Ethiopian Tax Systems PDF

CHAPTER FOUR ETHIOPIAN TAX SYSTEMS 1 Basic Elements of a Tax System The five pillars/basic elements of tax system are – Taxpayer refers to any individual or organization that is obligated to pay tax – Tax Base is the value of everything which is subje...

CHAPTER FOUR ETHIOPIAN TAX SYSTEMS 1 Basic Elements of a Tax System The five pillars/basic elements of tax system are – Taxpayer refers to any individual or organization that is obligated to pay tax – Tax Base is the value of everything which is subject to taxation – Tax Rate is the amount of taxes expresses as a percentage of the tax base – Tax Period is the period for tax assessment. It can be a year (tax year), month, etc. – Tax Administration refers to any government office mainly with a responsibility of tax collection and other related activities. 2  Tax Related Terms 1. Delinquent Tax: refers to taxes remaining unpaid on and after the date of penalty. 2. Fiscal Year refers to the twelve month period used by the government 3. Gross Income is the total income of individual or business 4. Tax Abatement refers to a complete or partial cancellation of imposed taxes. 5. Tax Assessment is the determination of the amount subjected to tax. 6. Tax Avoidance is the practice of paying as little tax as possible by using available legal loopholes. 7. Tax Bracket is a range of income subject 3to 8. Tax Cut is the act of reducing taxes for certain reason. 9. Tax Credit is an investment activity which directly minimizes the tax to be paid. 10.Tax Deduction is the amounts legally permitted to be subtracted from gross income. 11.Tax Evasion is an illegal activity in which a taxpayers seek to hide taxable income by overstating expenses or understating revenues. 12.Tax Exemption is a legal provision that permits to deduct specified amount from gross income as a tax free income. 13.Tax Exile refers to somebody who leaves a country in order to avoid paying taxes. 14.Tax Favored Investment refers to an investment whose profits are taxed lower tax rate. 4 15.Tax Function is a function of tax accountant. 16.Taxable Income refers to the amount of an Individual or business income which is subject to taxation 17.Tax Holiday is period of no taxation 18.Tax Liability is the legal obligation of a taxpayer to the government 19.Tax Liens is claim for unpaid taxes. 20.Tax Levy is the total amount of taxes imposed on an individual or corporation 21.Tax Penalties are fines or punishments imposed on a taxpayer 22.Tax Refund an amount that a government gives back to a taxpayer 23.Tax Relief is tax savings in the form of special allowable deduction. 24.Tax Schedule is the official list of tax rates matched with different level of incomes 25.Tax Shelter is an investment activity that protects some of a taxpayer's income from taxes. 5 Types of taxes in Ethiopia and administrati onDirect Taxes 1. Tax Natur Taxpayers Administered by e Employme Monthl Individuals MoR and Regional Revenue nt y Bureaus Rental Annual Individuals Regional Revenue Bureaus Sole proprietorships Regional Finance Bureaus Partnerships Regional Revenue Bureaus Companies MoR Business Annual Sole proprietorships Regional Revenue Bureaus Partnerships Regional Revenue Bureaus Companies, Public MoR Enterprises Miscellane Annual Individuals Regional Revenue Bureaus ous Sole proprietorships Regional Revenue Bureaus Partnerships Regional Revenue Bureaus Companies, Public MoR 6  2. Indirect Taxes Value Added Permanen Individuals MoR Tax t Sole proprietorships Partnerships Companies, Other non-profit organizations and association unless specifically exempted. Turnover Tax Permanen Individuals MoR t Sole proprietorships Partnerships Companies Non-profit organizations unless exempted Excise Tax Permanen Individuals MoR t Sole proprietorships Partnerships Companies Custom duty Permanen Individuals and companies 7 There are a number of different ways in which the government raises money from taxpayers. In Ethiopia, both direct and indirect taxes are available. Income taxes – Ethiopian taxes are divided into categories and schedules. – Business income taxpayers in Ethiopian taxation system are divided into three categories. These are: –Category “A” taxpayers; –Category “B” taxpayers, and –Category “C” taxpayers. 8 1. Category “A” Taxpayers Any business having an annual turnover of >Birr 1,000,000 They are required to file a balance sheet and a profit and loss statement (income statement) for taxation purpose. 2. Category “B” Taxpayers Includes business which has an annual turnover of over Birr 500,000 but below Birr 1,000,000. They should file profit and loss statement (income statement) at the end of the year. 3. Category “C” Taxpayers Those who have annual turnover of less than Birr 500,000 as estimated by the Tax Authority. 