The Ministry of Finance (MoF) has amended a 16-year-old withholding tax regulation to ensure that individual business people deduct withholding tax when they make a purchase.
The directive issued on March 29 mandated that businesses licenses registered by individual business owners be included in the withholding tax collection scheme.
Previously, legal personalities or businesses like share companies or PLCs were responsible for deducting withholding tax. The current amendment signed by Ahmed Shide, Minister of Finance, added businesses that previously were not responsible for deducting withholding tax.
According to legal experts at the Ministry of Revenue, which is responsible for enforcing laws issued by the Ministry of Finance, the individual businesses are licensed mostly by their own name or affiliates. They have at least 10 million birr in transactions over three years.
“Businesses that have the stated amount of trading within three years will be responsible for deducting the withholding as of the coming week,” an expert at the Ministry of Revenue told Capital.
Daniel Tarekegn, an accountant and auditor, told Capital that there are several businesses that have over 10 million birr in transactions every year, but they are not a PLC or holder of other business licenses. Instead, they are registered as individual businesses under organizations like the Addis Ababa Trade Bureau.
“The current scheme will be applied to these type of businesses that may be building material shops, trading machines or big retail shops located around major market places,” he added. “The amendment will place a further burden on the work of accountants or auditors,” Daniel said.
“The previous directive, which made business entities deduct the withholding tax, created an imbalance in the market between businesses which were not responsible or accountable for deducting state tax,” legal experts at the Ministry of Revenue said. They claimed that the current amendment will normalize the market and increase tax collection.
He said that the federal revenue collection body, which is the Ministry of Revenue, is the responsible body for following businesses that are legal personalities like share companies, unions or PLCs and possibly governmental and non government organs that are already deducting withholding tax. “The current amendment will put responsibility on the city administration and regional revenue offices to impose the scheme,” he added
The amendment will be applicable as of Tuesday April 9 and regional bureaus and the two city administrations are responsible for identifying which businesses are effected by the new rule.
A withholding tax, or a retention tax, is an income tax to be paid to the government by the payer of the income rather than by the recipient of the income. The tax is thus withheld or deducted from the income due to the recipient.
The current amendment replaces the directive issued on June 2003. Even though withholding tax deduction has several thresholds based on the type of businesses, 2 percent is the most common one.