Chapter Three

Public Finance in Ethiopia

1
 3.1 Features of Ethiopian Federal
Finance
Federalism is a system of government in which there is
division of powers and functions between federal
government and several regional governments, each of
which in its own sphere coordinates with the others and
each of which acts directly on the people through its
administrative machinery.
Federal finance refers to the system of assigning the
source of revenue to the central as well as state
governments for the efficient discharge of their respective
functions i.e. clear-cut division is made regarding the
allocation of resources of revenue between the central and
state authorities. 2
Con’t…
The form of government is parliamentary having both
federal and state governments with legislative,
executive, and judicial powers.
Federalism requires decentralization of government
decision making and implementation involves
delegating more power to the decentralized divisions
of the government. The goal of this strategy is to
speed up government action and to deliver a more
suitable package of services needed by the locality.

3
Con’t….
One component of federalism is fiscal federalism (federal
finance) which gives local governments some taxing
power and expenditure responsibility, and allows them to
decide on the level and structure of their expenditure
budgets.
The main goal of fiscal decentralization is to move
governance closer to the people, and this does requires
strengthening local government finances. Fiscal
decentralization requires local governments with some
autonomy to made independent fiscal decisions.
Federal finance refers to the system of assigning the
source of revenue to government. 4
Principles of Federal Finance
In the case of federal system of finance, the following
main principles must be applied:
1. Principle of Independence
2. Principle of Equity
3. Principle of Uniformity
4. Principle of Adequacy
5. Principle of Fiscal Access
6. Principle of Integration and Co-ordination.
7. Principle of Efficiency
8. Principle of Administrative Economy
9. Principle of Accountability. 5
1. Principle of Independence
Under the system of federal finance, a Government
should be autonomous and free about the internal
financial matters concerned.
It means each Government should have separate
sources of revenue, authority to levy taxes, to borrow
money and to meet the expenditure.

6
2. Principle of Equity
From the point of view of equity, the resources
should be distributed among the different states
so that each state receives a fair share of
revenue.
The allocation of resources should be made in
such a way as to give equitable treatment to the
individuals and business firms in different
places.
7
3. Principle of Uniformity
In a federal system, each state should pay
equal tax payments for federal finance. But this
principle cannot be followed in practice
because the taxable capacity of each unit is not
of the same.
Since this principle of uniformity emphasis on
the uniformity of pattern of expenditure in all
the states, equality of contribution imposes
heavy burden on backward states.
8
4. Principle of Adequacy of Resources
The principle of adequacy means that the resources of each
Government i.e. Central and State should be adequate to carry
out its functions effectively.
Here adequacy must be decided with reference to both current
as well as future needs. Besides, the resources should be elastic
in order to meet the growing needs and unforeseen expenditure
like war, floods etc.
5. Principle of Fiscal Access: In a federal system, there should be
possibility for the Central and State Governments to develop
new source of revenue within their prescribed fields to meet
the growing financial needs. the resources should grow with
the increase in the responsibilities of the Government.
9
6. Principle of Integration and Co-ordination
The whole financial system of a federation should be well
integrated. There should be a perfect co ordination among
different layers of the financial system of the country.
Then only the federal system will prosper. This should be
done in such a way to promote the overall economic
development of the country.
7. Principle of Efficiency: The financial system
should be well organized and efficiently administered.
 There should be no scope for evasion and fraud. No one
should be taxed more than once in a year.
 Double taxation should be avoided.
10
8. Principle of Administrative Economy
Economy is the important criterion of any federal
financial system. That is, the cost of collection should be
at the minimum level and the major portion of revenue
should be made available for the other expenditure outlays
of the Governments.
9. Principle of Accountability: In a federal set up, the
Governments both Central and States enjoy financial
autonomy. Thus, in such a system each Government
should be accountable to its own legislature for its
financial decisions. i.e. the Central to the Parliament and
the State to the Assembly.
11
Modes of Allocation of Revenue Resources in
federal Government
In a federal Government, allocation of financial resources
between the centre and the states is of great importance.
While allocating the resources, the principles of
uniformity, adequacy, autonomy, transference,
administrative economy and federal control are to be
followed. These principles are not exclusive. They are
interdependent.
Modes of Allocation
There are two types of allocation. They are as follows:

12
1. Independent System
Under this system, the units in a federation are
deriving their revenue from absolutely
different sources. There would be no
concurrence or contact between the centre and
the units.
2. Mixed System: Under this system, there
would be concurrence and contact between the
centre and the units. This system is divided
into two viz., concurrent mixed system and the
contact mixed system. 13
Con’t….
In the concurrent mixed system, both centre and
the states have concurrent powers of taxation
regarding certain sources. There would be no
transfer of resources from the centre to the
states.
In the contact mixed system, contact between the
centre and the states is created. There would be
assignments, subsidies, subventions or
contributions.
14
 Balancing factors of allocation
Prof. Adarkar points out that it would be impossible
to think about an independent system. The most
desirable system of federal finance must ensure large
measure of independence and adequacy. If either the
centre or the states are not able to meet their
requirements, it should be made good by certain
balancing factors.
The balancing factors are those, which would make
good the financial inadequacy of either the centre or
the states in a federation. They are as follows:
15
1. Assignments
Usually the Federal Government levies and collects
certain taxes. But it is shared on an agreed basis with
the states. Of course the distribution of this share
between the states is very difficult. The basis of
distribution may be as follows:
On the basis of actual collections from different states.
 On the basis of population and
On the basis of economic backwardness of the states.

