The Proverbial Rabbit: Sufficient Tax Revenue

The Ethiopian Revenues & Customs Authority (ERCA) is a government body tasked with achieving the impossible. It is expected to collect a relatively large sum of tax revenues from an uncomfortably small tax base.

The Authority is expected to turn 230 billion Br into the government’s coffers by the end of this fiscal year. Considering the state of Ethiopia’s private sector, this is akin to pulling a rabbit out of a hat.

The vicious forex crunch alone could have made this target unlikely. But add to this the regulatory roadblocks such as the 16.5pc credit cap. These are just two challenges wounding the private sector that has had to make do with the low-skilled labour force, weak infrastructure and inefficient public institutions for far too long.

But the Authority seems determined to get the proverbial rabbit. By July, it will enact a binding invoice format that consigners have to fill when exporting goods to Ethiopia. Never mind the fact that the Authority has no means of enforcing the format – with its legal jurisdiction confined to the borders of Ethiopia – and that much of this burden will lie on importers that have to go the extra steps of ensuring the format is adhered to.

The Authority has likewise instructed commercial banks to begin collecting taxes on the fringe benefits of their employees, as well as freezing bank accounts and confiscating vehicles to obtain payments on the expired customs guarantee of insurance companies.

With such ramped-up policing, the Authority now boasts 133.5 billion Br worth of taxes that have been collected in the first three quarters of this fiscal year.

I am rooting for the Authority to fulfil its target. Ethiopia’s debt buildup is becoming unsustainable. Public debt was already over half of the gross domestic product (GDP) by last year. All of the infrastructure development we see in our cities and towns have come at a hefty price, and if there is any hope of sustaining them, it can only be either through better export performance or domestic revenues.

The government has banked on both. But the former still disappoints while the latter, though improving, is still far lower than the nation should be reaping. Ethiopia’s economy is filled with inconsistencies: while our GDP has often been growing at a double-digit rate, our national income has remained in the gutter.

Much of this has been as a result of not being able – or refusing – to see the big picture. The government has been too focused on a reductionist approach to the woes of the economy. It has consistently lacked faith in the human nature.

The means to addressing low tax revenues have been enforcing previous laws and coming up with new ones. It has been to reap it out of a part of the economy that is unwell.

While it is right not to be naïve about the instincts of business owners and board of directors, the government must understand it is in their nature to be selfish. It is then the job of the authorities to moderate this fairly recognizable human feature and use it to the credit of society.

Profit is what drives people. It gets employees as well as business owners to work to achieve a higher goal and compete robustly. As long as the venture is within the bounds of the law, the government must follow a policy of facilitating and supporting this instinct. Regulating is a must for things can get out of hand, but this must not turn into aggressive policing.

What is crucial for Ethiopia’s economy, and its private sector is not more taxes, it is less corporate and employment taxes. It is also introducing flexible policies and winding down on regulations. Unavoidably, this would mean lesser revenues in the short term, which is why it is critical for the government to hold back on its infrastructure spending – instead of depending on public-private partnerships (PPPs).

A lesser tax burden and a relaxed business environment mean more money in the hands of consumers as well as producers. As the former spend more, the latter would likewise be incentivised to expand to produce and hire more aggressively. The tax base will be larger, and although the government will be collecting a lesser proportion, it would be a share of a much bigger whole.

Governing is not easy, especially as it involves a great deal of give-and-take. Ethiopia, as it stands, is severely cash-strapped. The urge should not be to take more. It should be to help the private sector so that it can give more.

By Christian Tesfaye
Christian Tesfaye ( is Fortune’s Op-Ed Editor whose interests run amok in the directions of both print and audiovisual storytelling.

Published on May 31,2018 [ Vol 19 ,No 944]



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