Chapter Three

VAT and TOT

Meaning and Features of VAT
• It is an indirect tax. Imposed on consumption/transactions, it is a
consumption-based tax
• The ultimate burden to pay rests on the consumers. The statutory
incidence/immediate burden of VAT is imposed on business entities
for administration convenience.
• Its peculiar features
• It is a multi-stage tax. A value-added tax is imposed on a taxable
product every time it changes hands in the chain of production and
distribution. But excise tax is single stage tax.
• Its tax base is the value added at each step. The name itself signifies
this. it is a tax on the value added and fully credits input VAT already
paid.
• The system of rebating/crediting. Firms are allowed to deduct taxes
they paid on their material inputs against their taxable sales.
Out put tax (VAT collected from consumers) minus input tax (VAT paid
to inputs), gives us the tax base of VAT.
• Input tax is paid by business entities on the purchase of inputs that are
used to produce a taxable product.
• Output tax is the tax a business entity collects from the sale of taxable
products. As a result, a firm’s liability is only the difference between
the output tax and input tax.
• What is allowed to be rebated is VAT paid for inputs. Other taxes are
not going to be rebated since they have their own treatment.
Types of VAT
• On the bases of scope of rebating/deducting input taxes on the
purchases of capital goods/assets
• Gross product VAT- based on the total sales (gross product) rather
than just the added value at each level.
VAT paid on purchase of capital goods, such as machinery are not
allowed to be rebated. So, only taxes paid for trading stocks credited?
• The most unfavored type and it is theoretical.
• Income type VAT.
• Like the above, no direct rebate for the purchase value of capital goods.
But, it allows refund on the periodic allowance for the depreciation
value of capital goods. VAT paid on the purchases of capital inputs is
amortized over the expected lives of the capital inputs.
Amortization - the scheduled reduction of a debt over a specified
period through regular payments
• Consumption type of VAT.
• VAT paid on all business purchases including capital equipment are
allowed of rebate. capital purchases are treated the same way as the
purchase of any other input.
• Much easier method for both tax collectors and taxpayers, since they
do not need to make a distinction between capital goods and trading
stocks/current expenditures in determining liability.
• The most widely used and theoretically accepted type of VAT.
• Capital Goods” means goods used in a person’s taxable activity solely
in the manufacture of goods or the supply of services that have a
useful economic life of at least One year, but does not include trading
stock. Art 2(5) of VAT proc. No 1341/2024
Methods of Computing VAT Liability
• Invoice credit method: Value-added is determined by deducting the
amount of paid input tax from the amount of output tax (collected
VAT). It is a tax to tax deduction.
• Favored since it could minimize evasion. taxpayers will collect
receipts of input taxes (for z sake of rebate/refund they), and since the
law oblige them they keep records for out put tax collected) .
• The invoice method attaches the tax liability to individual transactions
making it legally and technically far superior to other forms.
• Subtraction method
• Deducting from the total sales of a taxable activity, the amount of
purchases used to make a taxable transaction and then applying the
rate which determines liability of VAT.
• Total sale (including sale price and collected VAT) minus total costs
incurred to inputs.
• The deduction will give us the added value (not the amount of VAT
liability).
• Then apply the rate on the added value. The result will be the amount
of VAT liability.
• Under subtraction method all sales and purchases are lumped
together, which makes it much more difficult to determine which
goods were taxed at a different rate, or which goods were exported.
• This method will not be easily workable when goods are exempted or
zero-rated
• It does not require invoices. The data on total purchases and total
sales is obtained from company sales and purchase annual book of
records.
• As a result, the subtraction method VAT is described as being
"accounts-based," rather than "transaction-based VAT and is
commonly perceived to be a tax on an entity.
• In contrast, the credit-invoice method tax is commonly understood to
be a tax on specific goods and services.
• Addition method:
• It works by adding VAT to the cost of goods or services, rather than
calculating it from the difference between output and input tax (like in
the standard invoice method).
• The VAT is added to the price directly to determine the final selling
price (gross price).
Principles of Value-added Tax