16
2. Subsidies
The states very often find themselves with
financial stringency. They are granted certain
subsidies by the center on account of the
transfer of certain sources like customs or
excises to the center.

17
3. Subvention
Subventions are grants-in-aid to redress certain
inequalities between states. They are made for specific
purposes. They should be spent for the purpose for
which they are made. The spending of the amount
would be under the supervision of the granting
authority.
These are the bases and modes of allocation of funds
between the center and the states. The distribution of
financial sources in Ethiopia is based on the
recommendations of the Ministry of Economic
Development.
18
Con’t….
Fiscal federalism has four components:
Revenue Assignment
Expenditure Assignment
Intergovernmental Transfer
Borrowing

19
3.2. Revenue Assignment
 The distribution of revenues between the centre and
states is followed on the basis of constitution of
Ethiopia and Proclamation No. 33/1992-Proclamation
to define sharing of revenue between the central
government and the regional governments. The
Articles 96, 97, 98, 99 and 100 of the constitution of
Ethiopia make a clear demarcation of areas where the
Central alone or State alone have authority to impose
taxes. It contains a detailed list of the functions and
financial resources of the centre and states.
20
3.2.1. Objectives of Revenue sharing
The sharing between the central government and the
Regional Governments has the following objectives:
 To enable the central Government and the Regional
Governments efficiently carry out their respective duties
and responsibilities.
 To assist Regional Governments, develop their regions on
their own initiatives;
 To narrow the existing gap in development and economic
growth between regions;
 To encourage activities those, have common interest to
regions. 21
3.2.2. Basis for Revenue Sharing
The sharing of revenue between the central government
and the national/ regional governments takes in to
consideration the following principles:
 Ownership of source of revenue
 The National or Regional character of the sources of
revenue;
 Convenience of levying and collection of the tax or duty;
 Population, distribution of wealth and standard of
development of each region;
 Other factors that are basis for integrated and balanced
economy. 22
3.2.3. Categorization of Revenue
According to constitution of Ethiopia revenues are
categorized as central, regional and joint. The sources
of revenue are given under federal/central list are as
follows;
a. Duties, tax and other charges levied on the importation
and exportation of goods;
b. Personal income tax collected from the employees of
the central Government and the International
Organizations
c. Profit tax, Personal income tax and sales tax collected
from enterprises owned by the Central Government.23
Con’t….
d. Taxes collected from National Lotteries and other
chance winning prizes;
e. Taxes collected on income from air, train and marine
transport activities;
f. Taxes collected from rent of houses and properties
owned by the central Government;
g. Charges and fees on licenses and services issued or
rented by the central Government;

24
The following shall be Revenues for the Regions:
1. Personal income tax collected from the employees of
the Regional Government and Employees other than
those covered under the sources of central
government.
2. Rural land use fee.
3. Agricultural income tax collected from farmers not
incorporated in an organization.
4. Profit and sales tax collected individual traders.
5. Tax on income from inland water transportation.

25
Con’t…..
6. Taxes collected from rent of houses and properties
owned by the Regional Governments;
7. Profit tax, personal income tax and sales tax collected
from enterprises owned by the Regional Government:
8. With prejudice to joint revenue sources, income tax,
royalty and rent of land collected from mining
activities.
9. Charges and fees on licenses and services issued or
rented by the Regional Government;

26
The following are Joint Taxes:
 Profit tax, personal income tax and sales tax collected
from enterprises jointly owned by the central Government
and Regional Governments;
 Profit tax, dividend tax and sales tax collected from
Organizations;
 Profit tax, royalty and rent of land collected from large
scale mining, any petroleum and gas operations;
 Forest royalty

27
3.2.4. Collection and Allocation of Joint
Revenues
The federal government collects both the
federal and joint revenues. The joint revenue is
shared based on a decision made by a
committee appointed by the prime minister and
consisted of representatives of both levels of
governments

