International banking services, remittance and electronic transactions are up for value-added taxation as the Ministry of Finance officials contemplate widening the tax base.

Loans and credit disbursements, deposits, bonds, shares, pensions and provident funds and cash transfers are exempted from VAT while the regulation for interest-free banking services is left open for later imposition.

The legal experts drawn from the finance and revenue ministries have been preparing a draft bill to replace the 20-year-old proclamation since last year and released the first draft for comment in August. However, the services that were exempted from value-added tax (VAT) were not clearly stated.

The federal budget assumes revenue growth of 37pc from last year to reach 439 billion Br. Close to 28pc of the revenues are from income tax and 45 billion Br (10pc) from value-added tax on services.

A consumer tax levied on imported goods, domestic services, and sales, is the government’s primary revenue source. It accounts for 21pc of the 279 billion Br collected by federal tax authorities last year.

Banks were not present at the meeting held last week at the Ministry's hall to discuss the proposed bill imposing consumption tax on financial services citing that they did not get official invitations.

The Ethiopian Bankers Association lobby for the 22 commercial banks. Its Secretary General, Demsew Kassa, is not aware of the discussion. However, the officials have not planned to call for another meeting.

Aklilu Wubet, president of Wegagen Bank, question the timing of expanding the tax base in the country's current economic climate. Last year, his bank generated 40 million Br from fees and commissions, netting over half a billion Birr profit. According to Aklilu, commercial banks should be given time to develop a system that complements the request.

The major shareholder of Tilahun Chala Import & Export Plc, Tilahun Chala believes the inflationary price of goods and services is the result of multiple factors. The commissions to open letters of credit asked by the private banks increased from the prior years, while the shipping cost forced traders to adjuted offers on the imported goods, said Tilahun.

Incorporated 10 years ago, the company began exports of coffee, oilseeds and pulses with 20 million Br and imported tyres with up to 100 million Br. Tilahun claims the tyre cost saw a 10,000 Br increase from last year now close to 43,000 Br.

"The VAT imposition may exacerbate the price," said Tilahun.

Established with commercial banks and the National Bank of Ethiopia in 2015, EthSwitch S.C., facilitated close to 40 million interoperable ATM transactions worth 44 billion Br processed. Last year the payment switch operator reported 221 million Br in gross profit, registering a growth of 153pc from last year’s performance.

The national switch operator partnered with nearly a dozen banks, enabling customers to issue transactions that are on the list of services up for imposition of vat.

The government's amendment of the 2002 proclamation that switched sales tax for VAT is not the first to occur. The Parliament approved an amendment three years ago that reduced the requirement that businesses with annual revenues of over 70 million Br.

Abraham Rega, the legal expert at the Ministry of Finance, is drafting the new set of amendments referencing other countries' experiences.

"The international experience indicates that services should be taxable," said Abraham. According to him, the bill's enforcement is delayed to discuss with each stakeholder.

Girum Tesgaye, president of Berhan Bank worries that the burden shouldered by the clients behind the tax deployment will increase operating expenses for system upgrading and hiring more employees to monitor and collect the money. The bank netted 478 million Br and collected five Birr for a withdrawal of 1000 Br by ATM machines.

The number of ATM cardholders has increased to 17 million, with 150 billion Br worth of transactions made in 2021, evident that customers have stopped going to banks to withdraw money.

The government is facing a budget deficit of 309 billion Br and plans to push to increase tax revenues by expanding the tax base and introducing property and social welfare taxes.

However, Atlaw Alemu (PhD), an economist at Addis Abeba University, warns the results will be the reverse.

"It'll corner end-users," he said.

According to Atlaw, the tax burden may force them to look for alternatives, avoiding the use of financial institutions altogether. He recommends officials focus on proper utilisation of the budget instead of toiling to introduce more tax.

PUBLISHED ON Mar 04,2023 [ VOL 23 , NO 1192]

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