Fortune News | Oct 22,2022
Federal legislators are wrestling with a bill tabled before Parliament that would overhaul how taxes are levied on land use rights and housing properties, igniting a contentious debate among officials, industry representatives, and taxpayers. The draft legislation, which seeks to grant regional states and municipal authorities the power to impose their respective property taxes within a federally mandated range, is tabled as the federal government plans to broaden its tax base and the regional states reduce dependence on federal coffers.
Drafted jointly by experts from the Finance and Urban Development & Infrastructure ministries, the bill marks the most consequential tax reform attempt in decades. The crux of the debate is the principle of taxing the increased value of properties that benefit from public-funded infrastructure projects. The bill, under review by the Standing Committee for Planning, Budget & Finance, would empower local lawmakers to set tax rates between 0.1pc and one percent.
Supporters within the federal government believe the measure will strengthen local fiscal autonomy by providing regional and municipal administrations with a steady revenue stream to fund infrastructure projects. The policy’s architects argue that this will enhance the financial independence of lower-tier government structures, which currently rely heavily on federal subsidies to cover budget shortfalls. Collectively, policymakers hope the reform can increase the tax-to-GDP ratio to more than 10pc, which is lagging behind the sub-Saharan African average.
The tension within the debate unveiled a larger reality on the fiscal front. The federal government struggles with low revenue collection compared with many African peers, with property taxes currently contributing less than one percent to GDP in most developing countries. Research by Norway-based Chr. Michelsen Institute uncovered that property tax yields account for less than 0.5pc of GDP in many African countries.
The same study found that property taxes make up about 25pc of local government revenue in Kenya, offering a possible model for Ethiopia’s reformers.
Opposition, however, is mounting from industries and interest groups fearing further economic strain.
During a recent public hearing before Parliament, the Ethiopian Pharmaceutical Manufacturers Association (EPMA) took a notable stand against the bill. The Association's President, Daniel Waktola, argued that imposing property taxes on pharmaceutical manufacturers, a fledgling industry struggling with poor returns on investment, could harm its survival. He contended that the sector requires extensive facilities and thus would shoulder a disproportionate burden.
Low returns and high operational costs have long plagued these firms, leaving them ill-prepared for new tax obligations. Daniel pleaded for a temporary exemption for the industry until it becomes more competitive, warning that additional costs risk driving firms out of the market.
"The industry hasn't even begun making a proper return, " he said.
Officials from the Finance Ministry rejected this plea, showing little appetite for exemptions. According to senior tax policy advisor Wassihun Abate, such carve-outs would undermine the broader objectives of building a more robust revenue base and deter development plans. State Minister for Finance Eyob Tekalign (PhD) says the pharmaceutical industry already benefits from policy incentives and should be expected to contribute to government revenue. "There is no such thing as exemption for the pharma industry," he said, "It will only deter development".
The authorities' reluctance to concede shows that they view the new property tax as a decisive measure for fiscal sustainability. It complements the federal and regional governments' plan to collect 1.5 trillion Br in taxes in the 2024-25 fiscal year.
The real estate sector, another embattled industry, has its leaders voiced their apprehensions about the bill. Developers argue that the tax would introduce new financial burdens at a time when high input costs and tepid demand have already eroded their margins.
Solomon Ali, a liaison officer for Gift Real Estate, a major developer with over 3,000 units under its portfolio, questioned the application of property taxes to his industry. He argued that developers are builders rather than owners and should not be liable for long-term levies intended for property holders. According to Solomon, taxing developers and prospective property owners amounts to double taxation and could push up housing prices, adding yet another cost to already-strained buyers.
For Wassihun of the Finance Ministry, real estate developers have themselves contributed to inflated housing prices and the tax plan would help ensure they share in the cost of the infrastructure improvements that enhance their projects’ values.
The draft legislation would replace what is known as the “Wall & Roof Tax,” an outdated system from 1976 that authorities recently revived and amended in Addis Abeba. Local officials say that once the new proclamation is ratified, the city’s existing tax rates will be revised, and previously exempt properties, including condominium units, will be included.
This could directly impact residents like 64-year-old pensioner Getachew Amede, who moved into a condominium in the Arabsa neighbourhood earlier this year. Currently paying a property tax, he finds it difficult to afford with a monthly pension of 5,000 Br; he is worried that a higher, more broadly applied tax regime could strain his limited income even further. Though the new legislation includes provisions for exemptions targeting low-income households, critics question whether such measures will be narrowly defined and adequately enforced.
Officials express fears about possible exploitation of the exemption system. Representatives such as Kibret Mohammed from the Revenues Bureau of the Amhara Regional State warn that institutions, including religious entities holding large tracts of land, could exploit loopholes to avoid tax liabilities. The concern manifested the complexities of enacting a property tax in a country where land ownership is with the state and valuation records remain incomplete and inconsistently maintained.
The recent passage of a law on property valuation, designed to standardise property assessments, provides some groundwork. The new law sets a uniform system for valuing real estate and is planned to roll out across 2,500 cities and towns. Officials intend to rely on private valuators to streamline and ensure accurate property valuations, a critical step in preventing disputes.
According to Helen Debebe, a state minister for Urban Development & Infrastructure, her office would establish a dedicated project office and trained personnel to implement the property valuation regime. The hope is that more reliable property records will boost taxpayer confidence in the system’s fairness and deter attempts to skirt obligations. "Governement is asking for its return on investment," she said.
Sceptics abound, arguing that the property tax's success depends on resolving the problem of incomplete property documentation.
Elias Teklay, a lawyer specialising in property disputes, noted that only a small fraction of plots have been integrated into the country’s nascent cadastre system. The majority remain under the authority of local Land Development & Management bureaus, raising the possibility that incomplete records and unresolved claims will undermine tax calculations. Without proper documentation, many taxpayers could challenge assessments, and it remains uncertain how quickly authorities can bring these properties into the official register.
Officials say they are working to strengthen tax administration and expand the base without imposing undue hardship on citizens already coping with a high cost of living and disability. Voices like that of Bekelech Tiruye, general manager of the Ethiopian National Association of the Blind, call attention to the vulnerability of certain groups. She urged lawmakers to consider exemptions for physically impaired individuals, who face limited employment opportunities and cannot easily absorb higher taxes.
Such appeals reflect the broader public's anxiety over whether the new levy will be administered fairly and with sensitivity to many people's realities.
To handle potential disputes, the draft legislation calls for establishing independent appellate benches in every city to mediate disputes between taxpayers and tax authorities.
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