9  Schedules of tax The Ethiopian Tax System follows the scheduler system of taxation whereby different types of income are segregated into different schedules for computing the tax liability According to the Income tax Proclamation number 979/2016 provides for the taxation of income in accordance with the following schedules: – Schedule ‘A’ , income from employment; – Schedule ‘B’ , income from rental of buildings; – Schedule ‘C’ , income from business profit; – Schedule ‘D’ , other income; – Schedule ‘E’, Exempt income. 10 A. SCHEDULE ‘A’ – INCOME FROM EMPLOYMENT – It shall be imposed for each calendar month at the rate specified on an employee who receives employment income during the month. It is taxed Employment based on income (Per listing. the following Income tax Deductions Month-birr) payable (ETB) 0-600 0% - 601-1,650 10% 60 Birr 1,651-3,200 15% 142.50 Birr 3,201-5,250 20% 302.50 Birr 5,251-7,800 25% 565 Birr 7,801-10,900 30% 955 Birr Over10,900 35% 1,500 Birr 11 Computation of Taxable Employment Income (TEI) TEI = Gross Employment Income – Special Tax Exemption Gross Employment Income –refers to any income earned from employment sources regardless of the way it is earned Tax Exemptions – are employment incomes exempted from EIT. Tax Exemptions are classified into two: Special Exemptions and Personal Exemption – Special Tax Exemptions – are income directly exempted by the income tax proclamation in Ethiopia for special reasons. – Personal Exemption – is a non-taxable income for each employee under Schedule “A” per month. It is common to all employees regardless of their employment income, which is Br 600 per month. It is considered an income taxable at rate of 0%. 12 In Ethiopia, in this respect, according to Article 33 of proclamation No. 64/1975 the following is discussed about payment for overtime work. – A worker shall be entitled to be paid at a rate of one and one quarter (1 )times his/her ordinary hourly rate for overtime work performed before 10 O’clock in the evening (10 p.m.). – A worker shall be paid at the rate of one and one half (1 ½) times his/her ordinary hourly rate for overtime work performed between 10 o’clock in the evening (10 p.m.) and six O’clock in the morning (6 a.m.). – Overtime work performed on the weekly rest days shall be paid at a rate of two (2) times the ordinary hourly rate of payment. – A worker shall be paid at a rate of two and half (2 ½) times the ordinary hourly rate for overtime work performed on a public holiday. 13  Alternative 1: When all payments are made at the end of the month Determination of Taxable Employment Income Basic salary Xxxxx + Overtime Pay Xxxxx + Transport allowance Xxxxx + Other allowances Xxxxx =Gross Employment Income Xxxxx Less: Special Tax (xxxxx) 14 Alternative 2: Special Exemptions can be paid any time Determination of Taxable Employment Income Basic salary xxxxx Overtime pay xxxxx Taxable Transport allowance xxxxx Other Taxable allowances xxxxx Taxable Employment Income xxxxx 15 Example 1: – Ato Solomon is an employee of Excel Pvt. Ltd. Co. The basic salary of Br 3,200 is meant for 160 normal working hours. He worked 170 hours during the month of Tahsas 2011. – Assuming that all overtime work is done on employee weekly rest days and the employee received Br 300 transportation allowance according to the employment contract: – Required: determine taxable employment income: 16  Calculation of Employment Income Tax (EIT) EIT=Taxable Employment Income @ marginal Tax Rate – Table 4:1 Employment Income Tax under Deduction Method Deduction TB Range of Tax Deduction EIT Calculation TEI Rate 1st 0-600 Exempt - No Tax Payment 2nd 601-1,650 10% 60 Birr EIT = TEI @ 10% – 60 3rd 15% EIT =TEI @ 15% – 1,651-3,200 142.50 Birr 142.5 4th 20% EIT =TEI @ 20% – 3,201-5,250 302.50 Birr 302.5 5th 5,251-7,800 25% 565 Birr EIT =TEI @ 25%n – 565 6th 7,801-10,900 30% 955 Birr EIT = TEI @ 30% – 955 7th 35% EIT =TEI @ 35% – Over10,900 1,500 Birr 1,500 Example 1: Use the previous example and determine the amount of Employment income tax 17  Example 2: Assume Ato Abebe is an employee in Addis Ceramics Factory with a monthly salary of birr 1,200 birr and is required to work 160 hours monthly. In the month of Tahsas, he worked for 168 hours and worked extra-hours on weekends. – Answer: Employment income tax = Br 72 Example 3: Assume Ato Abdissa Taddesse earned an amount of birr 11,175 subject to income tax, his employment income tax is calculated as follows; Answer: Employment income tax =Br 2,411.25 18 SCHEDULE ‘B’ – INCOME FROM RENTAL OF BUILDINGS – This schedule is used to tax income earned on rental of properties. Income under this schedule is payable by both business organizations and individuals who have rental of properties. Rental of buildings – Income tax is imposed on the income from rental of buildings and collected at the following rates: – On income of bodies (share companies, PLC's for example) thirty percent (30%) of taxable income, – On income of persons according to Schedule B (shown below) of the Income Tax Proclamation No. 286/2002 and its amendment in July 2016. 