28
3.3. Expenditure Assignment
The federal structure of Ethiopia allocates functions and
responsibilities, and hence expenditure, to federal
government and regional governments.
Art 51 of the Constitution entrusts the federal government
with power subject to national defense, international or
foreign relations, citizenship, immigration and
naturalization; interstate commerce, postal and
telecommunication services, weights and measures, domestic
currency coinage and foreign currency usage, banking,
patents and copyrights, operation of air, rail and water
transports and highways linking two or more states, enacting
labour, electoral, procedural, criminal, and commercial29
Con’t….
Art 52 (2) assigns to regional governments such power and
functions as enacting and executing the state constitutions;
 establishing state police,
 maintaining public peace and order;
 administration of land and other natural resource within the
region; and
 formulating and executing economic and social development
policies, strategies and plans of the state.
The states also have power over areas of education, health and
agriculture.
 Both regional governments and federal government are required
to cover expenditure to be incurred in connection with their
30
3.4. Intergovernmental Transfer (Subsidy)
Intergovernmental transfers (IGTs) are the movement of
public funds between different levels of government, such
as a central government providing funds to state or local
governments, to support various public services and
achieve broader policy objectives like fairness, economic
unity, and balanced development.
As can be evidently observed from the revenue and
expenditure assignments addressed in the Constitution, the
lucrative (profitable) sources of revenue in Ethiopia are
assigned to the federal government while a wide range of
expenditure responsibilities are reserved to the regions.
.31
Con.t……
This resulted in significant vertical fiscal
imbalance between the federal and regional
governments.
Besides, the adoption of the federal system has
created autonomous regions that vary
enormously in area, population size,
infrastructure, human and institutional capacity
and socio- economic status.
32
Con’t….
As a result, there is an extensive difference in the fiscal
capacities of these regions. Recognizing the
inevitability of fiscal imbalances resulting from the
division of powers in the constitution, the disparities in
population, natural resources as well as human and
institutional capacities among regions, the Constitution
lays down legal basis for fiscal transfer- the transfer of
money from central government to regional
governments.
Annually there is a formula-based unconditional
transfer of money from the federal government to
33
3.5. Borrowing
Regional governments are not allowed to borrow from
abroad. It is the federal government that has the power to
borrow from abroad. They can, however, borrow
internally from banks to meet the cash flow timing
problem.
Borrowing internally from banks requires the permission
of MOFED. When regional governments experience
budget shortfall in any fiscal year the federal government
may give them loan in the form of advance to be charged
to their budgetary subsidy of the following year.

34
3.6. Budgeting and its process in Ethiopia
3.6.1. The Concept of Budgeting in Ethiopia
The government budget represents a plan/forecast by
government of its expenditures and revenues for a
specified period. Commonly government budget is
prepared for a year, known as a financial year or fiscal
year.
 In Ethiopia the fiscal year is from July 7 of this year to
July 6 of the coming year (Hamle 1-Sene 30 in Ethiopian
calendar).

35
Con’t…
Budgeting involves different tasks on the expenditures
and revenues sides of government finance. On the side of
expenditure, it deals with the determination of the total
size of the budget (i.e. total amount of money for the
year), size of expenditures on different functions, and the
extent of outlays on various activities.
On the revenue side, it involves the determination of the
size of the overall revenue and foreign aid.
Furthermore, budgeting also address the issue of the
budget deficit (i.e. the excess of outlays over domestic
revenues), and it’s financing.
36
3.6.2. Budget Structures in Ethiopia
Budget structures are the formats that organize budget
data. Budget data could be classified in different ways and
for different purposes.
 In the early days, for instance, budget classification
basically focused on providing a better understanding of
the intentions and purposes of government for which
funds were planned and to be spent.
The first classification of the budget is between revenue
and expenditure.

37
Revenue Budget
It represents the annual forecast of revenues to be raised by
government through taxation and other discretionary
measures.
In Ethiopia, the revenue budget is usually structured into
three major headings:
 ordinary revenue,
 external assistance, and
 capital revenue. Hence, the funds expected from these three
sources are proclaimed as the annual revenue budget for the
country. The revenue budget is prepared by the Ministry of
Finance (MoF) for the federal government and by Finance
Bureaus for regional governments. 38
CON’T…
Ordinary revenues include both tax and non- tax
revenues.
The tax revenues being direct taxes (personal income tax,
rental income tax, business income tax, agricultural
income tax, tax on dividend and chance wining, land use
fee and lease); indirect taxes (excise tax on locally
manufactured goods, sales tax on locally manufactured
goods, service sales tax, stamps and duty); and taxes on
foreign trade (customs duty on imported goods, duty and
tax on coffee export).
Non tax revenues include charges and fees; investment
revenue; miscellaneous revenue and pension39
Con’t…
The second major item in revenue budget is external
assistance.
It includes: cash grants, these are grants from multilateral
and bilateral donors for different structural adjustment
programs; and technical assistance in cash and material
form.
The third item is capital revenue. This could be from
domestic (sales of movable properties and collection of
loans), external loan from multilateral and bilateral
creditors mostly for capital projects, and grants in the
form of counterpart fund.
40
Expenditures Budget
Government expenditures for administration and
developmental activities are handled through the expenditures
budget. These expenditures are categorized into recurrent and
capital expenditures.
The recurrent budget which covers the current expenditures is
financed in principle by taxation (more broadly by domestic
revenue from tax and non- tax sources), and
the capital budget which covers the acquisition of newly
produced assets of the economy is financed through external
borrowing and grants. The Expenditure Budget includes the
following two types of Budgets:
41
Con’t….
1. Recurrent Budget, and
2. Capital Budget.
1. Recurrent Budget:-Financial proclamation 57/1996 and
financial regulation 17/1997 defined only the capital budget,
implicitly defining the recurrent one as a residual. To common
practice, however, is to include in the recurrent budget
expenditures of recurrent nature (like salaries of civil servants)
and fixed assets with a multi-year life.
The recurrent budget is structured by implementing agencies
(public bodies) under four functional categories: administrative
and general services, economic services, social services, and
other expenditures.
42
2. Capital Budget
 Capital budget is budget for capital expenditures.
 Financial proclamation 57/1996 defined capital
expenditure as “an outlay for the acquisition of
improvements to fixed assets, and includes expenditures
made for consultancy services.” Financial regulations
17/1997 further provided a detailed definition of capital
expenditures to mean:
a. The acquisition, reclamation, enhancement as laying out
of land exclusive of roads, buildings or other structures;
b. The acquisition, construction, preparation enhancement or
replacement of roads, buildings and other structures;
43
Con’t…
c. The acquisition, installation or replacement of movable
plant, machinery and apparatus, vehicles and vessels;
d. The making of advances, grants or other financial
assistance to any person towards him/her on the matters
mentioned in (a) to (c) above or in the acquisition of
investments; and
e. The acquisition of share of capital or loan capital in
anybody corporate;
f. Any associated consultancy costs of the above.

