A new excise tax proclamation tabled in Parliament this week has shuffled existing rates, with the new bill aiming to correct mistakes in the law ratified just two years ago.
The existing excise tax is exaggerated, negatively affected local industries, and some has proven difficult to collect, according to studies conducted by the government.
The existing average sum of taxes on vehicles ranges between 66 percent and 374 percent. This is high compared to the average taxes on vehicles, which stood at 96 percent in Kenya, 71 percent in Rwanda, and 40 percent in Ghana, Meseret Haile, the government whip in Parliament, said. As a result, the average tax on vehicles is now reduced to 121 percent under the amended proclamation.
After the excise tax proclamation was ratified in 2020 and dramatically increased vehicle rates, the government’s revenue from the import of vehicles has significantly increased. But now that the new proclamation has cut taxes on vehicles, Meseret says that the government could lose up to 5.5 billion birr in revenue.
The new bill reduced the rate on used car imports of up to 1300 cc from 30 percent to five percent.
Excise tax on telecommunication services of mobile and wireless telephones (Internet, voice, and SMS), which were exempted in the existing proclamation, now stands at five percent. A 200 percent tax will be imposed on vehicles especially designed for traveling on snow and golf cars.
Used vehicles exceeding five years of age are assessed between 410 and 500 percent, while three-wheelers with only spark-ignition internal combustion reciprocating piston engines, whether diesel or semi-diesel, with cylinder capacities not exceeding 1501–3000 cc are exempted from excise.
“The existing excise tax proclamation, which was amended and introduced two years ago, has levied higher taxes on old cars. It contributed to environmental protection and also increased tax collection,” Meseret said. “However, some of the rates in the existing proclamation are negatively affecting the competitiveness of domestic industries.”
Kenya, which is used as a benchmark for the new bill, collects a 10 percent excise tax on telecom services.
Members of Parliament (MP), however, argued that vehicle rates remain high and unaffordable for citizens.
“Used cars will continue to be taxed at hundreds of percent under the amendment, while suppliers of smoking pipes (including pipe bowls) and cigarettes are paying 20 percent excise tax,” Aschale Alamire (MP), said.
Festive, carnivals, or other entertainment articles, including conjuring tricks and novelty jokes, are also levied at 20 percent, which is unfair, according to the MP. “Which one is useful for this country? These items are unnecessary for this country, and more tax should be levied on these items.”
Another MP argued that the five percent excise tax levied on telecom is disproportional to the efficiency of telecom service and per capita airtime usage in Ethiopia. “The tax might be necessary, but is it worth the provision of telecom services in Ethiopia? Kenya is taken as indicative, but the telecom service in Kenya is much more efficient than Ethiopia,” said the MP.
Tadesse Lencho (PhD), cofounder and managing partner of TBeST Law LLP, who has also lectured tax laws at Addis Ababa University (AAU) for decades, is among the scholars who contributed to the drafting of the existing excise tax and the new commercial code. He says that most of the amendments made in the new proclamation were raised during the drafting of the existing proclamation just three years ago but rejected by the tax officials.
“An excise tax on telecom equipment imports was proposed in the draft of the current proclamation,” Tadesse explained. “But the government exempted it after ethio telecom complained three years ago. However, they levied the telecom excise tax on purpose now, because private telecom operators are now active in Ethiopia.”
The new bill also exempts the importation of video production equipment, including televisions and cameras, from the existing excise tax, which is levied at 10 percent.
Tadesse believes that these were the wrong taxes from the start.
“They were considered a luxury in the 1970s, and that concept persisted. We suggested it should be exempted when the existing excise tax was drafted in 2019. A video camera is not a consumption item; it is an input item for the content makers in the entertainment industry. Now, the government has understood our previous recommendations and amended them in the new proclamation.”
The rate on sugar is halved from 20 percent, which is welcomed by the beverage industry. Levies on the import of pure alcohols are also reduced from 60 to 10 percent. The existing rates have highly affected local breweries, according to Meseret.
Duty-free imports allowed under the second schedule of tariff-free imports are now also subject to excise tax. However, NGOs, investors, and people with disabilities will now be required to pay excise tax on items imported duty-free.
For Tadesse, the target of the excise tax is not to raise revenue. “The Ethiopian government considers it a source of revenue. Basically, excise tax has a policy objective, unlike other tax types like VAT. Excise tax is levied to reduce the import of goods like alcohol, cigars, and luxury goods. Excise tax levied on vehicles, which is called benefit excise, is also basically to raise road funds.”
Tadesse also claims that the government’s estimate of a 5.5 billion birr loss in the new proclamation is incorrect. He says that the revenue reduction is actually not a loss since the higher excise tax revenue collected in the past couple of years was basically wrong.
“So, we cannot say that excise tax revenue will drop. Rather, the right excise tax will be collected now. The excise tax rates levied on vehicles in the 2020 existing proclamation were highly exaggerated. Larger vehicles faced tax increases of hundreds of percent. This was decided without any reason. It is very good that the rates are now reduced.”
