Micky Smart Short note center
Ethiopian Tax Law Short note
Page | 1
, Chapter One: General Introduction
Definition and Classification of Taxes
What is tax?
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.
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 defined to be burdens, or charges, imposed by "the legislative power of a state
upon persons or property," to "raise money for public purposes."
What are public goods and the nature of public goods?
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.
Who is empowered to levy tax?
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 and state
Government in Article 51 and Article 52 amongst which is the levying and collection of
taxes and duties on revenue sources reserved their respective jurisdiction.
What is the base of tax?
Page | 2
, 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. However this classification is impractical.
It has also been suggested that we might use the different specific means employed by
nations to measure benefit or 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.
What are the definitional elements of tax?
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.
N.B. 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.
What are the common forms of taxation?
A commonly applied classification of taxes is into direct and indirect taxes based on 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.
E.g. the major types of direct taxes in Ethiopia are personal income tax, rental tax,
business profit tax, and withholding tax, taxes from loyalties, from games of chance,
dividends or property taxes.
b. 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.
E.g. the major types of indirect taxes in Ethiopia are value added tax, custom duties,
stamp duties, excise tax and turn over tax.
General Theories and Principles of Taxation
Page | 3
, What are the major distributions to attain equity?
Obviously everybody should not pay an equal share of taxation, and there are three
important possible forms of distribution which have been suggested from time to time; each
is intended to secure equity and each supposed to be based on the ‘ability to pay’.
a. Pure proportional form; taking income as the standard, it is laid down that the
criterion of ability to pay would be attained by taxpayers paying in proportion to their
income proportion being considered in the strict mathematical sense of the word.
e.g. Suppose that a quarter of a man's income was required by the State; then a man
earning 10 Birr a week would pay 25 cents, and the one getting 2 Birr a week would pay
l0 cents each week; the first man might now no longer be able to keep a motor cycle,
while the latter would hardly be able to feed his wife and family.
b. Progressive or graduated form of distribution, in which the rate of taxation levied
increases with the size of the income.
c. Qualified proportional one. Here, once again taking income as the standard, "equality
of sacrifice" can be obtained (it is said) by exempting a certain amount of income and
levying a uniform or possibly a slightly graduated rate of tax on any income above that
limit.
e.g. This is, of course, the way in which our present income tax works, which allows "a
personal allowance " of 135, or 225 " in the case of an individual whose wife is living
with him/her to be free of income tax.
What are the fundamental principles of taxation?
The two central principles of taxation relate to the impact of tax on efficiency concerned with
the allocation of resources) and equity (concerned with the distribution of income). As the
major principles of taxation in any system, it is worth taking an in-depth look at
“efficiency” and “equity (fairness)”.
a. Efficiency: A good tax system should be efficient in that it should be able to waste as
little money and resources as possible. Efficiency can be measured against three
standpoints: These three relate to the cost of operation of the tax system, to its flexibility
and certainty.
Page | 4
Ethiopian Tax Law Short note
Page | 1
, Chapter One: General Introduction
Definition and Classification of Taxes
What is tax?
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.
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 defined to be burdens, or charges, imposed by "the legislative power of a state
upon persons or property," to "raise money for public purposes."
What are public goods and the nature of public goods?
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.
Who is empowered to levy tax?
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 and state
Government in Article 51 and Article 52 amongst which is the levying and collection of
taxes and duties on revenue sources reserved their respective jurisdiction.
What is the base of tax?
Page | 2
, 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. However this classification is impractical.
It has also been suggested that we might use the different specific means employed by
nations to measure benefit or 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.
What are the definitional elements of tax?
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.
N.B. 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.
What are the common forms of taxation?
A commonly applied classification of taxes is into direct and indirect taxes based on 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.
E.g. the major types of direct taxes in Ethiopia are personal income tax, rental tax,
business profit tax, and withholding tax, taxes from loyalties, from games of chance,
dividends or property taxes.
b. 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.
E.g. the major types of indirect taxes in Ethiopia are value added tax, custom duties,
stamp duties, excise tax and turn over tax.
General Theories and Principles of Taxation
Page | 3
, What are the major distributions to attain equity?
Obviously everybody should not pay an equal share of taxation, and there are three
important possible forms of distribution which have been suggested from time to time; each
is intended to secure equity and each supposed to be based on the ‘ability to pay’.
a. Pure proportional form; taking income as the standard, it is laid down that the
criterion of ability to pay would be attained by taxpayers paying in proportion to their
income proportion being considered in the strict mathematical sense of the word.
e.g. Suppose that a quarter of a man's income was required by the State; then a man
earning 10 Birr a week would pay 25 cents, and the one getting 2 Birr a week would pay
l0 cents each week; the first man might now no longer be able to keep a motor cycle,
while the latter would hardly be able to feed his wife and family.
b. Progressive or graduated form of distribution, in which the rate of taxation levied
increases with the size of the income.
c. Qualified proportional one. Here, once again taking income as the standard, "equality
of sacrifice" can be obtained (it is said) by exempting a certain amount of income and
levying a uniform or possibly a slightly graduated rate of tax on any income above that
limit.
e.g. This is, of course, the way in which our present income tax works, which allows "a
personal allowance " of 135, or 225 " in the case of an individual whose wife is living
with him/her to be free of income tax.
What are the fundamental principles of taxation?
The two central principles of taxation relate to the impact of tax on efficiency concerned with
the allocation of resources) and equity (concerned with the distribution of income). As the
major principles of taxation in any system, it is worth taking an in-depth look at
“efficiency” and “equity (fairness)”.
a. Efficiency: A good tax system should be efficient in that it should be able to waste as
little money and resources as possible. Efficiency can be measured against three
standpoints: These three relate to the cost of operation of the tax system, to its flexibility
and certainty.
Page | 4
