Public Finance and

Taxation
BY
REDWAN KELIL
Basics of Public Finance
 Basics of Public Finance
1.1. Definition of public finance
1.2. Scope of public finance
1.3. The role of government in the economy
1.4. Public expenditure
1.5. Public revenue
1.6. Public debt
1.7. Public administration
1.8. Fiscal federalism
 Understand public
finance ,role and its functions,
differentiate public revenues,
expenditures, debt (1 mark)
 Definition of public finance
• Governments, all over the world have started
number of public projects. To provide social
facilities, the government requires adequate
revenue.
• Public Finance, therefore, deals with the
income and expenditure of public authorities.
• Public finance deals with how and through
what different sources the government gets
income, how it spends it and how it controls
and administers its incomes and
expenditures.
• It lie on the borderline between Economics
and Politics.
 Scope of Public Finance
The subject matter of the public finance is
classifies under five broad categories.
1. Public Revenue
2. Public Expenditure
3. Public Debt
4. Financial Administration and Control, and
5. Economic Stability and Growth.
 Public Revenue
• This is one of the branches of public finance. It
deals with the various sources from which the
state might derive its income.
• These sources include incomes from taxes,
commercial revenues in the form of prices of
goods and services supplied by public
enterprises, administrative revenues in the
form of fees, fines etc and gifts and grants.
Public revenue vs Public receipts
• Public revenue includes that income which is
not subject to repayment by the government.
Public receipts include all the income of the
government including public borrowing and
issue of new currency. In this way public
revenue is a part of public receipts.
• Public Receipts = Public revenue + Public
borrowing + issue of new currency
 Basic Categories of Government
Receipt
• Capital Receipts
• Revenue Receipts
 Revenue Receipts

It includes “routine” and “earned” ones

1. Tax-revenue
2. Non-tax revenue.
 Tax-revenue
i. Taxes on income
It covers corporation tax, income tax and similar other taxes, if
any, in force.
ii. Taxes on property and capital transactions
taxes on specific forms of wealth and its transfers such
as estate duty, wealth tax, gift tax, house tax, land revenue
and stamps and registration fees, etc.
iii. Taxes on commodities and services
This section includes taxes on production, sale, purchase,
transport, storage, and consumption of goods and services.
 Non-tax Revenue Receipt
➢ This category covers the receipts of Currency Notes Press, Mints and
Profit from circulation of small coins.
➢ Interest receipts on loans by the government to other parties,
➢ Dividends and profits from public sector undertaking.
2. Non-tax Revenue Receipt
i. Currency, coinage and mint:
ii. Interest receipts, dividends and profits:
E.g contributions from railways and posts and telecommunications,
iii. Other non–tax revenue:
➢ It covers revenue from various government activities and services such
as from administrative services, public service commission, police, jails
, agricultural and allied services, industry and minerals, water and
power development services, transport and communications, supplies
and disposal, public works, education, housing, information and
publicity, broadcasting, grants-in-aid and contributions etc.
 Capital Receipts
Capital receipts of the government take money
forms. The most important one comprises of
borrowings which can be classified in terms of
their origin and maturity
• on the basis of origin, public borrowings may be
external (outside the country), or internal (with
in the country).
• In terms of maturity, there may be, ”long term”,
“medium term”, or “short term” loans with
specific demarcation of boundaries for each.
 Public Spending/expenditure
• PE is incurred by public authorities - either for
the satisfaction of collective needs of the
citizens or for promoting their economic and
social welfare. It is incurred by the
government for the attainment of public good.
• Therefore public expenditure, deals with the
expenditure which a government incur for its
own maintenance, the society and the
economy and helping other countries.
 Current and Capital Expenditure
• Technically, in the structure of a budget, most
governments classify public expenditure into
two:

(i) Current expenditure, and

(ii) Capital expenditure
 Objectives of Public Expenditure
• Dr. Dalton divided the aims of public
expenditure into two parts:
(i) Security of life against the external aggression
and internal disorder and injustice.

