For anyone who might have read the recently released macroeconomic handbook on Ethiopia, a flagship report produced for the first time by Access Capital, the aggressive drive by tax authorities ought to be understandable.

For a private equity fund ambitious to mark its presence in the Ethiopian fledging private sector, Access Capital’s first report on Ethiopia’s macroeconomic situation declares that the country’s tax base is under a “rapid erosion;” it dropped from 16pc of the GDP in 2004 to 12.1pc last year, earning the country a place as the bottom third of countries in Africa, the hand book disclosed. But the scenario hardly stops there; the report warned that “if not reserved, such a sharp fall in internally-generated resources will clearly thwart the effectiveness of any state whether it aims to be ‘developmental’ or not.”

It is indeed an alarming call to come from a private firm, whose concern on the sharp fall in the share of domestic revenues to the GDP is well corroborated by the IMF. The share of domestic revenue to the GDP of 13.4pc in 2008 has gone down by a 1.7 percentage point, even from the five-year average beginning 1997.

Thus, if Messieurs Meles Zenawi and Melaku Fenta are engineering a process to revamp and overhaul the entire tax system so that the Revenues and Customs Authority would realize its ambition of collecting the largest ever recorded (30 billion Br) revenues from domestic sources, there should be no blame hinged on them.

If they succeed, not only will they have collected far larger than the 1.2 billion Br the government had collected in the early 1990s; they would have also gone much further in helping the administration achieve its goal of keeping the budget deficit less than 1.5pc of the GDP, half the amount European Union requires its member countries. Achieving its targets may also mean that the share of domestic revenues will have the opportunity to reach 20pc to the GDP. That will indeed be very impressive.

The result so far is a mixed bag. The half-year performance report from the authority reveals that 12 billion Br had been collected from direct and indirect tax up until December 2008; since then, it has beefed up by an additional four billion Birr.

But this also means that the authority has to generate 4.6 billion Br revenue from domestic sources in each of the next three months. This will indeed be an uphill tax for the administration, while a terrifying episode for the business community.

Of the 600,000 businesses registered across the country in the tax identification number (TIN), a fraction of them are federal taxpayers. And from these 13,000, a little less than 700 are in the category of large taxpayers’ basket. However, should those in payrolls be included, the government expects this to swell to 1.6 million potential taxpayers.

Whether or not businesses could bear a tax volume that is close to equal to African average is yet to be seen. What is evident is the administration is under aggressive efforts to collect what is due to the state. Recently, close to 1,000 taxpayers were put under what authorities describe as “desk audit;” a new system that reviews the accounts of companies reconciling self declared statements of accounts, data retrieved from fiscal printers, and that obtained from the customs agency.

If businesses could not see the clear signal from the government, they are indeed up for a real surprise. On its part, the government procured, a few years ago, a software its developers fancy as an integrated tax administration system. It has rewritten the tax code, in consultation with the chambers of commerce, sectoral and industrial associations, and with the employers’ federation. It also restructured the tax organization merging customs and revenues into one federal agency and streamlined its work process in such a way that those determining companies’ taxes do not to engage with taxpayers.

Introducing and enforcing value added tax and forcing companies to install fiscal printers are all clever ways of developing the capabilities of the state to collect, analyse, demand and enforce what is due to it. There should be little resistance in this respect, for this was what the state ought to be doing in the first place all along.   

But now that the tax man is roaring like a lion with real teeth would do, it will not be an easy time ahead for all the parties involved.

Why people do not pay taxes in Ethiopia is a subject of debate. Not too many people in Ethiopia find paying tax a pleasurable thing, to be frank. This is a country where the culture of tax compliance is at its lowest even compared to the African average. People could be dumfounded to learn that a research conducted by the University of Oregon in 2007, based on brain scans, suggests that “paying tax feels good.”

It is difficult to imagine this scenario being an overwhelming experience in Ethiopia. Some attribute the culture of non-compliance to tax to deprivations of basic services by successive states of Ethiopia. Taxpayers were in no position to know where and how their money is spent; nor did they have the right to ask. And yet, they see the provision of basic service denied to the vast majority of the population, while the building of fiscal infrastructure had not been that visible.

This group of people would like to see the government employee the carrot in encouraging people to become responsible citizens. They would like to see the government recognize those who are religious in paying tax; and they should be provided with incentives so that others should follow suit. The revenue collection system should be simplified; tax agents should be courteous and the tax amount should be lowered. In case they have problems, the appeal mechanism ought to be less complicated and not costly at all.

They would like to see the tax system achieve two things: It is not worth dealing with corrupt tax officers, while taxpayers feel confident that they would never be subjected to arbitrary imposition of taxes that is too expensive to fight. 

There are others who have a rather realistic take on the issue. They tend to believe that the stick does the job, for many businesses are there to milk the system, any system. The realists see paying tax not as a matter of pleasure or convenience, or self-imposed national duty. The answer is to develop the state’s capacity in collecting information and data, strengthening its intelligence capabilities and the enforcement power.  

Both may have their respective merit; but the toughest part is to strike the right balance. It is to the interest of government to see companies grow and expand. Not only do they generate more income and pay more taxes; they could also generate more jobs and help stimulate the economy. As much as the tax authorities would like to see a change of culture and mindset among members of the business community in their compliance to pay tax, they too should change their mindset about business.

Tax officials should recognize that companies are partners in the broader scheme of bringing social wellbeing and national prosperity; and they are not blood sucking monsters as often they are portrayed. They are entitled to as much respect and decent treatment as the taxman is accorded whenever he enters the premises of a taxpayer. The engagement between tax officials and taxpayers should not be that of cat and mouse, but partnership based on transparent rules and accountable conducts.

Ensuring this now should serve the best interest of the governing party. Only a little more than a year away from national elections, the ruling party can hardy afford to pick up a fight with tax payers, only to promise debt forgiveness when it is close to the voting date. It happened before, and there is no reason why it will not happen again unless the situation is handled carefully.