Sudden Tax Overhaul Jolts Business Community, Fuels Confusion Over VAT Transition

Sudden Tax Overhaul Jolts Business Community, Fuels Confusion Over VAT Transition

Sep 7 , 2025. By YITBAREK GETACHEW ( FORTUNE STAFF WRITER )

Businesses are facing sweeping changes as the federal government suspends the Turnover Tax (TOT) and mandates Value Added Tax (VAT) registration for those with annual revenues above two million Birr. The new directive, issued in July, gives existing businesses just 30 days to comply. The VAT directive, signed by Finance Minister Ahmed Shide on September 2, broadens the tax net to include not only corporations but also individuals offering professional services.

The federal tax officials' abrupt tax reform, which suspends the long-standing Turnover Tax (TOT) and replaces it with an expansive Value Added Tax (VAT) regime, has ushered in confusion, liquidity strain, and regulatory uncertainty for the business community.

Designed ostensibly to expand the tax base and shore up a declining tax-to-GDP ratio, the overhaul is facing fierce backlash from business leaders, tax professionals, and industry associations, not only for its substance but also for its process, which is mired by a lack of consultation, the absence of a transition plan, and disregard for operational realities.

The turmoil began in July, when a new income tax proclamation abruptly suspended the long-standing TOT system. That was followed by a directive from the Ministry of Finance last week requiring a much broader segment of businesses to register for VAT. Under the new rules, any business with annual revenues above two million Birr, whether incorporated or not, should register for VAT. The directive applies to all Category “A” taxpayers and even captures individuals providing professional services, regardless of whether they meet the turnover threshold.

Existing businesses have been given only 30 days to comply.

Officials at the Ministry of Finance defend the reforms as fiscally necessary. According to Mulay Weldu, director of Tax Policy, a worrying decline in the tax-to-GDP ratio, which he said has fallen by an average of 0.5 percentage points annually, reached 6.3pc last year. The federal governemnt plans to collect 1.2 trillion Br in tax revenue this fiscal year, expanding the tax base, not increasing the "burden on current taxpayers."

“There is no over-taxation,” Mulay said. “It's all about expanding the base.”

However, for businesses on the ground, the immediate effects have been disruptive. With the TOT no longer in effect and VAT compliance now mandatory for many businesses, they find themselves in a liminal space, lacking the regulatory infrastructure and legal guidance to adjust. One major operational concern is that VAT-registered businesses can no longer deduct expenses incurred from purchases made through non-VAT-registered suppliers. Without VAT receipts, cost recovery becomes impossible.

“Receipts for purchases get discarded at the revenue bureau,” said Aychluhm Kebede, vice president of the Addis Chamber of Commerce & Sectoral Association. “This issue needs adjustment.”

He blamed inconsistencies in the law’s enforcement, forcing some businesses, such as repair and maintenance providers, to exit the market altogether.

The tension reached a crescendo at a heated panel discussion hosted by the Addis Chamber at the Skylight Hotel on September 2, 2025. Held under the banner, “Building Fair, Transparent, and Efficient Tax & Customs Systems,” the forum brought together senior government officials, business leaders, and tax professionals. The sharpest rebukes were directed at the absence of a transition period.

“You cannot simply fail to include a transition period,” said Yirgu Tamrie, chairman of the Ethiopian Professional Association of Accountants & Auditors (EPAAA).

Yirgu urged the need for comprehensive guidelines to accompany such a major shift, after years of adherence to the TOT regime.

Concerns extended beyond VAT, though. Taxpayer associations decried prolonged delays and ambiguity in customs procedures. Multiple speakers stated the overreach of tax auditors and the lack of due process afforded to taxpayers. Under current rules, taxpayers should deposit 50pc of the disputed tax amount before they can lodge an appeal, a policy described as prohibitive and unfair.

Adding to frustrations is the new alphabetical tax collection schedule introduced by the Addis Abeba City Revenue Bureau. The system dictates tax payment dates based on the first letter of a business’s name, an approach critics say lacks any legal basis.

“It’s a blatant violation of taxpayer rights,” said Yirgu. “It doesn’t matter whether your business starts with ‘A’ or ‘Z’; the law should apply equally to all.”

Business leaders echoed these grievances. According to Abdul Hussien, a veteran businessman in Merkato, the shortened payment windows are choking working capital.

“Paying in tighter intervals means losing essential liquidity,” he said. “It undermines our ability to operate and reinvest.”

Despite paying over half a million Birr in taxes last year, Abdul finds the unpredictability of the new system threatening his business.

City officials defended the alphabetical system as a pragmatic tool to streamline processing.

“It isn't against the law,” said Worknesh Seboka, deputy head of Tax Affairs at the Addis Abeba Revenue Bureau.

However, research commissioned by the Addis Chamber and the American Chamber of Commerce painted a troubling picture of systemic dysfunction. The findings cited unpredictable policy shifts, overlapping directives, weak stakeholder engagement, and arbitrary enforcement as persistent problems. The study found that the customs system, in particular, suffers from outdated procedures, technology gaps, and inconsistent valuation practices, factors that inflate costs for importers and delay refunds for exporters.

Chamber leaders have called for a comprehensive and consolidated tax manual to be released before further reforms are implemented. Other recommendations include reforming audit practices, lowering the appeals deposit to 20pc, modernising digital platforms for VAT refunds, aligning customs valuations with international standards, and introducing more competition in maritime logistics to reduce dependence on Ethiopian Shipping Lines.

According to Henok Asefa, a veteran tax and finance consultant, the government’s failure to phase in the new system risks destabilising businesses.

“The reform rollout lacks both timing and tact,” he told Fortune.

Henok argued that the new quarterly payment schedule may severely disrupt business liquidity.

“It will shake their capital,” Henok warned.

He also questioned the legal basis of the new directives, especially as some remain in "draft form."

As of this week, the VAT directive, signed by Finance Minister Ahmed Shide on September 2 and uploaded online the following day, is still being circulated informally.

“A 25pc tax payment without adjustment to financial realities dramatically breaks with the income tax law,” Henok said.

Officials admit the process has not been flawless. Yoseph Shiferaw, director general of Taxation at the Ministry of Revenue, confirmed the TOT suspension and acknowledged operational gaps, but declined to disclose further details.

“We've developed a self-contained exit strategy for this,” he said, without elaborating.

PUBLISHED ON Sep 07,2025 [ VOL 26 , NO 1323]