Achilles Heel of the Latest Budget

Putting the enormous damage inflicted on the country aside, the ruling EPRDF has a history of changing tough challenges into policy opportunities its leaders proudly and often speak of. Guided by policies of opportunities, many reforms have been instituted over the years, of which reforming the taxation system is one.

It is not unusual to observe tough times and national tragedies turn into opportunities by astute political parties. History testifies – repeatedly – that without conflicts, there hardly is progress. The extent of a particular conflict or toughness of a situation might sometimes interfere with less harm, other times bloodily; but it would be naive to imagine change comes without conflicts.

Of course, who benefits from such consequential changes is another area of debate. But surely, the EPRDFites have been observed making changes and getting organised when they are pushed to the edge and squeezed hard.

The consolidation of policies in the post-war Ethiopia and Eritrea, the aspiration to make the developmental state concept a hegemonic thinking in the aftermath of the bitterly contested 2005 national elections, and the cabinet reshuffle following the recent political unrest, are among the major incidents that the party made following formidable challenges to its rule.

After almost a decade in slumber, mostly preoccupied with security and political tasks, the ruling party was shocked and forced to make changes in the early 2000s. It formalised and consolidated some of its key policies in 2004, and publicised them in 2005, following the war that caused the split of the TPLF, the senior member of the ruling coalition.

The tax reform aimed at raising internal capability to mobilise domestic resources to finance public expenditures on social goods and services has seen a moderate success. It helped to expand the historically land-based tax system to businesses and widened its coverage.

It introduced consumer tax in the form of value-added tax (VAT) and imposed on hundreds of thousands of businesses the use of fiscal printers, an electronic registry of transactions. The reform has also introduced new kinds of taxes and, equally important, it has attracted a significant number of experts in the field and helped promote business and created jobs.

The contributions of tax revenues to the national budget has been increasing, reaching over 190 billion Br during the current fiscal year from 15.4 billion Br in 2005. This has redrawn the ratio between a foreign handout and domestic resources in paying for the budget, reducing the share of foreign assistance by close to a five-fold over the past decade.

The reform that led to the increase in tax revenues should also have another reason. The tax reform can be considered as a fiscal instrument to reduce dependency on foreign sources to finance domestic endeavours that most of the time come with many conditionalities, a situation apparent in almost all developing countries. The Revolutionary Democrats who would love to avoid receiving handouts on conditionality surely must eye that an aggressive way of tax collection would immensely contribute to policy liberalisation.

However, in spite of all the efforts, the contribution of tax revenues to the budget remains below the expectation. Apparently, the aggregate of income collected from tax is getting bigger every year, but the rate of growth in tax revenues mobilisation is not as much as expected compared to the budget share it is supposed to cover.

Last year, it was hoped that 62pc of the budget, amounting to 274 billion Br, would be covered by tax revenues. It was not to be the case. The Ethiopian Revenues & Customs Authority (ERCA) was able to collect only half of its target. The gaps in the budget have been filled in for several years by loans which no doubt are a burden on the country’s economy and aid with contingencies.

This year again the government has proposed more than 320 billion Br for the budget of the next fiscal year. The bill, which is tabled in Parliament, aspires to collect more than 61pc of the budget from domestic tax revenues. The Administration of Prime Minister Hailemariam Desalegn believes that mobilising the required amount of tax is possible if it builds the capacity of ERCA.

Indeed, there has been several tax reform programs undertaken in Ethiopia over the past two decades. Nonetheless, considering the previous performances of the taxman, and the culture of evasion and reluctance to declare books truthfully, it seems an uphill battle to Kebede Chane, the sitting chief of ERCA, to meet his commitments.

Why have the structural reform programs and subsequent initiatives at the ERCA failed to bring the required results in raising sufficient funds from internal sources to pay the state’s bill? Why is it that taxpayers remain adamant in holding themselves back on the taxman?

One reason could be the inability of officials at ERCA to bring as many businesses as there are on the ground into the tax net. Despite considerable improvement over the past decade, still, far too many businesses remain convinced that they can get away with their habit of dodging tax. It shows that law enforcement in areas of tax compliance remains unsatisfactory, while at the same time reveals no small number of officers responsible for the enforcement of the law are corrupt.

Evidently, manipulating the tax regime and compromising tax enforcement officials is one sure way of making it from rags to riches within a few years, alongside access to land and loans as well as state contracts.

The system of taxation must reduce the cost of compliance by improving the efficiency and integrity of tax collectors. Creating a less costly mechanism to convince members of the business community defaulting on their obligation has a consequence too painful to contemplate. Effective and efficient tax laws enforcement is indispensable. Rewarding those willing to comply with fair assessments and efficient services, and putting the price high on those resistant to fulfil their obligations is what Kebede and his team should focus on. They should not allow the culture and sense of impunity in dodging tax as an instrument of competition in the market.

However, despite an enabling structural change and efficiency in the taxman’s authority of enforcement, or whether the tax paying public is made to be aware of the necessity of tax, the crises in domestic revenues mobilisation runs deep as it is complex and demands to establish an overall transparent and accountable regime.

In collecting taxes, the social contract between the government and the taxpayers has a significant implication. Both have to discharge their duties. The public in general and the business community, in particular, has to pay their required taxes correctly and on time, and the government in return has a constitutional obligation to serve the public.

If a section of society feels that it is not benefiting from the economic and social development of the country, its members have no reason to pay taxes willingly. They would go to any length to conceal their income. Discriminatory, inconsistent and judicious enforcement of the law are also ways of discouraging businesses from meeting their obligation.

Taxpayers would like to see a tangible improvement in the services that the state provides. Citizens have equal opportunities to share benefits out of the national pie. Thus, narrowing the ever-increasing gap between the haves and the have-nots, treating people equally before the law, and improving the precision of tax estimation would help increase the rate of contribution of tax revenue to the budget.

It is not also only about building infrastructures, providing services and protecting the security. The contractual relationship between the state and the taxpayer public includes – ideally – empowerment and participation in the decision-making process of the affairs of the country.

People would like and have the right to participate in their country’s political affairs. If there is a better freedom and involvement in the political sphere, it is likely there will be accountability and transparency which are the cornerstones for good governance and sources of legitimacy.

With a credible approach, it would not be as difficult to converse with taxpayers and convince them to come to terms with the fact that paying tax is far more important to advance the common good. A responsive government coupled with well-informed citizenry can create a demanding society on the way its money is spent.

Published on Jun 17,2017 [ Vol 18 ,No 894]



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