A new directive is beginning to shake up the tax regime with tougher penalties for non-compliance. Federal tax authorities are claiming to fight under-reporting and boost revenue collections. Under Aynalem Nigusse, minister of Revenues, they have revised penal rules for tax obligations hoping to enhance predictability and streamline tax administration.

Under the directive, administrative penalties are stricter, and penalty waivers are determined by whether taxpayers make timely and full payments of taxes, interest, and any non-waivable penalties. The revised rules also slash penalty waivers by 10 percentage points for unpaid or undeclared dues. Tax officials say this step is crucial to discouraging tax evasion, which they believe has eroded government revenue for far too long.

“Our tax collection has been undermined,” said Birrara Litgeb, the Ministry's tax debt administration director.

He blamed historically low penalties that failed to encourage full compliance, contributing to the growth of under-reported and unpaid taxes over the years.

The federal government collected about 547 billion Br in tax revenue in the seven months of the current budget year, while interests and penalties amounted to 51.9 billion Br. Officials believe these penalties are critical for reinforcing compliance and driving revenue. The Ministry is working toward a combined federal and regional government target of 1.5 trillion Br in domestic taxes for the current fiscal year, putting its enforcers under pressure to crack down on overdue payments.

The directive escalates penalties for undeclared taxes from low to high, putting medium-level penalties on unpaid assessments. New provisions have also been introduced, building on changes to tax administration, excise, and VAT proclamations over the past five years. Departments that handle penalty waivers now have more explicit roles, and penalties are separated into low, medium, and high categories according to how severely they affect tax administration.

If taxpayers settle amounts due within 30 days of receiving a notice — whether from the tax review department, tax appeal commission, or court rulings — penalties can be reduced by up to 90pc for low-level, 80pc for medium-level, and 70pc for high-level. It represents 10 percentage points lower than the reductions available under the previous directive. For payments made between 31 and 60 days, waivers drop to 80pc, 70pc, and 60pc for low, medium, and high, respectively. Those made after 60 days only qualify for 70pc, 60pc, and 50pc waivers. If property has been seized because of tax arrears, those who pay before an auction notice is issued may see waivers of 60pc for low-level penalties, 50pc for medium-level, and 40pc for high-level.

These rules only address administrative penalties and do not cover interest on tax arrears unless a miscalculation derives from an administrative error. Once verified, branch managers are mandated to correct the interest.

Federal tax authorities hope that the new system encourages a more transparent and efficient tax environment at a time when many businesses complain of aggressive enforcement and complicated rules. They believe up to 90pc of a penalty may be waived, depending on how many subordination incidents an administrator finds. Complete waivers can be granted in cases of force majeure, such as natural disasters or serious illness, court-certified business bankruptcies, voluntary disclosure of tax errors before findings by authorities, and substantial property loss from verified disasters.

Low-level penalties may be waived entirely if taxpayers pay taxes, interest, and non-waivable penalties within 30 days of receiving a tax assessment or legal notice.

Despite these changes, many businesses argue that the government’s approach is too heavy-handed, accusing officials of layering bureaucracy and unpredictability onto an already challenging environment. Recent efforts to raise Ethiopia’s tax-to-GDP ratio by 0.5pc centre on VAT collections, which are part of a broader reform agenda advocated by the International Monetary Fund (IMF). In July last year, Ethiopian authorities agreed with the IMF to increase the ratio by four percentage points by 2027/28, using various tax reforms, including VAT.

Over the past four months, confusion has emerged as tax authorities have demanded back taxes, interest, and penalties from banks. Commercial banks say the new VAT law, ratified in July, caused a flurry of retroactive assessments for the prior seven months. The Revenue Ministry wants banks to comply retroactively from the effective date of the proclamation, which has triggered penalties and interest charges for undeclared taxes.

Bank executives claim having to pay steep sums even as they struggle to recoup uncollected VAT from customers.

“Banks are struggling with unfair tax requirements,” said Demssw Kassah, secretary general of the Ethiopian Bankers’ Association.

The Association has repeatedly pleaded with the ministries of Revenue and Finance for waivers or new rules. He says these calls have gone largely unanswered, leaving potential liabilities in the billions of Birr. The banking industry has also requested written guidelines for district tax offices to start collecting VAT on October 1, 2024, instead of the earlier date.

Sidama Bank, for instance, faces roughly six million Birr in unpaid interest and penalties. According to its President, Tadesse Hatiya, his bank has talked with tax officials about what he sees as an unfair levy.

"The bank has been affected by debts from interest and penalties," Tadesse told Fortune. “It's not communicated to us officially.”

Gedda Bank's President, Wolde Bulto, is wrestling with similar issues. He worries that recovering uncollected VAT from past transactions is nearly impossible, which puts banks under added pressure.

“The financial impact on banks cannot be understated,” he said, noting liquidity constraints and performance struggles.

His bank lost millions of Birr in revenue to penalties and interest.