19  Income Deduction Taxable Income from in Birr tax rental (Per year-birr) payable 0 - 7,200 0% None 7,201 - 19,800 10% 720 19,801 - 38,400 15% 1,710 38,401 - 63,000 20% 3,630 63,001 - 93,600 25% 6,780 93,601 - 130,800 30% 11,460 Over 130,800 35% 18,000 20 Determination of Taxable rental Income for those Taxpayers Maintaining Books of Accounts Rental Income Received xxxxx Add: the following amounts Amount on the lease of furniture xxxxx Amount on the lease of equipment's xxxxx Payments made by the lessee on behalf lessor xxxxx Cost renovation/improvement paid by lessee xxxxx Gross Rental Income xxxxx Less: deductible expenses Land and building tax xxxxx Annual lease payment on land xxxxx Cost of repairs and maintenance xxxxx Depreciation of building xxxxx Depreciation of furniture and equipment xxxxx Interest on bank loans xxxxx Adverting expense to call tenant xxxxx Other expense, if any incurred to generate xxxxx 21 rental income  For Taxpayers not maintaining Books of Rental Income Received Accounts xxxxx Add: The Following Amounts Amount on the lease of furniture xxxxx Amount on the lease of equipment's xxxxx Payments made by the lessee on behalf lessor xxxxx Cost renovation or improvement paid by the lessee xxxxx Gross Rental Income (GRI) xxxxx Less: Deductible Expenses Land and building tax, if any xxxxx Allowance for repairs, maintenance & xxxxx depreciation(50%@GRI) Total deductible expense (xxxx x) Taxable rental income xxxxx 22  Illustration Assume that XYZ Private Limited Company rented a furnished office building to ABC Company for Br 40,000 per month on Hamle 1, 2008 for 5 years. The following data pertain to the expenses incurred and other allowable deductions. The company keeps books and records properly. – Tax on building…………………………..…….Br 2,400 – Tax on land………………………………..……… 2,160 – Maintenance on building…………..….…..……. 12,000 – Depreciation on building (for 12 months)…. …..28,000 – Interest on loan (for 12 months)…. ……….........12,000 – Insurance premium (for 12 months)………......... 5,720 Required: Compute rental income tax for the year ended Sense 30, 2009. 23 Solution: Annual Rental Income...40,000 X 12 = Br 480,000 Less: Allowable Deductions: Tax on building………. Br 2,400 Tax on land ……....…… 2,160 Maintenance……….... 12,000 Depreciation………....… 28,000 Interest………………........ 12,000 Insurance…………....…….. 5,720 Total …………......................……… (62,280) Taxable Income………………………. Br 417,720 Rental Income Tax: For the year ended Sene 30, 2009 = Br 417,720 X 30%= Br 125,316 24 Example 2: Assume ATO ABEBE, the owner of ABE BUILDING, let out (leased) the Building at Br 2,000,000 per annum. In addition to this, the lessee will incur Br 100,000 cost for repair and maintenance of the building. Assume further that Ato Abebe maintains books of Accounts and the following expenses are incurred Cost of by the lessor: Lease payments on Br 100,000 Land Land and Building Tax 4,800 Other Deductible Expenses 5,200 Required: Determine the Gross Rental Income, Taxable Rental Income, and Rental Income Tax25 Solution Rental Income Received 2,000,0 00 Add: Payments made by the lessee on behalf lessor 100,000 Gross Rental Income 2,100,0 00 Less: deductible expenses Land and building tax 4,800 Annual lease payment on land 100,00 0 OtherIncome Rental expense,Tax if any incurred to generate 5,200 rental income = 1,990,000 x.35 = 696,500 – 18,000 Total deduction (110,00 = 678,500 0) Taxable rental income 1,990,0 00 26 Exercise: Mr Blue leased his furnished building for Br 2,000 per month and the equipment's and furniture were leased for Br 1,000 per month. In addition payments made by the lessee on behalf lessor include 10,000 total. He paid Br 1,200 land and building tax to the city Municipality. Determine Gross Rental Income, Taxable Rental Income & Rental Income Tax Liability assuming that the house was vacant for four months during tax year Rental Income Received 24,000 Payments made by the lessee on behalf lessor 10,000 Gross Rental Income (GRI) 34,000 Less: Deductible Expenses Land and building tax, if any 1,200 Allowance for repairs, maintenance & 17,000 depreciation(50%@GRI) Total deductible expense (18,200) 27 Rental Income Tax = 15,800 x.10 = 1,580 – 720 =860 28  Business Income Tax (Schedule C)activities are taxed under Profit earned from business Schedule C. Categories of Taxpayers The categorization