The Ministry of Revenue (MoR), which has been undergoing extensive reform, has changed its policy to be more in line with the recommendations from international organizations, in hopes of expanding tax collection and improving the business climate.
Early this week the ministry amended or compiled eight different directives (from 142 to 149). One involves the Value Added Tax (vat) refund.
According to Abere Abebe, Team Leader on Drafting and Consulting of Laws at MoR, most of the directives were re-amended in consideration of the Income Tax Proclamation that was amended in 2016 and the Tax Administration Proclamation.
“The main motive of the amendments is to make them easier for the tax payers to understand,” Abere told Capital.
The directive that is getting the most attention is the Vat refund which was amended with the goal of accelerating business activity and the tax refund directive to reduce the settlement period, Abere said.
“For instance it used to take five months to get the vat refund on capital goods expenditures but now we can settle it within a month, while the refunds that were settled within two months have gone down to 45 days,” Abere said.
The name of the directive was changed from ‘vat refund directive’ to ‘risk based refund directive’, showing that the new priority is reducing risk and using a better assessment methodology, according to the legal expert at MoR.
“The new directive has classified the risk in to three stages the lower and medium risk stages will get their refund without a comprehensive audit. Previously, even low risk refunds had to be comprehensively audited,” Abere added. High risk refund claims will be settled after a comprehensive audit but concluded with the required period.
He argues that the current directive is pro tax payer and that it will improve local or FDI investments because the vat will take less time to refund.
Befirdu Messeret, Tax Payers Education Director at MoR, told Capital the motive of the new amendments is to make doing business and paying taxes easier.
“The vat refund and other directives that are being compiled or amended should improve the MoR operation and enhance tax collection, which is also recommended by different international partners,” Befirdu said.
“Two of the 11 criteria in the World Bank report on making business easier, focuses on paying taxes and trading across borders. This is directly related with the tax ministry, and vat refunding and paying taxes must be easier,” he said.
The refund scheme has been considered as problematic that is now changed, according to the ministry tax payers’ education division head.
The tax collection in the country is very poor compared with the GDP ratio of regional and peer countries. Two years ago, the government improved the tax GDP ratio about 13 percent, then it declined to 11 percent last budget year. The government projects that the GDP tax ratio will stand at 17 percent by next budget year.
Currently MoR is undertaking several changes to improve its revenue besides modernizing the operation. A group of government leaders was formed under the chairmanship of PM Abiy Ahmed (PhD) to improve the country’s doing business rank from the current status. The World Bank 2019 Ease of Doing Business put the country at 159 from 190 countries. Regional countries like Rwanda and Kenya stood at 29 and 61 respectively.