The excise tax reform that Prime Minister Abiy Ahmed’s administration undertook after assuming power four years ago was the most consequential of all the tax amendments enacted during that time. From old automobiles to tobacco products and beverages, a substantial change was made to apply a higher excise tax while expanding the tax base to include those that were not subject to the same tax category.
Once again, the issue is now in the spotlight as the Ministry of Finance (MoF) revises the excise tax proclamation in response to the need to boost tax income and the persistent call from various interest groups to lower rate on what they call “the sin tax” on some products vital to the country.
Regulators, executives, manufacturers, associations, and stakeholders convened in one of Ethiopia’s House of People’s Representatives (HPR) venues on March 29, 2023. The Plan, Budget, and Financial Affairs Standing Committee met, presided over by its chairperson, Desalegn Wodaje, to discuss the draft amendment to the excise tax proclamation tabled before Parliament at the end of January.
The amendment was required due to rising government expenditure, which should be compensated by higher tax revenues, according to officials from the MoF, the institution in charge of drafting the bill.
“One of the goals of excise tax is that such an indirect tax has a big power to generate more income, and thus some goods face excise tax for this purpose,” Eyob Tekalign (PhD), state minister for the Finance Ministry, said while making his opening remarks in the meeting.
“The amendment comes as we are preparing the budget for the next fiscal year, and that requires boosting tax revenues,” Eyob pleaded with the House for urgent approval of the proclamation.
The draft proclamation makes telecommunications services excisable, with a five percent tax imposed. The government anticipates that levying the indirect tax on telecom will generate additional revenue, but how much will be collected remains to be seen.
The 71 million users of century-old, state-owned ethio telecom will be the main contributors to the excise tax. Ethio telecom earned 61.3 billion birr in revenues last year, while it generated 33.8 billion birr in the first six months of this year. Safaricom, an intercontinental operator, now serves the telecom sector with over three million subscribers. Its services will be subject to the same excise tax as ethio telecom, with its contribution expected to rise as its client base expands.
As there are new sectors that will face excise taxes, there will be those that receive a reduction.
There will be exceptions for video cameras and televisions. Both are now subject to a 10 percent excise tax due to their status as luxury items, but the draft proclamation removes them from the list of excisable products. Another change will be made to the excise tax imposed on automobiles. The adjustment was implemented to reduce the high tax on autos.
Ethiopia has the highest rate of automobile taxes among many African countries, ranging between 66 and 374 percent. Kenya has the highest rate of all car taxes at 96 percent, Rwanda has 71 percent, and Ghana has 40 percent. The current proposed measure divides new car excise tax rates into four categories based on engine capacity.
Importers of new vehicles with engine capacities less than 1,500 cubic centimeters (cc) will be charged 10 percent, while those with capacities greater than 2,500 cc will be charged 20 percent. New vehicles with engine capacities up to 3,000 cc will bear a 30 percent excise tax, two times lower than the rate faced by vehicles with capacities greater than 3,000 cc.
Many consumers were relieved to hear that the government will exempt and reduce some taxes on products, including cars and cameras, but others are worried about the still-high excise tax imposed on products like tobacco. Representatives of the National Tobacco Enterprise (NTE), whose major shareholder is Japan Tobacco International (JTI), raised the issue in Parliament about the impact of excise and other levies on expanding illicit trade activities.
Yitbarek Zekarias, chairperson of the tobacco company’s workers union, advised the government to curb the illicit trade before it has a catastrophic impact on the country as a whole. He boldly stated that the excise tax opened the door to the proliferation of untraceable products.
“The tax that aims to reduce consumption of the products has largely increased illicit trade activities in the country. This makes the legally existing company shambolic while the youth are being addicted to products that are illegal,” he said.
Representative of the tobacco monopoly, Yayehrad Abate, voiced concern about the growing role of illicit tobacco trade in the market, just after the adoption of the existing excise tax proclamation in 2020.
Notwithstanding his agreement to the implementation of an indirect tax on his company’s six goods, he encourages an investigation of whether the measures implemented have accomplished the government’s health and income objectives.
Yayehrad remembered occasions in which his colleagues and he encouraged the administration to avoid imposing a 197 percent excise tax since illicit trade regulation was disorderly. He revealed last Wednesday that the move had forced his company to cut at least 40 percent of its total production.
“Had this 40 percent of product reduction contributed to the decrease in consumption by society, we would have concluded that the objective by the government was achieved,” he said. “But according to the study we conducted, the 55 percent market share of the contraband before the excise tax adjustment increased to 65 percent afterwards.”
Yayehrad’s company’s production cut resulted in two straight years of losses and the layoff of 318 workers, he explained.
Producers of alcoholic beverages also made bold claims about the government’s incapacity to control illicit trade activities. Representatives of the National Alcohol and Liquor Factory expressed concern about the public’s potential decision to move to unregulated local alcoholic beverages as a means of avoiding the rising prices of their products.
Mekonen, one of the representatives, praised the government for lowering the excise tax on alcohol inputs. This was done in order to avoid charging the same item twice. Yet after the amendment three years ago, the rate of excise duty on these goods has gone from 60 to 10 percent.
As a result of the excise tax, Mekonnen says his consumers are more likely to buy illegally manufactured goods because his company’s products are taxed multiple times, starting with the purchase of basic input and ending with the final sale.
“Repeated taxation has severe repercussions. Among them is the expansion of locally made alcoholic beverages like Areke as well as the importation of illegally imported beverages,” he said. “The government loses a significant amount of revenue as a result of the growth of these illicit activities.”
Nebiyou Zeleke, deputy chairperson of the workers union at the National Alcohol and Liquor Factory, was worried about his union members as he talked about how they were losing their jobs. He asked if the government has a plan for the thousand people who work directly in the market and the many others working at the company if the illicit trade wins the market.
He also seemed more worried about the health consequences. “The government should realize the disastrous health effects of not being able to control the production and sale of illegal alcohol,” he said. Several consultants and people from health-related civil society groups spoke out against what the alcoholic product manufacturer’s representatives were saying.
Melaku Getachew, who works for an organization that fights non-communicable diseases, urged the representatives of the tobacco monopoly and alcohol factory to differentiate between illegal trade and excise tax.
Neither the argument made by the factory’s representative nor the labor union made sense to him because it made him think that factory-made products are better for the health than goods that are sold illegally. “I don’t think it’s fair to say that illegal goods have bad effects while your own product is bad,” he said.
Melaku felt the argument made about the staff layoffs was comical. He said that tobacco kills about 17,000 people in Ethiopia every year. He based this on a study from five years ago.
“Should we argue about the few hundred people who lost their jobs or the 17,000 people who died because of the product?” he asked. “This is a health bill to pay.”
In the middle of a debate about the role of excise taxes in illegal trades, a public health researcher, Sisay, disproved the results that Yayehrad had presented. He and his team had looked into how much of the market was made up of the illegal tobacco trade three years ago. They found that it was never 55 percent but rather 18 percent, according to the researcher.
“If the production really went down by 40 percent, it means that the goal for public health was met,” he said. “Because that was our main goal, and the world is also heading toward the endgame with tobacco. There is not a single good thing about smoking, zero benefit.”
Sisay cited a study conducted by the Ethiopian Public Health Institute. About 87 percent of the tobacco used in Ethiopia is the brand Nyala, and the price of illegally imported tobacco is higher than the price of tobacco made in Ethiopia, according to the study.
“There is still room for more taxation,” the researcher concluded.