• origin principle: goods shall be subject to VAT in the area of

production irrespective of the place of consumption. The VAT rate of
the origin country would be applied
• destination principle: goods shall be subject to VAT in the area of
consumption irrespective of the place of production.
• Under destination principle exports are not subject to VAT in the
exporting country. This means that the exporting country does not
charge VAT on the goods or services being exported. Instead, the VAT
is applied in the destination country (where the goods are consumed
or used).
• The importer who pay VAT on the import can deduct it as input VAT
when they sell the goods to their customers, effectively making the
VAT neutral for the business.
• Encourages international trade: By exempting exports from VAT in
the exporting country, this principle helps to avoid double taxation
(paying VAT both in the exporting and importing countries).
• Refund or exemption for businesses: In many cases, businesses that
export goods can recover or be refunded the VAT they paid on inputs
(raw materials, supplies, etc.) used to make those goods.
• avoids "tax cascading": Without the destination principle, goods
could be taxed multiple times as they cross borders, resulting in "tax
cascading."
Advantages of VAT
• It allows little room for evasion. Duty to use VAT invoice for the purpose of rebate
makes it transparent. Plus, since there is rebate, less motive to evade by business
entities.
• VAT has anti-cascading effect. there is no double taxation of the same base. only the
added value taxed. it is neutral. imposition of the tax does not interfere in the
decision of firms on what and how to produce.
• Encourages saving and investment. Because, it is a consumption tax.
• It encourages exports. If adopted the destination principle; products are subject to
tax in those areas where they are consumed. Exports are not taxed/taxed at zero rate
(no need to collect out put VAT). Exports are untaxed while imports are taxed. Plus,
exporters are allowed to rebate input VAT (without collecting out put VAT). On the
contrary, VAT following the origin principle encompasses all products produced
within the state under its operation. Exports are taxed, while imports are not.
• Generate significant revenue. Because, it is a consumption tax (individuals will
not stop consuming) and since it encourages compliance, taxes are collected
effectively.
• It has less tax burden- paid fragmentally. Plus, not felt by the ultimate
taxpayers/the pain of sacrifice less-paid in form of price.
Disadvantages of VAT

