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For the past seven years, the Tax Authority used to accept the income declaration made by businesses in order to determine tax payments, without any additional assessments of its own. This has changed for good, says the Authority, which has dispatched its own taskforce to survey the assets of small businesses, which will then be used for determining tax payments, writes EDEN SAHLE, FORTUNE STAFF WRITER

Small Businesses Threaten Shutdown, Over New Tax Pressures

 

Zelalem Banteyewalu, a graduate of Addis Abeba University’s School of Fine Arts and Design, opened an advertising shop in 2010 on the second floor of the Kirkos Trade Centre. He started his businesses last year by providing advertising services on banners, T-shirts and billboards, and he even hired one employee to manage his shop during his absence.

Zelalem has become one of the 8,094 registered Turnover Tax (ToT) payers in Kirkos District, many of whom were lining up to pay their annual taxes for the fiscal year of 2011/12 in the Wereda 10 Office, this week.

 Kirkos District, where Zelalem’s business is located, has made a revision on the tax estimation three times in 2010/11, blaming the galloping inflation rate, which stood at 38.1pc in June 2011. This has resulted in Zelalem paying more in taxes.

Zelalem was held up by surprise, along with his fellow tax payers at the Wereda 10 office, which is delegated by the Ethiopian Revenues and Customs Authority (ERCA) to collect tax payments from category “C.”

His tax payments used to be based on his income declaration, according to the voluntary system enforced seven years ago, which averaged 356 Br a year.  Zelalem’s tax duty, however, has escalated to 16, 373 Br, representing a 217pc increase, after being classified as a category “C” taxpayer.

Among the 84,805 taxpayers registered in the capital city, 48,831 are like Zelalem, who are under category “C” taxpayers, covering 57.6pc of all taxpayers, according to data from the ERCA.

In the past seven years, ERCA used to accept taxpayers income declarations for determining tax payments, without any additional assessments of its own. 

A new tax evaluation directive, however, has increased Zelalem’s tax payments, along with the tax payments of 8,094 taxpayers in the Kirkos District, who are forced to be registered as category “C” taxpayers, who are required to make ToT payments. 

ERCA, which introduced the new directive three months ago, has conducted a campaign to register taxpayers from November until March 2011, after only 5,052 taxpayers in Kirkos took the opportunity to register as taxpayers, avoiding penalties from the tax authority.

The move was part of an effort to increase the country’s tax base, and an effort to reach the forecasted 12.1pc tax contribution of the Gross Domestic Product (GDP), which is estimated to be 471.8 billion Br by the 2011/12 fiscal year, according to sources in ERCA, who are not authorised to officially comment.

Tax contributions of the GDP were 11.3pc of GDP in the 2009/10 fiscal year, and 11.7 of GDP in the 2010/11 fiscal year, bringing in 383.4 billion Br and 425.6 billion Br, respectively.

Under the GTP, ERCA aims to increase tax contributions to 17pc of the nominal GDP by the fiscal year of 2014/15, placing pressure on the tax authority.

With the aim of registering more taxpayers and broadening the tax base to reach its house goal collecting 70 billion Br during the fiscal year of 2011/12, the authority recruited 1,200 fresh university graduates from Addis Abeba University (AAU), the oldest and largest higher education institution.

The fresh graduates, whom ERCA trained in the basics of marketing survey for three months, surveyed 95,000 business establishments around the city over a three-month period.

Besides the market survey, members of the taskforce assessed the purchase bills of new taxpayers, their observable assets, including furniture and equipments, and their declarations of income and expenses.

The taskforce made taxpayers who do not keep accounting books sign a single copy of the new assessment of their tax duty, which would be deposited with the ERCA after the estimation of tax. 

ERCA’s fresh graduates in the taskforce reported that 9,000 people were not paying their tax duties, 11,000 taxpayers were not paying value added tax (VAT), and 36,000 businesses were still required to use cash registers.

The members of the taskforce, which were instructed to review the outdated, seven-year-old tax valuation system, and replace it with an all new valuation system in all of the 10 districts of the capital, claimed that 11,000 businesses, including Zelalem’s, were making less tax payments than was expected of them.

They reported that business owners, like Zelalem, had been under paying tax duties, by claiming that they earn less than 100,000 Br, annually.

The authority and the City Administration, which collected 4.5 billion Br in tax revenues during 2010/11, and planned to collect 5.6 billion Br tax during 2011/12, were suprised with the revealing findings. ERCA agreed, however, that the new assessment system should not apply retroactively, to save businesses from being closed down by being over burdened by the tax payments, and the imposition of a three-month penalty on the businesses that were alleged to be hiding their actual income attribution.

The minimum of a three-month tax penalty imposed on businesses which were allegedly underpaying taxes amounts to 20,000 Br, and can be increased by the authority depending on the size and years of operation of the businesses.

