In recent weeks, reports have highlighted additional taxation affecting ride-hailing drivers in Ethiopia, at a time when they are already facing rising tax bills and operating costs. Discussions around the approach to taxing app-based rides have naturally drawn attention to what such changes could mean for drivers and passengers.
Ethiopia’s decision to bring ride-hailing into the VAT system is part of a legitimate effort to modernise the tax base for the digital economy. For the thousands of drivers who earn their living through these apps, though, the real question is not the principle but who will actually bear the cost. Under the current proposal, VAT would apply to the full value of every ride booked through a platform, not only to the platform’s commission. Most drivers are individual earners operating well below any VAT threshold, and they would have no way to recover that tax. In practice, the burden is likely to land on them, either through lower take-home pay per ride or through higher fares that push passengers back toward informal street hailing. For drivers who chose platforms precisely because they offer traceable income and a degree of formal status, the design of this measure could decide whether digital work remains a viable livelihood or becomes a reason to leave it.
Protecting drivers’ livelihoods
This debate comes at a difficult time for Ethiopian households. After falling to 9.4% in March 2026, its lowest level since 2018, inflation rose again following the oil shock linked to the conflict in the Middle East. According to the Ethiopian Statistics Service, it reached 15.3% in July 2026, with food prices rising even faster. Fuel has been at the centre of this shift. Between January and May 2026, the price of a litre of petrol rose by around 30%, to 167.50 birr, while diesel climbed by some 40%, to just over 180 birr, and supply shortages left many vehicles idle. For ride-hailing drivers, most of whom are self-employed, often rent their vehicles and have neither a guaranteed income nor social protection, these increases have already significantly reduced net earnings. Any additional cost would therefore fall directly on a workforce with very little room to absorb it.
But, the Ministry of Revenues’ letter/guidance on the mechanism recognises that the income generated from a ride belongs to the transport service provider, the driver, rather than to the platform. Applying VAT to the full fare therefore means that the tax base consists, in large part, of the driver’s own income. This situation is well documented internationally. As noted in the report The Impact of the Growth of the Sharing and Gig Economy on VAT/GST Policy and Administration, published by the OECD in 2021, regimes that make platforms liable for VAT on the full value of the services they facilitate can have a significant negative effect on providers’ earnings. The same report observes that such an approach may bring within the scope of VAT activities that would not otherwise be taxed, since thresholds are then assessed at the level of the platform rather than for each individual driver. It also notes that people providing labour-intensive services through platforms tend to come from the lower end of the income spectrum.
A simple illustration helps to measure what is at stake. At Ethiopia’s standard rate of 15%, a ride priced at 100 birr, if the fare remains unchanged, contains 13.04 birr of VAT, meaning that more than 13% of the value of the ride no longer reaches the driver. This would materially reduce the amount available to cover the driver’s earnings and operating costs.
If the tax is instead fully passed on to the passenger, the same 100-birr pre-tax ride would cost 115 birr. The economic impact may therefore fall on the driver, the passenger, or be shared between them depending on market conditions.
By comparison, if the platform’s commission on the same ride were, for example, 15 birr, VAT applied to that commission alone would amount to 2.25 birr. The choice of tax base therefore makes a considerable difference.
This is not a theoretical alternative. A 2025 KPMG Advisory whitepaper on mobility regulation recommends that governments collect VAT on platform commissions and have platforms act as withholding agents for drivers, keeping any additional per-ride levies low and consistent (0.5–1%) so as not to overburden the sector. Côte d’Ivoire already applies this design in practice, licensing platforms and charging 18% VAT on the commissions they earn, rather than on the full value of each ride. – an arrangement KPMG credits with integrating a significant portion of the informal transport economy into the formal accounting system.
Keeping everyday mobility affordable
Where drivers are unable to absorb this additional cost, part of it is likely to be reflected in fares. In the same illustrative example, a 100-birr ride would cost 115 birr if the tax were fully passed on. For many households that rely on these services to reach their workplace, a health centre or a school, this would add to existing pressure on purchasing power.
European experience offers a helpful point of reference. According to the Study on the economic effects of the current VAT rules for passenger transport, prepared in 2014 for the European Commission by a consortium led by the CPB Netherlands Bureau for Economic Policy Analysis, 17 of the 28 EU Member States applied a reduced rate, an exemption or a special scheme to domestic taxi services at the time, rather than their standard rate. Sweden taxed taxi rides at 6% against a standard rate of 25%, the Netherlands at 6% against 21%, and Germany at 7% rather than 19% for journeys within a municipality or shorter than 50 km. Italy exempted urban taxi transport altogether, on the grounds that it serves the public interest. These choices reflect a widely shared recognition that everyday mobility merits particular attention in the design of consumption taxes.
Supporting formalisation
Every ride booked through an application leaves a record of who provided the service, when, where and at what price. The OECD report highlights the considerable opportunities that platforms create for greater visibility and traceability of economic activity, and for the formalisation of previously informal activity, particularly in developing economies, notably by reducing the cash-based informal economy. Preserving these benefits requires that operating within such traceable ecosystems remains attractive for drivers and passengers alike. The OECD makes a comparable observation about certain other collection mechanisms, noting that they may encourage the use of cash or of payment channels outside the formal system.
A balanced implementation in everyone’s interest
The objective is not to question the principle of taxation, but to ensure that it is applied in a proportionate and economically sustainable way. The ride-hailing sector plays an important role in Ethiopia. It supports tens of thousands of drivers, some of them graduates with few other job opportunities, and complements a largely saturated public transport network in a city where the vast majority of trips rely on public transport or walking. It already contributes to public revenue, with over 340 million birr in income tax collected from more than 33,000 drivers in Addis Ababa, and is one of the most dynamic sectors of the country’s digital economy.
However, a heavy VAT burden on app-based rides could prove counterproductive. If the additional cost makes platform rides less attractive, some drivers and passengers may turn to offline, cash-based arrangements. Local press already reports this shift among drivers facing higher tax bills. The OECD warns that taxing the full value of rides at platform level can discourage drivers from using the platforms concerned, even though platforms are one of the most effective tools for formalising previously informal activity. Rides that leave the platforms also leave the most traceable part of the sector, narrowing the tax base and ultimately reducing rather than increasing government revenue.
