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Why always Hamle? - Tax Thoughts

As the saying goes “Nothing is certain in life except death and tax.” It’s hardly possible to skip the verges of taxation in life. From the giants in Wall Street to anyone who has the purchasing ability from shop feels the hard pinch of tax either directly or indirectly.  Different forms of tax make through to the pockets of every member of the society. For instance, whenever you drink tea or coffee in a café you pay Value Added Tax (VAT).

The government has the responsibility to make sure whether what is due from different sectors is put in the treasury. The taxation power of governments is an inherent power of a state. It exists independent of any authorizing source—the power emanates as a community starts to exist as a state.

Traditionally a government is entrusted with three main responsibilities --- Defense of the country, Maintenance of law and order, and Socioeconomic development. Executing this entrusted responsibility requires revenue.  To cover up required expenditure the government takes part of the wealth of its subjects—through the scheme called TAX. Although, there are different non-tax ways the chief means to create social welfare is via TAX. When we talk about Tax there are a lot of different types depending on the source they target to impose on. VAT, Income Tax, Customs Duty, Turnover Tax, Donation Tax, Capital Gain Tax, Estate Duty Tax… are few among many. Even though there are different forms of tax this op-ed focuses on Ethiopian Income Tax, particularly about the time of its collection. Income tax is essentially a tax levied on a person’s income from various sources. It is a direct tax in the sense that it is demanded from the very persons who, it is intended or desired, should pay it.

It became a learned experience to watch long lanes of taxpayers on the months spreading from Hamile to Meskerem. This natural course of action created a belief to be a mandatory period of collection among both taxpayers and collecting authorities. Recent observation of tax authorities in the Eastern part of the country by the writer of this op-ed revealed the same fact. Like any levy, income tax is the creature of statute and there are no principles of law applicable to the tax other than those found in the Income Tax legislation itself according to their true meaning and effect. It follows, therefore, that it is the statute alone that must be consulted to establish the tax liability of a person.

So, when is the law requires the taxpayer to declare income tax? The current law governing income tax is Federal Income Tax Proclamation No 979 (hereafter proclamation) with different corroborating Regulations and Directives. Further, many regional states have their own Income Tax Legislations, however, they are a verbatim copy of the federal legislation. So, it is important to go through this legislation in order to answer, WHEN?

Ethiopia adopted schedular form of Income taxation, which mainly has four schedules to tax income from different sources. The first schedule governs employment income tax. The provisions run from Article 10 to Article 12 of the proclamation. The second schedule regulates the income tax levied on income collected from the rental business. The provisions applicable in such instances are those provisions from Article 13 to Article 17. The third schedule imposes a tax on income derived from business activity. The provisions are applicable in this circumstance run from Article 18 to Article 28. The fourth schedule imposes tax income derived from “Other Income”. The provisions applicable to these incomes run from Article 51 to Article 64. Nevertheless, all schedules do share one thing—they are declared or collected at the end of the “Tax Year”, except incomes treated under Schedule A & D.

Tax Year—As a Point of Reference for Tax Collection

Taxpayers are required to pay the amount due to the government at the end of their tax year. Who is this taxpayer? There are different categories of taxpayers, however, in a very reductionist sense, taxpayers are those persons liable to pay tax. A person is defined in the proclamation to refer to both Natural Person (who has flesh and blood) and Body (corporate entities who has their own separate existence from the individuals who created them). Both types of persons are liable to pay tax. The law set out different meanings of tax year depending on their personality. Article 2(21) of the proclamation reads as:

“Tax year” means:

a) for an individual, the one-year period from 1st Hamle to 30th Sene, unless the Authority has granted permission, by notice in writing and subject to such conditions as may be specified by the Authority in the notice, for the individual to use its accounting year as the individual’s tax year;

b) for a body, the accounting year of the body; or

c) a transitional accounting year as determined under Article 28 of this Proclamation;

For a natural person, sub (a) provides that the tax year is the one-year period from the 1st Hamle to 30th Sene. However, the Authority may authorize based on the application made by the individual that can grant permission to use a different one-year period as the individual’s tax year. However, it has been a long-standing practice in Ethiopia for the Authority to grant permission to some classes of the individual to use a different period as their tax year. The main example is farmers and this ensures that their tax year ends at the end of harvesting when they have the cash flow to pay tax.

For a body (corporate entities), sub-art (b) provides that the tax year is the accounting year of the body, i.e., the one year ending on the date of the annual balance of the financial accounts of the body (Article 28). Such permission for a body corporate to use its accounting period as its tax year avoids the compliance costs. As voiding compliance cost is at the heart of tax canons. It follows, therefore, the tax year for body corporate principally depends on the accounting period (financial year) of the company. “Tax year” also includes a transitional tax year under Article 28 when a taxpayer changes its tax year. A transitional tax year is a short tax year between the end of a former tax year and the beginning of the new tax year

When to Pay?

The preceding discussion outlines the relevancy of tax year for taxation of income.  As collection income tax depends on the tax year, payment of tax depends on the time of tax declaration.  Tax declaration is the moment where the taxpayer provides details or information pertaining to the overall income statement of the year to the tax authorities and this always comes at the end of the tax year. This time of declaration differs depending on where the taxpayer falls within the category. Regarding declaration in case of employment income tax, Employment taxpayers are not obliged to declare unless they are employed under more than one employer and obliged to withhold income tax as per Art 93 of ITP.

Nevertheless, for category A & B taxpayers, payment of tax is due from the time tax declaration is made. All body corporates are deemed to be Category A taxpayers and natural persons fall in both categories in terms of Article 3 of the ITP.  Article 84 sub 4 provides that a Category ‘C’ must file a tax declaration for a tax year within the period 7th day of July to the 6th day of August following the end of the tax year. However, in all other circumstances, all category income taxpayers (defined under article 3 of the ITP) are required to pay their respective income tax after-tax declaration for the year is due.


Article 84. Payment of Tax

2/ The tax payable for a tax year by a Category ‘A’ or Category ‘B’ taxpayer shall be due on the date that the taxpayer’s tax declaration for the year is due.



The author wants to conclude the above discussion with the following remarks.  Hamile has opted for two reasons. One, Hamile has got an established acceptance among taxpayers as a time when their tax year comes to an end. Second, lack of awareness as to the relevant legislation both by the authorities and taxpayers. Still clearly determining the exact time depends on individual circumstances of taxpayers, it can’t be done in one basket treatment. Authorities should abstain from rushing to penalize taxpayers for late payment without considering the exact tax year or financial year of taxpayers. Further, the time of payment is an important element to have the business license renewed. Possible consistency should be maintained between taxing authorities and the trade office.

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Thursday, 18 July 2024