(ii) Development or up gradation of social life in

the community.
 Canons of Public Expenditure
It used for the fundamental rules or principles governing
the spending policy of the government. According to
Prof. Findley Shirras, the canons are:
• Canon of Benefit
• Canon of Economy
• Canon of sanction
• Canon of Surplus
• Canon of Elasticity
• Canon of Productivity
• Canon of Equity
• Canon of certainty.
 Canons of Public Expenditure
1. Canon of Benefit. Public expenditure should
be so planned and implemented as to bring
about the greatest possible benefit to society.
2. Canon of economy. Public expenditure should
be incurred carefully so that there is no
wastage of funds.
3. Canon of sanction: This cannon suggests that
no public spending should be made without
the approval of proper authority.
 Canons of Public Expenditure
4. Canon of surplus. This canon requires that
expenditure of public authorities should be
kept within the limits of current revenues.
5. Canon of elasticity. Canon of elasticity
requires that the rules of public expenditure
should not be too rigid to achieve the real
purpose and that it should be allowed to vary
according to the needs and circumstances.
 Canons of Public Expenditure
• Canon of Productivity: This canon or principle implies that
the expenditure policy of the Governments should be
such that would encourage production in a country.
• Canon of Equity: One of the foremost aims of public
expenditure is also to ensure the just and equitable
distribution of is more significant for the countries where
the gap between the highest income and the lowest
income groups is very wide.
• Canon of certainty. This canon requires that public
authorities should clearly know the purpose and extent of
public expenditure. The spending unit should be certain
as to the amount and objective of public expenditure.
• Canon of Equality: The subjects of every state
ought to contribute towards the support of
the government, as nearly as possible, in
proportion to their respective abilities;
 PUBLIC DEBT
• Public debt is of recent growth and was unheard
of prior to the 18th century. In modern times,
however, borrowing by the States has become a
normal method of government finance.
 Classification of public debt
➢ Source of Borrowing (internal debt and external
debt)
➢ Purpose of the loan (Productive and
unproductive debt)
➢ According to nature (Compulsory and voluntary
debt)
➢ Funded and unfunded debt for (creating a
permanent asset meant to meet current needs)
➢ Time Duration of loan(short, medium, and long
term loan).
 REDEMPTION OF PUBLIC DEBT
• Repudiation of Debt. Repudiation of debt
means simply that the government refuses to
pay the interest as well as the principal.
• Conversion of Loans:-
• Serial Bond Redemption
• Sinking Fund.
 What Is Fiscal Policy?
• FISCAL policy is the use of government spending
and taxation to influence the economy.
Governments typically use fiscal policy to
promote strong and sustainable growth and
reduce poverty.
 Public finance Vs Private finance

Similarities between Public Finance and Private

Finance:
• Satisfaction of Human Wants:
• Balancing of Income and Expenditure:
• Maximum Satisfaction:
• Borrowing a Common Feature:
• Economic Choice a Common Problem:
 Differences between Public Finance and
Private Finance:
1. Adjustment of Income and
Expenditure(investment and financing)
2. Nature of Benefit: (individual and collective)
3. Postponement of Expenditure:
4. Allocation of Resources: (maximum satisfaction
& maximum social welfare)
5. Motive of expenditure: expects return & social
welfare and economic development
6. Influence on expenditure: customs, habits
culture religion & policy
 Differences between Public Finance and
Private Finance:
7. Nature of Perspective: (quick return
ling term perspective)
8. Nature of Budget:
9. Nature of resources: (enormous kinds of
resources & limited resources)
12. Audit: (subject to audit )
11. Publicity: (disclose)
10. Coercion: (use force to get their income)
 Q1
1. Similarities between public and private
finance include:
A. Both aim at balancing income and expenditure
B. Both try making the best use of available scarce
resources
C. Both need to borrow in order to cover the gap
between the income and expenditure.
D. All of the above
 Q2
All of the following are the Roles of public expenditure
EXCEPT:
A. Public expenditure plays a vital role in development and
promotion of social overheads such as hospitals, schools, roads
etc.
B. The growth of rural and under developed areas is entirely
dependent on public expenditure.
C. Public expenditure is used extensively in the agricultural sector
for formulating irrigation network, seed farms, fertilizers etc.
D. The time, effort and money spent on the exploration and
extraction of minerals resources are derived out of the public
expenditure.
E. None
 Q3
Which is the main point on the basis of which
public finance can be separated from private
finance:
(a) Price policy
(b) Borrowings
(c) Secrecy
(d) Elasticity in income
 Q4
Which one of the following is not a method for
redeeming public debt?
A) Sinking fund
B) refinancing
C) Terminal annuities
D) Grants in aid
 Q5
Deficit financing may lead to:
A) Poverty
B) Unemployment
C) Inflation
D) Deflation
 Q6
Which of the following is not a fiscal Policy
instrument?
a) Interest rate
b) Public expenditure
c) Taxation
d) budget
Meaning and Characteristics of Taxation

