My Opinion | Dec 04,2020
January 4 , 2020
By Taddese Lencho (PhD)
Revenue should be the last and the least consideration in the design and implementation of excise tax policy. If the government is looking to raise more tax revenues, it should revisit the other general but less discriminatory taxes like the VAT and income taxes, argues Taddese Lencho (PhD), blasting the proposed excise tax law. He is an assistant professor of law at Addis Abeba University and can be reached at firstname.lastname@example.org.
Samuel Johnson memorably described excise taxes as “a hateful tax levied upon commodities.”
As special levies on selected goods, excise taxes historically dominated the taxation of commodities as most governments could only manage to impose taxes on a few selected goods. Because of the obvious discrimination in the taxation of a few goods, it was no surprise that excise taxes entered the imagination of the public as “hateful taxes”.
Products like alcohol and tobacco are perennial targets of excise taxation all over the world. Modern excise taxes have of course expanded to include new types of goods beyond tobacco and alcohol, but in many ways, modern excise taxes have shrunk in their scope as governments have found more comprehensive taxes like the VAT to replace them for raising general tax revenues.
Few consumers in Ethiopia know that a wide range of products that they consume daily are subject to excise taxes. Sugar is taxed at 33pc of its cost of production before it leaves the factory, salt at 30pc before it leaves the salt mine and textile products and garments at 10pc before they are released from their factories, as well as when they are imported. The excise taxes with which most people are vaguely familiar (to the extent they care about such things at all) are those levied on alcoholic products and tobacco. And in the Ethiopian case, those levied on cars have become notorious because of the expensive price of cars in Ethiopia, much of which is due to the heavy excise duty on imported cars.
Nearly two decades after the last excise tax law was issued, a new draft excise tax bill has been sent to the parliament and is currently before the parliamentary committee for public consultation. The draft excise tax law has targeted almost all of the already excisable products and added a few more. The new entrants include edible oil of certain fatty content, plastic bags and human and synthetic hair products. And from services, telecommunications are targeted by excise taxation for the first time.
Most people are inclined to think of excise taxes as one unified tax, but in reality, excise taxes are a collection of at least four different excises distinctly identified by their policy objectives. Regulatory excises target harmful products like cigarettes, alcohol, plastic bags and old cars. Benefit excises target products that are closely associated with the use of roads and highways, such as petroleum, tires and vehicles. Luxury excises target luxury products like jewelry, carpets and watches for raising revenue from those who consume luxury goods.
In Ethiopia, a fourth category has been used to target widely consumable products like sugar, salt and textiles. The three-the regulatory, benefit and luxury excises-are widely used throughout the world, while the fourth category remains a controversial form of excise taxation used mostly by the governments of developing countries strapped for cash.
A good tax policy recommends that various excise taxes should be treated separately and preferably issued in separate legislations. Few remember today that Ethiopia had separate excise tax laws in all the four categories up until the year 1990. There were separate excise tax laws for alcoholic products as there were for petroleum and lubricants, and during the Imperial period, the revenues from petroleum and lubricants were legally obligated to be kept in a separate trust fund, called the Highway Renovation Fund.
The preamble of the draft excise tax bill states the reasons for why a new tax bill has become necessary. Some of the reasons, such as changing the tax base from the controversial “cost of production” to “factory price,” are properly addressed in the draft bill and will surely improve the certainty and predictability of excise tax assessments in the future. We can take these changes as positives and focus for now on the negatives of the draft excise tax bill.
As if to confirm Samuel Johnson’s observation of excise taxes as “hateful taxes,” let me mention three reasons why the draft excise tax bill is objectionable. First of all, the draft excise tax imposes taxes on the means of production, and as such constitutes in part a production tax. The most notable of these means of production is the proposed 100pc tax on tractors, which are less than four years old. There is no reason under the sun why excise taxes should target tractors or any other agricultural means of production for that matter. In the current economic situation of Ethiopia, the very suggestion of a tax (any tax) on tractors is obscene and one is at a loss to surmise what the drafters were thinking in proposing an excise tax on tractors.
Tractors are an obvious sentimental pick for finding the draft excise tax bill objectionable, but they are not the only means of production targeted by the draft bill. A whole slew of goods used in the transportation, logistics and construction industry, such as public transport vehicles and drilling derricks, are subject to high excise tax rates which would make these items very expensive for those who engage in the business of transportation and logistics. Any tax, old or new, that imposes heavy duties on the means of production is objectionable.
The other problem is that the tax rates for some of the excisable goods are scandalously high. A 500pc excise tax rate is not something one would expect to be in any modern tax law, but the draft excise bill proposes exactly that for vehicles which are more than seven years older than their year of manufacture. This is apparently to discourage the importation of used vehicles, but ironically, it has been precisely the high excise tax rates in the past that have had the perverse effect of forcing consumers to prefer used and old vehicles in Ethiopia.
