Fed Shifts Gears as Motorists Face New Tax

Oct 5 , 2025. By BEZAWIT HULUAGER ( FORTUNE STAFF WRITER )

The federal government is rolling out a new “motor vehicle circulation tax” targeting fuel-powered cars, shifting road users toward electric vehicles. The tax forms part of an ambitious policy push designed to raise the tax-to-GDP ratio by 1.7 percentage points in a single year, a target closely watched by the IMF.

The federal government is set to roll out a new "motor vehicle circulation tax" in the current fiscal year, targeting fuel-powered vehicles.

The policy, though publicly justified as a move toward environmental sustainability, carries strong fiscal undertones, meeting the International Monetary Fund’s (IMF) push for domestic revenue mobilisation. Officials are expected to raise the tax-to-GDP ratio by 1.7 percentage points this fiscal year alone, a tall order that has placed fuel vehicles squarely in the crosshairs.

According to people familiar with the matter, the policy is designed to push drivers to cleaner alternatives, such as electric vehicles, while making it increasingly costly to operate conventional vehicles.

Federal authorities have long made their intentions clear in wanting drivers to switch to electric vehicles. Over recent years, they have dangled a series of incentives for electric cars, while quietly and sometimes not so quietly raising limitations for those who stick with gasoline and diesel.

The tax, outlined in the Ministry of Finance’s "Citizen Budget", is part of a broader strategy that includes VAT and excise taxes on fuel, a freeze on new tax incentives, and plans for a property tax. Together, these measures form the foundation of a five-year tax modernisation plan to lift the tax-to-GDP ratio by 3.8 percentage points by 2027/28 to 9.9pc. The Ministry's new plan is part of a wider set of changes that are already reshaping the tax system.

The most recent income tax proclamation has already taken effect. It includes a minimum alternative tax to combat evasion, higher withholding taxes on deposit interest, royalties, and gambling winnings, and a streamlined presumptive tax regime for small businesses. The list of changes also features a new inheritance and donation tax, a revised personal income tax schedule, and a freeze on any new tax incentives, except for those that have already been granted.

Federal officials are planning to introduce a property tax, expand the use of excise stamps across more products, and roll out annual motor vehicle ownership fees. The IMF projects that the vehicle ownership tax alone could yield 0.1pc of GDP in its first year, and double that in its second. Over the next three years, the value-added tax (VAT) on fuel is expected to contribute 0.5pc of GDP annually, while excise taxes on fuel will add another 0.3pc. If subsidies are removed altogether, fuel taxes could generate as much as 0.8pc of GDP. A one percentage point increase in the withholding tax rate, from two percent, would add another 0.1pc of GDP.

According to a government official, speaking on the condition of anonymity because he is not authorised to speak publicly, in many other countries, vehicles are classified as taxable property, but in Ethiopia, property tax has traditionally applied only to immovable assets. Now, authorities are considering new tax categories for gasoline and diesel vehicles, and are reviewing models from other countries as they shape their approach.

According to a recent study by the Ministry, which used a 2019 Toyota Yaris as its benchmark, Zimbabwe charges the highest annual vehicle carbon tax in sub-Saharan Africa at 120 dollars, while the lowest is 1.70 dollars. The regional average is an annual 35 dollars per vehicle. By mid-2023, Ethiopia had approximately 1.4 million vehicles on its roads, with passenger cars accounting for two-thirds of the total, according to data from Align Automotive. Addis Abeba accounts for more than half of all vehicles in the country, followed by the Oromia Regional State at 20pc.

Federal transportation authorities have been developing a strategy to promote the adoption of electric vehicles. A plan developed under the Ministry of Transport & Logistics (MoTL), which is meant to run alongside the new tax regime, envisions a gradual phase-out of conventional cars. It includes proposals for building charging infrastructure, offering incentives for local manufacturers, and launching retrofitting programs. Transportation officials describe this as a national effort to modernise transport, attract green investment, and build public trust in sustainable mobility.

However, for many vehicle owners, the policy falls flat. In the sprawling Mercato district, Kidus Abate, 38, runs a clothing shop and owns a Dzire automobilr, which he uses to shuttle between Mercato and his residence in the Kotebe area, northeast outskirts of the city. His annual payments for registration and related fees already come to 4,425 Br. This year, he paid 180,000 Br in business taxes, an increase of 30,000 Br over last year.

“The government’s aggressive tax collection approach is forcing us to question whether we can even continue,” Kidus told Fortune, visibly frustrated.

He recalled a failed effort last year to reclassify pickup trucks as commercial vehicles, which would have made them eligible for discounted fuel. Because his vehicle is registered in his name, he missed out on the savings.

“We know all cars fall under different schemes, but they tagged mine as a truck,” he said.

Vehicle ownership has always come with challenges, but for Kidus, maintenance only deepens his burden. A safety check can cost 3,000 Br every two months. Tires run over 20,000 Br apiece. He recently paid 15,500 Br for a radiator replacement.

“Spare parts are untouchable,” he said. “Prices just climb and climb.”

The spike followed last year’s floating of the Birr, a monetary policy change that doubled the price of imported parts.

“We'll accept them, because we can’t do anything," said Kidus, reacting to the looming vehicle circulation tax. "We're on the receiving end."

For policy analysts, such as Bereket Tesfaye, founder of Circular Nexus Consulting and an expert in electric mobility, the new taxes come as no surprise. He sees the tax as a logical consequence of incentivising electric vehicles.

“When EVs are incentivised, fuel vehicles must be disincentivised,” he said.

However, he blamed shortcomings in the authorities' approach. Unlike other countries that subsidise the cost of electric cars by as much as 40pc, with support from federal and regional governments, the domestic policy is limited to duty-free imports. Elsewhere, governments have taken further action, restricting road access for high-polluting vehicles or making registration far more expensive.

According to Bereket, infrastructure remains inadequate and technical capacity is lacking, with almost no training programs for electric vehicle service and maintenance. Electricity access is limited, charging stations are scarce, and there is no financing scheme from the financial sector to facilitate adoption. He is concerned that the rollout is too rushed to deliver results.

“There’s no phased approach," he said. “Other countries worked on this for 20 years, step by step, before hitting big goals. For us, it looks more like ambition than preparation.”

Economists warn that the social cost of these policies could be steep.

Girum Amaha, a former business and economics consultant who now heads regulatory strategy and market intelligence at Fenan Pay, argued that layering the vehicle circulation tax on top of property, excise, and VAT risks shifting the tax burden onto the middle and lower-income households.

“These are the groups that actually own durable assets like vehicles and homes,” Girum told Fortune. “Wealthier households lease, finance, or shield income with deductions. The middle class absorbs the blow.”

Girum cautioned that disposable income could be squeezed even further, with higher transportation costs likely to be passed on to consumers.

“Transport is a basic necessity,” he said. “If you tax providers, the public pays.”

Girum urged federal authorities to balance their tax push with policies that stimulate growth and income.

“They've to create deductions that prevent overlapping liabilities," he said. "They need to shift the weight toward higher-income earners and corporations that can absorb it.”

PUBLISHED ON Oct 05,2025 [ VOL 26 , NO 1327]