax.

Value Added Tax (VAT)

 VAT may be defined as a consumption/expenditure tax charged on the value added to goods and
services by importers, manufacturers and traders at each stage of the production and distribution
process.
 VAT is a tax not on the total value of goods sold or services rendered but only on the incremental
value or newly created value by the last seller.
 VAT is a tax on the value added to goods and services by enterprises at each stage of the production
and distribution processes.

Rate of Tax
The number and rate of Value added tax vary from country to country and some countries have two or more
tax rates. In Ethiopia case, taxable supplies are charged at zero or standard rate of 15%.
A) Zero Rate
The zero rate is a tax rate of nil. Thus, although no tax is charged on a supply taxed at the zero rates,
it is all other respects treated as a taxable supply. Supplies of zero-rated goods or services are
business transactions, which VAT is chargeable at 0% (in effect no VAT is charged). Zero rate
supplies are taxable supplies although no VAT is charged and the value of these supplies forms part
of the taxable turnover for registration purposes. You can claim full Input tax (tax paid on purchases)
credit related to your zero rated supplies.
Zero rate supplies include
 The supply of export of goods or services,
 The supply of gold to the National Bank Of Ethiopia,
B) Standard Rate (Positive rate)
The standard rate is a tax rate of 15% based on the tax exclusive value of the goods or services
supplied. This is equivalent to 2/3 (15/115) 0f the tax inclusive value (i.e consideration) of the goods
or services supplied. This fraction is known as the “VAT fraction”. Any taxable supply, which is not
charged to tax at the zero rates, is charged to tax at the standard rate. This includes:
 Every taxable transaction by registered person
 Every import of goods, other than exempt; and
 An import of services
VAT On Import

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All goods which are imported into Ethiopia by an importer, whether registered for VAT or not, are liable to
VAT with the exception of goods that are exempted. The importer pays VAT on imported goods regardless
of whether the goods are for private or business purposes. VAT on imported goods is paid at the point of
clearing the goods from Custom Authority.
VAT On Export
All export goods and services are liable to VAT at zero-rate (0%). This means, the exporter charges VAT at
0% on his export, effectively, no tax is charged on export. However, the exporter is entitled to reclaim the
VAT paid on the goods or services purchased to produce exportable goods or services if he is a VAT
registered person
Component of VAT
Input VAT
The Vat that your business pays over on taxable supplies made (VAT paid on purchase) and can be
recovered only insofar as your business is VAT-registered and makes taxable outputs.
Output VAT
The VAT that your business collect over on taxable supplies (VAT paid on sales)
VAT Payable
This is the VAT to be paid to Tax Authority by a taxable person
VAT Payable = OUTPUT TAX – INPUT TAX
If the output VAT exceeds the input VAT, the VAT registered person has collected more tax from its sales
and, thus, the excess VAT collected (net VAT) must be paid to the Tax Authority at the end of the VAT
accounting period.
Output Vat > Input VAT = VAT Payable/VAT Liability
VAT Refund
VAT refund (VAT refundable) is the net VAT that a VAT registered person (taxable person) expects from
the Tax Authority when input VAT (VAT paid on purchase for supply) exceeds output VAT (VAT charged
on sales). A VAT registered person in Ethiopia is entitled to VAT refund based on VAT Proclamation No
285/2002, Article 27 and VAT Regulation No. 79/2002, Article 15.
If input VAT exceeds the output VAT, the difference results in VAT refundable or VAT credit.
Input VAT > Output VAT = VAT Credit/ VAT Refundable
Consumption Type of VAT Computation
Example 01
ABC company earns revenue of birr 1,500,000 vat inclusive during the year. The company paid Br 45,000
vat during purchase. The company withhold Br 8,000 per month from employment increase tax and it
also paid 30,000 Br yearly business profit tax to the tax authority.
Required:=

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 i. Compute purchase price of the item?
ii. Compute direct liability for the year?
iii. Compute direct liability for the year?
Solution
Ans i. Required purchase price?
VAT = purchase price (p) x 15% = p x 0.15
Price = VAT /0.15
= 45,000/0.15
P = 300,000 Birr
Ans ii. Required direct tax?
Direct tax = business profit tax + employment income tax
= 30,000 +8,000(12)
Direct tax = 126,652.17
Ans iii. Required indirect tax?
Indirect tax = net VAT
Net VAT/ VAT liability = Out VAT – input VAT
1,50,000(15/115) – 45,000
= 195,652.17 – 45,000
Indirect tax = 150,652.17 Birr

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