44
3.6.3.Budget Deficit
A budget is considered as surplus or deficit according to
the position of the revenue accounts of the government.
Thus, a surplus budget is one in which revenue receipts
exceed expenditure charged to revenue account regardless
of the gap in capital accounts;
 while a deficit budget is one in which expenditure is
greater than current revenue receipts. Budget deficit is the
excess of total expenditure over total revenue of the
government.
Thus, deficit financing can be defined as “the financing of
a deliberately created gap between public revenue and
45
Methods of Financing Deficit
There are four important techniques through
which the government may finance its
budgetary deficits. They are as follows:
i. Borrowing from central bank
ii. The running down of accumulated cash
balances
iii. The government may issue new currency
iv. Borrowing from market or from external
sources. 46
Objectives of Deficit Financing
The following are the major objectives of deficit
financing.
a. Deficit financing has generally been used as a method
of meeting the financial needs of the government in
times of war, when it is considered difficult to
mobilize adequate resources.
b. Keynes advocated deficit financing as an instrument
of economic policy to overcome conditions of
depression and to raise the level of output and
employment.
47
Con’t…
c. The use of deficit financing has also been considered
essential for financing economic development
especially in under developed countries.
d. Deficit financing is also promoted for the
mobilization of surplus idle and unutilized resources
in the economy.

48
Effects of Deficit Financing
Deficit financing has both positive and negative
effects in the economy as under:
1. Inflationary (rise in prices) effect: The most serious
disadvantage of deficit finance is the inflationary (rise
of prices). Deficit financing increases the total volume
of money supply. Unless there is proportional increase
in production this can lead to inflation.
 When deficit financing goes too far it becomes self-
defeating. There was inflationary pressure during the
decade due to deficit financing.
49
Con’t…
2. Effects on distribution of wealth and income: The real
income of wage earners gets reduced and that of
entrepreneurs/ businessmen increased, leading to
distribution of wealth in favor of business class.
3. Faster growth: Country is able to implement the
developmental plans through deficit financing thereby
attaining faster growth.
4. Change in pattern of Investment: Deficit financing leads
to encouragement for investment in certain fields like
construction, luxury consumption, inventory holding and
speculation. This may lead to investment in undesirable
fields. 50
Con’t….
5. Credit creation in banks: Inflationary forces created
by deficit financing are reinforced by increase credit
creation by banks. Among various fiscal measures,
deficit financing has been assigned an important place
in financing developmental plan and various
developing countries including Ethiopia resort to
deficit financing to meet budgetary gaps.

51
 CHAPTERFOUR:
ETHIOPIAN TAX SYSTEM
After the completion of this chapter, the students will be
able to:
 Understand the structure and administration of Ethiopian
tax system
Know the income tax laws and practices
 Realize about consumption taxes
Elaborate the stamp duties
Understand foreign trade taxes

52
 4.1. Structure of Ethiopian tax system and
administration
Tax revenue is the vital governments’ revenue in any
world. The Ethiopian government collects diversified type
of tax from its citizens in order to fulfill public goods and
services and improve the living standards of the society.
To do this, the government of Ethiopia delegated to one
government institution called Ethiopian Revenue and
Custom Authority (ERCA) in order to establish tax rules,
regulations, and policies; administer and collect tax
revenue to the government.
ERCA is established starting from at federal level up to
the kebele level.
53
 Powers and Duties of Tax Authority
(Article-38)
 The Tax Authority shall be empowered to investigate any
statements, records and books of account submitted by
any taxpayer at any time by:
a) Sending properly accredited inspectors to the place of
business or practice of the tax payer to check same or any
vouchers, stocks of other material items of the taxpayer;
b) requiring the taxpayer or any employee thereof who has
access to or custody of any information, records or books
of account to produce the same and to attend during
normal office hours at any reasonably convenient tax
office and answer any questions relating thereof;
54
CON’T….
c) Requiring any person including municipality Body,
Financial Institution Department or Agency of Federal
or Regional Government to disclose particulars of any
information or transactions, including any lending or
borrowing which it may have relating to the taxpayer.

