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16th VADA Annual Conference
28th-30th November 2013
Freetown, Sierra Leone
7/28/2017
APPLICATION OF VALUE ADDED TAX IN
THE CONSTRUCTION INDUSTRY: THE CASE
OF ETHIOPIA
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IN
Introduced since January 2003 replacing the sales tax, as
a basic component of modernizing the tax system.
VAT introduced in Ethiopia is the input-output model of
VAT. Proclamation No 285/2002 provides unless there is an
express exemption, VAT applies to:
 Supply of goods and rendition of services in Ethiopia,
and ,
 Importation of goods and acquisition of services into
Ethiopia at the standard rate of 15%,
Exported goods and related services, supply of gold to the
National Bank of Ethiopia, and a supply by a registered
person to another registered person in a single transaction
of substantially all of the assets of a taxable activity or an
independent functioning part of a taxable activity as a
going concern, are zero-rated,
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HIGHLIGHTS OF VAT IMPLEMENTATION
ETHIOPIA
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1. HIGHLIGHTS OF VAT IMPLEMENTATION IN
ETHIOPIA...CONTD.
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VAT exemption has been extended to basic necessities such as
education, medical services, electricity and water, kerosene,
basic foods, transportation service, finance service, the sale of a
used dwelling or the lease of dwelling, the supply of goods and
rendering services in the form of humanitarian aid, etc.
As per the power granted to exempt other goods and services
and issue directives to implement the VAT Proclamation to the
Minister of Finance and Economic Development, various
supplies have been made exempt and directives issued.
The amendment made to the original Proclamation is mainly on
the use of Sales Register Machine (Electronic Fiscal Devices),
possibility of filing a VAT return through electronic devices and
clarifications that were vague for implementation.
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1.HIGHLIGHTS OF VAT IMPLEMENTATION
ETHIOPIA...CONTD.
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IN
Registration Requirements:
Obligatory Registration- business activity
with annual taxable turnover of Ethiopian Birr
500,000 (USD 31,250) is qualifying a taxable
person;
Voluntary Registration- to those who regularly
transact at least 75% with registered persons;
Cancellation of Registration-where the
registered person ceases to make taxable
transaction/annual sales less than threshold.
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1.
HIGHLIGHTS OF VAT IMPLEMENTATION IN
ETHIOPIA...CONTD.
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Though VAT liability is created with every transaction,
considering practical conditions the tax is accounted monthly,
The VAT liability in any accounting period (Ethiopian calendar
month) will be the total amount of output tax charged on sales,
less the input VAT paid relating to taxable sales.
REVERSE TAXATION
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Applied on services acquired from non-residents,
Reported as output tax within 30 days of the date of payment,
The payment document for non- resident is considered to be a
VAT invoice,
The corresponding input tax can be claimed as a credit provided
that the buyer is registered person.
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VAT LIABILITY
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HIGHLIGHTS OF VAT IMPLEMENTATION IN
ETHIOPIA...CONTD.
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REFUNDS
 Allowed if at least 25 percent of the value of a registered person’s
taxable transactions for the accounting period is taxed at a zero
rate,
 For non-zero rated transactions the amount of VAT applied as a
credit in excess of the amount of VAT charged for the accounting
period is carried forward to the next five accounting periods and
credited against payment for these periods.
VAT Administration
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Administered at national level as per the joint decision made by
the House Representatives and House of Federation pursuant to
article 99 of the constitution,
• Although VAT is administered centrally, the revenues will be
shared between different tiers of governments based upon the 6
established sharing formula.
HIGHLIGHTS OF VAT IMPLEMENTATION IN
ETHIOPIA...CONTD.
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VAT Administration... Contd.
 Regional and city administration revenue bodies delegated
by the federal Revenue Authority to administer VAT
payers with their respective jurisdictions since September
2005.
 Assisted by automated program known SIGTAS,
 Integrated with other taxes and currently administered at
all tax centres of the Federal and regional governments,
 VAT Withholding Scheme in place since April 2010 as
per the amended VAT Proclamation No, 609/2008 and the
Directive issued by the Ministry of Finance and Economic
Development,
 VAT registrants are obliged to use sales register machines.
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2. VAT APPLICATION IN THE CONSTRUCTION
INDUSTRY
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participants in the construction industry:
Contractors
General/Prime Contractors
Construction Managers
Commercial Contractors
Commercial Project Owners
Residential Construction Developer
Sub-contractors
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2. VAT APPLICATION IN THE CONSTRUCTION
INDUSTRY ...CONTD.
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participants in the construction
industry…Contd.
Highway Contractors
Heavy Construction Contractors
Architect/Engineers
Material Suppliers
Construction Equipment Lenders
Surety Companies
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VAT APPLICATION IN THE CONSTRUCTION
INDUSTRY ...CONTD.
The contracting process is an important component of the
construction industry and may impact the VAT treatment of the
contract.
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Types of construction contracts includes:
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Long-Term Contracts
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Short-Term Contracts
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Fixed Price or Lump-Sum Contracts
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Cost-Plus Contracts
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Time and Material Contracts
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Unit Price Contracts
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The VAT proclamation provisions apply to all participants in the
construction industry.
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2.
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VAT administration challenges (with regard to taxpayers)
Non-compliance to the VAT law:
 Failure to register,
 Issuance of fictitious invoices among related persons
without actual transaction so that the buyer can claim
refund or overstate input VAT,
 Prevalence of significant number of non-filers and nil-filers,
even though they make taxable businesses,
 Non-remittance of VAT collected ,
 Non accounting (non-issuance of VAT invoice) for advance
collected from clients,
 Non-issuance of VAT invoice for VAT withheld on time, (on
the date withheld),
 Accounting of VAT on Materials supplied by the owner,
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VAT APPLICATION IN THE CONSTRUCTION
INDUSTRY ...CONTD.
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VAT administration challenges (from the RA point of
view)
Lack of effective audit capacity,
Mal-practices in the administration aspects,
Reluctance to identify eligible participants in the industry
and conduct registration,
Exemption privileges extended to micro & small scale
enterprises, but engage on major construction projects,
Failure to promptly process refund requests (companies
having more than 50% of their taxable transactions with
VAT withholding agents need to get their refund within
one month from the date of request).
VAT collection from the Construction sector is not
commensurate with the fast growth of the sector . Tax
evasion is a significant revenue risk (both for VAT and
business profit tax).
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VAT APPLICATION IN THE CONSTRUCTION
INDUSTRY ...CONTD.
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3. MEASURES FOR IMPROVEMENT
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Enhance engagement with the different stakeholders in the
construction sector.
Strengthen Audit Capacity.
widen risk-based audit coverage.
Identify and register eligible taxpayers.
Expedite refund with due care
Issue assessment notice on non-filers
Enforcement measures on fraudsters
Name and shame fraudsters
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Thank you!!
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