The country has already earned an unflattering distinction as a dumping ground for used old cars. The new tax bill appears determined to make Ethiopia a country where vehicles are simply the most expensive on the planet. The drafters who are bold enough to propose 500pc as a tax rate should be bold enough to propose a “ban” on the importation of vehicles that are seven years older than their manufacture date. At this prohibitive rate, 90pc of the price of an imported car constitutes the tax payable to the government in the form of customs and excise duties, surtaxes and the VAT. Not since the heydays of socialism has Ethiopia seen a tax rate so high and a burden so unconscionable.
Finally, the choice of luxury goods in the draft excise tax bill leaves a lot to be desired. The draft tax bill repeats the mistakes made in the successive excise tax laws, which is one of presuming goods as “luxury” by just looking at the goods en masse. This approach of the designation of goods as “luxury goods” en masse is outdated and does not at all further the desire of the government to impose higher taxes on those who consume or use “luxury goods”. It is especially disappointing to find such items as the TV set as a “luxury item” in the year 2019. TV sets have been the subject of excise taxation since the 1970s, because TV sets in the 1970s were indeed luxury possessions sitting only in the homes of the well-off, but since the turn of the present century, TV is no longer a possession of the rich.
One suspects that vehicles have been the target of extraordinarily high excise tax rates, because vehicles are considered a “luxury” in the Ethiopian context. The draft bill continues this mindset, which again is the result of the irrational presumption of regarding all items in the same category as “luxury” items.
The draft bill applies differential rates on the basis of the year of manufacture and the size of the cylinders of the vehicles. The year of manufacture is a legitimate consideration for discouraging the importation of old vehicles, although the extraordinarily high tax rates are not justified under any circumstances. The size of the vehicles is also a legitimate consideration as it is a factor in the usage of highways and roads but the requirement of an upfront payment of excise taxation equivalent to the price of the vehicle is not justified by any economic theory.
Although the users of vehicles should bear the cost of highway construction and maintenance, there is no correlation between paying more than 100pc of the value of the vehicles and the usage of the roads. A more rational approach would be to recover the cost of highway construction and maintenance for a tenth of the value, or a fixed amount upfront and then recover the rest from items that are associated with the recurrent usage of roads and highways, such as petroleum and petroleum lubricants and tires. The perverse effect of high excise taxation upfront will be the recycling of old vehicles like the Lada and now the Toyota Vitz.
It is also disappointing that the draft does not impose higher tax rates on expensive luxury vehicles, which are most certainly used by the rich. Expensive sport utility vehicles like the Hummer and the Land Cruiser V8 and sports cars, which are unabashedly seen on the streets of Addis, should have been subject to higher tax rates. The people who are flaunting such conspicuous consumption in the streets should pay more in taxes than a civil servant, who has to borrow money from the banks in order to buy a modest vehicle to commute from home to work. A 500pc tax rate does not look good in the tax books, but a 500pc tax rate surely looks good if the target is a luxury car consumed only by the super rich.
On the subject of luxury goods, it is not at all evident if all the luxury items that the rich typically consume are thoroughly researched for inclusion in the new bill. It does not require much research really, and a visit to the rich and well-off homes would have unearthed a number of imported items, which the rich consume not just to live a “good life” but also to show off to others that they are rich. Sitting on my desk, I can point to expensive furniture and home construction materials as legitimate subjects of excise taxation, and there is no guilt in collecting extra revenue from those who can afford it, which is the very purpose of selective excise taxation on luxury items.
One expects the draft excise tax bill to be a thoroughgoing overhaul of the excise tax system in Ethiopia. Instead, what we got is a recycling of the old problems of excise taxation and a tendency of viewing them as a silver bullet for solving much bigger problems of budget deficits and environmental woes. The parliamentary committee to which the draft bill has been referred should listen to legitimate concerns about the draft in its public consultation meetings and return the bill back to the Ministry of Finance for addressing these legitimate concerns so that the draft bill meets the purposes stated in the preamble.
The starting point of tax policy in considering excise taxation should not be revenue, although the government ends up collecting public revenues from the levying of excise taxes. The starting point should be the other public policies that excise taxes are universally designed to address, which are high tax rates on harmful products like cigarettes and alcohol, benefit taxes on goods most closely associated with roads, such as petroleum products and tires, and the higher taxation of the rich and the well-off who consume luxury products. Revenue is the last and the least consideration in the design and implementation of excise tax policy. If the government is looking to raise more tax revenues, it should revisit the other general but less discriminatory taxes like the VAT and income taxes.
PUBLISHED ON Jan 04,2020 [ VOL 20 , NO 1027]
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