2.1. Objectives of taxation

2.2. Principles of taxation
2.3. Tax classifications
2.4. Tax rate structures
2.5. Shifting and incidence of taxation
2.6. Tax evasion, avoidance and delinquency
 Explain the meaning, objectives and
classifications of taxations, identify tax rate
structures (1)
37
2.1. Meaning and Characteristics
of Taxation
• In every country major part of the revenue is
raised through taxation.
• According to Prof. Taylor “Taxes are
compulsory payments to gov­ernments
without expectations of direct return or
benefit to the tax payer”
• Taxes are payments people are required to pay
to local, state and national governments.
• Taxes are used to pay for services provided by
government:
– Schools
– Police
– Defense
– Etc.
 GENERAL CHARACTERISTICS OF TAX:
• Tax is a Compulsory Contribution:
• Benefit is not the Basic Condition:
• Personal Obligation:
• Common Interest:
• Legal Collection:
• Element of Sacrifice:
• Regular and Periodical Payment:
• No Discrimination:
• Wide Scope:
 Objectives of taxation
• Raising Revenue:
• Tax system reduces inequalities
• Discourage undesirable activities
• Allocate Resources
• Capital Accumulation and saving
• Reduction in Regional Imbalances:
• To protect local industries from foreign competition
• Creation of Employment Opportunities:
• Encouragement of Exports:
• Enhancement of Standard of Living:
 Principles of taxation
In this sense, his canons of taxation are
‘classical’ in sense, four canons of taxation are:
(i) Canon of equality or equity
(ii) Canon of certainty
(iii) Canon of economy
(iv) Canon of convenience.
• Modern economists have added more in the list
of canons of taxation, these are:
(v) Canon of productivity
(vi) Canon of elasticity
(vii) Canon of simplicity
(viii) Canon of diversity.
Tax systems
 Single and Multiple tax
systems
• Single tax system is where there is only one
tax in place;

• A single tax means only one kind of tax. It

does not mean tax on only one person. On
other words, a tax on one thing i.e. on one
class of things or one class of people.

