Noah Safari Aug 2 2009
Resources drawn from the economy support governments. Ethiopia has introduced and issued different types taxes. MOR is responsible to enforce and implement tax law, regulations and directives of the country. In the first half of the Ethiopian fiscal year, the MoR collected 9.729 billion birr, slightly missing its target of 10.246 billion birr. On March 18, 2008, the government had lifted VAT and TOT on food grains and flour to reduce the impact of high inflation on poor citizens. The lifting of the tax (VAT) costs the government approximately 400 million birr.
Each type of tax has certain advantages and each causes unique problems in implementation. The government currently subsidizes fuel, food, water, education, cement, regions and municipalities to the tune of 5 billion birr annually and the subsidization will continue. Government expenditures are becoming high. Prices are in continuous rise so the subsidy provided by the government will never be enough to cover the same goods and services at the market price.
MoR collected 9.729 billion birr, out of the revenue collected, the Customs Authority accounted for 55.69% of the total, whereas the Federal Inland Revenue Authority comprised 44.18%, the remaining being registered by the National Lottery. In Ethiopia, the tax bases and types of taxes are not enough to support the government effort and are limited to custom, VAT, profit and income taxes only. The government should focus on other means and types of revenues and taxes. Land tax and property taxes are the least revenue of the government compare to most Africa countries and the rest of the world.
Levying more land tax on cities and towns is regarded as the most efficient by some economists and encourages efforts to improve the quality (that is, the economic value) of land. It encourages developing effectively the plot to skyscraper building. Levy land tax on houses and buildings based upon the current use and value of the land and this is the major source of revenue for most municipal governments in developed and developing countries.
Property tax is likely to be similar to the "roof tax" a levy proportionate to the size and scale of a building, which is in effect a tax on the number and density of houses. The word "roof tax” is similar to the Amharic "taria gibir". The word "land tax" is similar to the Amharic "afer gibir" or "meret gibir". Land lease is different from land tax. Also levy more tax on land would drive down land prices too much. Certainly, a land tax has obvious advantages: it is simple and cheap to levy; evasion is impossible; transparent; and also it penalizes owners who do not put their land to work. A land tax is usually levied based on the size; value and location of plot exist.
For instance, current land tax rate around Bole area (considered to be Beverly Hills’ of Ethiopia) is less than one birr per sqm annually, which is almost nothing. In Kenya, Nairobi city center land tax rate would cost (average) $30 USD per sq.m annually, and doesn’t include property tax. Addis Hilton hotel pay less than 100 thousand birr annual fee for about 100,000 sqm areas.
In Ethiopia reality, rich people and speculators are taking advantage of direct and indirect subsidies and other government benefits. Current land and property tax system has many irregularities which enable the rich to benefit from indirect subsidies. Urban tax reforms are needed to ensure that this no longer happens.
According to the experience cities in China where the new policy to raise land fees and taxes has been tried, higher land taxes and fees would check excessive redevelopment of land for industrial and commercial projects and force local governments to improve the viability of projects. A very important benefit of a tax on land over a tax on income is that the revenue always equals the tax levy, unlike income or sales taxes, which can result in shortfalls producing budget deficits. The land tax always produces the required and budgeted revenue for municipality’s tax levies.
Land and property taxes generally tend to redistribute the benefits of wealth from higher to lower income groups, since they often pay for state programs of subsidies, health centers, schools and other low cost and free services used by low-income groups. In general such tax systems are simple to understand and implement, and receipts from revenue will directly go to local infrastructure requirements and subsidies. Land tax is determined on an annual basis, as a fixed amount per square meter.
Some economists believe that checking excessive growth of credit and land supply could be an effective way of cooling the economy and controlling the inflation. Lack of effective controls will lead the economy to the level of "You can't steer it, you can't regulate it anymore. You can't get the genie back in the bottle. All major city municipalities such as Dire Dawa, Mekele, Bahir Dar, Awassa and others never produce sufficient revenues to be shared. Most of their revenue collector institutions are passive and no effective plans to generate money.
Municipalities receive most of their revenue from sources of taxes and state aids. Some of above municipalities collect 20 million birr annual revenue and less revenue compared to a single mid to high end mid-sized company in Ethiopia can register. City administration problem lies mainly because their chronic income shortfalls do not allow them to maintain planed activities.
In order to cover this shortfall of budget and to be self sufficient while maintaining their investment program, which could be addressed through an increase in the city government's revenue collection capacity and land tax reform. Land fee regulations should be re-structured based on areas of Addis and municipalities should adopt new rates on annual basis.
I hope the government will make sure that Ethiopia will have sustainable economic growth and peace.
The writer can be reached: noah.safari@yahoo.com