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Excise Tax Bill: reasons for concern

Since the news broke out from the House of People’s Representatives (HPR), the proposed excise bill has become contentious not only for its content and focus on vehicles but also on the legislative process it has passed through. In the following note, I reflect on how the draft bill missed-out and overlooked important environmental and sustainable development principles that could have enhanced the current climate change trajectory in the road transport sector. In this part of the note, I focus on the participatory nature of the drafting process and provide few illustrations regarding its possible socio-economic impact.

Consultation with stakeholders – dusted

The draft bill was drafted by experts from the Ministry of Finance and Economic Cooperation (MoFEC) and Ministry of Revenue (MoR). No consultations were conducted with any of the producers or suppliers of the taxable products or services during the drafting process. In the auto industry, neither the producers nor importers of used vehicles were consulted. It is the practice of a rogue government to draft such laws behind the scenes and surprise its client pretty much the same as the market. Ethiopian Automotive Producers Association, established with the support of the Metal Industry Development Institute (MIDI) and its members don’t have any idea about the proposed tax until it was presented for the Council of Ministers. Used car importers have got their own associations and recently complained that they were not informed nor consulted about the matter. We have heard that other producers (e.g. bottled water and soft drink producers and even Ethio-Telecom) whose products and services are included in the excise bill were not reached out as well.

Worried by the growing outrages and price hikes on some products in the market well before the bill comes into force, agencies have now started discussions with media and stakeholders. Anecdotally, it is too late too little to satisfy the requirements of consultation that should have been done in the drafting process. The current consultation process resembles a lobbying and awareness creation campaign than a genuine consultation to improve the bill’s content. You can see that from the ongoing discussions and the fact that the bill is already in the hand of the House but the consultation was prepared by the sponsoring agencies.

We have witnessed from the news outlets that many producers associations are expressing their anger over the process. These producers are customers of the Ministry and entities that will be directly affected by the proposed bill. I believe that any consultation to come at the House of People’s Representative standing committees will not be a fruitious endeavor, at least to discuss alternative options and implications of the proposed bill. The House committees are not technical experts to listen to such comments, to revise the clauses, evaluate its overall implications as they haven’t done the research. Why did MoFEC decide to avoid facing producers and service providers early in the process? Why did it fail to provide them with its justification – economic, social and environmental impacts of the proposed bill?

Constitutional requirements overlooked?

I very much note that to ‘consult’ never equals to ‘consent’. The former is a constitutionally guaranteed right – ‘to be consulted with respect to policies and projects affecting their community’ (Arts 43(2) and 89(6), FDRE Constitution) while the latter is left for the discretion of the agencies. The stake here is consultation and genuine discussion with stakeholders although the final decision about the contents of the bill remains with the agencies. They might have practical or strategic reasons for doing so but should be challenged as unconstitutional.

Some may argue that consultation will anyway be hosted by the House Standing Committee on the draft bill. Yet I argue that any consultation before the House Standing Committees is procedural (to satisfy the House’s own Working Procedure and Code of Conduct) than substantive (revise the bill as necessary). Conceivably it never equals the robust and meticulous discussion and substantive consultation that should have happened in the bill’s early drafting stage. This time around, the Standing Committee will return the draft bill to the House with its recommendation – endorse it with or without modification or reject it. Perhaps, past experiences in the House caution us not to be optimistic. Hence, the draft bill is unlikely to be rejected but will pass into law very soon.

Car price under the new scenario

Many were mystified by the higher rate of tax proposed especially on used vehicles. The bill is meticulously detailed when it comes to vehicles. I will focus only on cars that are used to transport less than 10 passengers, as defined in the bill. The tax rate on new and used cars looks the following.

