Ethiopia is preparing to establish a formal revenue-sharing system for a new motor vehicle ownership tax that is expected to take effect in the 2027/28 budget year, according to a document obtained by Capital.
The Council of Ministers is expected to submit the proposal to the House of Federation by the end of December 2026. If approved, the plan will create a legal framework for sharing revenue from the new tax between the federal government and regional states in line with constitutional requirements.
The vehicle ownership tax is part of a broader government effort to strengthen domestic revenue collection and raise the country’s tax-to-GDP ratio. Officials expect the measure to contribute about 0.1 percent of GDP in its first year and around 0.2 percent in the second year.
State Minister of Finance Semereta Sewasew said earlier this month that Ethiopia has made notable progress in improving tax collection capacity. Speaking at an African regional consultation in early July, she said the country’s tax-to-GDP ratio had risen from 6.2 percent to 8.2 percent over the past two years and was projected to reach 10.8 percent in the current budget year.
The proposed tax comes as the federal government looks for new ways to finance rising public spending. The 2026/27 budget was approved at 2.339 trillion birr, with more than 1.61 trillion birr expected from domestic revenue. Of that amount, tax revenue is projected to account for 1.49 trillion birr.
The revenue-sharing proposal is grounded in Ethiopia’s constitutional framework, which recognizes federal, regional and shared sources of revenue. The system is intended to support regional autonomy while also ensuring fiscal responsibility and transparency in public finance.
Legal and policy experts note, however, that the absence of detailed rules governing shared revenue sources has long created uncertainty over how such income should be divided.
The new proposal is expected to address some of those gaps, especially as the government prepares to begin collecting a tax that could become a significant source of income over time.
The International Monetary Fund has estimated that the vehicle ownership tax could bring in about 0.1 percent of GDP in the first year, rising to 0.2 percent in the second year. But analysts say the tax’s impact will depend heavily on how it is designed and implemented.
The plan faces questions over fairness and affordability, particularly because Ethiopia has a limited vehicle fleet. Data cited from CleanTechnica in 2024 put the number of registered vehicles in the country at about 1.2 million, a figure that suggests the new levy could place a heavy burden on vehicle owners if not carefully structured.
Economist Aschalew Tefera said the reform is necessary to strengthen government revenue and support fiscal balance, but warned that its effects on the wider economy need close attention. He said many vehicle owners are not wealthy investors, but ordinary citizens who rely on their cars for transport services and daily income.
According to Aschalew, adding a new ownership tax could raise operating costs for low-income drivers and worsen inflationary pressure. He said policymakers should consider the ability to pay and make a clear distinction between vehicles used for business and those used for personal use.
Policy analysts have raised similar concerns, arguing that a tax system linked to vehicle ownership, property, excise and VAT risks shifting the burden toward middle- and lower-income households. They warn that families with modest assets are often easier to tax than wealthier households that can use more complex financial arrangements to reduce exposure. The pressure on households is already high. Ethiopia’s general inflation rate stood at 13.4 percent year on year in May 2026, while month-on-month inflation rose by 1.7 percent, according to the Ethiopian Statistics Service.
The government now has several months to finalize the legal and administrative groundwork before the tax is introduced. That includes approval by the House of Federation, setting up collection systems, defining the revenue-sharing formula and preparing public awareness and compliance measures. How the proposal is ultimately shaped may determine not only how much revenue it raises, but also how fairly the new tax is perceived by the public.
