Jun 29 , 2024

Domestic pharmaceutical manufacturers are scrambling for exemptions from property taxes as factories in the capital are threatened with having their water supply cut off for failing to make payments. While the property tax proclamation has yet to be ratified, the Addis Abeba City administration's amendment to the Wall & Roof tax has resulted in significant challenges for the 14 plants in the capital.

Liquidity issues for operational costs, foreign currency shortages, and poor industry linkages have dragged the sector's productivity down, while the new taxes have created a new layer of complexity.

Daniel Waqtola(PhD), President of the Ethiopian Pharmaceutical and Supply Association(EPSA), penned a series of letters to the Ministers of Health and Industry over the past few months pleading for an exemption from the property tax. He says the imposition of additional taxes on a vital industry capable of significantly contributing to the national economy is contrary to the import substitution strategy.

"The industry is barely surviving as it is," Daniel told Fortune.

Daniel points out that the large space necessary for pharmaceutical manufacturing translates to higher imposition of property taxes, compounding the fledgling industry's troubles. He says the legal framework should support the industry, which is just starting to blossom.

"Foreign investors won't come in under these conditions," Daniel says.

The domestic pharmaceutical industry contributes around 8pc to Ethiopia's annual medical consumption. At the same time, it supplies only 13pc of the 800 medicines purchased by the state-owned Ethiopian Pharmaceutical Supplies Services(EPSS).

The Ministry of Industry, which oversees over 270 manufacturers, has been calling for an exemption from property taxes for all local manufacturers.

Tirist Bimerew, Head of the incentive desk at the Ministry,  says the need to treat manufacturers separately from other sectors is self-evident. She pointed out the contradiction in imposing new taxes on industry while advocating for import substitution.

"It will impact industrial productivity," Tirist told Fortune.

However, local manufacturing has been struggling for quite some time. A United Nations Development Program (UNDP) report revealed that 450 factors ceased operations in 2022. The manufacturing sector's share has dipped by 1.5pc to around 4 over the past two years.

The Health Ministry acquired the services of the American Consulting firm Mckinsey & Company last year to identify some of the policy issues that could help realize its import substitution goals.

Mebratu Massebo, the senior advisor at the Minstry, says they can only advocate for tax exemptions and different policy tools. He indicated that several policy options are being considered to help the manufacturers.

"There is nothing we can do about the tax issues, though," Mebratu told Fortune.

An official from the Finance Ministry who spoke to Fortune on conditions of anonymity says manufacturing will not exempted from property taxes as there is no international experience to justify it. He pointed out the unlikelihood of any exemptions happening as the draft proclamation has already reached parliament.

"There is no such thing as a manufacturer's exemption," the official says

The Federal government's latest budget proposal places property taxes as an important pillar in boosting tax revenue by 23pc to 502 billion Br in the coming year's domestic revenue target.

Asmamam Mulgeta, head of finance & property tax project office at the capital's finance bureau, says the rates from last year's amendments to the wall & roof tax will be revised after the property tax proclamtion gets ratified.

The Addis Abeba Revenues Bureau, which collected around 9.1 billion Br from the wall and roof tax in the first nine months of the current fiscal year, has given factories a two week deadline to meet their Wall & Roof tax obligations. For those who fail to make payment, a five percent penalty and suspension of water and electricity services are on the cards.

Heyru Hassen, the Bureau's tax assessment leader, says a long list of administrative measures is necessary to ensure compliance with tax laws. He believes the novelty of the tax is the main source of confusion for the public.

"It is an unreasonable fear," Heyru told Fortune.

The offical explains that several factors are considered when levying the property tax, including construction material, annual rent value and location. He believes that taxes will help increase infrastructure development in the capital.

However, the possibility of renewed infrastructure has not appeased the local manufacturers.

The 13-year-old Jalphar Pharmaceuticals PLC, which operates out of a 3,000 sqm plant in Bole District, is one of the factories that received a warning letter from the revenue bureau.

Kedir Shefir, the company's country manager, says the expensive construction materials used for pharmaceutical plants require special treatment from tax authorities. He fears that the added property tax costs will be transferred to the consumer without some policy intervention.

"An exemption or holiday is crucial," Kedir told Fortune.

The manager says foreign currency has become a significant barrier to production, with the plant operating at a fifth of its full capacity. Kedir says they have stopped manufacturing one of its products to utilize the available foreign currency effectively.

"The tax needs thorough reconsideration," he says.

Experts like Fasika Mekete believe imposing taxes on the budding industry will diminish its long-term productivity. The former advisor at the Health Ministry says little has been done so far to incentivise local production, which is evident in its less than 10pc contribution to the supply.

"The manufacturers need support, not taxes," he told Fortune.

Fasika expects the already high cost of medicines in the country to be exacerbated without adequate local production in the long run.

PUBLISHED ON Jun 29,2024 [ VOL 25 , NO 1261]

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