Cylinder Capacity

Propulsion type

Excise Tax on New Cars (%)

Excise Tax on Used Cars (%)

1-2 years

2-4 years

4-7 years

>7 years

1300

Gasoline & Diesel

30

80

130

230

430

Hybrid-electric

30

80

130

230

430

1301-1500

Gasoline & Diesel

60

110

160

260

460

Hybrid-electric

60

110

160

260

460

1501-1800

Gasoline

60

110

160

260

460

Diesel

100

150

200

300

500

Hybrid-electric

60

110

160

260

460

> 1801

Gasoline & Diesel

100

150

200

300

500

Hybrid-electric

100

150

200

300

500

Battery Electric

-

50

100

200

400

MoFEC, The draft Excise Tax bill (2019)

Let us do a simple illustration to show how the price of cars would look like under the proposed bill. Assume that you wanted to import a 2011 Toyota Vitz car of 1300 CC from UAE that initially costs USD 3,257 (114,000 ETB) in the market (note that prices are taken from online used car dealers in UAE and Japan). With the cost of freight and insurance estimated at 30,000 ETB, the cost (CIF value) becomes 144,000 Birr when it reaches Ethiopia. Cars are subjected to customs duties, excise tax, VAT, Surtax and Withholding tax each taxes having a cumulative effect on the other. The cost difference of this specific car when it is subject to the existing 30 percent (A scenario below) and the proposed 430 percent (B scenario below) excise tax is significant. As can be seen from the table below, the final cost of the car will become over 1.3 million ETB under the new excise tax regime while the current cost was 329,282 ETB. When you add up additional transport costs and a 12 percent profit margin, a 114,000 Toyota Vitz in Dubai will have a price tag of more than 1.5 million ETB under the proposed tax.

We can try it again with two other cars: (C) used Toyota Vitz of 2018 model with 1300 CC that costs you around USD 12,000 (385,000 ETB), and (D) new Toyota Vitz with 1300 CC which will cost you around USD 17,800 (623,000 ETB). The cost when they finally arrive in Ethiopia (before adding the retail and transport costs and the profits of sellers) will become 1.4 million ETB for the used 2018 model and 1.6 million ETB for the new model. That figure came out after considering the much-reduced customs duty and excise tax rates on these two models. Well, that is that!! Henceforth, the cheapest car one can buy in Ethiopia will still be that 2011 model with around 1.5 million ETB price tag.

Car price scenario analysis

­

Car Model (1300 CC)

CFI

Customs Duty (30 or 35%)

Excise Tax (30 to 430%)

VAT (15%)

Surtax (10%)

Withholding Tax (3%)

Total Tax

Final Cost

A

2011

144,000

50,400

58,320

37,908

29,063

9,591

185,282

329,282

B

2011

144,000

50,400

835,920

154,548

118,487

39,101

1,198,455

1,342,455

C

2018

425,000

148,750

459,000

154,913

118,766

39,193

920,622

1,345,622

D

NEW

663,000

198,900

258,570

168,071

128,854

42,522

796,916

1,459,916

Note: Taxes on cars (A – 30 percent existing excise; B - the proposed 430 percent excise; C- the proposed 80 percent excise; and D – the proposed and existing 30 percent excise tax)

Obviously, the final burden rests on the customer, and the government shouldn't take that for granted under the disguise of environmental protection. Arguably, in a much-unsettled situation of current Ethiopia, an attempt for a radical change (with the effect of banning used vehicles) might fall apart due to resistance by businesses and lack of political support. A step by step approach that sets short to long term target might do justice both for the economy, environment, and social equity. Such an ill-fitted instrument might dwindle the perception of environmental protection in general and climate change in particular.

Does the government lose revenue as a result of the proposed excise tax? Not sure. Taking cars alone, it is certain, however, that the total tax which is collected from four or five used cars under existing tax could be matched by taxing a single car under any of the proposed rates. When you add up the costs that will be saved as a result of fuel efficiency, lower spare part demands, and reduced traffic accidents, the government has nothing or little to lose in terms of revenue. Yet there could be some revenues lost as a result of relieving minibusses and buses from the excise tax. Hence, it requires investigating the whole tax system and predicting how the market will respond to it.

Impact on the used car business

It was reported that more than 4000 importers of used cars are registered and licensed by the Ministry of Trade and Industry (MoTI). Assuming that only half of them are operational and each of them employs at least seven staffs, the existence of a total of 2000 businesses and 14,000 workers are directly affected by the bill. When you add up other businesses that are dependent on the used cars business like car retailors, spare part dealers, garage operators, and parts and component designers, tens of thousands more employees will be laid off from their work.

