22 September 2017

Ethiopia: Sound Tax-to-GDP Ratio - Call of the Day

editorial

Empirical evidences show that the Ethiopian tax-to-GDP ratio is low. As it has been mentioned in the second Growth and Transformation Plan (GTPII), the share of tax revenue amounted to only 13.3 percent of the GDP, which is far below the average tax-to-GDP ratio for Sub-Saharan countries. From this, it follows that the country has a room to increase its domestic revenues--which is exactly what the government has done by applying a business profit tax rate revision over the last months. The revision is based on a daily income valuation assessment carried out at national level.

Tax reforms of such kinds are not uncommon in Ethiopia since 1991. But, these days, the series of reforms become more and more relevant on various accounts. In one hand, the successive double digit economic growth is benefiting the various segments of the society.

The public driven government spending on infrastructural facilities is growing by leaps and bounds, not to mention the importance of taxation to redistribute wealth, on the other. Thus, bringing more taxpayers and businesses to the tax bracket is not an option but a matter of sustaining the quickly ascending economic growth. Collecting taxes from every business profit as well as income also broaden the tax base. This means, the burden would be relieved from the few private enterprises. If this is so, the question here is: How can the country make the economic growth and the tax revenue to be proportional?

The ways and means to increase tax revenue is engaging in rigorous research undertakings. It is crystal clear that informed and an all convincing decisions result from empirical researches. Indeed, such studies could be a means to understand the alternatives and broaden the tax base. As rightly mentioned by Ministry of Finance and Economic Cooperation, there are areas that require the interventions of researcheRs - which includes, but not limited to, the functioning of the tax system and ways of improving the system, tax evasion and avoidance, modernization of business process, re-organization and better use of available data for tax assessment. Moreover, research works should also focus on innovative and modern tax reform measures which would be less painful or one of a kind that does not go against the saving and investment schemes of the private sector. Actually, the government alone cannot and will not undertake such researches. The private sector, particularly economic think-tanks, as well as other associations has the responsibilities of assisting the government in this regard.

Another mechanism to increase domestic revenue, as a result of tax, is installing a functioning voluntary tax compliance mentality among the tax payers. There are various improvements which speak for themselves in terms infrastructural provisions. This in itself will help create tax compliance. Be this as it may, more awareness raising works should be carried out to build the mentality among the tax payers. This cannot come all of a sudden as Rome was not build over night. But, a steadfast foundation should be laid so sooner than later.

It goes without saying that mobilizing domestic financial resources, tax in this regard, paves the way for more policy space, and instill a 'can do' mentality on citizens' mind as developmental feats could be realized with domestic financial sources. On top of this, the country can get the ticket to pursue priority programs with its own resources. The effort would also sounds when one put it in the context of the current global situation in which external resources are hard to come by.

In a nutshell, pertinent government and private bodies have the lion's share of responsibilities. One, they need to carry out researches on the foreseeable gaps. And two, these bodies need to raise the awareness of the public in general.

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