News Analysis: New VAT amendment sparks heated debate over taxing essential services

A public consultation regarding the proposed amendment to the Value Added Tax (VAT) proclamation, convened by parliament on 18 June, 2024, witnessed a lively debate amongst stakeholders representing a diverse range of sectors (Photo: Social Media)

Addis Abeba – As the current fiscal year draws to a close, legislators have been intensely debating a series of critical bills. These include a draft proclamation regulating civil servants and a controversial bill that would allow investigators to intercept communications without judicial approval in cases of counterfeiting and terrorism financing.

Another key piece of legislation under consideration is an amendment to the Value Added Tax (VAT) proclamation, first introduced in 2002.

This week, the House of Peoples’ Representatives held a public consultation meeting to discuss the recently introduced revised VAT bill. The proposed legislation seeks to broaden the scope of VAT by including transportation services as well as the supply of portable water and electricity.

The revised VAT bill was introduced to lawmakers shortly after Finance Minister Ahmed Shide presented the budget proposal for the upcoming fiscal year. This proposed budget outlines significant government spending, totaling 971 billion birr, with the federal government aiming to collect 502 billion birr in tax revenue.

During his budget presentation, Minister Ahmed detailed plans to generate an additional 92.5 billion birr through tax revenue adjustments. These adjustments include amendments to current VAT and excise tax laws, along with the implementation of new taxes such as property and green levies.

A lively public consultation meeting, organized by parliament on 18 June, 2024, saw stakeholders from various sectors engage in a heated debate.

The focus of the debate was a provision in the draft VAT bill that proposes to include basic services within the VAT regime. Experts and officials from the Ministry of Finance, including State Minister Eyob Tekalign, were present to answer questions and provide clarification.

The proposed legislation specifically targets transportation services provided by vehicles with less than eight passenger seats. This provision includes services offered by taxi-hailing service providers but excludes three-wheeled Bajaj vehicles. The bill also proposes to bring the provision of portable water and electricity services under the VAT regime.

During the consultation, many participants pointed out a contradiction between the proposed VAT inclusion of these services and the current legal exemption for basic necessities. One participant argued that VAT is a “pass-through tax,” meaning businesses ultimately pass the cost onto consumers. He also expressed concern that this policy shift could worsen inflation.

A Ministry of Finance expert addressed these concerns by highlighting the government’s commitment to promoting mass transit. He explained that individuals using smaller vehicles (seating less than eight) likely have the means to absorb the VAT burden, while those who rely on mass transit are typically less privileged.

Furthermore, the expert emphasized plans to exempt a baseline amount of electricity and water consumption, enough for an average household’s needs. “Consumption exceeding this established limit would be subject to VAT,” the expert clarified. He added that the Ministry of Finance would conduct a dedicated study to determine the precise threshold for the exemption.

A representative from the Ethiopian Flour and Powder Products Manufacturers Association raised concerns about including food items like biscuits under VAT.

“This primarily affects those who can’t afford better food options,” he argued. “Many mothers pack their children’s lunches with biscuits,” he added, highlighting the impact on essential food items.

The representative further pointed out that energy biscuits are a common food source for workers in coffee-growing regions. “Taxing biscuits contradicts the intended benefit of the tax law, which is to protect the underprivileged,” he concluded.

According to State Minister Eyob Tekalegn, the current revision to the VAT proclamation aims to rectify the discrepancy between actual and potential tax collection (Photo: HoPR)

Officials clarified that the bill allows the government to exclude essential food items. The revised bill grants the Council of Ministers the authority to decide on these exclusions.

However, a macroeconomist, speaking to Addis Standard on condition of anonymity, expressed reservations about this approach.

The economist argued that entrusting this decision-making power to the Council of Ministers, already burdened with numerous pressing issues, might not be the most efficient solution. He recommended transferring this authority to the Ministry of Finance, which possesses the relevant expertise and flexibility to make timely adjustments when necessary.

The draft legislation proposes extending the VAT regime to encompass financial technology services, outlining a 15% VAT on many electronically conducted transactions.

Representatives from Ethio Telecom and Safaricom Ethiopia raised concerns about the limited scope of exempt on digital transactions. They argued that this contradicts the country’s vision of fostering a strong digital economy.

A representative from Ethio Telecom pointed out, “The revision seems to include certain digital financial services we offer.” He further argued that including digital services under the VAT umbrella seems illogical at this early stage, considering the sector’s infancy.

“Ethio Telecom is currently laying the groundwork by launching select digital services without commission charges,” he explained. “Imposing VAT on these services during this critical launch phase could be counterproductive.”

Representatives from both companies also sought clarification on the tax treatment of transactions facilitated by platforms like Telebirr and M-PESA.

In response, Ministry of Finance experts clarified that transactions conducted through these platforms would be exempt from VAT. However, services provided by fintech and payment system operators in general would be subject to VAT.

State Minister Eyob explained that the VAT amendment aims to integrate new economic activities, like digital transactions, into the tax system.

He acknowledged the importance of fostering digital transformation but emphasized that sufficient tax revenue is needed to finance the infrastructure projects that will enable it.

Eyob further explained that when VAT was introduced in 2002, the goal was to broaden the tax base and increase revenue from indirect taxes. “While we’ve seen progress, the actual VAT collection falls short of its potential,” he stressed.

According to Eyob, the current revision to the proclamation aims to rectify this discrepancy between actual and potential tax collection.

During the last fiscal year, VAT collections accounted for approximately 15% of the total tax revenue generated. To finance the proposed budget for the upcoming fiscal year, the government aims to collect nearly 100 billion birr in the form of VAT, representing roughly 20% of total tax income.

Officials anticipate the enactment of this bill, with its provisions taking effect at the beginning of the coming year. AS

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