KEYIR NEWS - Analysts warn that inefficiencies in tax administration, rather than policy design, are undermining Ethiopia’s ability to mobilise domestic resources.
Despite contributing a significant share to Ethiopia’s overall tax revenue, Value Added Tax (VAT) remains underperforming in terms of its contribution to the national economy, according to recent analysis.
VAT, a consumption-based levy imposed on goods and services and ultimately borne by the consumer, is central to Ethiopia’s fiscal system. The standard VAT rate stands at 15 per cent, and receipts from the tax account for more than one-fifth of the country’s total tax income.
Yet, in proportional terms, VAT contributes only around 0.4 per cent of gross domestic product (GDP), well below the average among comparable economies.
By contrast, international benchmarks suggest that VAT revenues should typically generate up to 1.4 per cent of GDP in low- and middle-income countries. Ethiopia’s shortfall, analysts contend, is not primarily the result of policy design but rather of structural weaknesses in tax administration.
Challenges such as inefficient collection, widespread non-compliance, and gaps in enforcement have hindered the system’s capacity to mobilise resources effectively.
The implications for fiscal policy are significant. VAT was introduced in Ethiopia in 2003 as part of a broader tax reform agenda aimed at strengthening public finances and reducing reliance on trade tariffs. While the tax has since become one of the government’s principal sources of revenue, experts warn that its potential remains far from fully realised.
Addressing the gap between policy ambition and actual collection is therefore regarded as a priority.
Strengthening administrative capacity, improving taxpayer compliance, and closing loopholes are seen as essential steps. Without such measures, the cost of maintaining the current system will continue to outweigh its benefits, potentially undermining broader fiscal stability.
Government officials have acknowledged the challenge, noting that reforms in tax administration are already under way. These include efforts to modernise VAT collection systems, enhance digital reporting mechanisms, and improve monitoring of high-risk sectors.
As Ethiopia seeks to finance ambitious development goals and expand social investment, boosting VAT efficiency could play a critical role.
Economists argue that a more effective VAT regime would not only increase government revenue but also foster a fairer and more sustainable tax system—ensuring that fiscal burdens are more evenly distributed across the economy.