PM Office Turns Down Appeal for Tax Reduction

Research suggests that the government should consider lowering corporate tax rate

The Prime Minster’s Office has rejected an appeal to consider a corporate profit tax reduction for manufacturing companies by 17pc from a flat rate of 30pc. However, the Office accepted most of the recommendations forwarded by the national think-tank, the Ethiopian Policy Studies & Research Centre.

Last Monday Prime Minister Hailemariam Desalegn met officials from the policy think-tank and representatives from the manufacturing sector to discuss the challenges of the industries which have led the sector not to be as effective as anticipated. The meeting also aimed to recommend major policy adjustments. Out of eight uncovered binding constraints of the manufacturing sector, the Centre identified a tax related issue and recommended that government to consider revising its policy to reduce the business tax rate, depreciation method and tax-deductible rates.

“The main reason to conduct the research was the poor performance of the manufacturing sector according to the expectation of the government industrial policy, and the questions of survival in the sector,” said Amare Matebu (PhD), lead researcher at the Centre.

The poor performance of the manufacturing sector can be seen in the number of businesses currently operating: out of 17,519 business licenses issued in the past 25 years, only 1,873 (10pc) of them are currently fully operational.

There were eight main findings of the research regarding the manufacturing sector challenge; the tax issue was one of them. After going through the major challenges the research came up with recommendations and held discussions with stakeholders with a direct relation to the manufacturing sector. The discussion was mainly on how to solve the challenges of the sector.

While discussing all the findings of the research, Prime Minister Hailemariam accepted most of the policy adjustment recommendations made by the Centre except the tax policy adjustment, mentioning the contribution of tax revenue for the country’s overall GDP.

Last year, the Ethiopian Revenues & Customs Authority collected a corporate profit tax of 36.4 billion Br, 20pc higher than that of the preceding fiscal year.

“In other countries’ experience, the manufacturing industries pay less corporate profit taxes than other services sectors. This helped those countries to have a strong manufacturing industry,” Amare told Fortune.

The research suggests that the government should consider lowering the business tax rate, which is currently 30pc. In addition to the corporate profit tax, it also suggested depreciation reduction has to be increased from the current 20pc to 50-80pc. It also recommends the tax deduction should be applicable to the expenses of the manufacturing industries such as expenses for training, patent right registration and trade fair and expo.

The research, which took 20 months, was carried out on 255 manufacturing companies that are located in four regional states and two city administrations.

The other limitations of the manufacturing sector that were uncovered by the study are constraints relating to access to finance, incentives and privileges, raw materials, the capability of the investors, infrastructure, technology transfer, market problem and industrial management and leadership.

Regarding access to finance, the research stated that the sluggish process of the Development Bank of Ethiopia (DBE) in availing loans and its non-transparent processes were the causes. In addition, the research criticises the discouraging interest rate of DBE which stands at 12pc, citing that other countries’ experience is 7.5pc.

During the 2014/15 fiscal year DBE, a policy financer especially for investments, targeted to disburse 4.6 billion Br loans but only availed 2.24 billion Br of it.

The study also mentioned the foreign currency shortage as another severe problem facing the companies. The research also mentions that the low level of incentives and privileges given to the manufacturing industry have led investors to turn to the service sector businesses,which has a short return period, such as real estate development, hotel business and trading.

The supply of raw materials on the market for manufacturers is another challenge of the sector. The quality, cost and amount of the raw material for the sector has gaps and is becoming a challenge for the sector.

The processes surrounding the issuance of a business license also presented a challenge to manufacturers. Out of 29,908 importers, only 2,500 of them supply raw materials and spare parts for the manufacturing sector.

The research stated that all these challenges stem from the efficiency of the professionals in the sector, lack of coordination and gaps in performances.

“We will have one more consultative forum with the Prime Minister for further discussions on some points,” Sekuture Getachew, director of Communications & Information at the Centre told Fortune.

The Policy Study and Research Center is headed up by Abay Tsehaye, a senior government official. It was established by the Council of Ministers regulation three years ago with the principal mission to study local and international issues and to formulate and propose policy and strategic ideas essential for the development of the country.

It conducts studies and researches on Agricultural and Rural Development, Industrial Development, Urban Development, Government Capacity Building and Good Governance, and Macroeconomy. The Center formulates enlightened policy ideas that play an influential role towards the attainment of growth in the different sectors described above.

The Centre is one of the major national think-tanks along with the existing Ethiopian Development Research Institute (EDRI) commanded by Mekonnen Manyazewal, the National Planning Commission (NPC) headed by Yinager Dessie (PhD) and Institute of Development & Policy Research (IDPR) under Addis Ababa University.


Published on Apr 08,2017 [ Vol 17 ,No 883]



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