The Controversial Minimum Salary Floor for Hospitality and Service Sectors Set by Addis Ababa Revenue Bureau

“There is a ridiculous difference between what is paid and what they say they will pay,” said the Addis Ababa Revenue Bureau in a recent statement that has stirred legal debates and ignited public discourse on wage disparity and tax collection methods in Ethiopia.

In a move aimed at improving payroll tax compliance, the Addis Ababa Revenue Bureau introduced a minimum salary floor for employees in select commercial sectors, including hotels, restaurants, bars, and butcher shops. The goal was to close the gap between reported and actual wages, which, according to the Bureau, had been vastly underreported, especially in sectors where employee wages are often kept under the radar to evade tax liabilities.

A Glimpse into the New Salary Floor System

The Bureau has established a range of minimum wages based on employee headcounts in various industries. This move is designed to ensure that payroll taxes are accurately levied according to the number of employees in these businesses, in an effort to prevent tax evasion.

Breakdown of the New System:

• Hotels: Between 32 and 50 employees
• Bar and Restaurant: 20 to 24 employees
• Cafeteria: 17 to 25 employees
• Restaurant: 17 to 22 employees
• Food and Butcher Shops: 28 to 48 employees
• Liquor and Butcher Businesses: 20 to 28 employees

The rates for payroll tax collection are directly tied to the number of employees within each sector. Importantly, the minimum wage for workers outside of hospitality, security, and cleaning jobs has been set at 5,000 Birr per month.

The Wage Breakdown

For businesses in the selected industries, the salary structure is as follows:

• Butcher Shop and Liquor Business:
  • Manager/Supervisor: 5,000 – 9,500 Birr
  • Kasher: 5,000 – 6,000 Birr
  • Main Chef: 5,000 – 18,000 Birr
  • Host: 3,000 – 3,500 Birr
  • Cleaning/Protection: 2,500 – 3,000 Birr
  • Chief Butcher: 5,000 – 7,000 Birr
  • Assistant Butcher: 5,000 – 5,500 Birr
  • Butcher: 6,000 – 9,000 Birr
• Food, Drink, and Butchery:
  • Manager/Supervisor: 8,000 – 13,500 Birr
  • Kasher: 5,000 – 7,000 Birr
  • Main Chef: 6,000 – 18,000 Birr
  • Host: 2,500 – 4,000 Birr
  • Cleaning/Protection: 3,000 – 4,000 Birr
• Restaurants, Cafeterias, Bars, and Hotels:
  • Manager/Supervisor: 6,000 – 13,500 Birr
  • Kasher: 5,000 – 7,000 Birr
  • Main Chef: 5,000 – 18,000 Birr
  • Host: 2,000 – 4,000 Birr
  • Cleaning/Protection: 2,500 – 4,000 Birr

These wage ranges aim to standardize pay across the industry while aligning with tax reporting requirements.

Tax Evasion and Wage Underreporting

The core issue, according to the Revenue Bureau, is that many businesses, particularly in the hospitality and service sectors, have been underreporting wages to avoid payroll taxes. Mr. Ayele, the Bureau’s Communications Director, pointed out that his office had conducted detailed research revealing significant discrepancies between what businesses claim to pay their employees and the actual wages received. “There is a ridiculous difference between what you pay and what you claim to pay,” Mr. Ayele emphasized.

This system was created to curb such practices and ensure that employees are fairly compensated while businesses comply with tax regulations. However, the Bureau’s approach has raised questions about its legality and fairness, particularly in light of existing legal frameworks.

The Legal Debate: Is the System Constitutional?

The introduction of a minimum wage floor by the Addis Ababa Revenue Bureau has sparked legal concerns. Ato Gideon W/Yohannes, a lecturer in International Trade and Economic Law at Addis Ababa University, criticized the Bureau’s actions, calling them illegal. According to Ato Gideon, there is no legal foundation in Ethiopian law that allows the Revenue Bureau to set a minimum wage floor or determine taxable income without approval from the relevant legislative body.

“The act is illegal,” Ato Gideon argued. “There is nothing in the current legal framework that empowers the Addis Ababa Revenue Bureau to set a minimum wage rate for various job categories and income types. Wages are taxable income, and the law clearly states that taxes should be levied according to legal statutes, not administrative decisions.”

Ato Gideon pointed out that the Constitution mandates that taxes be levied by law, not by executive order or administrative guidance. As such, the Bureau’s decision to impose a minimum wage and collect taxes based on it without legal backing may violate both constitutional provisions and principles of taxation.

The Call for Legislative Oversight

While the Addis Ababa Revenue Bureau has set the new rates as a response to what it perceives as widespread tax evasion, critics argue that such significant changes to the tax system and wage structure should only be made through proper legislative processes. According to Ato Gideon, any attempt by the Bureau to manage tax collection in this manner undermines the legal and constitutional framework governing taxation in Ethiopia.

This raises the question: Can the government effectively collect taxes and address wage underreporting without clear legal authority to do so?

A Complex Issue

The Addis Ababa Revenue Bureau’s decision to implement a minimum wage floor and link it to payroll taxes highlights a significant challenge in Ethiopia’s business environment—wage underreporting and tax evasion. While the Bureau’s intentions are rooted in ensuring fair compensation and proper tax collection, the lack of a legal foundation for these measures poses serious questions about the constitutionality and legality of such actions.

As this issue unfolds, it will likely prompt further discussions on the need for comprehensive tax reform and legal clarity regarding wage regulation in Ethiopia. For now, the Revenue Bureau’s bold approach may be viewed as a necessary step to curb tax evasion, but it remains to be seen whether it will withstand legal scrutiny and legislative review.