55
Confidentiality of Tax Information (Article-39)
The Tax Authority and all persons who are or have been
its agents or employees shall maintain the secrecy of all
information except such information as are required by the
Commercial Code of Ethiopia to be published by trade
gazette, on particular taxpayers received by them in an
official capacity, and may disclose such information only
to the following persons:
i. Employees of the Tax Authority, for the purpose of
carrying out their official duties;
ii. Law enforcement agencies, for the purpose of the
prosecution of a person for tax violations;
56
Con’t….
iii. Courts, in proceedings to establish a person’s
liability for tax, penalties, or interest, or in any
criminal case;
iv. Tax authorities of a foreign country, in accordance
with an international treaty to which Ethiopia is a
party.
 Information concerning a taxpayer may be disclosed
to another person with the taxpayer’s written consent.

57
 Code of Conduct for Tax Authority
Employees (Article-40)
1. Each employee of the Tax Authority shall
a. Be honest and fair, treating each taxpayer with
courtesy and respect;
b. Apply the law, regulations and rulings to each case on
the basis the objective facts in that case, showing no
partiality to members of his family or to friends;
c. Refrain from participating in any determination that
will affect his or his spouse’s tax liability;

58
Con’t….
d. Where either a known family relationship or a
business interest might influence any determination he
must, as an employee, make public (in the manner
provided by regulations) such relationship or interest;
e. Subject to Article 39 protect the confidentiality of any
tax or duty information, and
f. Not solicit or accept any bribe or perform any other
improper act relating to the duty to determine or
collect any tax.

59
Con’t…..
No employee of the Tax Authority shall act as
a tax accountant or consultant or accept
employment from any person preparing tax
declarations or giving tax advice.
Generally, tax revenues in our country
Ethiopia is collected by both federal and
regional governments.

60
4.2. Income Taxes
 The following the different types of income taxes
implemented recently in Ethiopia.
4.1.1 Schedule ‘A’ Income: Employment Income
Any remuneration paid by an employer to his
employee in consideration of his services is called
salary. It includes the value of fringe benefits provided
by the employer.
 Every person deriving income from employment is
liable to pay tax on that income at the rate specified in
Schedule A-Article 11.
61
Tax Rate (Article-11)
The tax payable on income from employment shall be charged,
levied and collected at the following rates:
Schedule A
Employment income (per month) Birr Employment Deductions
income tax Rate
0 600 0 (Exempted) Nil
601 1650 10 60
1651 3200 15 142.5
3201 5250 20 302.5
5251 7800 25 565
7801 10,900 30 955
Above 10,900 35 1500 62
 Determination of Employment Income
(Article-12)
1) Employment income shall include any payments or gains
in cash or in kind received from employment by an
individual, including income from former employment or
otherwise or from prospective employment.
2) The type of taxable fringe benefits and the manner of
their assessment shall be determined by Regulations to be
issued by the Council of Ministers.
3) Income received in the form of wages does not include
representation and other similar expenditures (on social
functions, guest accommodations, etc.)

63
Exempted Incomes (Article-13)
The following categories of income shall be exempt from
payment of income tax hereunder:
(a). Income from casual employment: income from
employment received by casual employees who are not
regularly employed provided that they do not work for
more than one(1) month for the same employer in any
twelve(12) months period;
(b). Contribution of retirement benefits by employers:
pension contribution, provident fund and all forms of
retirement benefits contributed by employers in an
amount that does not exceed 15 % (fifteen percent) of the
monthly salary of the employee; 64
Con’t….
(c). Reciprocity, income from employment: subject to
reciprocity, income from employment, received for
services entered in the exercise of their duties by:
(i) Diplomatic and consular representatives, and
(ii) Other persons employed in any Embassy, Legation,
Consulate or Mission of a foreign state performing state
affairs, who are national of that state and bearers of
diplomatic passports or who are in accordance with
international usage or custom normally and usually
exempted from the payment of income tax.

65
Con’t….
(d) Specifically, exempted income: income specifically
exempted from income tax by:
i. any law in Ethiopia, unless specifically amended or
deleted by this Proclamation;
ii. ii. International treaty; or
iii.iii. An agreement made or approved by the Minister.
(e) Exempted income by regulations: The Council of
Ministers may by regulations exempt any income
recognized as such by this Proclamation for economic,
administrative or social reasons.
66
Con’t…..
(f) Payments as compensation: payments made
to a person as compensation or gratitude in
relation to:
(i) Personal injuries suffered by that person;
(ii) The death of another person.

67
 4.2.2. Schedule ‘B’ Income: Income
from Rent of Buildings
Under the Schedule ‘B’ the basis of charge is the
rental income received from the property. That is,
Income tax shall be imposed on the income from
rental of buildings. Every person deriving income
from rent of buildings is liable to pay tax on that
income at the rate specified in Schedule B-Article 15.