of taxpayers depends upon of the following points: Annual turnover or annual sales, Maintenance of accounting records or books of accounts, Requirements for registered vouchers, Number and types of financial statements to be prepared for tax purposes, Tax Year Category ‘A’ Taxpayers Category ‘A’ Taxpayers shall include the following persons and bodies: – Any business having an annual turnover of >Br 1,000,000 – Any company incorporated under the laws of Ethiopia or in a foreign country – Share Companies They have to use registered vouchers 29 Category ‘B’ Taxpayers – They shall include any business having an annual turnover of Br 500,000 and above (500,000 to 999,999.99). – They have to maintain accounting records – They have to use registered vouchers – Category “B” taxpayers shall submit only a profit and loss statement to the Tax Authority – The tax year can be year of the body Category ‘C’ Taxpayers – They include Taxpayer whose annual turnover is estimated by the Tax Authority as being up to Birr 500,000 – Maintaining books of accounts is not mandatory – They are not required to use registered vouchers – They are not required to submit any financial 30 Business Profit Tax Rate 1) Taxable Business Profit of body is taxable at the rate of 30 %. 2) The rate of business income tax applicable to an individual is as follows: Taxable Income per annum Amount taxable Deduction 0 - 7,200 0% None 7,201 - 19,800 10% 720 19,801 - 38,400 15% 1,710 38,401 - 63,000 20% 3,630 63,001 - 93,600 25% 6,780 93,601 - 130,800 30% 11,460 Over 130,800 35% 18,000 Presumptive Tax – is a predetermined amount of tax paid by small businesses whose annual sales is less than Br 500,000. The tax is estimated by estimating annual sales (daily sales) 31 Deductible Expenses (Allowable Deductions) Any Direct Costs and expenses of producing the Income is deductible – General Concept of deductible expenses. It includes: – Insurance Expense – Promotional Expense – Commissions Expense – Payment to Holding or Parent Company – General and administrative expenses – Salary Expense A. Salary paid to employees B. Salary paid to Management of the Company C. Salary paid to children of business owners – Interest Expense – Shall not exceed Inter-Bank Interest Rate +2% A. To lending institutions recognized by the national bank of Ethiopia, B. To foreign banks permitted to lend to enterprises in Ethiopia; C. To shareholders of Companies 32 – Donations and Gift Expense – Maintenance and Improvement Expense – 20% of Depreciation Base – Bad Debts Expense (Uncollectible Accounts Expense) – Participation deduction (Deduction for Reinvestment of Profit) – Special Reserves for Finance Institutions – provisions for NPLs – Transportation Allowance paid to Employees not exceeding the limit – Retirement Benefits – less or equal to 15% of the basic salary of the employee – Representation Expense – 10% of basic salary of employee – Trading Stock Disposed (Cost of Goods Sold) - The cost of trading stock disposed during a tax period is determined on the basis of the Average Cost Method 33 Non-Deductible Expenses – An increase in the share capital of a company or the basic capital of a registered partnership – Voluntary pension or provident fund contributions over and above 15% of the monthly salary of the employee – Declared dividends and paid-out profit shares – Interest in excess of the rate used between the National Bank of Ethiopia and the commercial banks increased by two (2) percentage points – Damages covered by insurance policy – Punitive damages and penalties 34 – The creation or increase of reserves, provisions and other special-purpose funds unless otherwise allowed by the Proclamation – Income Tax paid on Schedule C income and Recoverable or Refundable Value-Added Tax – Representation expenses over and above 10% of basic salary – Personal consumption expenses; – Expenditures exceeding the limits set forth in Proclamation – Entertainment expenses – Donation/gift to other entities not listed in the proclamation – Expenditure for maintenance of other private properties of the proprietor or partner of the enterprises 35 – Losses not connected with or not arising out of the Exemptions The following categories of income shall be exempt from payment of business income tax hereunder: – Awards for adopted or suggested innovations and cost saving measures – Public awards for outstanding performance – Income specifically exempted from income tax by the law in force in Ethiopia, by international treaty or by an agreement made or approved by the Ministry of Revenue – The revenue obtained by the Federal Government, Regional State Governments and Local Governments of Ethiopia; and the National Bank of Ethiopia from activities that are incidental to their