Ethiopia Holds VAT at 15% in Landmark Overhaul to Reverse Fiscal Decline

Ethiopia Holds VAT at 15% in Landmark Overhaul to Reverse Fiscal Decline The Ministry of Finance has confirmed the Value Added Tax rate will remain at 15% under a new proclamation, the first major update in three decades, as it battles a sharp drop in national revenue. Ethiopia’s Ministry of Finance has officially confirmed it will maintain the country’s Value Added Tax (VAT) rate at 15 percent, cementing a key pillar of its sweeping tax system overhaul. The decision is part of a newly amended VAT Proclamation implemented in the 2017 fiscal year, representing the most significant reform to the nation’s consumption tax in 30 years. The move comes at a critical juncture for the nation’s economy. Rather than simply hiking rates, the government is focusing on a structural overhaul to reverse what officials describe as a continuous and alarming decline in tax revenue. Stemming the Fiscal Bleed The urgency behind the reform is stark. According to the Ministry, Ethiopia’s tax-to-GDP ratio has plummeted from a high of over 12 percent to its current level of less than 7 percent. This sharp decline is severely constraining the government’s ability to fund ambitious national development projects. Strikingly, the ministry’s analysis reveals that underperformance in the VAT system is the single largest contributor to this shortfall, accounting for a staggering 44 percent of the total revenue decrease. The policy review points to an outdated legal framework and a progressively eroded tax base as the primary culprits. Widespread exemptions, particularly on food and other basic consumables, have created significant revenue gaps, rendering the tax system inefficient and unable to keep pace with the country’s economic reality. The Strategy: A Modern Overhaul, Not a Rate Hike In response, the government’s medium-term revenue strategy eschews a simple rate increase in favor of a more fundamental fix. The amended proclamation is designed to modernize the law, aligning it with the “current economic situation and changes in the coming years.” “The Value Added Tax law has been amended in line with the current economic situation,” the Ministry of Finance stated. The goal is to broaden the tax base—bringing more goods and services into the net—to create a more robust and predictable revenue stream. On paper, VAT is seen as the ideal tool. “It does not distort production decisions and does not create cascading… making its potential to increase tax revenue higher than all other taxes,” argues a supporting policy document. The challenge now is to translate that theoretical potential into tangible fiscal results. The Social and Economic Balancing Act While the fiscal imperative is clear, the government faces a delicate balancing act. The amended law must navigate the regressive nature of indirect taxes, which can disproportionately harm low-income households that spend a larger portion of their income on essential goods. The decision to hold the rate at 15% while expanding the base reflects this dual challenge. The success of this landmark reform will ultimately depend on the government’s ability to thread this needle: effectively boosting its revenue to fuel national growth while simultaneously ensuring the system is fair to its most vulnerable citizens.