• Violate vertical equality - both the rich and the poor taxed equally
• It is not simple and easy tax to adopt.
• highly uneconomical especially for the smaller firms since it requires them to
maintain elaborate and costly accounts.
• It needs an honest and efficient government tax administrative machinery. It is
necessary that the country adopting this tax should be sufficiently advanced in its
financial and economic structure and the firms should be in the habit of keeping
proper accounts.
• The door for evasion is not fully closed. Records may be forged, there may be
backdoor negotiations between the businesses and consumers.
VAT in Ethiopia
• Power of levying - Undesignated power of taxation – art. 99 of FDRE
Cons. (there was argument to exclude VAT from this, considering it as
a sale tax). The joint session of HPR and HoF, in April 2002,
designated the power to levy VAT to the Federal Government.
Regional governments can collect VAT on behalf of the Federal
Government by delegation.
• But, in 2004, the federal government adopt a formula which split a
30/70.
• New proc. VAT - assessed and collected by the Ministry of Revenue
or the Customs Commission, as appropriate. However, the Ministry of
Revenue may delegate the Regional and City Administration Revenue
Bureaus to assess and collect the Value Added Tax on its behalf. Art 4
• Art 8. Imposition of Value Added - Value added tax shall be imposed
on the following: a) a taxable supply made by a registered person; b) a
taxable import made by any person; and c) a reverse charged supply
made to a registered person, Government entity
• A Reverse Charged Supply refers to a situation where the
responsibility for reporting and paying the VAT shifts from the seller
(supplier) to the buyer (customer).
• Art 6 Where a registered person carries on a taxable activity both in
and outside Ethiopia and there is an internal provision of services
from the part of the taxable activity carried on outside Ethiopia to the
part of the taxable activity carried on in Ethiopia, the internal
provision of services shall be treated as a reverse charged supply
• Taxable activity - any activity carried on continuously or regularly by a
person that involves the supply of goods or services to any other person
for consideration shall be a taxable activity. Art 7 of proc. 1341/2024
• VAT is unthinkable without supply of goods and/or services.
• But if it is a registered person, whether or not carried on continuously or
regularly. Thus, frequency of the activity is immaterial.
• Taxable Supply” means: a supply of goods or services that is made in
Ethiopia by a person in the course or furtherance of a taxable activity
carried on by the person, other than an exempt supply. Art 2(47)
• supplies that are not related to or connected with the business activity,
such as sales of personal property by a taxpayer are not made in in the
course or furtherance of a taxable activity
• personal consumption of business goods (called withdrawal of goods
for personal consumption) constitutes a supply in the course or
furtherance of a taxable activity.
Rate of VAT Art 8 (2)
• The rate of VAT shall be:
• a) for a taxable supply that is a Zero-rated supply, Zero percent, or
• b) in any other case 15 percent
• Art 9 Zero-Rated Supply - Schedule 1 attached to this Proclamation
• the supply is an export of goods;
• the supply of goods is made in the course of repairing, renovating,
modifying, or treating temporarily imported goods
• EXPORTS OF SERVICES - A supply of services shall be a zero-rated
supply if:
• (a) the services are for use or consumption outside Ethiopia. E.g
financial consulting, and insurance to clients in other countries,
software development, Online education, language teaching
• (b) the services are supplied directly in connection with goods that
are temporarily imported goods provided the goods are not imported
into Ethiopia for more than 12 calendar months;
• c) international transport services
• d) when the service is directly provided in another country
• DOMESTIC ZERO-RATED SUPPLIES
• (A) a supply of goods or services as part of the transfer of a taxable
activity, by a registered person to another registered person where all
the following conditions are satisfied:
• (i) all the goods or services necessary for the continued operation of
the taxable activity, are supplied to the transferee;
• (ii) the transferor carries on the taxable activity until the day of
transfer;
• (iii) the transferee will not carry on the taxable activity to make
exempt supplies and will not use the goods or services for private use;
• (B) a supply of gold to the National Bank of Ethiopia. why?
• Monetary Policy: national banks are responsible for managing
national currency reserves, including holding gold as part of their
reserves.
• Gold is also viewed as a form financial asset rather than a consumer
good. When central banks acquire gold, they are doing so primarily to
hold it as part of their national reserves and not for consumption or
use in the ordinary market economy.
• International practice, e.g. guidelines of IMF
• Art 10. Exempt Supply - specified in Schedule 2 attached
• (a) a sale of residential premises (to reduce Residential Housing
problems);
• (b) a lease of residential premises, other than a lease for a term of
less than 2 months; Commercial Nature of Short-Term Rentals,
Standardization of VAT Application: Many VAT systems apply VAT to
services that are short-term or temporary in nature, like hotel stays
(consistency in taxing similar services), Revenue Generation (VAT on
short-term rentals can be a source of revenue for the government,
especially in high-tourism areas or cities where short-term rentals are
common)
• (d) a supply of an education materials and “education course”
• (e) a supply of child-care services by a licensed provider of such
services;
• (f) a supply of medical services; provided by a health professional or
medicinal professional licensed under the Food, Medicine and
Health Care Administration and Control Proclamation
• (g) a supply of a prescription medicine;
• (h) a supply of public transport services;
• (i) a supply of religious or church-related services by a religious
organisation;
• (j) a supply of medical equipment, medical device, a mosquito net;
• a supply of seeds, fertiliser, pesticides, herbicides, or fungicides for
use exclusively in agricultural activities
• supply of drinking water excluding bottled water (however not
exceeding the monthly consumption determined by the directive
issued by the Ministry of Revenue)
• supply of electricity (not exceeding the monthly consumption
determined by the directive issued by the Ministry),
• Any supplies of a person where 60% or more of his employees are
disabled;
• food supplies as determined by the Directives issued by the Ministry;
• a supply of ambulance and fire accident vehicles and equipment.
• Directive 1006 /2024 – ministry of finance
• Cereals and pulses: Teff, wheat, barley, maize, sorghum, zengada
(Ethiopian millet), dagusa (Finger millet), oats, peas, beans, lentil,
soyabean; chickpeas, lupin bean (gebeto), grass pea (lathyrus sativus)
and other similar grains and powder of these
• Agricultural inputs: Fertilizer, pesticides, seed, veterinary medicine
and drug sprayer
• Injera, bread and milk
• Anti-malarial mosquito nets, condoms and chemicals for water
treatment
• Import and local production of food oil
• Import and local production of rice
• Import and local production of pasta and macaroni
• Eggs
Tax payers

