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GLOBAL COLLEGE AMBO CAMPUS

ACCOUNTING DEPARTMENT
BASIC ACCOUNTING WORKS LEVEL II
Unit of Competence: Develop Understanding of
Taxation
Module Title: Develop Understanding of Taxation
LG Code: BUF BAW2 07 0812

TTLM Code: BUF BAW2 M07 1212

CONTENTS PAGE
INTRODUCTION…………………………………………………………………… 2
LO1Identify and discuss the role of taxation in the Ethiopian economy-------7
 The purpose of taxation
 The various ways that tax is collected
 The role of the Ethiopian Revenues and Customs
 What taxation revenue is

 The role fo taxation

 Financing government activity

 Maintaining equity in the national economy
 Promotint efficiency where markets fail to contrll politions or
health dangers
 Social Infructution .

LO2 Identify and discuss direct tax --------------------13

 Key terminology used in direct taxation

 Tax declaration forms
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 tax returns
 Sources of ongoing information
LO3 Identify and discuss indirect tax ---------------27
 Key terminology used in indirecttaxation
 structure of business and how this affects taxation
 How indirect tax is assessed
 indirect tax in Ethiopia

Identify and discuss the role of taxation in the

LO1 Ethiopian economy

1.1 Thepurpose of taxation

The purpose of taxation includes but is not limited to:

 financing government activity
 maintaining equity in the national economy
 promoting efficiency where markets fail to control pollution or health dangers
 social infrastructure
A tax should be distinguished from a criminal or civil penalty (or fine), at least in a crude way.

i. The relative size of exaction demanded and

ii. The specific objective behind it.

The larger the exaction and the major restrictive the objective, the more likely that the exaction
should be classified as a penalty rather than a tax.

1. 2 PRINCIPLE OF TAXATION

A tax system (that is, the set of all taxes) for achieving certain objectives chooses and adheres to
certain principles which are termed its characteristics.

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Canons of Taxation:

The three( 3 ) canons of taxation:

(1) Canon of Equality

This canon proclaims that a good tax is that which is based on the principle of equality..

(2) Canon of Certainty

This canon is meant to protect the tax payers from unnecessary harassment by the ‘tax
officials’. It implies that the tax-payer should be well informed about the time, amount
and the method of tax payment.

(3) Canon of Convenience

. According to, “every tax ought to be so levied at the time or in the manner in which it is
most likely to be convenient for the contributor to pay it

 Definition of Taxation

-WHAT IS TAX&TAXATION ?

TAX: is a financing charges or other levely imposed to the individual or a legal entity
by a government.

TAXATION: is a system of raising/increasing / money to finance government

expenditures/expense/.

1. 3 TAX OBJECTIVES

Initially, governments impose taxes for three basic purposes: to cover the cost of
administration, maintaining law and order in the country and for defense. Raising revenue: to

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render various economic and social activities, a government needs large amount of revenue and
to meet this government imposes various types of taxes.

 Removal of inequalities in income and wealth:

 Ensuring economic stability:
 Reduction in regional imbalances:.
 Capital accumulation
 Creation of employment opportunities
 Preventing harmful consumptions
 Beneficial diversion of resources
 Encouragement of exports
 Enhancement of standard of living

Characteristics of a Good Tax System

1. 4

(1) Tax is a Compulsory Contributio

Eg: Direct Tax and Indirect Tax

(2) The Assessee will be required to pay Tax if is due from him

-Eg: Pay tax, Individuals Earning monthly salary to pay 600 birr not be forced to pay tax on
income.

(3) Taxes are levied by the Government

-Eg:government collects a tax

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LO2 Identify and discuss direct tax

 Ways that tax is collected includethrough regional and federal level taxes including:
 direct tax
 Tax on Income from Employment / Personal Income Tax/
 business Profit Tax/
 Tax on Income from Rental of Buildings/
 Tax on Interest Income on Deposits
 Dividend Income Tax
 Tax on Income from Games of Chance

A. Direct tax
B. Indierct tax

A. Direct TAXES

Direct taxes are those taxes which are raid entirely by those persons on where they are
imposed. In other words, the immediate money burden is upon the person who pays the tax to
the authority. Direct taxes are those taxes which can not be shifted to others.

Income Tax

Income tax is one of the taxes that is levied and collected by the federal government. This tax Governed
by income tax Proclamation No 286/2002.Income tax is very important of direct tax. .

WHO IS LIABLE TO PAY INCOME TAX?

Every person whose taxable income for a month exceeds the minimum taxable limit is liable to
pay to the federal government income tax during the current month on the income of the
previous month at the rate in force.