• Against this claim note the following

problems:
– identification and choice of an appropriate
49
 Tax
classifications
Direct Versus Indirect Taxes :
Direct Indirect
taxes taxes
A kind of charge, A tax collected by an
which is directly intermediary (such as a
imposed on the retail store) from the
taxpayer & directly person who bears the
paid to the ultimate economic
government by the burden of the tax (such
persons (juristic or as the customer).
natural) & cannot be It can be shifted by the
shifted by the taxpayer to someone
taxpayer to someone else.
else. An indirect tax may
increase the price of a
good so that consumers
 Direct Taxes
• Direct taxes are levied directly on the taxpayer
when receiving the income. Burden or incidence
of taxes falls directly on taxpayers.
• Taxable income under direct taxes is categorized
into four schedules such as Schedule A:
Employment income, Schedule B: Rental
income, Schedule C: Business income, Schedule
D: Other income.
 Indirect Taxes
• Indirect taxes are taxes on goods and services.
They are also referred to as commodity or
consumption taxes, because they are paid
only when a particular transaction of goods or
services occurs. Very often, the taxpayer is not
aware of how much tax he is paying.
• The burden or incidence of indirect taxes falls
indirectly on the ultimate consumer rather
than on the first taxpayer.
 Taxation Systems
The ability to pay taxes can be accurately measured
with net income. It may be considered as an
appropriate basis for the allocation of tax burden
between different sections of the society. To
determine the appropriate tax system, various
factors are to be considered.
The tax systems may be summarized as follows:
1. Proportional Tax System.
2. Progressive Tax System.
3. Regressive Tax System.
 TAX AVOIDANCE AND EVASION
• Tax avoidance and evasions constitute a
problem in almost all the countries of the
world.
• Tax avoidance is different from tax evasion,
while evasion is against the law; avoidance is
within the realm of law.
• Suppression of income and & Inflation of
expenditure.
 Causes of Tax Evasion:
• Multiplicity of Tax Laws:
• Complicated Tax Laws:
• High Rates of Taxation:
• Inadequate Information as to Sources of Tax
Revenue:
• Investment in Real Property:
• Ineffective Tax Enforcement:
• Deterioration of Moral Standards:
 Remedies for Tax Evasion:
• Thorough Overhauling of Tax Laws:
• Reduction in Tax Rates:
• Replacement of Sales Tax & Excise Duties
with VAT:
• Maintenance of Proper Accounts:
• Introduction of Expenditure Tax:
• Tightening of Tax Enforcement:
 tax avoidance
• The tax avoidance can be defined as
“escaping from the tax liability by using the
available loop-holes of the tax laws”.
 Q7
Which one of the following statement cannot be
considered as the principal objective of taxation in the
Ethiopian context?
A. Guarantee economic stability at the federal and
regional administrative levels
B. Increasing regional imbalances among the regional
states and City administrations
C. Raising adequate public revenue that enables the
government to cover its expenditure
D. Redirecting and encouraging public private partnership
in the country
E. All of the above.
 Q8
Canon of taxation that requires the cost of tax
administration to be the minimum compared
with the revenue collected is coined as:
A. Certainty
B. Simplicity
C. Neutrality
D. Economy
E. Fairness
 Q9 & Q10
9. Proportional tax rate structure is a type of tax
system that takes equal amount of birr from
all people regardless of their income.
A. TRUE B. FALSE
10. Tax avoidance usually entails taxpayers
deliberately misrepresenting or concealing the
true state of their affairs to the tax authorities
to reduce their tax liability by illegal way.
A. TRUE B. FALSE
 Q11
Ad Valorom means
A. according to value
B. according to weight
C. according to size
D. according to advertisement costs
 Q12
Incidence of a tax refers to the--------------burden
of tax:
A) Initial
B) Ultimate
C) Intermediate
D) None
 Q13
------ is the device which satisfies the
requirements of the law but not in
accordance with the intentions of the law
• A. Tax evasion
• B. Tax planning
• C. Tax avoidance
• D. Tax management
4. Ethiopian Tax System
4.1. Structure of Ethiopian Tax System and Administration
4.2. Income Taxes
4.3. Consumption Taxes
4.3.1. Value-Added Tax
4.3.2. Turnover Tax
4.3.3. Excise Tax
4.4. Stamp duties
4.5. Foreign Trade Taxes
4.5.1. Custom duties
4.5.2. Import Procedures
4.5.3. Export Procedures
4.5.4. Sur-Tax
Prepare tax returns for the tax payers and
conduct tax assessment and manage tax
revenue for the government
(2 marks)
Income Tax in Ethiopia
 Cont’d…..

• According to Proc. No. 979/2016:

• “Income” means every form of economic

benefit, including non-recurring gains, in cash
or kind from whatever source derived and in
whatever form paid, credited, or received;
 Categories of Taxpayer

a) Category “A” taxpayer being

1/a body
2/any other person having an annual gross
income of Birr 1,000,000 or more;
b) Category “B” taxpayer being a person, other than a
body, having an annual gross income of Birr 500,000
or more but less than 1,000,000

c) Category “C” taxpayer being a person other than a

body, having an annual gross income of less than Birr
500,000
 Scope of Application
 This Proclamation shall apply to residents of
Ethiopia with respect to their worldwide
income.

