By Tsegamlak Solomon
What Impact Will the New Excise Tax Amendment Proclamation Have on Your Company?
The parliament convened last week to ratify the proposed new excise tax amendment proclamation (Amendment Proclamation). Once enacted, the Amendment Proclamation will significantly impact the business community in general. Whether you are an investor with a duty-free privilege, a vehicle importer, a beverage producer, or a TikToker trying to make a living out of the entertainment business, the Amendment Proclamation affects you and your business in one way or another. We have briefly analyzed how the amendment impacts the business community in general.
Why the Change?
Before diving into the details of what changed, it would be good to understand why the amendment was necessary. The major purposes for the introduction of the Amendment Proclamation are:
- Reducing the exaggerated excise tax rate imposed on imported new vehicles and some other items;
- Imposing an excise tax on certain special tax and customs-duty-free privilege beneficiaries by taking into consideration the special nature of Excise tax; and
- Generate more revenue for the government
How is Your Business Affected?
For Investors: The fact that you are a duty-free privilege beneficiary doesn’t entitle you to an exemption from Excise Tax
Certain actors in the economy are beneficiaries of a customs duty-free privilege. This may be due to two factors: (1) an international agreement to which the country is a signatory (such as goods imported into Ethiopia or purchased in Ethiopia by a diplomatic or consular mission, and others that are provided with privileges and immunities); or (2) the operation of the country’s laws, including the customs duty-free privilege given to investors on the importation of capital goods and construction materials for starting a new venture or expanding an existing one.
In both cases, the customs-duty privilege is used to extend up to exemptions from excise tax. However, the Amendment Proclamation lifted that exemption, as a result of which investors importing excisable goods will now be required to pay excise duty despite the exemption from customs duty and VAT. This is associated with the nature of the excise tax. One of the primary goals of the excise tax is to discourage certain harmful habits, such as those that affect the environment. With this goal in mind, the drafters believe that being entitled to duty-free privileges should not be a basis for exemption from excise tax. Hence, the exemption of capital goods and construction materials from customs duty will no longer result in an exemption from excise tax, as the purposes of the two tax categories are different.
For Tobacco, Alcoholic Drinks, and Sweet Producers: Your voices are heard at least to some degree
Producers of tobacco and alcoholic beverages vigorously opposed the new Excise Tax Proclamation when it was adopted about three years ago, repealing its predecessor Proclamation No. 307/2002. The main reason was that the Excise Tax Proclamation imposed a non-creditable excise tax rate on such producers on items like tobacco, sugar, and pure alcohol in addition to the tax on the end product. This was done to discourage the consumption of tobacco products and alcohol in the country. The producers’ grievance was that this arrangement had a double taxation effect. This resulted in a surge in the price of such products immediately after the Excise Tax Proclamation came into effect.
Photo © Dominic Chavez
The industries in these sectors suffered from huge tax burdens, and the surge in the price of the products led to the producers not being competitive in the market, considering similar imported items are taxed only once when they enter the market. As a result, the Amendment Proclamation proposes that the tax rate for pure alcohol be reduced from 60% to 10% to rectify this challenge. In addition, candy and other sweet producers that use sugar as an input for their products used to pay 20% on the end product besides the excise that they paid on the input. The Amendment Proclamation proposes lowering the final product tax to 10% to lessen the burden, which is a positive development for those engaged in the sector.
For Vehicle Importers: There is a New Reduced Rate on New Vehicles and a New Categorization of Vehicles
Following the change to the excise tax in 2020, the excise tax levied on old vehicles was set at up to 500%, which made importing used vehicles out of the question. This was done to encourage people to buy new vehicles that are supposed to be environmentally friendly and fuel-efficient. Accordingly, the 2020 Proclamation imposed a tax rate of 5% on new vehicles with a capacity below 1300cc, and new vehicles above that capacity were taxed at a rate of up to 100%. The Amendment Proclamation changed that approach and classified new vehicles into four categories: (a) below 1500cc, (b) 1501cc – 2500cc, (c) 2501cc – 3000cc, and (d) above 3000cc. As a result, to make new vehicles with a capacity of at least 1300cc equally encouraged, the Amendment Proclamation brought down the excise tax rate for all new vehicle categories to 10%, 20%, 30%, and 60%, respectively. This entails a 5% increase for vehicles below 1300cc and a reduced rate for the rest. It is also to be recalled that the government recently issued a law that exempts electric vehicles from excise tax and other duties.
If you’re a telecommunications service provider or rely on telecommunications services to operate your business, there is some bad news.
The huge budget deficit the country is facing currently is not news. The budget deficit, combined with the country’s strained relationship with international financiers as a result of the war, forced the government to look inward and mobilize funds domestically. Although revenue mobilization is not the major purpose of the excise tax, it helps the government fill in some of its deficits. As a result, the Amendment Proclamation proposes a 5% excise tax be levied on telecommunication services, which include mobile and wireless telephone (internet, voice, and SMS). Your office internet and your employee’s mobile card allowance might increase as a result. Of course, this is in addition to the 70 million telecom service users who may be affected in the country.
If you are in the entertainment business, you have positive news. Exemption of video cameras and television from excise tax is on the way
Recognizing the flourishing entertainment industry on the one hand, which includes the growing number of TikTokers and YouTubers you pass by on the street, and the lack of adequate copyright protection on the other hand, mandated the government to craft an incentive scheme to support the sector. As a result, the Amendment Proclamation proposes that the government exempt video cameras from excise duty, which was previously set at 10%.
Similarly, recognizing the role of television in educating and creating awareness in the public, the excise levy on televisions is also exempt from what used to be a 10% excise levy.