• Taxpayers here, to mean, the statutory ones or the immediate burden

• Art. 3 of VAT proclamation. As far as taxpayers are concerned, three types of persons
have been identified. These are;
• registered persons (Registration for VAT/arts. 16-18 of VAT proclamation, arts. 8-9 of
VAT regulation)
• Types of registration
• Cancellation of registration/ art. 19 of VAT proclamation, art. 10 of VAT regulation,
• persons who import goods and
• non-resident persons who import services to Ethiopia (pay tax as per art.
23 of VAT proclamation –reverse taxation. See also, art. 12 of VAT
regulation).
Tax base

• VAT is unthinkable without supply of goods and/or services. Thus, it is important to know them.
• What constitutes Supply of Goods and Rendition of Services is provided under Art. 4 of the
VATP. Goods defined under art. 2(7) VATP; service under art. 2(16) VATP. Regarding the
meaning of the terms Supply; Supply of Goods and Rendition of Services, see, arts. 2 (17-19) of
VATP.
• Thus, Supplies of goods or services are therefore understood as ‘sale’, ‘grant’ ‘transfer’ or
‘rendition’ of goods or services.
• See also, Mixed supply (art. 5 of VATP). Different supplies in one transaction. if z transactions
considered as incidental to z main activity (z taxable transaction), z former will be considered as
part of z latter hence not considered as mixed supply. but, if z transactions involved separate
transactions/not incidental/, zer is mixed supply. plus, if z other transaction involved with z
main taxable activity is z one which could be exempt transaction if done separately, it will be
considered as mixed supply. See, the examples.
• See also, art. 3 of VATR.
Taxable Transactions

• However, to apply VAT, the Supply of Goods and Rendition of Services must be a
taxable transaction.
• Article 7(3) of the VATP defines a taxable transaction. At least three elements;
• supply of goods or services. (as defined above).
• occurs in Ethiopia;
• in the course or furtherance of a taxable activity. The phrase ‘in the course or
furtherance of…’ might at first be puzzling until we realize that the phrase is
intended to capture all the multifarious forms of supplies ‘in connection’ with
a taxable activity. See art. 4 of VATP and art. 3 of VATR, to acknowledge how
expansive the law is to include many activities as done to further taxable
activity and to consider them as supply subject to VAT.
Taxable Transactions

• The only supplies that are not considered to be ‘in the course or furtherance of a
taxable activity’ are those supplies that are not related to or connected with the
business activity, such as sales of personal property by a taxpayer. Whether a
supply is in the course or furtherance of a taxable activity, of course, depends on
the facts and circumstances of each case. VAT laws are indifferent to the purposes
for which or the circumstances under which supplies are made. As we saw above,
even personal consumption of business goods (called withdrawal of goods for
personal consumption) constitutes a supply in the course or furtherance of a
taxable activity. See also art. 4 of VATR (explain ‘in furtherance/course’).
Taxable Transactions

