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Ethiopia is going to introduce a new custom proclamation which is aimed at easing and modernizing the custom procedures of the country. The Ethiopian Revenue and Custom Authority (ERCA) is also undertaking a nationwide tax potential study at a cost of more than 11 million birr.
In addition, ERCA plans to implement a new database system which will standardize the prices of internationally traded commodities according to top officials at ERCA who presented the authority’s plan for this Ethiopian fiscal year to the Budget and Finance Standing Committee of the House of Peoples’ Representatives last Wednesday.
“The authority has already completed the work necessary to amend the existing customs law in order to introduce a simplified customs process. It will be submitted to the Council of Ministers and the House of Peoples’ Representatives in the near future for approval,” said Melaku Fenta, Director General of ERCA, with a ministerial position. , Melaku appeared before the committee accompanied by more than a half dozen directors from the authority.
The new customs law is expected to introduce structural adjustments in the functions of the authority and its human resource management. It also ensures the ‘free movement of goods for those organizations identified as Authorized Economic Operators (AEO), ease Post Clearance Audits (PCA), and decentralize the activity of the authority’.
“We want to authorize more companies in different parts of the country after we weigh their real contribution to the economy and their compliance with the authority’s procedures and guidelines. A company entrusted with such privilege, but found failing will jeopardize itself,” warned the director general.
The authority approved 21 companies as AEO while the Ministry of Industry has submitted 176 more for authorization.
“Under the new customs arrangement, each imported commodity will have its own branch. For instance, goods designated for industrial engagement [manufacturing sector] will have a structural branch that can handle it. The same holds true for other sectors of the economy,” Eshetu Dessie, Deputy Director General of the authority, in charge of Change and Modernization functions told Capital.
The authority’s employees working schedule in airports, dry ports and customs check points will be arranged is such a way that customs officers are on duty around the clock. Any goods shipped by an economic entity identified as AEO will not stop at any customs check points of the authority. They simply ship their good from port and unload at their warehouse. The authority clears custom requirements of such goods after that. Goods qualified for PCA will be shipped from the port to the designated place without any customs clearance stopover. ERCA will have the authority to check at the final destination of the goods imported through PCA to see whether they are being used for the designated purpose or not. Goods imported for big projects like sugar development, power generation, and industrial use will be checked at the site of the project according to Eshetu.
“In the revised customs law, goods were brought to customs’ check points. The amendment introduces new ways in which customs officers can go to where the goods are. In the new arrangement we don’t need to wait until the goods under consideration reach our check point since it gives room for inspecting imported goods at the site where they are unloaded. Such a practice saves cost and project accomplishing time. That will help to further fuel the booming economic achievements of the country,” the director general explained to the committee.
The tax potential study will identify the revenue generating capacity of the country. Ethiopia’s share of taxes in the Gross Domestic Product is a little over 13 percent, which is well below the sub-Saharan average of 18 percent. In a bid to catch up with the continental average, ERCA plans to raise the figure to 15 percent in the coming three years.
A UK consultancy and research firm, Adam Smith, is conducting a study aimed at identifying the country’s tax potential. The study will identify the tax potentials of regional states so that the federal government can subsidize regional state budgets, which are short of their tax collection potential. Though the contract agreement to wrap-up the study was slated for two years, the firm vowed to complete it within a year.
Apart from identifying the country’s tax generating potential, the study will also serve the purpose of Federal Grant Formula. When the study is completed, regional states are provided with federal budget subsidies which fill the gap between their tax collection capacity and their development need. If a given regional states fails to meet its tax collection capacity, it will shoulder the burden of such incapacity, according to officials.
“The authority should introduce a system that can penalize regional states who are not collecting up to their tax potential, once the study is completed. Until then the authority should assist regional states in building their capacity in every possible manner,” said Wanna Wake, the chairman of the committee, while commenting on the overall reform activity and performance of the authority.
Regional states are advised to focus on collecting Turnover Taxes (TOT) since many of the organization not registered for Value added Tax (VAT) are administered by them.
The contribution of domestic tax surpassed that of customs duties for the first time in the history of the country according to the Ethiopian Revenue and Customs Authority (ERCA). The shift in revenue base is attributed to massive reform programs the authority is currently undertaking. The authority also collected 5.5 billion birr in the concluded Ethiopian budget year in tax arrears. It fired 89 staff in relation to disciplinary cases while 79 faced administrative measures.
Two years ago when the authority began its plans envisioned in the GTP (Growth and Transformation Plan), the contribution of customs duties to national revenue was around 67 percent. Now, that trend has been reversed. The contribution of domestic tax has reached a little over 51 percent of the total revenue collected while that of customs duty goes down to 48.8 percent in the concluded Ethiopian budget year.
In order to widen it tax base, Ethiopia needs to either improve its tax collection capacity by enrolling as many as possible in the tax system so that all taxpayers will comply with tax regulations and procedures or reduce tax rates to encourage voluntary compliance, according to Sisay Baharu, Planning and Performance Monitoring Director of the authority.
“The second option is not feasible in the short term since the governing economic plan of the country does not take into account tax rate reduction,” he explained.
The authority spends 0.83 birr to collect 100 birr in revenue.
Modernizing data base
The idea behind modernizing the database of the authority is preventing over and under invoicing of commodity prices, so that imported goods tariffs will be carried out in an acceptable manner. An Indian IT company has been conducting the data base improvement project for over a year. It is expected that the system will come into effect within a month or two.
The authority collected 22.5 billion birr in the first quarter of this budget year, surpassing its plan of collecting 21 billion birr. This is a 41 percent increase as compared to the first quarter of the 2011/12 fiscal year.
ERCA seized contraband goods valued at an estimated 333.6 million birr. Out of the total cost of goods, 307 million birr was attributed to imported goods, while 26.6 million birr is to export. The authority hired 2,000 employees, most of whom are new graduates. This pushes the total work force of the authority to 7,500 which fulfill only about 70 percent of the authority’s human resource demand.
The federal government tasked ERCA with bringing in about 71 billion birr in taxes and lottery sales’ profits in twelve months, to partially cover the 2011/12 budget of 117.8 billion birr for the fiscal year. It collected 70.75 billion birr fulfilling the government’s objective though it falls short of its own target of 76 billion birr. This year’s achievement is 40 percent more when compared to the previous year’s 50.8 billion birr.
Seventy percent of the country’s tax revenue comes from less than one thousand people according to information obtained from the authority.
The authority plans to raise 101 billion birr this fiscal year, portraying a 44 percent growth compared to the close to 71 billion birr it collected in the previous budget year. It also plans to collect 9.2 billion birr for Addis Ababa city government, up from the previous budget year’s 6.5 billion birr.
There are 26 thousand cash register users in the country, the majority of them being in Addis Ababa. Only 7,000 of the total cash register machines are found in regional states. More than 590 thousand people gave their finger prints to have a Tax Identification Number (TIN) in the past budget year, making the total number of finger prints collected over two million. Both the numbers of finger prints and cash registers are expected to continue increasing in the years ahead until all businesses embrace the modern system the authority plans to establish throughout the country.