operations 36  Computation of TBI from GAAP Based Financial Statements Particulars Amount Amount In ETB In ETB Taxable Business Profit from IFRS Based Income Statement xxxxx Add: Non-Deductible Expenses (If they are deducted) Depreciation on revalued assets......................................................................................................... xxxxx Above 15% of the basic salary retirement contribution..................................................................... xxxxx Declared dividends and paid-out profit Shares.................................................................................. xxxxx Interest in excess of the rate of specified in Proclamation................................................................. xxxxx Damages covered by insurance policy............................................................................................... xxxxx Punitive damages and penalties......................................................................................................... xxxxx Unallowed provisions and reserves................................................................................................... xxxxx Recoverable value-added tax............................................................................................................. xxxxx Representation Expense above 10% of the Basic Salary................................................................... xxxxx Personal Consumption Expenses....................................................................................................... xxxxx Entertainment Expenses..................................................................................................................... xxxxx Donation or gift made to organizations not listed.............................................................................. xxxxx Other expense if any.......................................................................................................................... xxxxx Total Non-Deductible Expenses........................................................................................................ xxxxx Less: Allowable Expenses (If not claimed) Expenses incurred for earning business income................................................................................ xxxxx Deprecation Expense......................................................................................................................... xxxxx Irrecoverable Bad Debts Expense...................................................................................................... xxxxx Total Deductible Expense.................................................................................................................. (xxxxx) Taxable Business Profit for tax purpose............................................................................................ xxxxx 37 Exercise YBZ Unincorporated business is a trading firm operating a fast food retailing business. The profit and loss statement for the 12 months ended Sene 30, 2002 for financial reporting purpose shows the following. YBZ Business Income Statement For the year ended, Sene 30, 2002 Net Sales Br.327,000 Less: Cost of Goods Sold 155,000 Gross Profit 172,000 Less: Operating Expenses: Salaries and Wages Br.22,000 Supplies 1,200 Advertising 9,100 Entertainment 2,200 Depreciation 20,000 Interest 2,500 Miscellaneous 1,300 58,300 Operating Income Br.113,700 38 The following information was obtained for tax reporting purpose.  The Br.55,000 ending inventory cost was determined based on the FIFO method. If the LIFO or Average Cost method had been used, the amount would have been Br.58,000 and Br.52,000, respectively.  Salaries and wages comprise Br.1,000 disallowable provident fund of employer’s contribution.  The interest is on Br.25,000, 10% simple annual interest borrowed from a recognized financial institution. The highest interest rate by NBE and commercial banks for the current year was 6%. 39  Solution YBZ Business Tax Income Statement For the year ended, Sene 30, 2002 Net Sales Br.327,000 – Less: Cost of Goods Sold 158,000 Gross Profit 169,000 Less: Operating Expenses: – Salaries and Wages Br.21,000 – Supplies 1,200 – Advertising 9,100 – Depreciation 20,000 – Interest 2,000 – Miscellaneous 1,300 (54,600) Taxable Income Business income Tax Liability = BirrBr.114,400 11,400 x 30% 40  Miscellaneous Income tax (Schedule D): Taxable incomes under this schedule include: I. Royalties: Includes a payment of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work. – Royalties shall be liable to tax at the flat rate of 5% Example: assume one Famous musician sold his album at Birr 1,000,000 to a Music Studio, determine the amount of other income