Responding to an overdue complaint from the business community over the use of bank statements as a source of information in assessment, levying and collecting of income tax, the tax authority has issued a new circular clarifying how bank statements should be interpreted to avoid overestimation of the taxable income.
For the past three years, during the tenure of Beker Shale, former Director General of Ethiopian Revenues & Customs Authority (ERCA), those in the business circle has been complaining about the use of bank statements in tax assessment.
The confusion came from businesspeople using one and the same bank account for both private use as well as business transactions. The use of their bank statement finally resulted in a wrong estimation of the taxable portion of their business income.
This has pushed businesses to relay more on personal cash safe boxes instead of bank accounts.
So a number of complaints from the business community have forced the Tax Authority to look into the matter. Finally, a study was conducted over the issue and presented to the Prime Minister’s Office and the Council of Ministers.
The assessment has found out that there is a lack of uniform procedures in dealing with bank statements for tax assessments.
Moreover, bank transactions indicating collection of informal loans, Equbs (social scheme for forced saving), personal moneys transfer transactions have been considered as revenue from sales, according to the study.
The new circular issued last week made it clear that previous tax assessment as well as collections has been done uniformly and were not fair.
In this respect, the circular ordered the re-visit of those tax estimations done before June, 2017 using bank statements.
Those who paid more than they should because of the wrong assessment mechanisms before the issuance of this circular and have already filed their complaints at the Authority will have their cases revisited and the taxes they paid. The circular also orders taxes to be refunded if they it was found to be based on wrong assessment of bank statements. This will be made after it was checked by an auditor, circular states.
However, if the tax they have paid before is found to be less than what they should have paid, they will have to pay the difference.
However, going forward, the tax authority will not be considering changes to bank statements unless and otherwise provided with evidence.
For the coming tax assessment, unless it’s backed by evidence, the difference in bank statement will be considered as taxable income, circular stated.
The circular has also listed a number of points that has to be considered in using bank statements while assessing incomes.
For instance, if tax payers receive a private loan and the transaction is made via bank account the authority has to look into the evidences to determine if the money is a business income.
The circular has also advised both private tax payers as well as organizations to separate their company’s bank account from their private accounts to avoid confusion during tax assessment.