68
Con’t….
Schedule B
Total rental income (per year) Rental income tax Deductions
rate
0 7200 0 Nil
7201 19,800 10 720
19,801 38,400 15 1710
38,401 63,000 20 3630
63,001 93,600 25 6780
93,601 130,800 30 11,460
Above 130,800 35 18,000

69
Determination of Income Tax Rate (Article-16)
1) Income from rental of building shall be computed as
follows:
(a) If the tax payer leased furnished quarters the amounts
received attributable to the lease of furniture and
equipment shall be included in income.
(b) Sub-lessors shall pay the tax on the difference between
income from sub-leasing and the rent paid to the lessor,
provided that the amount received from the sub-lessor is
greater than the amount payable to the lessor.

70
Con’t…
(c) The following amounts shall be deducted from
income in computing taxable income:
(i) Taxes paid with respect to the land and buildings
being leased; except income taxes; and
(ii) for taxpayers not maintaining books of account, one
fifth (1/5) of the gross income received as rent for
buildings furniture and equipment as an allowance for
repairs, maintenance and depreciation of such
buildings, furniture and equipment;

71
Con’t…
(iii) for taxpayers maintaining books of account, the
expenses incurred in earning, securing, and
maintaining rental income, to the extent that the
expenses can be proven by the taxpayer and subject to
the limitations specified by this Proclamation,
deductible expenses include (but are not limited to)
the cost of lease (rent) of land ,repairs , maintenance,
and depreciation of buildings, furniture and
equipment in accordance with Article 23 of this
Proclamation as well as interest on bank loans,
insurance premiums. 72
2) The owner of a building who allows a lessee to sub-lease
is liable for the payment of the tax for which the sub-
lessor is liable, in the event the sub-lessor fails to pay.
3) At the earlier of the time construction of a rental building
is completed or when the building is rented, the owner and
the builder are required to notify the administration of the
kebele in which the building is situated about such
completion and the name, address, and tax identification
number of the person (or persons) subject to tax on
income from rental of the building.

73
con’t…
Example: Mr. X has a building that is available for rent
in year 2012. The following are the details of the
property lease out
He has let out for twelve months
Actual rent for a month is birr 30,000
He paid 15% of the actual rent received as land taxes
and 3% as other taxes
 He spent birr 10,000 for maintenance of the building

74
Con’t…
Depreciation Schedule
Type Year Original Addition Total Cost
Cost
building 2012 3,000,000.0 ---- 3,000,000.0
0 0
Equipment 2012 150,000.00 ----- 150,000.00
Computer & 2012 100,000.00 60,000.00 160,000.00
accessory

75
Con’t….
 Required: Compute the taxable rental income and tax liability
assume
A. Mr. X does not maintain any books of accounts in this regard
B. Mr. X has maintained books of accounts
Solution (A):
 Annual rental income (birr 30,000*12 months) ---------360,000
Less: allowable deductions
 Land tax (lease) (15% of 360,000) -----54,000
 Other taxes (3% of 360,000) ------------10,800
 Maintenance (1/5 of 360,000) ----------72,000 (136,800)
 Taxable rental income………………………. ………..223,200
76
Con’t.…
Tax liability = (Taxable income x Tax rate)- deduction
= Birr (223,200 x 35%)-18,000
= Birr 60,120
Solution (B): Depreciation Schedule
1. For building 300,000 x 0.05=15,000
2. For Equipment 15,000 x 0.20= 3,000
3. For computer 16,000 x 0.25 = 4,000

77
Con’t….
Annual rental income (birr 30,000*12 months) -----------360,000
Less: allowable deductions
Land tax (15% of 360,000) ------54,000
Other taxes (3%of 360,000) ----10,800
 Maintenance --------------------10,000
Dep Expense Building----------15,000
Dep Expense Equipment- ----3,000
Dep Expense computer------4,000------------------- (96,800)
Taxable rental income…………………………….…263,200
Tax liability = (Taxable income* Tax rate) - Deduction
= (Birr 263,200 x 35%) - 18,000 = Birr 74,120 78
4.2.3. Schedule ‘C’ Income: Business
Income
Schedule C consists of the general and special parts. The
general part contains the common provisions (Articles 18-
35, and 45-50) and applies to all taxpayers that engage in
business activities.
The special part governs the income taxation of a specific
category of taxpayers- persons engaged in mining and
petroleum operations (contractors and licensees). It covers
Articles from 36 to 44.
The general part applies to the contractors and licensees
concerning those tax matters that are not regulated by the
special part.
79
Business income tax is imposed on a person conducting a
business. The person may be either a natural (individual)
or artificial (body) person.
A body is defined by the Tax Administration Proclamation
in a manner of including companies, partnerships, public
enterprises, and other forms of bodies. Although
cooperative societies have their own legal personality and
are regarded as a body, they are exempted from paying
income tax under Schedule C. The exemption is made not,
by the Income Tax Proclamation, but by the Cooperative
Society Proclamation. The purpose of the exemption is to
encourage cooperative societies. 80
The tax effects on a Schedule C body taxpayer are
similar to Schedule B-body taxpayer.
Schedule C contains one distinct rule with regard to
Micro Enterprises. Even if the enterprises fulfill the
definitional elements of body, they pay business
income tax as per the tax rates of individual
taxpayers. Encouraging the enterprises seems to be
the reason behind it.
Business is defined as any industrial, commercial,
professional, or vocational activity conducted for
profit. 81
 Tax Base of the Schedule
Schedule C applies to income from business activities.
The Income Tax Proclamation provides that an income tax
is imposed on a person that derives income from the
conduct of a business. This implies that a business income
(or an income that is derived from business activity) is the
tax base of Schedule C. The source of the income must be
‘business.
Like the case of Schedule B, the tax in Schedule C is not
imposed on the gross business income of the person.
Rather, it is imposed on the taxable business income,
which is the difference between the gross business income
and deductible expenses of the person. 82
Con’t….
 Tax Rate
1) Taxable business income of bodies is taxable at the rate of
30 %.
2) Taxable business income of other taxpayers shall be taxed
in accordance with the following Schedule C.

