Small Businesses Contend against City’s Tax Income Assessment

After the controversial presumptive tax assessment ended on June 7, 2017, the Addis Abeba branch of the Ethiopian Revenues & Customs Authority (ERCA) processed the collected data and announced the outcomes starting from June 26, 2017. The Level-C taxpayers, who have half a million Br in sales annually, reacted against the outcomes of the assessment like they did in the process. Meanwhile, ERCA states it has done things meticulously and fairly. Until things are rectified and a fair level of harmony is reached, the city's tax system remains uncertain with traders blaming the Authority, saying it is not fair, while the latter complains back, saying traders deceive or misunderstand taxation, reports BINYAM HAILEMESKEL, FORTUNE STAFF WRITER.

With a drizzling cloudy sky late in the afternoon last Wednesday, many traders with their gloomy faces sat in their shops around Amede Gebeya in Merkato.

They made a long chain of small shops before the narrow hectic road filled by rushers. These traders, approximately in fifteen stores, sell plumbing and related materials. Some of their materials are original, and others are second-hand.

Bilal Mubarak, 51, owns one of these tiny shops with no space in the room to swing a cat. In the one-meter long used-plumbing materials store, Bilal, a father of three, stands perching his elbows on his desk waiting for customers. He claims his customers are mainly from the low and, rarely, middle-class families.

As gloomy faced as one can be, he explicates how the six-year late presumptive tax assessment’s outcome has brought on strange feelings.

The tax law introduced this presumptive taxation system for micro taxpaying traders by exempting them from keeping books of accounts, intending to make it affordable and easy for management.

Bilal used to pay an annual business profit tax of 1,000 Br based on the old income tax proclamation, which was an obligation for Level-C taxpayers with an estimated annual revenue of up to 100,000 Br. However, this snowballed yearly to one million Birr.

The Ethiopian Revenues & Customs Authority (ERCA), Addis Abeba branch, estimated the daily incomes of the likes of Bilal’s businesses for the third time. It was aimed at developing a base in levying the income tax of the traders.

The Authority had 942 assessors. The Ministry of Finance & Economic Cooperation (MoFEC) and the Ministry of Trade (MoT) participated in the assessment, contributing 481 assessors each. Three supervision committees and 119 inspection groups, who look after the assessors to make sure things are done as fairly and accurately as possible on a daily basis, were also formed to facilitate the assessment.

The controversial estimation process concluded that many of the traders closed their shops during inspections. The assessment has also indicated that the traders reduce stocks and lie about their incomes which inconvenienced the process.

The Authority assessed the income of 148,000 traders in the capital city, whose trade is categorised under 99 types of businesses. These businesses have no books of accounts, and the quantity they sell is not precisely known, making their assessment mandatory.

The traders, on the other hand, were startled when the income assessment was announced. Many explained that they were escaping or deceiving the 1,904 assessors roaming the city. Because ERCA was, they claimed, notorious for imposing unfair taxes by estimating high sales incomes.

The Authority finally worked on the gathered data and revealed the results of its assessment for the traders starting on June 26, 2017.

“There was a businessman who went mad for hours after he saw his results,” Nuredin Arabo, a retailer for six years in the area, told Fortune.

Like what happened in the estimation process, the result has also brought series of disagreements and anger against the Authority. This also holds true for Bilal, who used to be a street vendor five years ago before he started his business in the small shop.

He was raging when he saw his annual income escalated to one million Birr, surging by more than ten-fold from the daily sales he claims to have.

“I was about to lose my mind,” he told Fortune, fighting back his tears. “But, when I realised that nearly all the traders here felt the same, I calmed down a bit.”

For any country, collecting tax revenue is essential for development. Establishing the necessary infrastructures like new roads, schools, health centres and the like, can be ensured when a tax is properly collected.

Ethiopia, like any other least developed country, usually faces a challenge in raising the sufficient amount of revenue for the promotion of economic growth. The country’s revenue administration system relies on taxpayers assessing their tax liability under the law, paying the correct amount of tax.

“One major problem is that the traders do not want to be taxed according to the reality,” said Atkilit G/Egziabher, support and monitor director at the Authority’s Addis Abeba branch. “The people who are unhappy with the recent assessment are those who want the country to be stuck with the six-year-old assessment.”

During the recent assessment, close to 8,000 businesses that do not pay tax were discovered.

The Authority states that the current assessment tries to make taxation fair, align it with the new tax income proclamation and update it with the present economic situation in line with the current purchasing power of money, which depreciated from 16 Br to 23 Br against the dollar over the past five years.

“Other than fairness and appropriateness, there is no other thing we did,” said Etsegenet Abera, vice chief director of the city branch of ERCA. “We were careful.”

To receive complaints, the Authority has established grievance hearing centres in 116 Weredas in the city, according to them. Taxpayers who are unsatisfied with the hearing centres can appeal to the district branch of the Tax Appeal Commission.

Many traders tried to present their grievances even before they saw the results, according to the officials. “There were prejudgments of traders over which we should have worked better on awareness creation.”

“This is disgraceful and shows how their tax understanding is small,” said Birhanu Tadesse, coordinator of the tax policy directorate at MoFEC.

Furthermore, employees of public and private institutions pay more than what small taxpayers spend for tax annually. A look at the tax account of the city administration, 20 billion Br in tax was collected in the just-ended fiscal year, of which 37pc was from employment tax. Nationally, category C taxpayers contribute below 20pc of the total tax revenue.

“Employees pay higher than small taxpayers, who earn more owing to many deductions in the tax law,” said Birhanu.

In Ethiopia, where the urban unemployment rate is 16.8pc, there are more than 1.6 million civil servants and 2.6 million employees who work in private companies and non-governmental organisations, according to the Central Statistical Agency (CSA).

Some experts who are aware of the tax system believe the absence of the Addis Ababa Chamber of Commerce & Sectoral Association in the assessment process is an indication that the assessment was inefficient.

“I cannot say the assessment is fair without an involvement of an independent body such as the Chamber,” an expert said. “The absence of the Chamber in the assessment process has made advantages tilt towards the Authority and hurt traders.”

An official from the Authority argues differently.

“The Chamber mainly represents large taxpayers,” said Atkilit.

No matter the controversies between the traders and the Authority, the latter plans to collect more than 25 billion Br in tax from Addis Abeba for the new fiscal year.

“The controversy is natural as governments want to collect tax while traders wish an absence of taxation entirely,” said Kebede Chane, director of ERCA. “Traders have a culture of hiding taxes, which shows backwardness.”

Up until the previous year, the tax ratio to gross domestic product (GDP) of the country was 13.5pc, five percentage points lower than the sub-Saharan average.

“We are working to push the ratio to 17pc in the coming three years,” said Prime Minister Hailemariam Desalegn while addressing the parliament last Friday. “To realise it, one of our tasks is building the capacity of the tax collector body and expanding our tax bases.”

Nevertheless, traders never seem to accept the misunderstanding on their side, saying that they are ready to pay taxes if assessments of their incomes are fair. And they keep pointing their fingers back at the Authority.

“Paying tax is acceptable, but only if it is levied fairly based on real income,” Bilal echoed. “I want a genuine assessment.”

Meanwhile, unless the Authority changes its approach as experts indicate, or traders become aware of the tax system, the city’s taxation remains a bone of contention, a hide-and-seek game in the grey area left by the taxation system.


Published on Jul 09,2017 [ Vol 18 ,No 898]



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