tax and record the tax liability at the time of payment to the artist and to the tax authority Royalty tax= 1,000,000 x 5 % = Br 50,000 II. Interest income on deposits: every person deriving income from interest on deposits shall pay tax at the rate of 5%. Example: Mr X deposited Birr 200,000 at prevailing Deposit rate (4%) at Commercial Bank of Ethiopia at the beginning of the tax year 2007. If the deposit is in the account for two years, determine the tax amount to be withheld by 41 Commercial Bank of Ethiopia III. Dividend income tax: every person deriving income from dividends from a share company or withdrawals of profits from a private limited company shall be subject to tax at the rate of 10%. Example: Red Share Company distributes 50% of the Net Income to Share Holders each year. During the tax year ended June 30, 209 the business had a Net Income of Br 500,000. Required: Determine the Dividend Income Tax on the Dividend Distributed Dividend Income Tax = 250,000 x 10%= Br 25,000 IV. Tax on income from games of chance: every person deriving income from winning of games of chance (e.g., lotteries, tom-bolas, and other similar games) should pay 15% of the value unless the value of the chance is less than Birr 100. Example: Ato Bedelu won Birr 100,000 from the lottery drawn on April 25th 2009. Determine the Tax Liability to be withheld 42 by the National Lottery Administration. V. Income from casual rental of property: every person deriving income from casual rental of property including any land, building, or movable property not related to a business activity, taxable under Schedule B, shall pay tax on the annual gross income at the rate of 15%. – This income from rental of movable and immovable property is derived by a person not engaged in regular trade or business. Example: Ato Solomon rented his Land Cruiser Toyota at Br 15,000/month for three months to SS Tour and Travel Pvt. Ltd. Co. Required: Determine the income tax to be withheld by the Payer SS Tour and Travel Pvt. Ltd. Co. Other Income Tax = 45,000 x 15% = Br 6,750 43 VI.Capital gains tax: income tax shall be payable on gains obtained from the transfer (sale or gift) of the following properties based on the associated rates: Building held for business 15% Factory 15% Office 15% Shares 30% However Buildings fully used for residences for two years prior to disposal and buildings in non-municipal area are exempt from payment of tax/ excluded from capital gain tax. 44 Capital Gain Tax – For Business Buildings Capital Gain Tax = Taxable Capital Gain @ 15% Selling Price of the building xxxxx Less: Cost of Building (xxxxx) Gross Capital Gain xxxxx Less: Inflation Adjustment xxxxx Taxes paid for the land xxxxx Taxes Paid for the Building xxxxx Total Deduction (xxxxx) Taxable Capital Gain xxxxx Capital Gain Tax (Taxable Capital Gain @ xxxxx 15%) 45  For Shares of Stock Capital Gain Tax = Taxable Capital Gain @ 30% Selling Price of the Share xxxxx Less: Par Value or Cost of Shares (xxxxx ) Gross Capital Gain xxxxx Less: Inflation Adjustment xxxx x Total Deduction (xxxxx ) Taxable Capital Gain xxxxx Capital Gain Tax (Taxable Capital Gain @ xxxxx 30%) 46 Example -1- SI Business Enterprise sold its building which has a cost of Br 85,000 at Br 185,000. The Building was held for 10 years and Br 11,000 Land and Building tax was paid on the building during the 10 years period. If the average inflation rate is 5%, determine the Taxable Capital Gain and the Capital Gain Tax. Selling Price of the building 185,00 0 Less: Cost of Building (85,000 ) Gross Capital Gain 100,00 0 Less: Inflation Adjustment 5,00 0 Taxes paid for the land and building 11,00 47  Example-2- Ato Abebe Purchased 100 Shares from NIB International Bank S. Co. at Birr 1,000 per share when the par value is Birr 1,000 per share on January 1, 2003. Ato Abebe sold the shares at Birr 1,700 per share on February 20, 2005. Taking year 2003 as a base year, the price index is 1.05 in 2005. Determine the tax on the Capital Gain Selling Price of the Share 170,00 0 Less: Par Value or Cost of Shares (100,00 0) Gross Capital Gain 70,000 Less: Inflation Adjustment 3,50 0 Total Deduction (3,500) Taxable Capital Gain 66,500 48  Indirect tax 1. Value Added Tax (VAT) – Indirect taxes concern commodities. – This means VAT is generally a tax on consumption of goods and services. – It is collected in the production and distribution process beginning with importers and producers of raw materials and ending with retailers. – The end impact and burden of VAT rests on the final consumer. – It is a charged on the added value(incremental value or newly created value of goods and services) – The proclamation of VAT no. 285/2002 officially replaced sales tax in Ethiopia. – As per this proclamation, value added tax is levied and collected at the flat rate of 15% 49  Components of Value Added Tax There are two principal components of VAT: 1. Output Tax – It is the Value Added Tax collected on the sale of taxable supplies (goods and services). – It is the VAT collected on sales. 