 This Proclamation shall apply to non-residents

with respect to their Ethiopian source income.
 Schedules of Income

 The tax system is scheduler system

a) Schedule ‘A’, income from employment;

b) Schedule ‘B’, income from rental of buildings;
c) Schedule ‘C’, income from business;
d) Schedule ‘D’, other income;
e) Schedule ‘E’, exempt income
 SCHEDULE ‘A’ –
EMPLOYMENT INCOME TAX

Who pays this tax?

 Every employee is required to pay a portion of

his/her monthly employment income in the form of
tax to the government.
 Cont’d

• Article 2(7), 979/2016

“Employee” means an individual engaged,

whether on a permanent or temporary basis, to
perform services under the direction and control
of another person, other than as an independent
contractor, and includes a director or other holder
of an office in the management of a body, and
government appointees and elected persons
holding public offices;
Employment Income Tax Rates
Art. 11 (979/2016)
Tax on other Employment Incomes
• Bonus
• Termination
• Annual leave
• Double employed
• Overtime
• Transportation allowance
• Hardship allowance
• Desert allowance
• Per diem allowance
 SCHEDULE ‘B’ –
INCOME FROM RENTAL OF BUILDINGS

• Rental income tax shall be imposed for each

tax year at the rate or rates specified in Art. 14
(979/2016) on a person renting out a building
or buildings who has taxable rental income for
the year.
Rental Income Tax Rates
(Art. 14 (979/2016) )
 Cont’d…..

Taxable Rental Income:

The taxable rental income of a taxpayer for a

tax year is the gross amount of income
derived by the taxpayer from the rental of a
building or buildings for the year reduced by
the total amount of deductions allowed to the
taxpayer for the year.
 Cont’d…..
 According to Art. 15/2 (979/2016):
 The gross amount of income derived by a taxpayer from the
rental of a building for a tax year shall include the following:
a) all amounts derived by the taxpayer during the year under
the lease agreement, including any lease premium or
similar amount;

b) all payments made by the lessee during the year on behalf

of the lessor according to the lease agreement;
 Cont’d…..

c) the amount of any bond, security, or similar

amount that, during the year, the taxpayer is
entitled to retain as a result of damage to the
building and that has not been used by the
taxpayer in repairing the damage to the building;

d) the value of any renovation or improvement

made under the lease agreement to the land or
building when the cost was borne by the lessee in
addition to the rent payable to the taxpayer.
 Cont’d…..

• If a taxpayer leases a furnished building, the

gross amount of income derived by the
taxpayer from the lease of the building shall
include any amount attributable to the lease
of the furniture or equipment.

• The gross amount of income derived by a

taxpayer from the lease of a building shall not
include exempt income.
 Cont’d…..

• In computing the taxable rental income for a tax year

of a taxpayer who does not maintain books of
account, a deduction shall be allowed for the following
amounts:

a) any fees & charges, but not tax, levied by a State or city
administration in respect of the land or building leased &
paid by the taxpayer during the year;

b) an amount equal to fifty present (50%) of the gross rental

income derived by the taxpayer for the year as an
allowance for the repair, maintenance, and depreciation
of the building, furniture, & equipment.
 Cont’d…..

• In computing the taxable rental income for a tax year

of a taxpayer who maintains books of account, a
deduction shall be allowed for any expenditures
incurred by the taxpayer in deriving rental income
and paid during the year including:
a) the cost of the lease of land on which the building is
situated;
b) repairs and maintenance;
c) depreciation of the building, furniture and equipment;
d) interest and insurance premiums; and
e) fees and charges, but not tax, levied by a State or city
administration in respect of the land or building leased.
 Cont’d…..
According to Art. 17/1 & 2 (979/2016),
New Rental Building Notification:

1) At the earlier of the time construction of a rental building

is completed or when the building is rented, the owner of
the building and the builder shall notify the Kebele
administration and local administration in which the
building is located about the completion and the name,
address, and TIN of the person or persons liable for rental
income tax with respect to the building.