When one thinks of significant changes like this, it is inevitable for a disturbance to occur and I wouldn't argue for maintaining the status quo, especially given that small size firms and informal family businesses are dominating the sector. Yet again the government has to allow these businesses and lives dependant on them to smoothly transition to a suitable sector. The expertise, capital, and marketing information accumulated in the informal used car market should be utilized to support the country’s ambition of greening the economy and expanding manufacturing sectors.

One possible solution would be assisting the businesses to turn into small manufacturers within the auto sector, like producing parts and components that feed into the emerging auto assembling and manufacturing industry. The other feasible option could be turning these small businesses into a bigger firm that could import new cars, provide service and maintenance, provide genuine spare parts and scrapping services. The experiences of Morocco and South Africa that produce more than 200,000 cars a year, dictate us that auto manufacturing is increasingly dependent on a reliable supply chain of small parts and components. Perhaps, auto manufacturers are specialising on the designing and assembling while outsourcing a significant amount of parts and component production to hundreds of firms established around them.

Doing so requires a mid- to a long-term plan of the relevant authorities and discussion with those involved in the used car value chain. Time is another factor for that and the current rushed bill will not do justice for such an effort. Unlike the practices elsewhere, legislation in Ethiopia enters into force immediately after it is passed by the House or published in the law gazette. No law guides when it should enter into force as it depends on the subject it regulates and the urgency of doing so. But practices dictate that it is such a bad practice that grace period or notice is not given for a proper transition, parties affected by the law to weight options and agencies to put in place the necessary structures for its implementation. Hence, the bill has to be preceded by a tangible plan that works to support parties that will be affected by the new excise tax, and I argue that the House committees should request MoFEC or other agencies to prepare and submit such plans before approving the bill.

On another observation, the proposed bill will probably please new car importers and assembling manufactures. Although they have not faced marketing problems for their cars in the short-run, it will further soar the demand for new cars and attract automotive giants into the Ethiopian market. If they are provided with their foreign currency demands, existing assembling companies can utilize their full designed potential and produce diverse models for the Ethiopian market. Auto companies who were escorting the market will jump into concrete actions and will create more jobs.

Market distortion ignored

Soon after the news of the proposed bill was heard, a price hike hit the used car market. True that the marketing system is informal and dominated by sabotage in Ethiopia. A price increase in fuel will prompt a price increase in house rent and other basic goods like tomatoes and teff. It was expected that an increase in excise tax on a certain product will trigger wider market speculation and open the door for market manipulation by the chain of informal business. In the absence of a legally determined profit margin, price is determined by suppliers who hold a monopoly in accessing the country's drained foreign exchange or black market, and the rogued value chain.

The used car importing business is filled with an informal family chain and small firms that import in hundreds or less. Most of the importers do not have their own retailing stores but transfer it to those who have a store on commission. The tricky part is that the importer would call a selling price for that particular car but the retailers are free to sell it with a higher price and retain the difference. That is a lucrative business for both parties once you've got a used car retailing shop and access to foreign currency. Those in the business pretty much know that only a few have access to the essential resources to run the lucrative business. That gives them the power to manipulate the prices. Was that unknown to the authorities that drafted the excise bill? Not at all.

Moving forward

The current bill is also challenged on other social grounds as well – chaotic transport situations in cities. The absence of descent mass transport has forced middle-classes to turn to private cars that this bill tries to reverse. Besides, we have witnessed in the past and now itself how inflation and market distortion affect products and services even before the entry into force of the bill and on untaxed items. As a result, the poor and middle classes are disproportionately hit by the waves of price hikes, and public anger and dissatisfaction is a genuine response. Yet the government should have expected that to come and done its homework beyond rhetoric. The fact that mini-buses, midi-buses, and buses are free from excise tax might help mitigate the damage.

Ed.’s Note: Mulugeta Getu Sisay is a PhD Researcher, Cardiff University, School of Law and Politics, UK, Cardiff. The views expressed in this article do not necessarily reflect the views of The Reporter. He can be reached at [email protected] or @MulugetaGSisay on Twitter.

Contributed by Mulugeta Getu Sisay