• Taxable activity- art. 6 of VATP. at least three elements the definition consists.
• An activity. What activity? The Amharic version (both its caption and content) makes it clear- business
activity. Yet, business activity, is not defined under VAT laws, unless we apply the understanding of
‘business’ in other laws, for the purpose of VAT too.
• be continuous or regular; (no more applicable). a registered person whether or not carried on
continuously or regularly. Thus, frequency of the activity is immaterial.
• involve or be intended to involve a supply for consideration. Consideration vs. profit (TKM vs. TRF).
• be carried on in Ethiopia or partly in Ethiopia.
• See, art. 2 (3) of VAT amendment. According to the amendment, taxable
activity means an activity which is carried on by a registered person whether
or not carried on continuously or regularly.
• so, does it mean, as long as a registered person involves in the supply of
goods/services mentioned under art.4/5, it is taxable? seems.
Taxable Transactions

• Taxable transaction vs. taxable activity. The former is about the identity of transactions subject to
VAT/TAX YEMEKEFELEBACHEW GEBEYETOCH/. Taxable activity/TAX
YEMIKEFELEBET YE NEGED SRA ENKESEKASA/ is seems referring to the person supplying
the goods/services. It is business person/registered person. The former is about transaction while
the latter is about the person.
• To impose VAT, the activity should qualify a taxable transaction. To impose VAT on the taxable
transaction the activity should be undertaken in the course or furtherance of a taxable activity. This
mean, it is not required for the activity concerned to be a taxable activity by itself (treated as a
business) as long as the transaction is carried in the context of a taxable activity (in the process of
running business).
• Therefore, being a taxable activity is not the requirement for the application of VAT (being done in
the course is suffice). What is important and determine the scope of application of VAT is taxable
transaction (the activity should qualify taxable transaction, not taxable activity).
Exempted transactions

• When we say exempt transactions, we mean that the supplier of goods or services
is not expected to collect tax from the consumers. This is because persons
supplying exempt transactions are totally out of the ambit of the VAT system.
• As such, the suppliers are not obliged to discharge any obligation in relation to
collection of VAT and they are not entitled to any benefit such as input tax
crediting. When the transactions are exempt transactions the consumers consume
the goods or services without paying VAT beyond and above the price.
• Exempted transactions/ art. 8 of VAT proclamation, arts. 19-33 of VAT regulation,
2 (5) of amendment VAT proclamation. See these transactions along with the
justifications for doing so.
Exempted transactions

• public policy reasons for the exemptions. We may, however, generalize the policies into two.
• First, motivated by the desire on the part of the government to encourage consumption of
certain goods and services. Many of the exemptions fall in this category. merit goods like
education, health and medical services, as well as those for books and transportation.
• Second, Certain types of transactions in goods and services have proved difficult for
conventional VATs to apply because of the technical challenges involved in levying VAT on
these transactions. In this category of exemptions, we place the exemptions granted for the
supply of residential houses, investment instruments like shares and bonds and the supplies
of financial services (technical difficulties involved in identifying and isolating the service
charges). Article 8(2)(a) (b) (c) VAT proclamation VATP; Articles 19, 20, and 21 VAT
régulation VATRs.
• Exemptions by The Ministry of Finance. The exemptions for supplies of bread, injera, milk
and agricultural inputs are some of the lists of goods added by the Ministry
Determining taxable value

