VAT Relief Sprouts in Addis, But Roots of Inequality Run Deep

Jul 13 , 2025. By RUTH BERHANU ( FORTUNE STAFF WRITER )

The Addis Abeba Revenue Bureau has scrapped a value-added tax (VAT) on unprocessed vegetables such as onions, potatoes, and their raw cousins, marking a policy shift that could ease household food bills and support struggling growers.

The exemption, grounded in a 2016 VAT amendment and reinforced by regulations issued this year, excludes raw vegetables from taxation, whether sold locally or exported. Fruits, for now, remain taxable. The shift is pitched as a relief valve in an economy still struggling with elevated food prices and rising formalisation pressures on micro and small enterprises.

"This exemption supports local agricultural businesses and potentially reduces the cost of essential food items," said Mulay Weldu, head of tax policy at the Ministry of Finance.

His optimism is shared, if cautiously, by stakeholders along the supply chain.

For vertically integrated operators like Fresh Corner grocery chains, owned by Luna Group, the change is major. Each step in their farm-to-shelf model, from cultivation to transport and retail, was taxed under the old regime.

Onions were sold at Fresh Corner for 88 Br with VAT, while smaller shops offered the same for 70 Br. The pricing gap siphoned off customers to informal vendors, despite higher quality standards at Luna.

With VAT off the table, Fresh Corner plans to adjust prices downwards by as much as 13pc, disclosed Hirut Hagos, a store manager. "We're aiming to get closer to 76.50 Br a kilo."

The policy could reset competitive dynamics, especially if formal retailers pass along savings and reclaim market share.

For smaller shopkeepers, however, the exemption brings less clarity.

Etsegenet Nigussie, who runs a corner shop near Megenagna, still struggles with VAT-related documentation and logistical problems. Until now, she sourced onions from Garment, the only local market that issued receipts needed for VAT filings. However, she finds transporting goods from the Garment area is costly.

“Our final price ends up 10 Br to 20 Br higher than Sunday markets or non-receipted vendors," she told Fortune. "Customers think we're inflating prices, but it is the system that leaves us no choice."

In a system where many upstream sellers lack proper invoicing, formal compliance becomes a cost rather than a shield. While the policy shift is intended to aid farmers, the sector's structural constraints may dull its impact.

Productivity remains stubbornly low. Onion yields, for instance, average only 90Qtls a hectare, barely a quarter of what research plots can achieve. The constraints are familiar—pest infestations, limited irrigation, poor road access, and rudimentary tools.

A 2023 study spotlighted the seed bottleneck. Most farmers use saved seeds or low-cost imports. Local certified varieties are scarce, and formal seed multiplication is weak. Experts say the VAT exemption, while they welcome it, will not unlock productivity gains unless accompanied by parallel investments in infrastructure, extension services, and input markets.

The exemption also comes at a precarious fiscal moment. VAT has become the federal government's most lucrative tax stream, with collections hitting above 200 billion Br in 2023/24, up 36.2pc year-on-year (YoY). The figure eclipsed all other taxes combined, accounting for 56.1pc of total tax receipts and over half of federal revenues.

Income tax, by contrast, brought in a mere 103.3 billion Br.

The Ministry of Finance has projected a record 284.5 billion Br in VAT revenues for the 2025/26 fiscal year, accounting for over half of total tax receipts. The figure marks a 30.1pc surge from the previous year's intake, an ambitious leap in a slowing economy struggling with liquidity constraints and persistent inflation.

According to the budget bill Parliament passed two weeks ago, VAT alone is expected to underwrite 53.6pc of the federal government's tax haul and nearly 39pc of total revenue, unveiling its role as the bedrock of public finances.

The twin pillars of domestic VAT (141.9 billion Br) and VAT on imports (142.6 billion Br) reveal a deepening dependence on consumer spending and external trade, even as officials tout industrial policy and self-reliance. With excise, income, and customs taxes trailing far behind, the ballooning VAT target spotlights the paradox of expanding a regressive tax in a state, leading experts to raise questions about equity, efficiency, and sustainability in the evolving tax regime.

"VAT has become our single most reliable revenue stream," a senior Finance Ministry official said.

But the policy's regressive nature, where poorer households pay proportionately more, raises concerns about tax equity. As Ethiopia phases out concessional loans and aid (currently 421.69 billion Br), it is leaning ever more heavily on VAT to fill the gap.

Experts see the recent VAT exemption as a gesture toward discontented consumers and smallholder constituencies. Economically, they view it as a calculated risk, trading short-term revenue for potential long-term gains in food security, formalisation, and rural livelihoods.

But as Mengistu Deyassa, assistant professor at Jimma University, warns, exemptions complicate tax enforcement and open loopholes.

"Monitoring compliance becomes more complex, especially when value chains are informal and opaque," he told Fortune. "The government risks losing vital revenue."

Officials are banking on digital enforcement, real-time audits, and better record-keeping across the supply chain. However, these experts warn that unless these are rolled out in tandem with incentives for upstream compliance, the exemption may be gamed by intermediaries, leaving consumers with modest price drops and the Treasury with unintended leakage.

For now, the onions in Fresh Corner's aisles may get cheaper, and city-bound trucks might carry a slightly lighter burden. But whether this relief translates into lasting gains for the vegetable sector, or merely papers over deeper inefficiencies, remains uncertain.

PUBLISHED ON Jul 13,2025 [ VOL 26 , NO 1315]