Tax and Tensions: Ethiopia’s Car Market Faces Unprecedented Challenges











After the shift to a market-based foreign exchange system, importers have become one of the hardest-hit groups in Ethiopia’s economy. The floating exchange rate has triggered sharp and unpredictable currency fluctuations, driving up the cost of acquiring foreign currency and creating immense financial pressure.

Car importers, added to this tension, are facing excessive taxation, further exacerbating their challenges. According to an anonymous car importer, the sector is facing several challenges like unfair competition with parallel car markets, new tax duty and financing options.

“The duty on fuel-powered internal combustion engine (ICE) vehicles imported in Completely Knocked Down (CKD) and Semi Knocked Down (SKD) form has increased by 20%, while an additional 10% excise tax has been imposed,” said an anonymous stakeholder from a local car importer. He explained that this change results in an overall tax and duty burden that is 30% higher than the previous year, a situation further exacerbated by the effects of devaluation. He also noted that the duty difference between CKD/SKD and Completely Built-Up (CBU) imports is only 5%, making the CKD/SKD option less attractive when factoring in the additional costs of importing, assembling the units, and covering factory overhead. The 5% duty difference, he pointed out, is still subject to confirmation.

He urged that, given the level of investment the sector contributes to the economy and the volume of employment opportunities it creates for citizens, the current duty and tax incentives, particularly on electric vehicles, are very discouraging.

“Compared to the Cost, Insurance, and Freight (CIF) cost, the authority’s cost assessment is impractical, especially for Chinese brands,” said another anonymous importer.

Parallel car markets, which are not subjected to taxes, present additional challenges to formal car markets. This creates an uneven playing field, making it harder for legally operating businesses to compete and sustain their operations.

As stated in a previous article on taxes by Addis Insight, “‘Don’t kill the goose that lays the golden eggs’ is a fundamental tax principle that warns against overburdening or overtaxing sources of wealth or income, as doing so can stifle growth and long-term productivity,” said Natae Eba, Seasoned Tax Lawyer.

Ethiopia plans to collect 900 billion birr from federal sources and 600 billion birr from regional governments. To achieve this, Prime Minister Abiy Ahmed (PhD) is establishing a high-level committee dedicated solely to overseeing revenue collection. One key aspect of the government’s strategy to increase tax revenue is bringing informal businesses into the formal sector. “Ethiopia is one of the countries with a low tax-collection rate, largely because many sectors operate informally. We want to change this. We are working on reforming tax laws, improving tax administration, automating processes, and changing the attitudes of tax workers,” Abiy said in Addis Ababa.

The government’s plan to bring informal businesses into the formal sector began with a wave of challenges in Africa’s largest market, Merkato. Businesses were left stunned by a sudden gridlock following a consequential decision by authorities to tighten tax administration. This abrupt shift is now causing shockwaves within the car business sector. However, experts argue that a transition period is necessary to allow businesses to adjust to the new regulations and avoid severe disruptions.

An anonymous economist expressed concern about the transition of informal businesses to the formal sector, stressing that, given their large number, the shift should not be rushed. The recommendation is to create a supportive and encouraging business environment to facilitate the process.