Tax reform is one of the major reforms undertaken by the government since the
Ethiopian Peoples’ Revolutionary Democratic Front came to power in May 1991.
Tax rate and tariff reductions, overhauling the tax system and improving tax administration,
and the modernization of the tax structure were among the core elements
of the tax reform.
As an element of the reform, in January 2003, Value Added Tax (VAT) was introduced
to replace the existing sales tax. VAT has specifi c characteristics which provide
for taxes on services as well as goods, a zero tax rating for exports and allows
for reduced (or zero) rates on basic products. It is contended that VAT increases
government revenue, improves economic effi ciency, promotes exports, and fosters
growth.
According to the Ministry of Finance and Economic Development (MoFED), the
collection of tax revenue has increased dramatically since the introduction of VAT
in January 2003. VAT revenue as a share of total tax revenue reached 41.4 percent
in 2007/08. Although the VAT system has been accepted and adopted by businesses
there have been many diffi culties in its implementation and these have led to complaints
from VAT-registered taxpayers.