2. Input Tax: – It is the value added tax paid on purchases of taxable goods and services. – It is the VAT paid on purchases Vat Payable or Liability = Output Tax is >Input Tax 50  VAT Registration in Ethiopia 1. Mandatory Registration – If the gross sales value or turnover of the enterprise, which is gross income for 12 calendar months, exceeds or likely to exceed Br 1,000,000, the person conducting the enterprise must register for VAT with VAT Department of the FIRA. 2. Voluntary Registration – Even if the annual turnover does not exceed Br.1,000,000 a person can apply to be registered for VAT if the person supplies more than 75% of its goods and supplies to taxable persons. 51  Classification of supplies for VAT Zero-Rated Supplies – Supplies on which VAT on supply is charged at 0%. – Are part of the VAT system – The company supplying zero rated supplies must register for VAT. – The firm can claim the Input Tax Credit on purchases either it is domestic or import. – The input VAT will be recovered but no Output Tax will be reported for the sales. Includes: – Export of goods and services – rendering of international transportation services – the supply of Gold to NBE 52 B) Exempted Supplies – Supplies on which VAT is NOT chargeable – The supplies are outside of the VAT system – Persons supplying only exempted supplies cannot register for VAT. – There is neither Input Tax nor Output Tax. No tax is collected when a person sells exempt goods & services No tax is paid when a person purchase exempt supplies. Includes – rendering of educational services, health services, financial services, religious services, – the supply of electricity, water, and kerosene – the provision of transport – the import or supply of books and printed materials – the import of gold to be transferred to the NBE 53 C) Standard Rated Supplies  Determination of the VAT Liability – The amount of tax payable or VAT Liability for any accounting period by a person who is registered or is required to register is the difference between the amounts of tax charged on taxable transactions i.e. the VAT charged on sales and the VAT paid on purchases of goods and services applying the Standard Rate. Example 1: if a taxable person purchases birr 200,000 goods and services and sales Birr 300,000 taxable supplies OutputduringTax: the month of Nehase, the VAT liability will be as follows: 300,000 @ 15 % 45,000 Input Tax: 200,000 @ 15% 30,000 VAT Liability 15,000 54 Computation of VAT The computation of the VAT liability from the manufacturer to the final consumer is presented as follows. Manufacturer Birr Purchases of raw materials………………….… ….… Br 2,000 VAT paid on raw material (15% x 2,000)…….…… 300 Cost of the material to the manufacturer………….. 2,300 Sells to the wholesaler the finished goods………. ….… ….… 4,000 – VAT (4,000 X 15%)……………………………………. 600 – Total selling price…………………………………. …… 4,600 VAT liability of the manufacturer (600-300)……………….……Br 300 Wholesaler – Sells to the retailer at a price ……………….….…….… 5,600 – VAT (5,600 X15%)………………………………………. 840 – Total selling price …………………………………….….. 6,440 VAT liability of the wholesaler (840-600) ……………………..……240 Retailer – Sells to the final customer at a price ………...….……… 8,400 – VAT (8,400 X 15%)………………………………..….….. 1,260 – Total selling price ………………………………….….…... 9,660 VAT liability of the retailer (1,260 – 840) …………………….……..420 Total VAT paid to FIRA………………………………………………….…….…..Br 960 55 Example: Dire food complex, VAT registered organization, sold 500 quintals of wheat flours at VAT exclusive price of birr 400 per quintal. The company also purchased 100 quintals of wheat at exclusive price of birr 300 per quintal from VAT registered supplier, in the month of Hamle. The factory has also imported chemicals and raw materials worth birr 100,000 excluding VAT for flour production in the month of Hamle. Required : Determine the VAT payable (VAT refund ) for the given month? Solution Output VAT : 500 x 400 x 15% = Br. 30,000 Less: Input VAT : Wheat 100 x 300 x 15% = Br. 4,500 Chemicals 100,000 x 15% = Br. 15,000 = 19500 VAT payable = Br. 10,500 56 Example -2- Anbesa shoe factory, vat registered company, purchased 10,000 Kgs of processed leather from Awash leather factory at VAT inclusive price of birr 690 per kg. It has also imported chemicals worth birr 400,000 excluding VAT for shoe making in the month of Hidar. Anbesa exported international standard shoes to Germany worth birr 3 million and sold 20,000 pairs