The federal government is imposing a new tax, hoping to generate an additional 22 billion Br this year.

Dubbed “social welfare levy”, the tax will apply to importers, who will pay three percent on the items they bring into the country, barring a few exemptions. Imported goods subject to surtaxes, including fertilisers, petroleum products, mass transport vehicles, and capital goods, are exempt. Tax officials will have to calculate the new levy after adding up the value of the imported goods, freight costs, and insurance fees.

Officials say the revenues will go towards reconstructing facilities damaged by the conflict in the north, instability in other parts of the country, and gaps brought on by the COVID-19 pandemic. Rising public expenditures have battered Ethiopia’s economy due to civil war, political instability, pandemic and ballooning global commodity prices. Surging budget deficits have led federal authorities to search for unprecedented financing, including property and fuel excise taxes.

The latest edict in social welfare tax is one more addition.

“The private sector should play its part,” said Habtamu Mengesha, director of legal affairs at the Ministry of Revenues.

Public infrastructure such as health centres and schools across the country have sustained damage from the militarised conflict. Close to 1,800 health centres in four regional states, including Afar and Oromia, have been partly or wholly damaged, disclosed Tadesse Yemane, director of infrastructure development at the Ministry of Health.

Health officials estimate the reconstruction work will demand 20 billion Br, although the spending could grow as health centres are still at risk in some areas. According to Tadesse, the Ministry submitted a proposal for additional financing to cover the costs last May.

In Addis Abeba, Zewditu Memorial Hospital is one of the health facilities having overstretched resources to the pandemic. It is the largest antiretroviral treatment centre, attending to 14,000 patients each month. Demand for drugs is up nearly fivefold due to the complications from COVID-19, said Hanna Lekata, director of pharmacy.

The upsurge in use of gloves and other personal protective equipment is part of the burden. Before the pandemic, the Hospital used 7,000 pairs of surgical gloves a year. It has since grown to 28,000.

Last year, the federal government apportioned the Hospital 39 million Br to cover pharmaceutical and equipment procurement costs, short 32 million Br from what Zewditu’s administrators had requested. This year, the budget approved is half the 80 million Br requested by the Hospital.

“We need additional financing to cover the gap,” said Hanna.

It might be difficult for the Hospital to make ends meet, as federal officials are eager to slash expenditures this fiscal year. And they have a good reason to.

The government has been trying to cover the cost of reconstruction by reallocating funds from other budget items but has met with little success.

Despite this year’s federal budget exceeding its predecessor by nearly 112 billion Br, financing the budget deficit of 308 billion Br is a daunting task awaiting Finance Minister Ahmed Shide and his deputies. Recurrent expenditures account for nearly 45pc of the 786.6 billion Br budget lawmakers approved this year.

Although financing the budget deficit through foreign loans and grants has been the norm, donors and lenders have lost their appetite owing to the civil war. Yet, federal authorities plan to cover a 10th of the budget from external sources.

Disaster financing and food assistance to drought-impacted areas in the Oromia, Southern and Somali regional states are also taking their toll on public coffers.

Prospects are not encouraging on the domestic tax revenue front either. Officials plan to cover 61pc of the budget through tax collection; however, it will be an uphill task considering the business slowdown. Federal officials said conflict and economic stagnation caused 40 billion Br losses in tax revenue last year.

A series of newly introduced taxes is hoped to cover the shortfalls. Officials plan to collect 2.4 billion Br annually from the excise tax on petroleum products.

“Although it was introduced a decade ago, the excise tax on fuel has not been collected properly,” said Habtamu.

He disclosed the federal government is awaiting for lawmakers at the House of Federation to decide on a mandated agency to introduce a property tax.

Despite official claims, experts caution the burden from these taxes will fall on consumers.

Sewale Abate (PhD), professor of finance at Addis Abeba University, warns these taxes could become the straw that breaks consumers’ backs.

“Coupled with the gradual lifting of fuel subsidies, the imposition of additional taxes will ignite the escalating inflation,” he cautioned.

The unrelenting inflationary pressure has been a source of distress for consumers, who spend over half of their income on food items. The headline inflation index has not fallen below the 30pc threshold since last August. It registered at 33.5pc last month, according to the latest report from the Ethiopian Statistics Service.

Food inflation stood at 35.5pc, with cereals such as teff and wheat exhibiting the highest jumps in price.

Habtamu disclosed that essential food items are exempted from the social welfare tax to ease the pressure on low-income households. However, the expert argues that officials pick the easy way out instead of finding durable solutions to bridge financing gaps.

Authorities say they are trying to boost revenues by widening the tax base.

Legal experts drawn from federal agencies, including the ministries of Finance and Revenues, are reviewing the law governing value-added tax (VAT) to incorporate nearly 200 e-commerce and e-classified companies operating in Ethiopia. The federal government plans to generate 45 billion Br from VAT on services this year.

PUBLISHED ON Aug 13,2022 [ VOL 23 , NO 1163]

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