Update on Ethiopia’s New Excise Tax Proclamation
Ethiopia’s excise tax regime has been in place for almost two decades. On February 13, 2020, the Federal Parliament approved a new Excise Tax Proclamation No. 1186/2020 (New Proclamation) repealing Excise Tax Proclamation No. 307/2002 and its amendments. (Repealed Proclamation). Drafted by the Ministry of Finance, the New Proclamation introduces new concepts and excise tax rates. In this issue of our legal update, we present a summary of the changes introduced:
- Objectives: The New Proclamation proposes to impose the tax on goods that are believed to be luxurious, hazardous to health, causes social problems as well as on basic goods which are demand inelastic. Secondly, it replaces the production cost-based assessment of the tax to the ex-factory price method of assessment. This would help to relieve the problem of unpredictability on the amount of tax the taxpayers are liable to pay. Thirdly, the new law aims to address the challenges in the collection of excise tax that emanated from the inadequacies of the Repealed Proclamation.
- Scope of Application: Excise tax will be applicable to 19 groups of items and 378 goods. In terms of coverage, excise tax is broadened to include motorcycles, plastic bags, wigs and human hair, fireworks and artificial flowers, which previously were not included in the tax net. On the other hand, some items such as laundry and dishwashing machines, clocks and watches that were previously subject to excise tax were removed. For full list of the items listed under Schedule I, please click here.
- The requirement of a license: The New Proclamation introduces a new requirement that was not previously mandatory. Eligible taxpayers are required to be licensed by the tax authority before engaging in the importation and production of goods or rendering of services.
- Eligibility: The license requirement is applicable to those who manufacture excisable goods in Ethiopia and import excisable goods. The Ministry of Finance may further impose a requirement of license on any other activity.
- Effect: Providing goods or rendering services that are excisable without having a license entails a liability to pay the tax that is payable in respect of the excisable goods and services in addition to being subject to penalties.
- The Issuer: An application for a license will be made to the Ministry of Revenue or counterpart institutions in the regional governments or city administrations (the Authority).
- Payment Period: Currently, goods imported to Ethiopia are liable to tax at the time of importation and goods produced in Ethiopia are liable to pay excise tax within 30 days of the date of production. Under the New Proclamation, goods manufactured in Ethiopia are subject to excise tax at the time of removal of goods from the manufacturer’s factory. Manufacturing of goods includes the production of goods in their final form any intermediate or uncompleted process in the production of excisable goods or distilling, rectifying, compounding or denaturing of spirits. If the products are not removed from the factory but consumed in the manufacturer’s factory, then the excise tax is payable at the time of consumption. The tax on imported goods arises at the time of importation but a special permit may be given by the Ministry of Finance (MoF) in relation to petroleum products).
- Exemption: Under the Repealed Proclamation, goods that are not included on the Schedule of taxable goods were deemed to have been exempted from the payment of excise tax. Under the New Proclamation, there are detailed rules on exemptions. The list of exempt goods is exhaustively provided under Schedule II here. Goods that fulfil the requirements of Schedule II are exempted. Among others, excisable goods exported under custom control and exports of excisable service, excisable goods destroyed by the manufacturer at the presence of the officials of the Authority, and supply of goods to entities that are exempt from excise tax by law are exempted from payment of excise tax. In addition to this, the MoF may exempt goods and services considering economic, social and administrative reasons. The excise tax is not applicable when excisable goods are destroyed or lost due to accident or other cause in the course of removal of goods from the factory by the manufacturer or before removal, or while the goods are onboard in aircraft or vessel in their way to Ethiopia. This exemption would not apply if the taxpayer is compensated for the damage and such compensation includes excise tax.
- Base of computation [the tax base]: The base of computation of excise tax under the Repealed Proclamation was based on goods produced locally and goods imported. The tax would be imposed on locally produced goods based on the cost of production. On the imported goods, the tax was imposed on the cost, insurance and freight (CIF) and the customs duty. Under the New Proclamation, the value on which the excise tax to be imposed will be determined based on (i) excisable value of goods or service or (ii) the quantity of goods.