• Place, Time and Value of Supplies/arts. 9-15 of VAT proclamation, art. 6, 7 of VAT regulation, Art. 2 (6, 7
and 8) of VAT amendment proclamation replaced art. 11 (6,7, 8 of VAT proclamation),
• VAT can be computed exclusive or inclusive of the tax itself. (VAT inclusive price vs. VAT exclusive price).
• VAT exclusive of the price, with tax invoices showing the price of the good separately from the VAT. So with
a 15% VAT rate, a 100 ETB good will be sold for a total of 115 ETB, 15 ETB being exclusive of the price of
the good. This method of computing VAT is (or should be) followed in all transactions where VAT is clearly
known to apply and where it is easy to apply VAT this way.
• VAT may also be computed inclusive of the tax, which is expressed in a formula: price (inclusive) SIBAZA
VAT rate SYKAFEL (100 +VAT rate)= amount of VAT Hence a price inclusive of VAT in the above example
would yield the following result: (115 SYBAZA 15) SYKAFEL (100 +15) = 15
• This method ensures that the taxpayer who uses VAT exclusive method and the taxpayer who is subject to
the VAT inclusive method are both subject to the same tax rate (15% in the above example) and collect the
same amount of tax (15 ETB in the example).
• The VAT inclusive method is not recommended on transparency grounds. The VAT inclusive method of
calculation ensures that the VAT remains the same whether the goods are sold exclusive or inclusive of VAT.
Tax rate

• Most of the time, it is recommended that VAT should be imposed, as much as

possible, with a few level of rates. This is so because it is helpful to avoid
administrative complexities that emanate from the need to segregate which supply
is imposed at which tax rate.
• Motivated by this administrative ease reason, Art. 7 of the VAT proclamation
provides two level of rates – flat rate of 15% and zero rate.
• Hence, in Ethiopia, as a matter of rule all taxable supplies, are taxed at a flat rate
of 15%. But, there are exceptions to this rule, the zero-rated ones.
• It makes no difference whether the supply is a domestic supply of goods or
services or whether the supply involves import of goods or services.
• Zero rate transactions/art. 7 (2) of VAT proclamation, arts. 34-38 of VAT
regulation. See these transactions along with the justifications for doing so.
• As the name indicates no tax is actually collected since the rate is zero. This
means that although those persons supplying zero-rated transactions are within the
ambit of VAT, they collect no VAT from consumers.
• Most of the time, supplies are zero-rated to encourage exporters so as to enable
them to compete in international trade.
• What is the importance of zero-rated transaction? Rebate.
• Zero-rated vs. exempt transactions
• To the extent that no VAT is collected, both are similar/both of them generate no VAT revenue
to the government.
• zero-rating operates within the VAT system while exempt transactions are out of the reach of
the VAT system.
• Those taxpayers who are engaged in supply of zero-rated transactions are entitled to tax
crediting for the VAT they pay while purchasing their inputs. However, persons engaged in
supply of exempt transactions are not entitled to tax crediting.
• From the perspective of their own justifications, they may be different. While zero rate is
more of to encourage exports, exemption is for social and technical reasons.
Registration for VAT

• Registration performs certain administrative functions in VAT. It is primarily designed to

provide government with the necessary information needed to assess and collect VAT
from taxpayers.
• Registration is what brings businesses within the network of VAT administration. Those
businesses that are registered for VAT are required to perform certain duties from time to
time, like; Articles 20 and 22 VATP.
• issuing invoices on transactions,
• collecting the VAT due and
• transmitting the proceeds to the government.
• Those who are registered are also entitled to certain privileges not available to
unregistered persons. The most important privilege is;
• the right to obtain tax credits for VAT paid on purchases or inputs. Article 21 VATP.
• The basic rationale for VAT registration threshold is administrative.
• It is generally assumed that those businesses whose annual turnovers exceed a certain
threshold possess the administrative capacity to comply with the recording and
accounting requirement of VAT, such as the capacity to issue VAT invoices. The
threshold is set at a fairly high turnover solely on this ground.
• Seven codes
• Code one (starts with the features of VAT). 1, 2, 3, 4, 5, 6, 7. Original.
• Code two (starts with the rate of VAT in Ethiopia). 7, 6, 5, 4, 3, 2, 1.
• Code three (starts with the advantages of VAT). 3, 6, 1, 4, 7, 2, 5.
• Code four (starts with taxpayers of VAT in Ethiopia). 5, 2, 4, 6, 7, 1, 3.
• Code five (starts with VAT regime of Ethiopia). 4, 6, 1, 5, 7, 3, 2.
• Code six (starts with consumption type of VAT). 2, 7, 5, 6, 1, 3, 4,
• Code seven (starts with zero rate and exempt transactions). 6, 1, 7, 3, 4, 2, 5.
ToT