83
Con’t….
Total Business Income (per year) Birr Business income Tax deductions
rate
0 7200 0 nill
7201 19,800 10 720
19,801 38,400 15 1710
38,401 63,000 20 3630
63,001 93,600 25 6780
93601 130,800 30 11,460
Above 130,800 35 18000

84
1. Deductible and non-deductible expenses
 Non-Deductible Expenses for business profit tax
1) The following expenses shall not be deductible:
(a) The cost of the acquisition, improvement, renewal
and reconstruction of business assets that are
depreciated pursuant to Article 23 of this
Proclamation;
(b) An increase of the share of capital of a company or
the basic capital of a registered partnership;
(c) Voluntary pension or provident fund contributions
over and above 15% of the monthly salary of the
85
Con’t…
(d) Declared dividends and paid-out profit shares;
(e) Interest in excess of the rate used between the National
Bank of Ethiopia and the commercial
banks increased by two (2) percentage points.
(f) Damages covered by insurance policy;
(g) Punitive damages and penalties;
(h) The creation or increase of reserves, provisions and other
special-purpose funds unless otherwise allowed by this
Proclamation;
(i) Income Tax paid on Schedule C income and recoverable
Value-Added Tax; 86
Con’t….
(j) Representation expenses over and above 10% of the
salary of the employee;
(k) Personal consumption expenses;
(l) Expenditures exceeding the limits set forth by this
Proclamation or regulations issued hereunder.
(m) Entertainment expenses;
(n) Donation or gift.
2. Notwithstanding the provisions of Sub-Article (1) (n) of
this article, the Council of Ministers may by Regulations
allow donations or gifts provided for public use to be
deducted. 87
3. Interest paid to shareholders on loans and advances shall
not be deductible to the extent that the loan or advances in
respect of which the interest paid exceeds on average
during the tax period four times the amount of the share
capital.
This sub-Article does not apply to banks and insurance
companies.
4. In the case of bodies other than companies, Sub-article (3)
above shall apply as if for the reference to share capital
there were substituted a reference to basic capital.

88
Deductible expenses of business profit tax
1. Operating expenses
In the determination of business income subject to tax in
Ethiopia, deductions shall be allowed for expenses
incurred for the purpose of earning, securing, and
maintaining that business income to the extent that the
expenses can be proven by the taxpayer and subject to the
limitations specified by this Proclamation.
2. Trading Stock (Article-22)
a. For the purposes of ascertaining the income of a person
for a tax period from a business, there shall be deducted
the cost of trading stock of the business disposed of by the
89
Trading stock is any property that the taxpayer
manufactures or acquires to manufacture, sell or exchange
in the ordinary course of business. Such property could
be movable or immovable, tangible or intangible.
Examples of trading stock are raw materials used in a
manufacturing process, semi-finished and finished goods,
and goods purchased for resale or exchange. To give more
specific examples, cereal (barley malt, rice, or maize),
hops, water, and yeast are raw materials or trading stocks
for a taxpayer that operates a beer factory.

90
3. Depreciation (Article-23)
 Depreciation means decrease in the value of assets by
wear and tear, caused by their use in the business over a
period of time. Its cost is spread over its anticipated life by
charging depreciation every year against the profits of the
business.
4. Assets eligible for Depreciation
Assets eligible for Depreciation are (i) Building, Plant and
machinery (iii) Furniture.
1) In the determination of taxable business income, the
owner of the business assets may deduct depreciation for91
Con’t…
2) The acquisition or construction cost, and the
cost of improvement, renewal and
reconstruction, of buildings and constructions
shall be depreciated individually on a
straight-line basis at five per cent (5%).
3) The acquisition or construction cost, and the
cost of improvement, renewal and
reconstruction, of intangible assets shall be
depreciated individually on a straight-line
basis at ten percent (10%)

92
The following two categories of business
assets shall be depreciated according to a
pooling system at the following rates:
(a) Computers, information systems, software
products and data storage equipment:
twenty- five (25%).
(b) All other business assets: twenty percent
(20%).

