Taxes are important sources of public revenue. Public goods and services are normally subject to collective consumption, thus requiring that we put some of what we earn into government hands. Public goods are normally supplied by public agencies due to their natures of non-rivalry and non-excludability. The nature of consumption of public goods is such that consumption by one does not reduce consumption for others. Besides, consumption of public goods by an agent does not exclude others from doing same. Such nature of public goods therefore makes them impossible for private suppliers to avail them at market prices like other commodities. Government intervention in the supply of public goods is, therefore, inevitable and can only be done if the public pays taxes for the production and supply of such goods.
To that end, immediately and directly, any government’s priority is the generation of revenue money by means of which it can procure such services and goods necessary for the performance of its functions. In the past, government sought to undertake this duty through numerous ways amongst which tributes and booty, feudal services, grants, aids, military duty and cultivation of crown lands are known to be the most prominent one. Later on, with civilization and the modernization of states, governments started to procure revenue indirectly by means of revenue collected in the form of money from the citizens of the state in which the government in question exercises its functions. Therefore, so long as a system of private property subsists, individuals must contribute from their property for the support of government. Such contributions are due from those citizens of a state over whom a government may directly exercise jurisdiction, as with respect to their property, or for whom any of its functions may be directly performed, as for the defense of their persons or property. All in all, from the point of view of the individual, tax is a contribution whereas from the point of view of the government tax is a collection or procurement.
A number of authors have tried to define the term ‘tax’; however, it is hard to say that these attempts at coming up with a definition for the term have been successful (mainly owing to the fact that too great precision is attempted in a single sentence). The best way to understand the term is to state the fundamental idea of a tax and afterwards to note its leading characteristics. Accordingly, in general terms, tax can be defined as a contribution from individuals out of their private property for the maintenance and defense of government, so that it may perform its functions and the ends of the state be realized. In simpler terms, “tax is a financial charge or other levy imposed on an individual or a legal entity by government”.
Taxes are a portion of private wealth, exacted from individuals by the State for the purpose of meeting the expenditure essential to carrying out the functions of government. Taxation in some form is an invariable attribute of an organized political society, and, under whatever name it exists, it becomes sooner or later the principal means of raising revenue for public purposes; it is thus the correlative to the services which government performs for the community. Acting under a natural impulse, men organize themselves into political societies for common safety and to secure the advantages which arise from combination; only by such union is the development of human powers possible or progress in civilization attainable. All organization implies administration, and this involves expenditure which must be met by public income. Economic separation of functions tends to increase with the complexity of society, and the more advanced the organization, the more numerous become the duties of government, the more elaborate and costly its machinery, and the larger the common fund requisite to meet expenditure incurred for the common good.
To the citizen of the modern state, taxation, however disagreeable it may be, seems natural. It is difficult to realize that it is essentially a recent growth and that it marks a comparatively late stage in the development of public revenue; it is more difficult to realize that each age has its own system of public revenue, and that the taxes of today are different from those of former times; it is still more difficult to perceive that our ideals of justice in taxation change with the alteration in social conditions.
Taxes are contributions from the national dividend; they must ultimately come out of the annual earnings of the nation. The private income of a nation is the index of the capacity of the people to pay taxes, since it is the real source of public revenue. Labor and wealth employed productively by individuals create a fund which can be drawn upon; hence, as Adam Smith urged, the importance of measures which remove restraints on production, and which tend to stimulate the enterprise of people.
Taxes are defined to be burdens, or charges, imposed by "the legislative power of a state upon persons or property," to "raise money for public purposes." It is a power inherent in sovereignty, and without which constitutional government cannot exist. It is vested in the Legislature by the general grant of the legislative power whether specially enumerated in the Constitution among the powers to be exercised by it or not. Coming particularly to the case of Ethiopia, the Constitution of the Federal Democratic Republic of Ethiopia, while enumerating the powers and duties of the Federal Government in Article 51 clearly states that the levying of taxes and the collection of duties on revenue sources is among the duties of the government. In addition to this, Article 52 goes on and enumerates the powers and functions of state governments, amongst which is the levying and collection of taxes and duties on revenue sources reserved to the States. When taxes are levied; the citizen is liable for their payment at the time and in the manner required and provided by the law authorizing their assessment and collection.
