Presumptive Taxation in Ethiopia - Prospects and Challenges

 

 

 

 

 

 

Final Draft

 

MAY-2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

“Presumptive taxation involves the use of indirect means to ascertain tax liability, which differ from the usual rules based on a taxpayer’s accounts.” A pragmatic but imperfect approach to the challenges of taxing small business-that may be the only viable method in some environments.

 
 
 

 

 

 

 

 


Presumptive Taxation in Ethiopia - Prospects and Challenges

 

Selamawit Yirgalem **

Ramaswami Parameswaran*

 

Abstract

The estimated income can be a base-broadening accumulation to the structure of conventional income taxation in place for less developed countries. It covers both schemes that are not sector-specific, such as minimum asset based taxes on corporate entities, as well as sector specific levies on hard-to-tax sectors of agriculture, small business, and self-employed professionals. It considers both design and administration for Ethiopia, which was engaged in a process of seeking sustainable fiscal correction as a part of the stabilization and reform process. Analyses of presumptive tax approaches in Bolivia, India, Mexico, Argentina, Nigeria, Peru, Venezuela, Ecuador, Nicaragua and Colombia, concludes that presumptive scheme, if well designed, can be simple and revenue productive. In this paper a humble attempt was made on the presumptive taxation in Ethiopia on the prospects and challenges.

 

The dictionary meaning of the term ‘Presumptive’ is having a reasonable basis or grounds for belief or acceptance. Accordingly, presumptive taxation is the application of indirect means to ascertain tax liability and is different from the usual provisions and rules of Income Tax Proclamations. That is, a presumptive income tax is a tax based on some measure of economic activity that surrogates for taxable income, rather than on taxable income itself. For instance, it may be assessed on the basis of a firm’s inventory of output, or of some input of the production process or of gross sales over a period of time and it covers a wide variety of alternative means of determining the tax base, ranging from methods of reconstructing income based on administrative practice. In any case, the aim of the tax authority is to estimate the taxable income of the whole economic activity at hand.

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** Lecturer, Department of Accounting & Finance, Faculty of Business and Economics,

      Addis Ababa University, Ethiopia

* Assistant Professor, Department of Accounting & Finance, Faculty of Business and Economics,

    Addis Ababa University, Ethiopia

Presumptive

 

 

 

 

 

 


Presumptive income taxation is employed primarily in economies where 'hard-to-tax' taxpayers comprise the majority of the population and administrative resources are scarce. In these countries, most taxpayers lack the financial transparency that allows for effective taxation by the government. The result is that governments estimate or presume the appropriate income on which taxes should be levied. In developed countries, the transition from presumptive to actual income-based taxation paralleled the shift from agricultural to industrial economies. Economic advancements replaced self-employment in farming and small-scale trade with concentrated employment in fewer and larger entities such as governments and large corporations. Whereas tax liability was formerly derived from indices such as estimated crop yield of agricultural lands, it gradually became a factor of actual income received from salary and wages. Movements towards more 'modern' forms of tax administration emerged, as businesses became more sophisticated and financial transparency increased. As accounting practices became more prevalent, self-assessment of tax liability and withholding tax at source inevitably followed.

In developing countries, however, presumptive taxation may still be the most appropriate method of tax administration for specific groups of taxpayers. The economic transition from agriculture to industry has not occurred to the same degree as in industrialized nations. However, most tax laws are written as if they had, assuming tax is assessed on well-defined measures of income and well documented in transparent accounting records. The reality is that most taxpayers do not possess the administrative resources to maintain accurate books or navigate complex tax codes. As a result, tax evasion is rampant and authorities exert considerable effort locating and taxing small and medium enterprises.

 

Cube: • Simplification, particularly in relation to the compliance burden on taxpayers with very low turnover(and the corresponding administrative burden of auditing such taxpayers) • To combat tax avoidance or evasion (which works only if the indicators on which the presumption is based are more difficult to hide than those forming the basis for accounting records) • By providing objective indicators for tax assessment, presumptive methods may lead to a more equitable distribution of the tax burden, when normal accounts-based methods are unreliable because of problems of taxpayer compliance or administrative corruption • Rebuttable presumptions can encourage taxpayers to keep proper accounts, because they subject taxpayers to a possibly higher tax burden in the absence of such accounts. • Presumptions of the exclusive type can be considered desirable because of their incentive effects—a taxpayer who earns more income will not have to pay more tax • Presumptions that serve as minimum taxes may be justified by a combination of reasons (revenue need, fairness concerns, and political or technical difficulty in addressing certain problems directly as opposed to doing so through a minimum tax) WHY- Presumptive Taxation.