Wednesday, February 8, 2023
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Money TalksWith a new tax on the horizon, regions envision fiscal independence

With a new tax on the horizon, regions envision fiscal independence

Since the relevance of property tax became a public agenda, formally brought to the table by a project office formed under the former Ministry of Urban Development & Housing (now rebranded as Ministry of Urban & Infrastructure Development), authorities responsible with following up on the matter have been exerting efforts to bring it to fruition. Even Prime Minister Abiy Ahmed (PhD) advocated for it. To his delight, it became a reality last week.

Citizens will soon be required to pay taxes if they own property.

Who should be in charge of collecting property tax was a more contentious question and debatable than whether or not it was necessary to do so in the first place. The debate was finally concluded on Wednesday, January 11, 2023. The power to collect property taxes had been given to the regional and city administrations rather than the federal government, whose officials had advocated taking 25 percent of the entire amount collected.

On Wednesday, members of Ethiopia’s House of Federation and House of Peoples’ Representatives convened for their first special joint meeting since the country’s last general election, which took place in 2021, in order to deliberate on the day’s agenda, property tax.

Resolution proposing that power be given to regional administrations was brought before the houses for debate and voting by standing committees of the Planning, Budget, and Finance of the HoPR and the Subsidy Budget and Shared Revenues of the HoF. The motion was approved with four votes against and five abstentions.

Following the presentation of the resolution by Hailu Ifa, the secretary of the Subsidy Budget and Shared Revenues standing committee of the HoF, members of the two houses debated the subject.

Hailu described how towns and regions struggle to finance their expenditures, as well as the role that property taxes may play in reducing the budget deficits they face. “They are significantly reliant on federal government subsidies.” It is a legitimate concern, considering that federal government subsidies account for more than half of regional state and municipals budgets.

“Cities in Ethiopia cover only 1.8pc of their expenditure with taxation of properties and land, whereas it is 30 percent in cities like Nairobi,” reads Hailu, as he presented the resolution.

MPs who voted for the resolution believes that imposing a property tax will help them attain budgetary independence while relieving pressure on the federal government, which allocates 27 percent of its budget to regional subsidies.

Tadesse Lencho (PhD), an expert in law and lecturer of tax and bankruptcy law at Addis Abeba University, and presently a managing partner at TBeST Law LLP, describes how property tax was not new to Ethiopia and how it was enforced during the reign of Emperor Haile Selassie. Property tax was levied on immovable assets such as plots of land under imperial rule, based on location, fertility of the soil, and several other factors, he stated. The Derg regime ended the rule in 1974, although the Ethiopian People’s Revolutionary Democratic Front (EPRDF) maintained the status quo.

“Property tax was one of Ethiopia’s oldest forms of taxation, although it was not recognized in the existing tax system and legislation,” he said.

He goes on to explain how property taxes relate to the notion of equity.

Residents living off their salary become the major backbone of the government tax, whilst citizens owning villas and living off better with municipality amenities are exempt from property tax, according to him. It is a view shared by MPs.

Tadesse, however, cautions the government to be wary of probable increases in rents and surging property prices as a result of the property tax.

“Those who are unable to pay will most likely be exempted from the legal frameworks that will take effect as a result of this. It should be thoroughly examined if there are people who own properties but are unable to pay the tax,” Tadesse shares his concern.

During the deliberation process, lawmakers expressed concerns about how this form of tax should not be imposed. Desalegn Chanie (PhD), former chairman of the National Movement of Amhara, voiced objections about the concept of a property tax in parliament.

Desalegn expressed his worry about immovable assets, which are largely residential dwellings erected by city inhabitants with numerous difficulties like as long time savings and loans.

“Why isn’t government focus on minimizing expenditure, rather than introducing new tax?” he asked. “The government should prioritize projects and work on minimizing expenditures, as the public already has huge tax burdens.”

Desalegn also raised the issue of whether regional governments would effectively use the collected taxes to the development of the cities from which the funds are derived. After collecting almost a billion Birr in internal taxes in Bahir Dar alone, the city he represents in parliament, the regional government returned a very tiny sum to the city’s infrastructure, he added.

The Finance Minister, Ahmed Shide, was audacious in asserting that “those who have managed to build properties in Ethiopia already have better income” when explaining the latest effort to widen the tax base to members of both houses.

Ahmed told members of both houses that the property tax would ensure equality in tax collection, citing the country’s low tax-to-GDP ratio and narrow tax base.

According to Shimelis Abdisa, president of Oromia Regional State and head of the House of Federation’s Subsidy Budget and Shared Revenues standing committee, one of the key purposes of granting regional governments the right to collect property taxes is fiscal independence.

According to him, the majority of taxes are either collected by the federal government or shared resources by the federal and regional governments. “The regions collect extremely tiny amount of tax, which is imposing strain on the own expenditure. Let alone development activities, most areas aren’t even covering their expenditure,” he noted.

Should the federal government be granted the power, which the House of Federation would then allocate to the regions, Shimelis indicated that the two city administrations, Addis Ababa and Dire Dawa, would be excluded since the HoF would not recognize the two cities.

Tadesse, the specialist in tax law, agrees that local governments should handle property taxes, since he feels that local governments primarily contribute to the value of a property. He also believes that property tax is the tax type most closely associated with local government.

“It’s the services and infrastructures the local administrations develop that add to the values of the properties. The federal government is very far from property tax,” he said. “Even regional governments shouldn’t claim ownership of the property taxes, it is for municipalities only.”

The federal government’s objective is for regional governments to delegate functions to their local administrative structures (municipalities), after which the cities would utilize the tax to fund their development plans.

“One big problem is that rich cities with larger numbers of property owners will be richer and poor cities will be pooper,” Tadesse said. “The federal government should come up with a solution on how to narrow the gap.”  

The next step would be to draft a proclamation on how the property tax would be imposed, after which regions would establish legal frameworks in accordance with what the parliament has legislated.

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