Companies will be entitled to receive refunds for the Value Added Tax (VAT) they paid while buying capital goods over 100 million Br within a month, according to a new bill that is in the making.

The previous system entitled taxpayers to receive refunds after the companies become operational. They were supposed to deduct their reimbursements from the VAT they collected after selling their products or services. The former system had pertained to businesses like mining that may have an extended lead time between investment and profits and in some cases have no returns to speak of.

Drafted and tabled to parliament by the Ministry of Finance, the draft proclamation aims at encouraging investment, according to the bill.

The bill tabled for discussion in parliament last week has also revised the VAT reporting time or the accounting period to three months for businesses with an annual turnover above 70 million Br. Those businesses below the threshold will continue to report every month as before.

The amendment says that the improvement is aimed at reducing the workload on middle and lower taxpayers, as well as time and human resources of the Ministry spent on handling filings from taxpayers who report zero VAT collected, known as nil reports.

The new bill has been discussed and unanimously approved by 297 attendees of parliament and sent to the Standing Committees for further deliberations last week.

The bill also has provisions that solve the challenges the taxpayers encounter on timely refunds of withholding tax to the Ministry of Revenues.

With the new bill, the VAT withheld by the buyer and paid to the tax authority is 50pc, and the balance is paid to the seller. In this case, the Ministry of Revenues has to implement a risk-based refund system by making selective auditing for solving fraudulent VAT refund claims. The VAT regime that was introduced in Ethiopia in 2002 as part of tax reform is a payment of an additional 15pc of the total price of a service or good by the consumer calculated on the value added to the product at each stage of its production.