of shoes at VAT exclusive price of birr 300 for each pairs of shoes to local market. Required: Determine Vat payable ( refund ) for the given month? Soln VAT output : – Local market: 20,000 x 300 x 15% = Br. 900,000 – Export : 3,000,000 x 0% = 0 Less VAT Input paid for : Leather 10,000 x 690 x 15/115 = 900,000 57  Turnover Tax (TOT) – It is a tax imposed on almost all goods and services on the total turnover rather than on the Value Added. Turnover tax is a sales tax. A reduced tax rate is applied for Turnover Tax as compared to the VAT in most of the countries of the world Rate of Turnover Tax – 2% (two percent) on Goods Sold Locally – For Services Rendered Locally; –2 % on Contractor, Grain Mills, tractors & Combine-Harvesters –10% on other services like Consultancy, Training, Legal advice, Auditing Base of Computation of the Turnover Tax – Base of computation of the Turnover tax shall be the Gross Receipt in respect of goods supplied or services rendered 58 Example: ABC Stationery Materials Sold Birr 3,000 Papers, Pens, Pencils and Others on June 30, 2009. Determine the Turnover Tax Liability on this transaction? Solution; TOT on sell of goods is computed by 2% TOT= Br. 3000 X 2% = Br. 60 59  Excise Tax: The other type of indirect tax adopted in Ethiopia is excise tax. Excise tax is, also known as selective tax, an indirect tax imposed on luxury goods, goods that are hazard to health and basic goods which are demand inelastic such as vehicles, jewelers, perfumes, alcoholic products, tobacco products, salt, textile products, etc. Some governments impose excise tax to achieve some specified objectives such as curving undesirable wants and avoidance of hazardous products like cigarettes, and alcoholic beverages. Ethiopia also introduced and imposed excise tax on selected imports and domestically produces goods. 60  Ethiopia has made excise tax reform and issued a new Excise Tax Proclamation (No. 1186/2020) by repealing Excise Tax Proclamation No. 307/2002 and its amendments (Excise Tax (Amendment) Proclamation No. 570/2008 and 610/2008) in February 2020. This is because, in order to address the problems that have arisen in collecting sufficient excise tax as a result of flaws in the old proclamation, it has become necessary to implement a new law that establishes a system that addresses the issues that have arisen thus far (Excise Tax Proclamation, 2020). 61  The new excise tax law introduced new concepts to Ethiopia's excise tax system. The new proclamation has made changes in the areas of the excise tax base, tax rate structure, and detailed rules on exemptions, starting with expanding the tax net by including items that were previously excluded from the tax net and removing items discovered to be unqualified for the stated rationale of excise taxation in Ethiopia from the tax net. Aside from that, there was a radical change in the administration of excise taxes. The new proclamation introduced license requirements for eligible taxpayers, as well as the excise tax control system and the excise stamp. (Excise Tax Proclamation, 2020) 62  As a result of reviewing the type of goods on which excise tax is collected, the excisable goods listed in Part I of the First Schedule of the Proclamation indicated that excise tax applies to 19 categories of items and 391 goods. As well under the new proclamation, the excise tax coverage has been expanded to include fats and oils, non-alcoholic beverages, chocolate and cocoa-based culinary preparations, motorcycles, plastic bags, tires, wigs and human hair, fireworks, and artificial flowers, which were previously excluded from the tax net. On the other hand, other things that were formerly subject to excise tax, such as laundry and dishwashing machines, clocks and watches, dolls and toys, and video decks, have been removed. (Excise Tax Proclamation, 2020) 63  Moreover the applicable tax rate in the new proclamation ranges from a low of 5% to 500% which is too wide compared to the old law 10% to 100%. And also the scope of exemption narrowed by setting detailed rules on it. The list of exempt goods is exhaustively provided under Schedule II in the proclamation. Let’s see the repealed proclamation in order to compare it with the current proclamation. 64 65 66 Customs Duty – Customs Duty is a duty or tax levied on Import and Export of goods by the Ethiopian Government. – Goods shall mean any commodities, personal effect and animals including money. – It can be Specific Duty and Ad valorem Duty – Ad-valorem Taxes – are taxes or duties levied as a percentage of the Value of Goods and Services. – Specific Tax – are the taxes levied at a fixed amount, irrespective of the Value of the goods and services. – The rate of customs duty varies from 0-35% 67 68 69