WHAT IS INCOME TAX?(

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Income tax is a monthly tax levied in every month at the prescribed rates, on every person in
respect of his income for relevant previous month.

TAXATION

Under the income tax proclamation, a person has to pay income tax on his income of a particular
month provided it exceeded a certain minimum limit prescribed in the proclamation.

3.3 SOURCE OF INCOME

Income taxable under this proclamation shall include, but not limited to:

A. income from employment

B. income from business activities
C. income derived by an entertainer, musician, or sports person from his
personal activities
D. Income from entrepreneurial activities carried on by a non- resident
through a permanent establishment in Ethiopia.
.

SCHEDULES OF INCOME

2.2

SCHEDULES OF INCOME

The proclamation provides for the taxation of income accordance with four schedules are as
follows:-

 Schedule ‘A’ income from employment

 Schedule ‘B’ income from rental buildings
 Schedule ‘C’ income from business
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 Schedule ‘D’ income from other sources including:-

i. Royalties

ii. Income paid form services rendered outside of Ethiopia

iii. Income from games of chance

iv. Dividends

v. Income from casual rental of property

vi. Interest income

vii. specified non- business capital gains

Every person having income as defined above shall pay income tax in accordance with this
proclamation.

SCHEDULE ‘A’ INCOME: EMPLOYMENT INCOME

Any remuneration paid by an employer to his employee in consideration of his services is called
salary. It includes the values of fringe benefits provided by the employer. Any payment received
in cash or in kind in the source of employment by an individual is taxable. This provision is very
extensive and includes the following

 Salaries
 Allowances
 Bonus
 Car benefits
 Housing benefits
Taxable income:- Every person driving income from employment is liable to pay tax on that
income at the rate specified in schedule A.

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Tax rate:- The tax payable on income from employment shall be charged, levied and collected at
the following rates.

Schedule ‘A’ “ old”

 Old
0.00--- -------------------------1800---Exempted

1801-----------------------------7800---10%---180.00
7801-----------------------------16800---15%--570.00

16801------------------------------28200---20%--1410.00

28201------------------------------42600---25%---2820.00

42601-------------------------------60,000---30%---4950.00

Over------------------------------60,000---35%---7950.00

 News
0.00------------------------7200----Exempted

7201-----------------------19800---10%--720.00

19801----------------------38400---15%---1710.00

38401 -----------------------63000---20%---3630.00

63001------------------------93600---25%---6780.00

93601------------------------130800---30%---11460.00

Over------------------------130800----35%---18000.00

 Employee Income Tax The Proclamation in Ethiopia Articles 286/2002 .

 News
0.00---------------------600----Exempted

601---------------------1650---10%----60.00

1651--------------------3200---15%----142.50

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3201---------------------5250----20%----302.50

5251-------------------7800------25%----565.00

7801-------------------10900-----30%----955.00

Over------------------10900-------35%----1500.00

Old

0.00------------------150------Exempted

151-----------------650-------10%---15.00

651----------------1400------15%----47.50

1401---------------2350------20%----117.50

2351---------------3550------25%----235.00

3551---------------5000-----30%-----412.50

Over---------------5000-----35%-----662.50

E.g: (650*15%) –( 650-150) –( 150*0-0)= 47.50

 TROUGH REGIONAL AND FEDERAL LEVEL TAXES INCLUD ;

The Element of Taxation

a) Direct taxe
b) Inderect taxe
 Direct taxe:
-Income from Employment -------( 5---35% )

-Income from rental building -----(10—35% )

-Income from business profit tax:

 Un corporates ( 10---35% )
 Incorporates ( 30% )
-income from royalties -----( 5% )

-income from paid for service rendered outside of Ethiopia ----( 10% )

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-Income from games of chance or lottery --------- ( 15% )

--Dividend------------------------------( 10% )

- Income from rental property: ( 15% )

-Land------

-Building or movable asset----

-Interest income -----( 5% )

-gains on transfer of certain investment property (sale or gift ):

-Building for business, factory office --( 15% )

- Share of companies--- (30% )

- PLC

 Indirect Tax

-VAT (value added tax)-------( 15% )

-Excise Tax----------( 10—100% )

-Custom Duty or/ tariff/ ( 10—30% )

-TOT / turn over tax/----( 2—10%)

-Building and Structures---( 5% )

-Intangible Asset---( 10% )

-Computers, Information System, Soft Product, Data

Storage Equipment ---( 25% )

-Business Asset Including:

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-Automobiles = ( 20 )

-Bus & Minibuses

-Export Tax: -Cow Skin

- Sheet Skin = flat (150%)

- Goat Skin

 Selling VAT ( output )= -Inclusive

-Including = (15/115)

-After

 Purchasing VAT( Input ) = -Exclusive

-Excluding =( 15/100 )

-Before

 VAT payable =output VAT - Input VAT

 MEE TANA OFIRRAA DALAGIME

EX: 1) Gada PLC is an importer of rein for comment bars from Belgium. The company has been engaged
in buying & selling activities. At the end of November 2014, the company paid net amount of 300000ETB
to ERCA for VAT. During the month of November it earns birr 1541000 VAT inclusive sales of
reinforcement bars. In addition Giada paid an employment income tax of 6000ETB per month collected
from employees & also paid administrative& general expense of 15000ETB during the month.