As can be evidenced from the discussion above, the basis of taxation is wealth. If wealth is the basis, then the classification of taxes might be made to depend on that of wealth. Such a method, although tried, has been found impracticable, because the processes of shifting render is impossible to ascertain the final incidence with sufficient accuracy for classification. It has also been suggested that we might use the different specific means employed by nations to measure benefit or faculty. But here, again, we meet with difficulties that are almost unsurpassable; for in that case the classification will depend on the theory adopted as to the correct measures. If we adopt the benefit theory, our classification will depend on the different indices of benefit chosen. If we adopt the faculty theory, then our classification will be according to the indices of faculty. But we are not at liberty to adopt one or the other of these theories exclusively, because no nations have done so in practice, and their taxes are some of them based on the one theory, or at least best explained thereby, and some on the other, while many combine both or may be interpreted in either way. At the same time, many taxes that could not be justified on either basis are retained by the nations on grounds of general expediency, because they yield considerable revenue, or because they have been long in use. If, therefore, we adopt a classification presupposing either theory, we shall find many taxes that do not conform to it. In as much as no consistent plan for the measurement of taxation has been adopted by any country, no uniform method of classification upon "natural" grounds can be found.
These difficulties are inherent in the matter that we are attempting to classify and such classification will not help us to ascertain the real nature of the things studied. These difficulties have not always been regarded as unsurpassable, and many brave attempts have been made to overcome them, but with so little uniformity as to mark the failure. There are almost as many classifications as writers. The least satisfactory of all are those that attempt to find some natural arrangement. Those which have the most apparent success accept the official names used by the treasury departments of the different nations, and give them merely such limitation as is necessary to use them scientifically.
A tax is a compulsory contribution of persons toward the needs of government. It follows from this definition (a) that a tax involves coercion upon its bearers, (b) who are in every case, either natural or legal persons, and (c) a specific public purpose as its end. Taxation includes the processes of levying, collecting, and paying taxes. Though taxes were historically voluntary contribution toward the expenses of government, gradually they were transformed into obligatory actions. At the present time, payment of taxes is obligatory in all civilized nations. The bearer of the tax is in all cases a person. Property belongs to some one, and when it is taken by means of taxation, the owner bears the burden. There can be no vital relation of obligation between inanimate property and the living state. The duty of supporting the state rests upon those who receive protection from it. While a large measure of the protection which the subject receives from the sovereign takes the form of security of possession, the thing possessed is but an incident in the relationship of the state and the individual. The third element in the definition of a tax is a specific public purpose as its object. Taxes are levied for the benefit of government as a whole, not for the advantage of individuals or of a particular class. Justification of taxation must rest on the will of the people expressed by legislation: when its results are applied otherwise than for the good of the general public, taxation can no longer be defended.
A commonly applied classification of taxes is into direct and indirect taxes. The classification of taxes into direct and indirect owes to the relationship between the nature of the taxes and the reason for payment of the taxes. A direct tax is one for which the formal and economic incidence are essentially the same, i.e. the taxpayer is not able to pass the burden to someone else. Accordingly, direct taxes are paid entirely by those persons on whom they are imposed. On the other hand, an indirect tax is a tax whereby the taxpayer’s burden to pay the tax can easily be passed on to another person. Generally, the tax incidence of an indirect tax is on the ultimate consumer; however, sometimes, sellers might absorb such indirect taxes so as to be competitive in the market in which they are operating. The major types of direct taxes in Ethiopia are personal income tax, rental tax, business profit tax, withholding tax and such other taxes like taxes from loyalties, from games of chance, dividends or property taxes. The major types of indirect taxes in Ethiopia are value added tax, custom duties, stamp duties, excise tax and turn over tax.
