A Brief on the Draft VAT Proclamation; The Changes Introduced
By Mahder Ambachew | Fri Aug 05 2022
Ethiopia introduced value added tax (“VAT”) two decades ago under VAT Proclamation No. 285/2002 (“VAT Proclamation”). The VAT Proclamation was introduced as a replacement for the sales tax that was in place. Since then, the VAT Proclamation has been amended twice in 2008 and 2019 per Proclamation No. 609/2008, and Proclamation No. 1157/2019 (collectively, the “Amendments”). The 2008 Amendments were mainly focused on VAT registration requirements and criminal liabilities associated with VAT. On the other hand, the 2019 Amendments were mainly on reducing the tax reporting burden for a certain category of taxpayers, withholding of VAT by taxpayers, and VAT refund. Despite the Amendments, however, the VAT Proclamation failed to cover new business concepts like e-commerce and other changes in the economy.
Consequently, a new VAT proclamation has been drafted (“Draft Proclamation”) that will replace the age-old VAT Proclamation. The Draft Proclamation is introduced to reform the rules in relation to VAT. The revision is needed to recognize new concepts which are recognized by the international community, take into consideration the changes in the economy and make VAT easily understandable and executable.
With the above policy background, the Draft Proclamation has made some major changes. In this blog, we will cover some of the major changes introduced by the Draft Proclamation.
Accounting period and VAT filing: Regarding accounting period and VAT filing, the Draft Proclamation seems to be in line with the 2019 Amendments, which has eased the cost of filing VAT by changing the VAT accounting period from one calendar month to three calendar months based on the annual turnover of a taxpayer. This is also expected to alleviate the cash flow problems of small VAT registered businesses. Whereas all taxpayers with an annual turnover transaction of more than 70M Birr will be required to file VAT every month.
Definition of terms: Terms like body, person, tax officer, fair market value, related person, and capital goods are defined under Federal Tax Administration Proclamation No 983/2016. The Draft Proclamation has given the same meaning to the terms, which ensures consistency across different tax laws. This will eliminate the uncertainty that can arise on the meaning of terms, which technically have the same meaning but have different definitions under different tax laws.
Taxable activities:The definition of the supply of goods and services is critical in defining what taxable activities are. The Draft Proclamation broadened the scope of a supply of goods to include any transaction that involves a change in ownership of the goods. Supply of service is also defined broadly and there has been a shift in the definition of supply of service to include thermal or electrical energy, gas, or water, which were defined as goods in the VAT Proclamation.
Registration: There are two types of registration for VAT under the VAT Proclamation and the Draft Proclamation, which are: obligatory registration and voluntary registration.
Obligatory registration: The VAT Proclamation imposes an obligation to register for VAT when the total value of taxable transactions during the 12 months exceeds ETB 500K. This was later raised to ETB 1M. The Draft Proclamation increased this amount to ETB 5M.
Voluntary registration: The VAT Proclamation allows voluntary registration if the applicant supplies at least 75% of its goods or services to a person/business registered for VAT. The Draft Proclamation has changed this requirement to a monetary requirement; if the taxable activity is more than ETB 2.5M the applicant will be allowed to register for VAT.
Cancellation of registration: Under the VAT Proclamation, a VAT-registered person can apply for cancellation if he has ceased to make taxable transactions. Under the Draft Proclamation, notice to the tax authority within seven days is required when taxable transactions cease to exist. Another reason for cancellation under both proclamations is when the total taxable transaction annual turnover in the period of 12 calendar months is expected to be not more than ETB 1M (ETB 5M, in the Draft Proclamation). In this case, the registered person can ask for cancellation at any time after three years of the date of its most recent registration for VAT. Under the Draft Proclamation, the three year requirement is reduced to two.
Zero-rated activities: Under the VAT Proclamation, there are mainly four taxable activities that are zero-rated; while the Draft Proclamation has maintained this list, it has included specific requirements to be fulfilled for each category. Furthermore, goods that are imported for the purpose of maintenance, renovation and improvement are zero-rated based on the Draft Proclamation.
Exempted goods and services: Certain activities which are exempted from VAT under the VAT Proclamation are subject to VAT under the Draft Proclamation. The Draft Proclamation has specifically excluded all exemptions and other benefits (i.e., zero rated activities) other than those listed under the draft.
The following are some of the activities which are currently exempted but will be subject to VAT when the Draft Proclamation becomes effective.
Transportation: Although transportation is exempted under the Draft Proclamation, taxis that have less than the capacity of holding 8 persons including the driver (which includes those operating through ride-hailing platforms and taxis), renting of vehicles, and vehicles used for transportation of tourists do not fall under the definition of transportation based on the Draft Proclamation, which means they are subject to VAT taxation.
Supply or import of national or foreign currency: Although the VAT Proclamation exempts supply or import of national or foreign currency, the Draft Proclamation did not. The Draft Proclamation specifically noted that any exemptions or activities that are zero-rated under the previous laws will not be applicable unless such benefits are given by the Draft Proclamation.
Supply or import of fuel gas, pension funds, permit and license fees, lease of a dwelling for less than two months, and others are also excluded from VAT exemption.
On another note, the Draft Proclamation has included tax exemptions that are not included under the VAT Proclamation. For instance, goods that investors import or buy locally that are exempted from customs duty per the investment incentive regulation, goods that are VAT exempted by international agreements and imported by international organizations, and goods that are imported by diplomats and missionaries are exempted from VAT.
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