 Instructions
1) Determine the amount of Direct Tax liability of the company for the month for October2014
2) Determine the amount of Input and output VAT for the month of october
EX 2: Global PLC is a business Organization and during the Megabit 30/2006.give are purpose tax .

S/ Tax categories Amount Tax Amount

N

1 Business profit 1000000

2 Sales Inclusive VAT 34500

3 Employee Income 10000

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4 Dividend Income 15000

5 Excise Tax 15000

6 Custom Duty 17000

 The company purchased Infrastructure’s during megabit by 11500 Inclusive

 Required

1) Calculate the Direct Tax & Indirect Tax?

2) “ “ “ Total Direct Tax & Indirect Tax?

Solun:
1. Direct Tax
1.Business Porfit Tax= 1000000*30%
= 1000000*30/100
=10000*30
=300000.00
2.Employee Income Tax= 10000.00

3.Dividend Income Tax=15000*10%

=15000*10/100
=1500.00

2. Indirect Tax:
1.sales( out put VAT) includingVAT= 34500*15/115
=517500/115
= 4500.00

2.purchasing( Input VAT)=11500*15/115

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=11500*15/115
= 172500/115
=1500.00

 VATPAYABLE=OUT PUT VAT—INPUTVAT

VATpayable = 4500.00 -- 1500.00

= 3000.00
Basically the Ethiopian tax law provides Direct and Indirect Taxes.
The Direct Taxes are divided into five categories:

C. Direct tax
D. Indierct tax

A.Direct tax

1. Personal income tax,

2. Rental tax,
3. Withholding tax,
4. Business profit tax and
5. Other taxes. Income From Rent Of Patent And Copyright, Income From Winning
Lottery, Income From Share In Company…etc fall under this category.

The main types of indirect taxes applicable are:

1. Value Added Tax (VAT),
2. Customs Duty,
3. Excise and
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4. Turn Over Taxes.

I. DIRECT TAXES
Incomes taxable under Article 6 of the Income Tax Proclamation No. 286/2002 includes:
 Income from employment (10% - 35%)
 Income from rental of building (10% - 35%)
 Income from business profit – for unincorporated entities (10% -35%);–for incorporated
ones (30%)
 Income from royalties is at flat rate of 5%
 Income paid for services rendered outside of Ethiopia is at a flat rate of 10%
 Income from games of chances (15%)
 Dividends (10%)
 Income from causal rental of property is 15% (any land, building or movable asset)
 Interest income (5%)
 Gains on transfer of certain investment property (sale or gift):
 Building for business, factory, office (15%)
 Shares of companies (30%)
 Income from agricultural activities – based on proclamations issued by regional states.
 Inheritances and donations: No estate duty or other death duties are levied in Ethiopia.

So an individual foreigner, who lives in Ethiopia for more than 183 days in a period of twelve
calendar months, whether continuously or intermittently, is regarded as being resident for the
entire tax period and is taxed in accordance with the provisions of Income Tax Proclamation No.
286/2002 (Article 5.2).

Article five of the proclamation, defines resident as follows:- 

1. The one who has permanent residence address in Ethiopia or
2. If the person has a place in Ethiopia that he frequently resides in or
3. If the person is an Ethiopian citizen but lives abroad for the purpose of councilor office,
diplomatic or for any other similar purposes.
4. If the person was present for 183 days in Ethiopia within 12 months permanently or other
way, the law regards him as an Ethiopian  resident and imposes him an obligation of
paying tax from any income he gets.
However, the following are excluded from the computation of taxable income in accordance with
Article 13 of the Income Tax Proclamation No. 286/2002 and Article 13 of the Regulations No.
78/2002:
 Medical treatment;

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 Transportation allowance;
 Hardship allowance;
 Reimbursement of travelling expenses incurred on duty;
 Per Diem and travelling expenses on joining and completion of employment, provided
that such payments are made pursuant to specific c provisions of the contract;
 board members’ and board secretaries’ allowances; the income of persons employed for
domestic duties;
 The contribution of the employer and the employee to the retirement or provident fund
and all forms of benefits contributed by employers that do not exceed 15% of monthly
salary; and
 Payments made to a person as compensation in relation to injuries suffered by that person
or the death of another person.

