Capital Ethiopia Newspaper

ERCA may increase VAT withholding

The growing number of requests for tax refunds is causing the government to consider increasing the withholding percentage from Value Added Tax (VAT). In the first four months of the budget year over 2.6 billion birr was slated to be refunded. There have been so many refund requests that companies have been complaining about delays in receiving them.

During the latest meeting with high tax payers, Ethiopian Revenue and Customs Authority (ERCA) officials said there have been significant increases in the amount of tax refund requests. Desta Bezabeh, Deputy Director for Inland Revenue of ERCA, said that ERCA has been assessing the reason for the increasing number, especially over the past few months.

According to a document that Capital obtained, in the first four months of the budget year over 2.6 billion birr was slated for refund. In the first four months of the budget year net collections after tax refunds and other transfers amounted to 53 billion birr.

During October ERCA allocated 887 million birr for tax refunds, according to its monthly performance. Experts said that this amount is much larger than the preceding period. That month ERCA was able to collect over 18.7 billion birr in revenue. Over 4.7 percent of that amount has been set aside for tax refunds.

ERCA currently withholds ten percent of the amount collected from VAT to settle tax return requests.

“Even though ERCA budgets a large amount of money for tax refunds there is still a big difference between demand and allocation,” experts at ERCA told Capital.

Authority officials disclosed that they have already informed the government about the situation.

“We are now working on a solution in collaboration with the Ministry of Finance and Economic Cooperation,” Desta said.

Some companies that attended last week’s meeting said they had been waiting for months to get their tax refund. Historically, tax refund requests have been responded to every month, although ERCA says they are working as fast as they can.

“Previously we were covering the refund request by ourselves, now funding shortages have been observed,” he said.

ERCA is looking at different options to solve the problem. One salient problem, the agency says is that people are increasingly filing illegal tax returns.

“Some of the tax payers are issuing illegal receipts without real transactions just to get the tax refund. ERCA is assessing the illegal actors who issued receipts without a transaction and some of them are already facing legal charges,” he told Capital.

One other potential solution involves increasing the withholding percentage from 10 to 13 percent. “We are now studying it,” he said. “As another alternative ERCA will collect the withholding amount that was given to some government offices that were permitted to use the withholding amount that they collected on behalf of the authority,” he explained.

Currently over two billion birr in unpaid accrued tax refunds are being requested by tax payers.

Companies involved in huge projects have expressed concern about the delay of their refunds. For instance Salini Impregilo, who constructed the Gibe III power project and Grand Ethiopian Renaissance Dam and other mega projects, has claimed that its 200 million birr tax refund has not been settled. Yapı Merkezi, a Turkish firm that is constructing the Awash-Woldya Railway is anticipating a 400 million birr tax refund.

During the discussion the recently appointed director of ERCA, Kebede Chane, also said that there is a serious ethical problem with regards to the private auditors which has increased the expense of the businesses, and that is contributing to tax evasion.

“We have spoken with the regulatory body, MoFEC, to correct the problem with a new controlling scheme,” the director said.

“Private auditor licensing will be strictly governed in the new plan,” he added.

Regulations and directives are being drafted that support the tax administration and proclamations were amended a few months ago.

He said that the regulations will be tabled for discussion before their ratification by the Council of Ministers.