Traders and Tax Authority Play Hide and Seek

Giving a closer look at the empty outlets of businesses located in many parts of the city, it can be witnessed that there is something new happening in the scene. It is the new daily income valuation process of the tax authority, that has led traders to hide their products with the major fear of being subjected to higher taxes. At the same time, the Authority is trying a different mechanism in order to address these challenges, FASIKA TADESSE, FORTUNE STAFF WRITER, reports.

On the afternoon of Wednesday, May 24, 2017, Merkato, the city’s largest open-air marketplace located in Addis Ketema District, was relatively quiet in contradiction of its casual routine. The hustle and bustle activity of the place was quiet for the past four consecutive weeks following the launch of the tax authority’s estimation of daily incomes of businesses.

Merkato, an adopted Italian word meaning to market, became unusually quiet as the Ethiopian Revenues and Customs Authority (ERCA) kicked off the revision of business tax rates after six years. The Authority estimated the daily income of businesses across the country.

One of the shops that were almost empty was Abduljelile Mustafa’s shop, located on the second floor of Addis Abeba Shopping Center. He retails general merchandise, such as consumer products and home supplies. His medium sized shop’s shelf was almost empty.

Despite the actual reason being hiding the items from the tax assessors, Abduljelile claims that shortage of commodity supply in the market is the main cause of the emptiness of his shop.

For ‘category C’ taxpayers, with a gross annual income of less than 500,000 Br according to the new income tax proclamation, the ERCA uses a presumptive taxation method.

“Because of foreign currency shortage many wholesalers are not providing us with the commodities,” Abduljelile told Fortune.

But this seems unlikely while giving a quiet visit to the shops in Merkato. Most of the shops have cleaned their shelves by removing their commodities and hiding them until the valuation of daily income of these businesses is concluded. Most of the shop owners claim that the tax assessors will estimate exaggerated income rates if they see their shops are filled with supplies and commodities.

For ‘category C’ taxpayers, with a gross annual income of less than 500,000 Br according to the new income tax proclamation, the ERCA uses a presumptive taxation method. This is done, as ‘category C’ (micro) taxpayers are not expected to have books of accounts like the other two taxpayer groups.

Therefore, tax assessors of the Authority step into each and every business that they believe has less than half a million Birr in annual gross revenue. The tax assessors ask the owners of the business how much their daily gross income is, and their expenses. After receiving the trader’s testament of their expenses and revenues, the assessors will estimate the daily gross income of these businesses benchmarking their observation and the reality.

The daily gross income of these businesses will be calculated into a year, and then the Authority will declare the tax of these companies depending on the profitability rate of their respective business category that has 99 lists.

Although the income tax proclamation of the country demands this has to be done every three years, it was last month that the ERCA deployed its tax experts to assess the daily gross income of these businesses after six years, delaying for one full term.

Because of the internal problems of the ERCA which are attributed to the pileup assignments and prioritising other assignments, the process was neglected for the past three years. Therefore, the Authority announced for the national daily income estimations to take place starting from the end of April 2017.

Since then, most of the businesses in the city including Abduljelil’s started clearing their shelves and hiding their commodities with the fear that the Authority might declare a higher amount of taxes on them.

“The business owners mainly do this with a misconception of the tax system of the country and its contribution to the economy,” says Wassihun Abate, director of legal services at the Ministry of Finance & Economic Cooperation (MoFEC).

This act of traders hiding the items is the major challenge for the tax assessors, according to Atkilit Gebregziabhre, supervision and support director at the Addis Abeba Branch of ERCA.

For the assessment, the ERCA organised 480 teams which are composed each of four experts and one supervisor, meaning over 2,000 employees of the Authority are deployed to assess the daily incomes of businesses in Addis Abeba.

The estimation is set to identify businesses shifts, and control illegal traders with no trade license, according to Atkilit.

But it seems that the target of the Authority has somehow failed as many traders across the city are trying to hide their commodities and undervalue their daily incomes.