 Tax system of structures:/ CASAA TAKSOOTA/

The tax system structures can be the “THREE”types

1. Proportoinal tax system=( yerooretii dhabbataa ta’ee fi

galii dabaala deemu)
2. Progressive tax system=(yerooretiin dabalaa deemu galii
hir’achaa deemaa)
3. Regressive tax system &=( yeroo galiin dabalaa deemu
reetin hir’achaa adeema)

1.Proportoinal tax system= yeroo retii dhabbataa ta’ee fi galii dabaala

deemu.
-A system that taxes every one at the same rate is the counistant& income increase
Eg: s/n Income Rate
1 1500 15%
2 2000 15%
3 3000 15%
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2.progressive tax system=(Yeroo retiin dabalaa demuu galiin hir’achaa deemaa.)

A system that tax every at the Income decrise & rate is the increase

Eg:

s/n Income Rate

1 2000 5%
2 1000 10%
3 500 15%

3.Regressive tax system= (yeroo gaalin dabalaa

Tha tax system that can be every at the income increase& rate is the dicrease

Eg: s/n Income Rate

1 2000 15%
2 4000 10%
3 7000 5%

 Single & Multiple Taxatoin

Based on the number of taxes a tax system may be classified as a:

a) Single &

b) Multiples

A. Single Taxation

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-A single tax system means oly one kind of tax / one tax base /. One can make a single
tax

- proportional ,-progressive& regressive

B.Multiples Taxation

Modern economy have laid great stress on the diversity of taxation that is there should be all
typesof taxes

-Diect Taxes&Indirect Taxes.

Taxable income:- Every person driving income from employment is liable to pay tax on that
income at the rate specified in schedule A.

Tax rate:- The tax payable on income from employment shall be charged, levied and collected at
the following rates.

Identify and discuss indirect tax

LO3

INDIRECT TAXES

B.

-Indirect tax is a tax the burden of which may not necessarily be borne by assesses. Indirect taxes can be
shifted or passed on to other persons.

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The main types of Indirect taxes applicable are:

1. Value Added Tax (VAT),
2. Customs Duty,
3. Excise and
4. Turn Over Taxes.

TURNOVER TAX

The turnover tax would be payable on goods sold and services rendered by persons not registered for
value added tax. The rate of turnover tax is

 2% on goods sold locally

 For services rendered locally
2% on contractors, grain mills, tractors and combine-harvesters

10% on others

NOTIFICATION OF CHANGES

A registered taxpayer is required to notify the tax authority:

 Any change in the name, address, place of business constitution, or nature of the principal
taxable activity or activities of the person
 Any change of address from which, or name in which, a taxable activity is carried by the
registered person, within 21 days following such change.
-VAT and Excise Tax are among the taxes that exist in the tax system. The Federal Government has
issued VAT Proclamation No. 285/2002 and Excise Tax Proclamation No. 307/2002. This section deals
with these taxes.

This section generally will discuss about VAT and Excise Tax. In particular, we will study about the
imposition of VAT and Excise Tax. We will also study the subject matters over which VAT and Excise Tax

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are imposed and the rates applicable over the various subject matters that are taxable. Finally we will
discuss the implementation and enforcement of the tax.

Objectives:

After having completed the study of this section, you will be able to:

 discuss imposition of VAT and Excise Tax

 identify exempted items
 explain the subject matters that are taxable
 describe the tax rates applicable to taxable subject matters
 explain the implementation of the taxes

 Value Added Tax

-The VAT Proclamation No. 285/2002 which has rescinded and replace the sales and excise tax
proclamation No.68/1993 and which has come into force as of January 2003 is a consumption tax which
is levied and paid as Value Added Tax at a rate of 15% of the value of every import of goods, other than
an exempt import and an import service.

 Tax system
Tax system which tax is the tax system are the type of

1. Global tax system

2. Schedule tax system

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1.Global tax system:

- is a tax system in which tax is computed aggregated of all income & losses that the tax payers
derived from different fources.

2.Schedule tax system:

- is a tax system in which tax is computed sepated schedule.

 Objective Taxation
- initially gevernment imposed that taxes for the three basic purpose.

a. Cost of administrative

b. Maintaining law

c. For defense

 Effective of taxation:

-effective of tax in the particulary they study how tax affect people are behavior icluding their
choice in:

- working, saving & investing.

Prep/ by Debasa Teshome

“Good luck chance”

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