Inflation considerations delays income tax reform

The Ministry of Finance and Economic Development (MoFED) is said to have halted the revision of Ethiopia's income tax structure following advice

from Prime Minister Hailemariam Desalegn's macroeconomic team on the inflationary implication of rolling out the tax amendment so close to when the government gave its employees a pay bump.

According to The Reporter's sources, the PM's macro-economy advisory team recommended exercising some precaution when thinking of introducing the revision made on the income tax structure mainly for the inflationary pressure it might have when coupled with the salary increment. As per the suggestion of the advisory team, MoFED delayed the tax revision proposal submitted to it by the Ethiopian Revenues and Customs Authority (ERCA) two years ago.

After conducting a thorough assessment of the country’s tax schedule, ERCA proposed a general tax reform affecting many of the tax proclamations including the Customs Proclamation, which had caught the attention of the authority much earlier. Both the proposal and the revision gained acceptance quickly, which culminated in the ratification of revised customs proclamation by the parliament a few months ago.

Among other tax categories that need revising, payroll and corporate taxes from the income tax category and those indirect tax types such as turnover taxes and value add taxes levied on the end user of products or a services are the main ones, according to sources.

However, the advice of the macro-economy team to MoFED focused more on the two stands of taxes from the income tax category; payroll and corporate taxes. According to the same sources, the team focused more on payroll taxes and corporate taxes due to their potential to start inflationary pressure on consumer prices in the local market. They further explained that a reform on income tax categories would directly affect the disposable income left in the consumers’ pockets after paying their taxes, and that would directly affect the price of the commodities that they buy from the market.

“It is mandatory for us to delay the revision on employment and corporate taxes categories at least for one year,” the source said.

The proposed revision on the payroll tax for instance is anticipated to have a significant effect on the existing minimum taxable income bracket or the threshold beyond which income will not be taxed, the 150 birr mark, and the 35 percent flat rate levied on salary bracket exceeding 5,000 birr. In fact, the two have always been identified to be the most controversial areas of the payroll tax structure in Ethiopia. For the 150 birr minimum threshold, the basic idea behind leaving income below that of the tax system seems to have been the main driving factor for its long time revision. According to experts, the basics of exempting income brackets below 150 birr is that if a person is perceived as an enterprise that is producing but getting the reward in the form of a salary as opposed to corporate income of businesses, then 150 birr is supposed to be the minimum amount of money that a person needs to ensure its survival. Just as costs in the case of businesses, which is deductible from the income of businesses before taxes are paid, 150 birr is assumed not to eligible to be taxed, hence deducted from the whole of the income of individuals before taxes. But, revision was long overdue since the value of 150 in market has long lost its value to achieve what it is assumed to achieve, pundits argue.

Hence, with this revision forthcoming together with the recent move of salary increment to government employees means that employees could have received much more money in the form of disposable income which could in turn be inflationary.

It is to be remembered that aiming to adjust the existing cost of living, the government of Ethiopia has decided to make adjustments to the pay of its employees by as high as 46 percent, incurring a total 10 billion birr additional cost per annum.

Source: The Reporter

….............................................................................

We welcome comments that advance the story through relevant opinion and data. If you see a comment that you believe is irrelevant or inappropriate, please! inform us. The views expressed in the comments do not represent those of Blogger.