2) The Kebele administration and local administration shall

communicate the information contained in the
notification to the Authority.
Sub lease
 SCHEDULE ‘C’ –
INCOME FROM BUSINESS

Business Income Tax shall be imposed for

each tax year at the rate or rates specified in
Art. 19 (979/2016) on a person conducting
business that has taxable income for the year.
 INCOME FROM BUSINESS
(Art. 19 (979/2016) )

1) The rate of business income tax applicable to a body is [30%].

2) The rates of business income tax applicable to an individual are:
 Cont’d…..
Taxable Income:

1. The taxable income of a taxpayer for a tax year shall

be the total business income of the taxpayer for the
year reduced by the total deductions allowed to the
taxpayer for the year.

2. The taxable income of a taxpayer for a tax year shall

be determined in accordance with the profit and
loss, or income statement, of the taxpayer for the
year prepared in accordance with the financial
reporting standards.
 Cont’d…..
Deductible Expenditures:

a) any expenditure to the extent necessarily incurred

by the taxpayer during the year in deriving, securing,
and maintaining amounts included in business
income;

b) the cost of trading stock disposed of by the taxpayer

during the year as determined in accordance with
the financial reporting standards;
 Cont’d…..

c) the total amount by which the depreciable assets and

business intangibles of the taxpayer have declined in
value during the year from use in deriving business
income as determined under Article 25 of the
Proclamation;
d) a loss on disposal of a business asset (other than
trading stock) disposed of by the taxpayer during the
year;
e) any other amount allowed as a deduction to the
taxpayer under the Proclamation for the year.
 Cont’d…..
Interest Expenditure

1) Subject to this Article and Article 46 of the

Proclamation, in determining the taxable income of
a taxpayer for a tax year,

“the taxpayer shall be allowed a deduction for any

interest incurred by the taxpayer in a tax year if the
taxpayer has used the proceeds or benefit of the debt
or other instrument or agreement that gives rise to the
interest to derive business income.”
 Cont’d…..
• No deduction shall be allowed for the following:

a) interest paid or payable by a taxpayer in excess of the

rate used between the National Bank of Ethiopia and
commercial banks increased by 2 percentage points
unless the interest is paid to:
 A financial institution recognised by the National Bank of
Ethiopia; or
 A foreign bank permitted to lend to persons in Ethiopia;

b) interest paid or payable by a taxpayer to a related person

who is a resident of Ethiopia except when the interest is
included in the business income of the related person.
 Cont’d…..
Charitable Donations:

The taxpayer shall be allowed a deduction for the amount of a

donation when the donation is made:
a) to a non-profit organisation (Defn. Proc. 621/2009); or
b) in response to an emergency call issued by the Government
to defend the sovereignty and integrity of the country, to
prevent or provide relief in relation to man-made or natural
disasters or an epidemic, or for any other similar cause;

The total deduction allowed to a taxpayer under sub-article (1)

of this Article for a tax year shall not exceed 10% of the taxable
income of the taxpayer for the year.
 Cont’d…..
Depreciations:

The taxpayer shall be allowed a deduction for the amount of

the depreciable assets and business intangibles of the taxpayer
declined in value during the year through use in deriving
business income.

• Buildings:
 On a straight line basis,
 Depreciated annually at 5%,
 Economic life of 20 years
 Post-acquisition capital costs depreciated over the
next twenty years.
 Cont’d…..

• Intangible assets:
 On straight line basis
 Depreciated annually at 10%,
 Economic life of 10 years,
 Post-acquisition capital costs depreciated over the next ten
years.
• Two pools of assets:
– computers, information systems, software products
and data storage equipment 25%;
Declining balance method
Depreciated annually at 25%,
Economic life of 4 years
 Cont’d…..

