News Analysis: Public discourse begins before government ratifies controversial property tax law

By Zelalem Takele @ZelalemTak11163

Addis Abeba – Ever since Prime Minister Abiy Ahmed unveiled his administration’s plan to introduce a property tax law more than a year ago, it has sparked growing anticipation among the public due to its direct impact on citizens’ income.

Millions of citizens have been eagerly waiting for further details, as the legislation directly affects their welfare. Earlier this week, the long-awaited property tax law bill was finally presented for public deliberation for the first time. Similar discussions were held previously between regional states representatives, experts and other stakeholders.

The draft legal framework, aimed at standardizing property tax nationwide, was presented during a public consultation meeting on 8 October, 2023. Wassihun Abate, a tax policy advisor at the Ministry of Finance, presented the bill.

The draft law follows a decision made by the House of Federation and House of Peoples’ Representatives in January 2023, granting regional administrations and municipalities the authority to collect designated property taxes. The federal government, specifically the Ministry of Finance, was tasked with providing a guideline framework in consultation with relevant stakeholders.

Once the draft proclamation is prepared, finalized, and subsequently ratified by the parliament, regional governments and municipalities will begin implementing the legal frameworks in alignment with the legislation enacted by the parliament.

According to Wassihun, the proposed tax bill aims to boost the revenues of regional governments and municipalities, thereby enabling them to improve civic services. The upcoming property tax bill is also expected to grant regions and municipalities budgetary independence.

“This initiative plays a crucial role in ensuring that regional governments attain fiscal autonomy,” commented Wassihun.

Sources familiar with the matter project that the proposed property tax will generate an annual revenue of 30 billion birr. Officials also hope that this measure will alleviate pressure on the federal government, which currently allocates 27% of its annual budget towards regional subsidies. For the current fiscal year, the federal government allocated 214 billion birr as regional subsidies.

The draft framework proposes implementing property taxes on two primary components: urban land usage rights and ownership of buildings or houses, which include any modifications made to urban land.

According to the draft, the taxable amount for any property would be set at 25% of either the market value or the replacement value of the property. The suggested tax rate for land usage rights ranges from 0.2% to 1% of the annual taxable amount, while the rate for property ownership and improvements is recommended to be between 0.1% and 1% of the taxable amount.

The draft states that tax rates should be reviewed annually, based on a city’s capital expenditure requirements and the appreciation of taxable property values. The incremental rates would start at a minimum of 0.1% in the first year and gradually increase to 1% over a period of four years. However, the annual property tax increase, excluding inflation, is capped at 0.5% of the taxable amount of the property.

The bill also proposes classifying urban areas into chartered cities or urban administrations. To determine property tax, the tax bill suggests categorizing plot areas and subdivisions based on the availability of essential amenities such as water supply, sanitation, and road infrastructure. Additionally, areas within each city category will be further classified based on the availability of services provided, and tax rates may be adjusted accordingly.

Wassihun stressed that the new tax law can play a crucial role in utilizing vacant and underutilized real estate resources efficiently. “Moreover, it will contribute to the establishment of a unified economic community throughout the entire country,” he said.

However, the proposed tax bill has faced criticism from various quarters. Eyasu Girma, an experienced financial consultant, expressed concerns about its timing, particularly considering the ongoing inflationary pressures in the country.

Urban residents, especially those with fixed incomes, are already struggling with skyrocketing prices for goods and services. According to the Ethiopian Statistics Service, inflation continues to be a critical concern, currently standing at around 28.8%. Of particular concern is the inflation rate for food, which stands at 27.3%.

Policymakers, including Finance Minister Ahmed Shide, insist that the government’s tax collection falls significantly short of its actual potential. They support this claim by pointing out the country’s low tax-to-GDP ratio and limited tax base.

Last fiscal year, the government collected 442 billion birr as tax revenue, representing a 12% increase compared to the previous year. However, the tax revenue-to-GDP ratio stood at 7.1% last year, far below the sub-Saharan African average of 16%. In fact, the tax-to-GDP ratio has been declining in recent years, dropping from 10.7% five years ago to its current level.

In an effort to boost tax collection, the government aims for a 20% increase in 2023/24. A month ago, the Ministry of Revenue announced plans to collect 529 billion birr from taxes this Ethiopian fiscal year.

Eysu raised doubts about the potential impact of the draft bill on the average Ethiopian’s finances, given the multitude of taxes already burdening citizens, such as VAT and income tax.

Four months ago, the Addis Ababa City Administration Revenue Office implemented a revised tax rate on condominium house roofs and walls, igniting a fervent debate and resulting in significant public outcry.

Additionally, Eyasu questioned the administrative costs associated with implementing the new tax law, casting doubt on the government’s anticipated net revenue gains.

The bill also proposes tax exemptions for certain types of property, including plots of land used for religious purposes, agricultural land located within city limits, and houses below a certain size. Government properties may also qualify for exemption, pending necessary approvals.

Sisay Zenebe, the general manager of Mela Property Management, argued in favor of exempting residential properties from this tax, stating that they do not generate a return on investment and should be considered as consumption goods.

Sisay also emphasized the importance of establishing a reliable information system to collect data on property ownership rights and their corresponding financial values. He reasoned that without a robust data collection system, the successful implementation and enforcement of the new tax could face challenges due to the prevalence of informally settled properties.

After incorporating feedback from participants and stakeholders, Wassihun and his colleagues plan to promptly send the final version of the tax bill to legislators. This will enable regional and municipal authorities to begin preparing legal frameworks aligned with the enacted legislation and boost revenue, thereby improving civic service provision. AS