“The tax assessors assume that shops with a full shelf have higher turnover and empty shops have lower turnover. And that is why we hide the commodities until the tax valuation is finalised,” said a bakery ingredients supplier at Merkato who wishes to remain anonymous.

“Therefore I hide the items from the shelf,” explains this supplier. “To convince the tax assessors even more, we explain that business is slow.”

Last week was the fourth week that the Authority started estimating the daily incomes of 143,550 businesses across the city. In some parts of Merkato, the valuation was already finalised, but still, most of the shops are empty with a fear of the experts possibly returning.

Beyond leaving their shops empty, the traders also give unrealistic daily gross incomes to the tax assessors.

According to most of the traders in all the areas, the shops in Merkato and different parts of the country will not return the commodities to their shops until the estimation process is concluded.

Mohammed Ali’s shop, which is located inside Gotera Condominium in Qirqos District, is one of the businesses which is still empty even though the tax assessors had already visited his shop two weeks ago.

On the afternoon of Tuesday, May 24, 2017, Fortune was at Mohammed’s shop for a few minutes and observed that a couple of buyers came into his shop, but they left without buying any items as he told them that he had run out of those items.

Beyond leaving their shops empty, the traders also give unrealistic daily gross incomes to the tax assessors. One of them is Siraj Kedir, who manages a family shop at Merkato, Bombe Tera. Siraj is a wholesaler of consumer commodities such as hair oils, biscuits, tobacco, candies and chewing gums.

He pays 5,000 Br as monthly rent for his 12sqm shop. He claims that his daily gross income is estimated to be 2,500 Br and makes a monthly purchase of items worth 75,000 Br. In addition to the rental expense, he reported to the tax assessors that he pays 2,000 Br in monthly school fees for his children and spends 500 Br to pay water, electricity and telecom bills.

He claims that he has been in this business for the past four years and paid 15,000 Br in tax earlier during the year and 18,000 Br last year.

While Fortune visited his shop he was receiving an order via telephone for 11 packs of a certain commodity.

“We know that most of the shops at Merkato are just displays, and they handle their business via phone and sell the items from their warehouses to the retailers,” said Wassihun.

As a solution, the tax assessors are using different mechanisms. These include studying the market nature of the areas, estimating the area of the shops to evaluate a number of commodities it can accommodate and assess store rental fees of the area which the Authority believes are indicators that can show the incomes of the businesses, according to the Authority.

“Businesses around Merkato have a hard-to-tax nature,” said Wassihun.

Some relate the problem of hiding daily income with the tax system of the country.

“The problem is not with the traders who hide their commodities, rather the structure of the tax system in the country,” said Yohannes Woldegebriel, a lawyer who specialises in tax law and commercial code.

According to Yohannes, the country is using a Presumptive Tax structure, which is exposed to corruption leading the country to lose an enormous amount of money from these taxpayers.

But officials from the Ministry and the Authority claim that the share of the ‘Category C’ taxpayers to the total tax revenue of the country is below 20pc. But up until the last fiscal year, the tax ratio to GDP of the country was only 13.5pc, which is below the sub-Saharan average of 18pc.

At the same time, the state believes that the country’s budget should be largely sourced from taxation. For that matter, the nation has targeted to push the tax to GDP ratio to 17pc by 2020.

“We don’t see the tax assessors that used to work at the Authority three to four years ago,” said Yohannes. “They left the company after taking enough amount of money in the form of bribery from the taxpayers.”

To avoid this problem, Yohannes suggests that all businesses have to have a book of accounts. One of his major suggestions is ERCA’s reformation over its tax structure, phasing out the Presumptive Tax structure.

He also advises the Authority to enforce rules for businesses to have an inventory or a complete list of items and register the number of stores of these businesses, and enforce regulation for them to sell all of their products with receipts. After doing all this, all of their transactions will be traceable, and they will be taxed properly, according to Yohannes.


Published on May 28,2017 [ Vol 18 ,No 892]



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