– All other business assets (Motor, Machineries…):

Declining balance method
Depreciated annually at 20%,
Economic life of 5 years
 Cont’d…..
Bad Debt:

• In the determination of taxable business income, a

deduction is allowed for a bad debt if the following
conditions are met:

– an amount corresponding to this debt was

previously included in the income;
– the debt is written off in the books of the
taxpayer; and
– any legal action to collect the debt has been taken
but the debt is not recoverable.
 Schedule ‘D’, other income
Royalties

‘Royalty income’ means a payment of any kind

received as a consideration for the use of, or the right
to use, any copyright of literary, artistic or scientific
work including cinematography films, and films or
tapes for radio or television broadcasting.

 Income tax at the rate of 5% on the gross amount of

the royalty.
 Cont’d…..
Dividends

1/ A resident of Ethiopia who derives a dividend

shall be liable for income tax at the rate of 10% of the
gross amount of the dividend.

2/ A non-resident who derives an Ethiopian source

dividend that is attributable to a permanent
establishment of the non-resident in Ethiopia shall be
liable for income tax at the rate of 10% on the gross
amount of the dividend.
 Cont’d…..
Interest

1/A resident of Ethiopia who derives interest shall be

liable for income tax at the rate of:

a) in the case a savings deposit with a financial

institution that is a resident of Ethiopia, 5% of the
gross amount of the interest; or

b) in any other case, 10% of the gross amount of the

interest.
 Cont’d…..
Interest

2/ A non-resident who derives Ethiopian source

interest that is attributable to a permanent
establishment of the non-resident in Ethiopia shall be
liable for income tax at the rate of:

a) in the case a savings deposit with a financial

institution that is a resident of Ethiopia, 5% of the gross
amount of the interest; or

b) in any other case, 10% of the gross amount of the

interest.
 Cont’d…..
Income from Games of Chance

1/ A person who derives income from winning at

games of chance held in Ethiopia shall be liable for
income tax at the rate of 15% on the gross amount of
the winnings.

2/ In computing the gross amount of winnings under

sub-article (1) of this Article, no deduction shall be
allowed for any loss incurred by the person from
games of chance.
 Cont’d…..
Income from Games of Chance

3/ Sub-article (1) of this Article shall not apply when

the winnings are less than 1000 Birr.

4/ In this Article, “games of chance” means a game

whose outcome depends primarily on chance rather
than the skill of the participant, including a lottery, card
game, or tombola.
 Cont’d…..
Income from Casual Rentals

1/ A person who derives income from the casual rental

of property in Ethiopia (including any land, building, or
movable property) shall be liable for income tax on the
annual gross rental income at the rate of 15% of the
gross amount of the rental income.
 Cont’d…..
Undistributed Profit

• Tax shall be paid at the rate of 10% on the net

undistributed profit of a body in the tax year to the
extent that it is not reinvested in accordance with
the directive to be issued by the Minister.
 Cont’d…..
Other Income

• A person who derives any income that is not

taxable under Schedule A, B, C, or the other
Articles of this Schedule shall be liable for
income tax at the rate of 15% on the gross
amount of the income.
 SCHEDULE ‘E’ –
EXEMPT INCOME
The following provided to an employee to the extent provided for in a Directive issued by the
Minister:

(1) an amount paid by an employer to cover the actual cost of medical

treatment of an employee;
(2) an allowance in lieu of means of transportation granted under a
contract of employment;
(3) a hardship allowance;
(4) an amount as reimbursement of travelling expenses incurred in the
course of employment;
(5) food and beverages provided for free to an employee by an employer
conducting a mining, manufacturing, or agricultural business;
 Cont’d…..
• allowances paid to members and secretaries of
boards of public enterprises, public bodies, or study
groups established by the Federal or a State
Government or City administration;

• contributions by an employer to a pension,

provident, or other retirement fund for the benefit
of an employee provided the monthly total of
contributions does not exceed 15% of the monthly
employment income of the employee;
 Cont’d…..
• allowances paid to members and secretaries of
boards of public enterprises, public bodies, or study
groups established by the Federal or a State
Government or City administration;

• contributions by an employer to a pension,

provident, or other retirement fund for the benefit
of an employee provided the monthly total of
contributions does not exceed 15% of the monthly
employment income of the employee;

• Salaries paid to domestic servants

 Cont’d…..

