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Widening tax base vis-a-vis curbing budget gap

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By Bilal Derso
Though putting in place a tax policy is undisputable measure to boost trust among taxpayers, thereby increasing revenue, for the time being, widening tax base and making bold pertinent institution is a timely move in narrowing the budget deficit, economic experts say.

The House of People’s Representatives approved a 320 billion birr budget for the current Ethiopian fiscal year, whilst the then Ethiopian Revenues and Customs Authority announced plan to collect 213.9 billion birr from tax, leaving a 34 percent gap between tax revenue and annual budget.

Speaking to The Ethiopian Herald, Associate Professor of Economics at Dilla University, Dr. Dawit Hayeso says lack of a defined tax policy in Ethiopia has brought a negative impact in flow of foreign direct investment as the policy is one of the instruments in attracting global companies.

Dr. Dawit notes that Ethiopia’s agriculture dependent economy, in which production and consumption is simultaneous, is difficult for effective evaluation and tax collection. The service sector in the other hand dominated by informal businesses that do not tend to pay taxes, thereby limiting the tax base. The industry sector is also largely characterized by tax concessions, he says, adding that many big foreign-owned and local companies prefer to engage in investment and business projects with longer tax holidays.

The expert points out that the engagement of public owned and public-affiliated corporate in massive expansion activities drain their profits and lower the amount of money they are expected to pay in the form of tax. In the other hand, tax evasion and tax avoidance are highly prevailed among individual businesses and companies, he adds.

Sharing the above rationale, Tax Partner at HST Professional Services, Getu Jemaneh says that Ethiopia’s low per capita income and inefficient accounting and recording system as well as attitudinal challenges hindered the government from collecting the revenue the economy could generate.

Lack of motivations of many tax payers to pay taxes on self-assessment basis seriously affects government’s revenue, Getu says, adding that many traders have shown inclination to work out of the tax system either due to misunderstanding of the tax system or deliberately engaging on the illegal route to gain unfair prosperity. The expert further states that the shortcomings witnessed in revenue collection system contribute for increased cost of tax compliance both for tax payers and tax collectors.

Despite the presence of tax provisions, gaps have also been perceived in tax collection capabilities. Regarding budget deficit, Dr. Dawit says that the level of Ethiopia’s budget deficit-GDP ratio has not exceeded from three percent and it would not pose serious challenge in the economy. He notes that the way the government finances the budget deficit including monetization, foreign and domestic loans, however, could bring in negative impact in the economy.

Printing new money and supply to the market would become inflationary, the expert says, adding that foreign borrowing brings in debt burden whilst loan from domestic sources adversely affects private investment and creates deficiency in efforts to channel resources. Another expert and Accounting and Finance Assistant Professor at Wollega University, Dessalegn Mossisa says that budget deficit is recommended for the developing countries including Ethiopia in triggering government’s involvement to enhance market imperfection to the private sector.

It may not be possible to close the budget deficit completely and reducing the deficit is possible gradually. According to the Associate Professor, incorporating Ethiopia’s big and complex informal sector and easing the procedure to black economy’s transformation to the formal channel has a key role to widen the tax base and boost government’s revenue.

He indicates that implementing modern technological outputs including automated tax collection system and assigned competent and competitive tax officials is also crucial in curtailing tax evasion and tax avoidance practices.

The political commitment of the government has a paramount importance to ensure peace and stability and keep the operation of businesses thereby deterring informal activities and boosting revenue, he adds. By the same token, Dr. Dawit says that re-adjusting the economic structure in channeling the existing agriculture-service transformation to a more productive agriculture-industry model is a long-term solution for the same cause.

The expert states that the prevalence of sound tax policy is instrumental in encouraging foreign companies to invest in Ethiopia’s economy. Putting in place an effective tax collect system is also something worth equal attention for the effective implementation of tax policy and build the trust of the public in paying tax. To Getu, the government should institute clear procedures on the application of the tax law and there should be clear harmonization among various tax collection branches.

Continuously engage with the tax payers and promote self assessment is also something worth consideration. The expert points out that the government needs to continuously work on clarifying tax laws and engage the private sector in making effective tax collecting system.

Expressing the usefulness of the National Tax Revenue Movement to promote tax collection, Getu notes that the movement shall remain active and persistence as well as inclusive for all hierarchy at all levels. Highlighting the crucial role tax has been playing in government expenditure and development, the experts say that nurturing public trust and exercising institutional transparency by tax authority will boost government’s revenue thereby narrowing budget deficit.