• It share many features of VAT

• It is an indirect tax. Imposed on consumption– persons who supply goods and services
• The ultimate burden to pay rests on the consumers.
• It is a multi-stage tax.
• Art. 2(11) of Proclamation 308/2002. From this sub-article, one can further
understand that there is no turnover tax in the absence of transaction of sale of
goods and services.
• Its difference from VAT
• Threshold. Transactions below 2 million Birr subject to TOT. Transactions above
this figure are dealt with VAT laws.
• The basic rationale for VAT registration threshold is administrative. It is generally
assumed that those businesses whose annual turnovers exceed a certain threshold
possess the administrative capacity to comply with the recording and accounting
requirement of VAT, such as the capacity to issue VAT invoices. The threshold is
set at a fairly high turnover solely on this ground. See, the preamble of ToTP
(second paragraph).
• Base. VAT is imposed on value-added while turnover tax is imposed on the gross
transaction.
• Why TOT introduced in addition to VAT/see, the preamble of the TOT proclamation
• designed to regulate kinds of sales taxes which are not covered by the VAT proclamation. We
can gather that when we have a glance at the second paragraph of the preamble of the
Turnover Tax proclamation.
• From the above-cited preamble of the Turnover Tax Proclamation, it is possible to
understand that the division of such family of sales taxes is (VAT and TOT) is created for
feasibility of administration. Had it not been for such considerations, all sales transactions
would have been covered under the VAT Proclamation. Because of administrative reason, it
is hard to subject all for VAT, hence TOT is designed for those out of VAT.
• The other thing that we can gather from the preamble is that in addition to being means of
generating revenue, turnover tax is aimed at achieving commercial fairness by subjecting
those transactions below 500,000.00 to pay a turnover tax.
• The other reason is to complete the tax coverage. TOT completes Ethiopian sales tax
Base of Turnover Tax
• the preamble of Proclamation No 308/2002 and Art. 3 the same proclamation,
• Therefore, the scope of application of this proclamation can be understood in terms of the following
elements.
• a) supply of goods
• Art. 2 (17) of the Value-add Tax Proclamation for ‘supply’. Art. 2(1) of TOT proclamation. Art. 2(7)
of the Turnover Tax proclamation
• b) rendition of services
• c) persons not registered for VAT
• the turnover tax is applicable to those persons (who supply goods and services) who are not registered
for value-added tax. However, turnover tax is not applicable to import of goods and import of services
as provided under Art. 3(1(c) and Art. 23 of the Value added Tax Proclamation.
• TOT not applicable to import of goods/services. Turnover tax is applicable to goods or services
supplied locally.
• Art. 5. the base of computation of the turnover tax is the gross receipts of goods and services
rendered. According to Art. 2(2) of Proclamation No 308/2002 by gross receipts is meant income
without reduction of expenses, including the cost of goods sold.
Rate and exemption of TOT

• You can also notice from art. 4 that turnover tax is also of regressive character.
This is because a flat rate of 2% (two percent) is applied to all sales of goods and
services involving grain mills, contractors, tractors and combine-harvesters and a
flat rate of 10% (ten percent) is applied to all other services.
• Art. 7. Nearly all countries exempt some supplies for distributional objectives
whereby some social services that are basic consumers’ necessity, such as health
care, education, welfare and cultural activities are exempted.
• The list is not exhaustive. 7/ 2 & 3/
ToT