- Based on excisable value: This is applicable when the Schedule I specifies the rate of tax payable based on excisable value. Goods imported to Ethiopia are subjected to tax on the sum total of custom value of goods and the amount of custom duty payable on the goods. The custom value of the goods under Ethiopian customs law is the actual cost of the goods up to the first entry point to the customs territory of Ethiopia. On the other hand, the excisable value of goods manufactured in Ethiopia is ex-factory selling price of the goods. The ex-factory price of goods is a price payable by a purchaser when the products are sold by the manufacturer or the open market value of the goods at the removal of goods at the manufacturing factory.
- Based on quantity: This is applicable when Schedule I specifies the rate of tax payable based on the quantity measured by volume or weight, for instance by a liter or a kilogram. Accordingly, imported goods will be subjected to excise tax based on the gross weight of the package and its contents when the goods are in a package intended for sale and when such package is not marked or labelled with a net weight or is not commonly sold as containing or not expecting to contain specific quantity or weight. The excise tax would be computed on a specific quantity of products if the products are intended for sale by retail and when the package is marked, labelled as containing a specific quantity of the goods or when it is sold as containing or expected to contain a specific quantity of goods. The Authority has the power to adjust the specific rate of excise tax every two years considering inflation.
- Excise control: The New Proclamation introduces an excise tax control system. Goods subject to excise tax in the store of the manufacturer are subjected to control of the Authority. The control time continues until the removal of goods from the factory of a licensed manufacturer for consumption in Ethiopia, or to export abroad and destruction of goods. Goods under control are subject to examination by the officer of the Authority at any time and the person cannot interfere or remove the goods from the factory. The manufacturer has various obligations in relation to excisable goods under the control of the Authority.
- Excise stamps: The other basic introduction of the New Proclamation is the prescription that excisable goods would be required to show excise stamp and mark-ups. Excise stamp is a mark, or an object affixed on excisable goods to indicate that Excise Tax has been paid on such goods. MoF is empowered to issue a directive that provides details on the goods subject to excise stamp, the marking that shall be affixed on goods that are exempt from excise tax and the systems for management of excise stamps and excisable goods, and the place and time of affixing excise stamps.
- Refunds: Under the Repealed Proclamation, excise tax paid on import of inputs that are used to produce textile and textile products and vehicles assembly locally are deductible from excise tax. The New Proclamation expands this privilege to other sectors specifically to goods imported or manufactured that have been used as raw materials in the manufacture of finished goods. The excise tax paid on the raw materials will be set off against the excise tax payable on the final goods. This relief is not applicable to alcohol, tobacco and sugar products. The New Proclamation permits the refund of excise tax paid by the taxpayer when the goods have been damaged or stolen during transportation to Ethiopia or while subject to excise control, when the buyer returned the goods based on a contract of sale, or when the purchaser unable to repay due to insolvency.
- Tax on goods re-imported: The New Proclamation provides a mechanism for imposing excise tax on exempt good on re-importation or purchase. As noted above, the law exempts the exportation of excisable goods. However, when these products are re-imported back to Ethiopia, the importer is liable to pay excise tax. The typical example mentioned by the law is re-importation of the goods that have been exported for use as stores on an aircraft operating in international traffic. Further, the exempted goods will also be subjected to excise tax when they are subsequently used or disposed against the intended purpose of the exemption.
- Administration of Excise Tax: The Tax Administration Proclamation No. 983/2016 will apply for the excise tax administration. The taxpayer has the obligation to keep records and submit to the Authority an excise tax return for each calendar month no later than the succeeding thirty days irrespective of the existence of excise tax payable for that month. The excise tax on imported goods is required to be paid at the time of importation and the Customs Proclamation will be applicable, in the same manner of its application to custom, for the purpose of assessing, collecting, accounting and enforcing the payment of excise tax on the importation of goods.
- Penalties: The manufacturing and importation of excisable products without having the license or manufacture of goods at a place not specified on the license entail an administrative penalty. The penalty will be to pay double of the excise tax that would have been payable if the person were licensed. The New Proclamation further provides various criminal liabilities for violation of the excise tax law.
- Effective date: The New Proclamation will be effective from the date of its approval by the House of Peoples Representative. Immediately after the approval by parliament, the Ministry of Revenue issued a notice to begin enforcing the tax from 14th February 2020. However, excisable products produced prior to such date will be subject to excise tax on its basis. Goods to be imported for which Letter of Credit has been opened prior to the enactment of the New Proclamation will be assessed and collected based on the Repealed Proclamation. The licensing requirement for the manufacturers of excisable product is applicable after six months of the publication of the Proclamation.