“Taxpayers could have been requested to pay millions in penalties, if it was not for an agreement between ERCA and the City Administration on behalf of the businesses,” Mamo Abdi, tax and customs affairs adviser to the Director General of ERCA, told Fortune.

The business owners in the city, however, who were forced to shift to category “C” and instructed to pay higher taxes, do not feel that they were granted favours by the authority.

“The amount that I am required to pay does not take my income and expenses into consideration,” said Zelalem in frustration, because he says that he does not have the money to pay the required amount.

His frustrations are echoed by many in the city, and other major towns across the country, who are responding in different ways, from breaking down into tears, to getting physical with tax collection officials at the weredas once they were notified of the amount they are required to pay.

One such frustrated taxpayer is Abel Sheferaw. He has joined the ToT scheme in the Bole District, which had 7,046 registered taxpayers in 2007. Abel opened his four-year old business, which sells mobile phone accessories and earns an average daily income of 60 Br he is located, around Gerji, a few minutes’ drive from the Bob Marley Square. After the tax force surveyed his business, he was notified to pay 3,000 Br, a significant increment from his previous tax duty of 700Br, roughly a 328 pc increase.

Some taxpayers, like Abel, are claiming that they cannot afford to pay the amount they are required, and the nightmare has just begun.

Some have decided to shutdown their businesses, an eventuality that neither ERCA nor the city wish, according to ERCA and city officials.

Zelalem, who is supporting his mother through his business, has already made up his mind to close his shop, although Abel still has some capital saved to carry on.

The complaints from businesses and the calls for the revision of the new valuation system have flared over the past few weeks.

Tewodros Teshome, 32, and a resident of Adama (or Nazareth), 100Km east of Addis Abeba, owns a share in a car garage. He established the garage with two of his friends with a capital of 4,000 Br eight years ago, paying 1,700 Br for rent, and employing 18 permanent and part-time employees.

The Adama Special Zone Administration of Customs made a survey, and included him and his peers in the category “C” taxpayer list. In the past, they claimed to pay about 2,500 Br, annually.

However, they are now required to pay 82,000 Br, an earth shattering 3,180pc increase with the newly enforced tax valuation system.

Tewodros, and his friends, who were engaged in the business for the last 22 years as employees, before opening their own garage, claimed to have an income from about 100 Br up to 500 Br. The car garage owners, who would service a minimum of five vehicles on a daily basis, have also collectively decided to shutdown their business because of their new tax reality.

“I never even counted that amount of money in my entire life, let alone pay that amount of money to the tax authority annually,” he told Fortune, clearly angry.

Despite the frustrations, and the resistance to pay, tax authorities do not plan to revise their projections for a minimum of three years.

“The sharp increase of taxes businesses owed in such a short period of time only signifies the instability of the tax system,” a tax expert at the Addis Abeba University told Fortune under condition of anonymity.

Experts in the industry also question the legitimacy of the survey in the absence of a standardised tax assessment system in the country.      

“The estimation based on the survey may not be 100pc accurate, if taxpayers have legitimate claims supported by evidence they can submit their appeal,” Mamo told Fortune.

A macroeconomist, who believes that taxpayers are disadvantaged, says the taxpayers, who are required to pay more than they are used to, would either shift the burden to their customers by increasing prices, or close their businesses, but in both cases the customers will suffer the most, since commodity prices will escalate. Otherwise, it will be difficult to get commodities in the market due to the shortage of players who can afford to pay the taxes.

He also argued that the tax valuation, which was revised considering the inflation rate, does not represent the real income of the businesses, as in the cases of Zelalem, Abel and Tewodros. In reality, their income has actually declined since they now spend more money to buy fewer items.

“As a result, tax duties of the businesses should have been decreased, instead of increasing tax rates,” the macroeconomist argued.

Mamo, however, is persistent in his belief that the income of businesses is on the rise, along with the growth of the economy.”

Although official documents of the GDP show that the country’s economy has grown by 11pc in the past five years, which supports Mamo’s claim, no disaggregated data is available to show that real income has increased as much for businesses.  

Taxpayers, who are aggrieved by the new tax system, could appeal to the tax review committee of ERCA within 10 days, and its tax appeal committee within 30 days. If they remain dissatisfied they can take ERCA all the way to court, according to the income tax proclamation issued in 2002.

These options, however, do not seem to be solutions for most of taxpayers, including Zelalem and Tewodros, who have already given up hope and opted to shut down their businesses. The new tax demands go too far, they argue, and now they are left with no plans for the future. They claim that they do not have the money to pay ERCA, or proceed with tax appeal procedures, which is 50pc upfront deposit of the tax amount they are told they owe the state.

 

By EDEN SAHLE,
FORTUNE STAFF WRITER

Samson Halieyesus, Elleni Araya, and Fikre Sintayehu, Fortune staff writers; and Daniel Kifle, special to Fortune - Adama, contributed to this feature.

 
 
   
 
 
 

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