93
Schedule D: Other Income Taxes
Schedule D is distinguished from the remaining schedules in
many aspects. There is no general and single source of
income/income that represents the schedule. The schedule is
a larger umbrella that covers distinct and independent sub-
schedules. While Schedules A, B, and C are represented by
employment, rentals of buildings, and business incomes
respectively,
Schedule D represents miscellaneous types of income. Most
of the incomes are traditionally called passive income.
Unlike an active income, passive income is a type of income
whereby the taxpayer does not engage significantly to derive
the income. 94
The taxpayer has no active participation in the activity
that serves as the source of the income. The income is
derived based on the regular activity of other people.
For example, companies make profits based on the
activities (works) done by their employees than the
shareholders. The dividend paid to the shareholders is an
example of passive income. Interest on loans and royalties
on intellectual property are the other examples of passive
income.

95
Unlike Schedules A, B, and C, Schedule D contains flat
tax rates and no distinction is made between body and
individual taxpayers for the purpose of the tax rate.
The tax rates are not the same for the miscellaneous
incomes. There exist different tax rates for the
miscellaneous incomes.
The minimum tax rate in the Schedule is 5%. It applies to
incomes like royalties.
The maximum tax rate is 30% and it applies to capital
gains derived from the disposal of shares and bonds.
96
Since each sub-schedule has its tax rate, income
aggregation rules do not apply to Schedule D. For
instance, dividends and income from lottery winnings
cannot be aggregated and taxed under the same tax rate.
More importantly, the same incomes falling under the
same sub-schedule are not taxed on their aggregate. A
person deriving dividends from
two or more different companies shall not be taxed on the
aggregate dividends.
Assume that Kidane bought 100 and 200 shares from X
and Y companies.
97
In 2014 E.C, he received dividends of 30,000 and 50,000
Birr from the two companies respectively. The dividend
tax is not calculated on the aggregate of 80,000 Birr.
Rather, it shall be computed separately, on each payment.
Even if both payments are subject to the same tax rate,
they are not taxed together. This is due to the application
of a final withholding system on schedule D.
There is no either a monthly or annual tax year under
Schedule D.

98
Royalties (Article- 31)
The term “royalty” means a payment of any kind received as a
consideration for the use of ,or the right to use, any copyright
of literary, artistic or scientific work, including
cinematography films and films or tapes for radio or
television broadcasting, any patent, trade work, design or
model, plan secret formula or process, or for the use or for
the right to use of any industrial, commercial or scientific
equipment, or for information concerning industrial,
commercial or scientific experience. It is taxable as follows:
Rate of tax
Royalties shall be liable to tax at a flat rate of flat rate of 5% 99
Income from Rendering of Technical Services (Article-
32)
• The term “technical service” means any kind of expert
advice or technological service rendered. All payments
made in consideration of any kind of technical services
rendered outside Ethiopia to resident persons in any form
shall be liable to tax under this Article- 32
• Rate of tax: It is Taxable at a flat rate of 10%. The
amount of tax shall be withheld and paid to the Tax
Authority by the payer.

100
Income from Games of winning a Chance (Article- 33)
 Every person deriving income from winning at games of
chance (for example, lotteries, tombolas, and other similar
activities) shall be subject to tax.
Rate of tax: It is Taxable at the rate of 15% except for
winnings of less than 100 Birr.
Dividends (Article- 34)
 Every person deriving income from dividends from a
share company or withdrawals of profits from a private
limited company shall be subject to tax under Article 34.
Rate of tax: It is Taxable at the rate of 10% 101
Income from Rental of Property (Article- 35)
Every person deriving income from the casual rental of
property (including any land, building, or moveable asset)
not related to a business activity taxable under Article 17
shall pay tax on the annual gross income.
Rate of tax: It is Taxable at the rate of 15%. This tax is a
final tax in lieu of a net income tax

102
Interest Income on Deposits (Article- 36)
As per Article 36, every person deriving income from interest on
deposits shall pay tax.
Rate of tax: It is Taxable at the rate of 5%
 Gain on Transfer of Certain Investment Property (Article- 37)
 Income Tax shall be payable on gains obtained from the transfer
(sale or gift) of property described in this Article at the following
rates:
Rate of tax
a) building held for business, factory, office 15% (fifteen percent)
b) shares of companies 30% (thirty percent)
 Gains obtained from the transfer of building held for residence
103
Entertainment income tax: this type of tax is obtained
from those foreign business firms that render
entertainment services like football, series film, and so on.
The tax rate is 10% of the taxable income.

104
4.2.5. Schedule ‘E’ Exempt Income
According to article 65 of federal income tax
proclamation number 979/2016 the exempted taxes are
regulated differently named as schedule E.
Exempt Income
1. an amount paid by an employer to cover the actual cost of
medical treatment of an employee;
2. an allowance in lieu of means of transportation granted
under a contract of employment
3. a hardship allowance;
4. transport expenses and per diem payments to an employee
travelling on a tour of duty; 105
5. travelling expenses paid to an employee recruited from
place other than the place of employment on joining or
completion of employment, including, in the case of a
foreign employee, travel expenses from and to their
country of origin, but only if the travel expenses have
been paid pursuant to specific provisions of the
employee’s contract of employment.
6. food and beverages provided for free to an employee by
an employer conducting amining, manufacturing, or
agricultural business

106