Once you tax you never go back
It was on May 17, 2007, that the Council of Ministers issued a regulation to levy surtax on imported items after the last surtax was lifted in 2002. The directive, which was signed by the late Prime Minister Meles Zenawi, excluded items exempted from customs duty.
The surtax is an additional tax on something already taxed, especially a higher rate of tax on incomes above a certain level. Surtax which is also referred to as a provisionary tax is a temporary tax that is to be used both for monitory or fiscal reasons.
The government levied a surtax on imports during the Ethio-Eritrean war in 2000, to subsidize the war. Two years later, when the war was over, the tax was lifted.
Sufiyan Ahmed, who was the then Minister of Finance and Economic Development, rationalized the imposition of the new tax as a fiscal measure to combat inflation.
“The imposition of the tax was necessitated with a view to building the financial capacity of the government needed for the intervention programmed to solve the rise in the cost of living, which is particularly affecting urban residents at a low and medium income level,” he was quoted as saying.
After Ethiopia got out of a significant drought-related contraction economy in 2002/03 its economy began rebounding at a rate of 10.7 percent for the next three years until 2006, which was above sub-Sharan average of 5.8 percent. Also, real per capita income also increased to an average of seven percent. This is why inflation increased from single digit figures before 2005 and skyrocketed to 18.5 percent at the end of 2006. Non-food inflation was as high as 17.3 in the same period of 2006.
Non-food inflation hiked because of large scale public investments, a rapid expansion of domestic credit and upward adjustments in controlled fuel prices in May 2006. The annual national inflation for 2017 was 18 percent and in February it was one percent higher.
In hopes of discouraging consumer demand, the government took monitory and fiscal measures, including introducing surtax on imports. Tadesse Lencho (PhD), a prominent tax lawyer and Assistant Professor of Law, agreed with imposing an additional 10 percent tax at the time to combat inflation.
“Demand for goods goes down when the price goes up,” he said. “As the regulation excluded capital goods the intention is clear that the government wanted to control consumption at the time.”
In addition, international organizations like the IMF and the World Bank recommended that the government take fiscal and monitory measures to combat inflation the year the tax was levied.
The IMF Staff Report for the 2007 Article IV Consultation encouraged the authorities to make forceful fiscal adjustments (some new revenue measures and cuts in nonpriority expenditures) and support them with a tighter monetary policy and greater exchange rate flexibility to ease demand pressures and start to push inflation downward. The same report also stated that official reserves decline mainly because disbursements of external assistance have been delayed.
However, after 12 years, inflation remained double-digit and the surtax remained part of the government’s sources of revenue.
Tadesse argues that in comparison with the nature of the surtax, having it intact for the past 12 years is extraordinary. The government should have lifted the tax early after meeting its goals.
In June 2010 country’s level overall inflation rate (annual change based on 12 month moving average) stood at 2.8 percent which was 33.6 percentage points lower than the corresponding annual average rate of 36.4 percent in June 2009. In this regard, the general moving average inflation rate was 46.1 in February 2009 and consequently declined to 2.8 percent in June 2010. In a similar way, the food moving average inflation rate has declined from 61.1 percent in February 2009 to -5.4 percent in June 2010. The Moving Average Inflation rate of non-food components decreased by 5.5 percentage points as compared to the one observed in June 2009.
“One can’t suggest the government lift the10 percent as inflation is still high and double-digit,” he said. “However, the tax is no longer a means to regulate the inflation and the government should come up with other interventions to combat or raise it significantly as this one is already blunted.”
The renowned tax and business law specialist associates the issue with antibiotics which have been taken longer than ordered by a doctor.
“The knife can no more cut and the tax history of our country shows addictive nature,” said Tadesse.
He recalled the existing tax called Ashura, which was levied on the immovable transaction in the late1940s. Tadesse could even find the proclamation suggesting four percent taxation on the transaction for research purposes, but the tax is still collectible. The purpose of the Ashura tax was used as a title deed. Now, however there is such a deed and the government still collects the Ashura tax.
“The fact that the government didn’t lift this tax on time will prove costly, and this instrument is already blunted. There are many excise taxes” he added.