A draft proclamation which is under circulation for fine tuning raises eye brows of some financial experts as the potential law seeks to switch the two-decade old value added tax (VAT) law to now suggest for government entities to withhold 50 percent of the VAT from suppliers. Experts pointed out that this presents a massive capability of eroding the working capital of the private sector.
In spite of such views, the draft proclamation that has been under discussion with pertinent stakeholders before being tabled to the Council of Ministers in the coming few weeks, is stated to introduce an easy and cushioning element to the blurry articles in the current proclamation that has loopholes.
The draft has also added some sectors to be included on the VAT regime on the aim to expand the tax base and collection, which is very poor compared with the tax GDP ratio and with other peer countries.
One of the key changes on the draft proclamation is that it will force government entities, which are the major high buyers in the country, to withhold half of the VAT amount that is supposed to be transferred for service or goods suppliers on the current proclamation.
Article 64, sub-article 1, states that if a taxable supply is made by a registered person to a government entity, the government entity shall withhold 50 percent of the VAT payable in respect of the supply.
It added that the VAT pay will be withheld to the Tax Authority in accordance with the procedures specified in a Directive issued by the Minister of Finance, while the remaining half of the VAT was payable in respect to the supply of the registered person making the supply.
However, some experts argue that the proposed withholding amount will highly affect the working capital of suppliers, “Particularly on the transaction of huge amounts.”
As a tax expert, who demanded anonymity, told Capital, the existed experience is of the government entity withholding only 2 percent for transactions more than 10,000 birr of service and for goods supply for more than 3,000 birr.
He recalled that on the industrial purchase it may expand to 35 percent. He said that the draft rate is very high that may affect the suppliers’ working capital.
Even though there is practice to withhold some portion of the VAT on the purchase at the government offices, the current proclamation doesn’t directly state it, like the draft law.
“If they get the amount it shall be a resource until they settle the payment for the tax authority. It is acceptable if concerns rose regarding the issue,” he added.
“The figure has been one of the discussed points on the latest consultation with stakeholders,” the tax expert expressed his hope citing that the rate will be reviewed before it is tabled to parliament for ratification.
Regarding the draft proclamation, other tax experts who have been well informed on the draft from its preparation, told Capital that the new proclamation will ease some of the unclear parts of the current law. They said that some of the areas that were covered by the VAT regime will be excluded when the new regulation is followed by the proclamation issue.
The other area that is expected to be included on the upcoming proclamation is the implantation of multiple VAT ratings.
“The current VAT law has a flat rate that is 15 percent, but it has been recommended for government to apply multiple VAT regimes. For instance the rate of getting service at restaurants and buying cars or jewelry should not be charged at similar rates,” the tax experts said.
Although not being included on the draft proclamation, the tax guru opines that the idea will be absorbed in the final draft for consideration, since it may ease the burden of the public and provide sustainable solutions to price hikes in the market.
Experts said that the experience of multiple VAT rate is applied in other countries, “For instance, in Kenya there is a triple VAT rate.”
The government is highly interested to expand its tax base and revenue collected from the public but to do that, several reforms in the tax system must be applied.
In one of the best performing years a decade ago, the tax GDP ratio was near 13 percent that is now back to a single digit.
The tax GDP ratio in Ethiopia is one of the lowest in the sub-Saharan countries to which international partners have been urging the government to improve its fiscal policy since it is crucial to give a room for the government to narrow the budget deficit and cover its expenditure from the resource secured from the tax revenue.