• an amount exempt from tax to the extent provided

for under an international agreement;
• an amount as compensation for personal injury or
the death of another person;
• a scholarship or bursary for attendance at an
educational institution;

• maintenance or child support payments;

 Q14
• Which one of the following is not allowable deduction for
businesses according to Ethiopian income tax proclamation of
979/2008?
A. Direct cost of producing the income such as the direct cost of
manufacturing, purchasing, importation, selling and such other
similar costs.
B. General and administrative expenses incurred for earning,
securing and maintaining the income.
C. Bad debt written off in the books and legal actions have been
taken for the collection of the debt.
D. Depreciation expense.
E. None of the above
 Q15
• Which one of the following is correct?
A. Taxpayers categorized as ‘A’ are required to declare their
taxable income within four months from the end of the tax
period.
B. Those taxpayers who are categorized as ‘B’ are required to
declare their taxable income within two months from the end
of the tax period
C. Category C taxpayers shall declare taxable income together
with the annual turnover, and the amount derived from the
sources other than the main operation.
D. All of the above
E. None of the above
 Q16
• Allowable deductions for rental income tax payers who
maintain books of records includes
A. depreciation of building, furniture, and equipment in
accordance with their books of accounts and the
regulation income tax proclamation.
B. the cost of lease (rent) of land
C. interest on bank loan, taken for the building, at the rate
permitted as per the income tax proclamation and
National Bank of Ethiopia regulation
D. insurance premium paid on building. E.
All of the above
 Q17
• Which one of the following is wrong?
A. Tax on dividend is a withholding tax at the rate of
10%.
B. A person who earns Br 16,000 from bank deposit
pays tax of Birr 800
C. Value Added Tax (VAT) is a general consumption
tax assessed on the value added to goods and
services
D. All of the above E. None of the above
 Q18
• Turnover tax in Ethiopia is
A. taxed at uniform rate of 2 % for all goods sold
locally
B. imposed on sales of goods and services
D. All of the above
C. category of indirect taxes
E. None of the above
 Q19
• Employment income tax in Ethiopia is
A. a tax on the earnings of an employee.
B. taxed at progressive rate.
C. withheld by the employers.
D. taxed at proportional rate.
E. All except D
 Q20
An Ethiopian citizen working in American
embassy pays employment income tax to
A. both governments of Ethiopia and America.
B. the government of Ethiopia.
C. the government of America.
D. All of the above
E. None of these
 Q21
Canon of taxation that requires tax payers to
understand the tax they pay in time and
amount to lessen errors, enhance compliance
and facilitate tax planning is coined as:
A. Certainty
B. Simplicity
C. Neutrality
D. Fairness
VALUE ADDED TAX
 Imposition of Value Added Tax
Value added tax shall be imposed
• (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, or large
unregistered person.
 The rate of VAT
• (a) for a taxable supply that is a zero-rated
supply, zero percent; or
• (b) in any other case, 15 percent.
 Compulsory Registration
• The registration threshold is 2, 000,000 (Two
Million) Birr or such other amount as specified
in the Directive to be determined by the
Ministry.
 Voluntary Registration
• A person may make an application under Sub-
Article (1) of this Article only if the annual
value of taxable supplies made, or to be made,
by the person exceeds 1, 000,000 (One Million
Ethiopian Birr.
 Value of a Supply
1/ Subject to this Proclamation, the value of a
supply shall be the consideration for the
supply.
2/ The value of a supply shall be the fair market
value of the supply determined at the time of
the supply if the supply is made by a person to
a related person for a price that is less than
the fair market value of the supply (including a
supply made for no consideration).