Scope and rate of Turn -over Tax in Ethiopia
1. Scope of Turn -over Tax
The government considers,for administrative feasibility and other reasons, persons whose annual taxable transaction exceeds 500,000 to be registered for VAT. Similarly, for those persons who are not registered for VAT, it is necessary to impose obligation of taxation. To this end turn over tax is imposed on those not registered for VAT to equalize and enhance fair ness in commercial relations and make complete the coverage of tax system so as to increase government’s revenue from taxation.
Therefore, the scope of application of turn over tax proclamation is on :
- supply of goods
- rendition of services
- persons not registered for VAT
With the definition of terms under turnover tax, unless otherwise defined in the proclamation, the meanings defined in Value Added Tax proclamation No. 285/2002 shall be used (Art 2(1).
i Supply of goods
In trying to define supply of goods under turn over tax proc, since it is not clearly touched, as per Art 2(17) of the VAT proclamation it is to mean the sale of goods and or services or both.
“Goods” is defined under Art 2(7) of proc 308(2002) is to mean any kind of goods or commodity that has exchange value, utility and brings about satisfaction and includes animals. From this wording, we can say that the scope of application turn over tax law is on sale of goods and animals also.
ii. Rendition of services
Services rendered to persons not registered for VAT are under the scope of turn over tax proclamation. Regarding the definition for the term service since the turn over proc fails to deal with it as per Art 2(1) of proc 308/2002 cum Art 2(7) of proc 285(2002) it is to ”mean work done for others which doesn’t result in the transfer of goods.”
iii. Persons not registered for VAT
The other term that needs explanation at this juncture is “persons not registered for VAT.” According to Art 2(4) of proc 308/2002” a person not registered” is a person who is not registered for VAT by reason of his annual turnover being bellow 500,000 or threshold set by the minister, by reason of not having applied for voluntary registration.
But, we have to notice also that turnover tax is not applicable to every import of goods and an import of services as provided under Art 23 of the VAT proclamation (they are subject to VAT).
Though turn over tax is applicable to supply of goods, rendition of services and to persons not registered for VAT, no all transactions are taxable. The proclamation recognizes certain exemptions: In this respect as per Art 7 the following are exempt from turn over tax:
- the sale or transfer of a dwelling house used for a minimum of two years or the lease of a dwelling;
- the rendition of financial services;
- the supply of national or foreign currency and securities except for that used for numismatic purposes;
- the rendering by religious organizations of religious or other related services;
- the supply of prescription drugs specified in directives issued by the relevant government agency; and rendering of medical services;
- the rendition of educational services provided by educational institutions as well as child care services for child can at pre-school institutions;
- supply of goods and rendering of services in the form of humanitarian aid
- the supply of electricity, kerosene and water, license fees, etc.
In addition, attention shall be rendered so as to infer that these are not the only listings of exemptions, ministry of finance and economic development by virtue of Art 7(2) of turnover tax proclamation may provide others by its directives.
2. Rates of Turnover Tax
The base to compute turn over tax is the goods receipts in respect of goods supplied or service rendered (Art 5). Thus, the person who sells goods and services has the obligation to collect the turnover tax from the buyer and transfer collected tax authority. Art 4 incorporates two kinds of rates: 2% on goods sold locally and for services rendered locally again in two rates:2% for contractors, grain mails, tractors and combine-harvesters and 10% on others.
Obligations of Tax Payers under the Turnover Tax Law
In enforcing income tax proclamation and VAT proclamation there are obligations imposed on tax payers and other concerned organs; establishment of organs responsible to enforce the laws; pass decisions and review the decisions in case complaint is lodged by aggrieved party. Likewise, these obligations and organs are recognized under turn over tax proclamation. Some of the obligations on tax payers include:
i. Filing of Turn over Tax Return and payment
Of course, turn over tax is to be declared and paid by tax payer. Therefore, outstanding obligation imposed on them is to file their tax return and pay the tax within the time reasonable in the proclamation. In this regard, Art 10 provides that:
10(1)- Tax payers subject to turn over tax shall:
- File a turnover tax return with the tax authority with one month after the end of every accounting period.
- Pay the tax for every accounting period by the deadline for filing the turnover tax return.
Each tax payer, is thus required to file a turn over tax return to the tax authority before the deadline mentioned above. The tax payers by implication are logically imposed to make correct calculations based on the rates stated under Art 4.
At this juncture, to know the period of time in determining deadline one has to understand what “accounting period” is? Under turnover tax “accounting period” is different for various category of tax payers. Art 10(2) in this respect states in the following manner.
Art 10(2) – for the purpose of this Article”Accounting period” shall mean:
- For tax payers classified as category ‘A’ tax payers under the income tax proclamation No. 286/2002, but are not required to register for VAT, the calendar month;
- For category “B” tax payers who are required to keep records under the income tax proc. No. 286/2002, each three month period commencing from the first day of the Ethiopian fiscal year or when approved by the Tax Authority, the first day of the Gorgorian Calendar year;
- For category “C” tax payers, who are not required to keep records under Income Tax proclamation No. 286/2002, the fiscal year?
ii. Keeping Recodes
This obligation is common in income Tax proclamation and VAT proclamation. Here too, tax payers subject to the record keeping requirement of Art 48 of the Income Tax proclamation No. 286/2002 are required to keep records prescribed there in for use determing Turn over Tax.
From the readings of this provision, it is possible to conclude that tax payers under turnover tax are under obligation to have recodes in similar fashion with income tax payers. The records shall also follow acceptable principles of accounting that can be presented as evidence incase conflict arises between tax payers and tax authority with regard to assessment of taxation.
iii. Notification of changes
It is difficult to know the whereabouts of tax payers incase there is frequent change of address on their part. Therefore, it is right to impose the obligation of notifying one’s address if the tax payer moves from his principal residence to an other abode.
To this end Art 17 runs:
17. Notification of changes:
A registered tax payer shall notify the authority in writing of
a. any change in the name, address, place of business, constitution on nature of the principal taxable activity the person; and
b. any change of address from which, or name in which, a taxable activity is carried on by the registered person with 21 days following such change.
A close reading from Art 17 implies that registered persons have such a duty. But we know that registered persons are subject to VAT proclamation and the scope of turn over tax proclamation is not extended to registered persons.
Thus, the term “registered person” in the English version is not appropriate. On the other side, the Amharic version, the binding in case of discrepancy between English and Amharic version of Ethiopian laws, imposes obligation only on tax payers by saying “ማንኛዉም ግብር ከፋይ “ basically to make all non registered tax payers as the registered one’s are covered under VAT obligation.
With regard to obligations of other entities impositions which have impact on the enforcement and collection of turn over tax are almost similar with that under VAT obligations.