Wednesday, June 19, 2024
BusinessFed unveils new tax to finance conflict rehabilitation project

Fed unveils new tax to finance conflict rehabilitation project

Officials expect 19.5 billion birr from the new tax source annually

The federal government introduces a new tax to finance its five-year rehabilitation and recovery project in conflict-ridden areas, mainly in northern Ethiopia.

The Council of Ministers approved a regulation that introduced a social welfare tax last week. It is the first of its kind and will be imposed on imported goods. Officials want to use revenues sourced from the new tax to finance the reconstruction of damaged infrastructure, including health and educational facilities.

It is a measure that comes as the government faces a budget squeeze because of mounting expenditure because of the war and a growing budget deficit due to a fall in aid and grants. The budget deficit is projected to surpass 309 billion birr this year, representing over four percent of the national GDP.  

The new tax is expected to relieve the government’s burden in reconstruction efforts, which are also backed by development partners such as the World Bank, which allocated USD 300 million last month.

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Except for traders who pay surtax, all importers will be required to pay three percent of the total amount of goods brought in from abroad. With the total imports of the country estimated to reach over USD 14 billion this year, officials expect to collect 19.5 billion birr (USD 360 million) from the new tax. It will be an addition to the 450 billion birr in revenue the government expects this fiscal year.

Besides causing damage to people’s lives and infrastructure, the war in northern Ethiopia has cost the government a lot in terms of finance. In the just ended fiscal year, the federal government spent 156 billion birr for rehabilitation efforts and humanitarian operations in the aftermath of the war. This is excluding the 100 billion birr in expenditure the government incurred for the same purpose in Tigray before the region fell under the control of the Tigray People’s Liberation Front (TPLF).

About USD 3.6 billion is also required to implement a recovery program in the health and education sectors across six regions where there was damage because of conflict and violence in the last two years.  Officials want to finance this through aid and by introducing a new source of revenue.

According to Habtamu Menesha, legal affairs director at the Ministry of Finance, the new regulation is intended to make importers share the burden faced by the government.

“At this time, the government has a huge budget burden. It is important to impose this type of tax to withstand the budget squeeze, “said Habtamu, explaining revenue collected from this tax will be used to rebuild destroyed health and education facilities and expand other basic social services.

The federal government’s expenditure on health, education, and other social services accounts for 70 percent of the total annual budget. The damage to these facilities due to the war has exacerbated the need for more budget allocation, according to the ministry.

“Since fulfilling the budget needs with the current revenue collection is not possible, creating a new source of revenue that can be collected easily and sustainably is necessary,” the explainer statement presented to the Council of Ministers reads.

Every imported good has been subject to a 10 percent surtax since 2007. Surtax is levied on all imported products, except for certain products that are imported by persons or organizations that are already exempted from customs duty.

Capital (investment) goods, petroleum, freight, and public passenger vehicles, as well as aircraft and their parts, are exempted from the surtax. It will be different in the case of the newly introduced tax. 

Capital and construction materials, including vehicles imported for new investment or expansion of existing investment will now be subjected to a new social welfare levy.

Apart from this, aircraft, spacecraft, and parts thereof, which were exempted from surtax, will face the new tax. Aviation firms such as Ethiopian Airlines will be required to pay a three-percent tax when they buy and import aircraft.

“Businesses with duty-free rights fall under the category when they import investment goods,” said Habtamu, explaining the new regulation.

People and organizations with diplomatic privileges are exempted from the new tax. In addition to this, the director explained that the Ministry of Finance has the authority to exempt imported products from social development tax through a directive it will issue in the future.

“In the current situation, imposing tariffs on wheat and edible oil can worsen inflation, so they will get an exemption,” he pointed out.

The three percent tax on goods is calculated solely on the basis of cost, insurance, and freight (CIF). Sur, VAT, and Excise Tax will not be included in the calculation.

Tadesse Lencho (PhD), a tax law expert, says that considering the government’s expenditure pressure, imposing this levy might be expected. However, he also expressed concern that the tax will be imposed on the capital goods imported by investors, which will affect their investment.

“It’s like taxing investment,” Tadesse said.

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