Legal experts drawn from federal agencies, including the ministries of Finance and Revenues, are drafting legislation to tax transactions made on e-commerce platforms.

The bill's authors contemplate broadening the tax base, incorporating e-commerce business at a time of shrinking tax revenues due to pandemic, runaway inflation, civil war, and political instability. These have depressed economic activities and led the federal government to a 40 billion Br loss in taxes last year.

“Over a quarter of the tax revenues planned for this year would not be collected,” Finance Minister Ahmed Shide told Parliament, defending the budget bill passed last week.

The federal budget assumes revenue growth of 37pc from last year to reach 439 billion Br. Close to 28pc of the revenues is planned to come from income tax, and 45 billion Br (10pc) from value added tax on services. Eyeing a budget deficit of 309 billion Br, the authorities are determined to boost tax revenues by widening the tax base. Minister Ahmed told Parliament that his Ministry planned to apply new taxes, such as on properties.

Value-added tax (VAT), a consumption tax levied on imported goods, domestic services, and sales, is the government’s primary revenue source. It accounted for 21pc of the 279 billion Br collected by federal tax authorities last year. Officials plan to increase the share of VAT to 25pc this year. VAT is applied as an indirect tax at different levels of production and distribution – end users ultimately shoulder it.

While the existing tax regime is primarily territorial, flourishing tech companies operate in a mostly tax and duty-free environment, resulting in revenue losses to the government. Cepheus Capital, a private equity firm, counted nearly 200 e-commerce and e-classified companies operating in Ethiopia. The absence regulatory framework governing acceptable records of where goods are delivered, invoices issued, and payments made electronically have been tax authorities’ challenge to pulling e-commerce into the tax net.

The law governing VAT does not recognise transactions facilitated through digital platforms due to the absence of provisions defining what constitutes a permanent establishment for electronic-based transactions. The law and the tax apply only to transactions conducted in physical places such as offices, factories, and stores. The provision applies to traditional brick-and-mortar companies. Dotcom firms that conduct business mainly through websites and digital platforms without a permanent address can avoid tax liabilities.

The bill, which recognises e-commerce platform operators as legal entities, dictates all establishments operating as e-commerce service providers undergo business registration as legacy companies. Thus far, e-commerce operators have had to register under different subsectors or work informally.

Zmall is one of these companies. Incorporated two years ago, it operates through a grocery shopping and food delivery application, partnering with close to 150 supermarkets, suppliers and shops. It charges between 60 Br and 450 Br depending on the distance, according to Abiy Mekonnen, general manager.

Zmall facilitates 2.4 million Br of transactions annually.