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One of the crucial issues that the draftsperson had to resolve before he set out to work on the project was as to whether the Commercial Code should be subjective or objective. A subjective Commercial Code is one which regulates a community of persons designated as “traders”. It considers above all the traders, but in order for the legislature to decide which persons have the status of a trader she must take into consideration the profession or activities which she deems to have a commercial character. Whereas, an objective commercial code regulates acts known as “acts of commerce”, as opposed to persons. The scope of application of such commercial code is determined entirely by the enumeration of these acts.
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Business organizations had gone through various stages throughout the centuries before they came to acquire characteristics which have made up distinct organizational forms prevalent in Ethiopia today. They grew from a single individual to a group of individuals organized, first in some sort of partnerships, then in a more refined type of partnership and finally to a corporate form.
The era of Emperor Menelik II witnessed the first business organization- the Franco- Ethiopian Railway Company. And the company came about by virtue of an imperial concession granted to Alfred Ilg in 1894 with a view to constructing a railway from Djibouti to Ethiopia via Harar to Entoto and then to the White Nile. Since it was incorporated in France in pursuance of French company law, coupled with the fact that its head office was in Paris, it remained a French company for all practical purposes, nonetheless. In exchange for the concession, several shares had been assigned to the Emperor. The concession was for 99 years and, upon expiry, ownership of the company was to be conveyed to the Imperial Ethiopian Government.
The second company to appear was the Bank of Abyssinia which was formed in 1905 as a branch of the National Bank of Egypt. This company came into being, like the Franco-Ethiopian Railway Company, by virtue of a concession granted by the Emperor. Its total subscribed capital was $500,000 of which $100,000 was to be paid after the company commences business. With respect to share in the profits, the Imperial Ethiopian Government was entitled to 20% while the other shareholders were entitled 70%. The legal existence of the company was fixed at 50 years from the date of its formation, without any stipulation as to the company’s fate upon its expiry. Nevertheless, in 1931, the government of Ethiopia bought the company and renamed it as “Bank of Ethiopia”.
The next company that was formed in Ethiopia was the Agricultural and Commercial Development Company of Ethiopia. Unlike its predecessors, the company was incorporated in Ethiopia, and thus, it was the first Ethiopian company, though its incorporation had not been made in compliance with no existing law other than an imperial decree issued to that effect.
The formation of the afore mentioned companied and the general trend would seem to have prompted promulgation of the following commercial laws: the Law of Loans of 1924, the Decree of Concessions of 1928, the Law of Bankruptcy of 1931, and the Company Law of 1933.
The Company Law of 1933 provides for various forms of business organizations, namely, share companies, joint stock companies, private limited companies, ordinary partnerships, and limited partnerships. It also contains several provisions pertaining to the formation, operation, and dissolution of companies.
In 1960, a more comprehensive commercial code was enacted. With respect to the drafting history of this code a few words were in order. Having accepted an invitation from the Imperial Ethiopian Government to draft a Commercial Code and a Maritime Code for Ethiopia, Professor Jean Escarra made several trips to Ethiopia in 1954, during which time he consulted with the Codification Commission and submitted to it the bulk of the texts later promulgated as Books II, IV, and V of the Commercial Code together with their exposes des motifs. Unfortunately, the work on the Commercial Code was interrupted due to the death of Professor Escarra in 1955. Then, the Imperial Ethiopian Government sent an invitation to Professor Alfred Jauffret to complete the unfinished draft Code by preparing the texts of Books I and III as well as to revise Prof. Escarra’s work. Prof. Jauffret submitted his draft texts along with a Final Report on March 1, 1958. The Amharic version of these texts was then submitted to the parliament, which in early 1960 approved the draft with several amendments. The final draft text of the Commercial Code was promulgated on May 5, 1960 and the Code came into force on September 11, 1960.