Categories of taxpayers
Administrative convenience requires classification of taxpayers into different groups at it is not possible to extend the same treatment to all taxpayers at the same time. In addition, principle of economy also requires the tax system to concert tax efforts on those taxpayers with high revenue potential. For this purpose, taxpayers must be classified into different categories. Taxpayers are classified into three categories according to their annual turnover they generate during a particular tax year. The Ethiopian income tax law classifies taxpayers into three categories.[1] Book keeping, declaration of income and other obligations differ from the taxpayer to taxpayer depending on the category they belong.
Category A taxpayers
Category “A” taxpayers are composed of two groups. The first group comprises of those taxpayers whose annual turnover for a single tax year is 500,000 or more.[2] In addition, any company incorporated under the laws of Ethiopia is a category “A” taxpayer irrespective of their annual turnover.[3]The rational for incorporating companies under category “A” irrespective of their annual turnover seems to dwell upon the idea that given the present local and international business environment by the time companies are established they must have at least 500,000 as a starting capital.[4]
Category “A” taxpayers are required to keep books and accounts. The books and accounts among other details must include the following[5]:-
- Gross profit and the manner in which it is computed.
- General and administrative expenses
- Deprecation
- Provisions and reserves.
- Business asset and liabilities
- Date lost of acquisition and the current book value of the good.
- All purchases and sales of goods and services related to the business activity … etc.
Keeping books and accounts is a mandatory requirement for Category “A” taxpayers.[6] Consequently, failure to keep books and accounts shall result in the payment of an administrative penalty.[7] Accordingly, if the taxpayer failed to keep books and accounts for one year he shall pay 20% of the tax assessed as an administrative penalty.[8] If the taxpayer failed to keep proper books and accounts for consecutive two years, the license of the taxpayer will be suspended.[9] Suspension of the license will force the taxpayer to be out of the business for the period during which the licenses is suspended. This penalty may extend to the extent of revoking the license of the taxpayer depending on the gravity of the act of the taxpayer.[10]
The books and accounts kept by the taxpayers will later be used as a means of determining their tax liability for the tax period for category “A” and “B” taxpayers. In addition to administrative penalties, failure to keep books and accounts results in determination of the tax liability of the taxpayer through estimation[11]
Category “B” Taxpayers
Category “B” taxpayers are those taxpayers with annual turnover greater than 100,000 but less than 500,000 Ethiopian Birr.[12]Like category “A” taxpayers’, category “B” taxpayers are also required to keep proper books and accounts.[13] Nevertheless, the books and accounts to be kept by category B taxpayers are less complicated compared to category ‘A’ taxpayers.[14] Thus, they are required to keep an account incorporating mainly profit and loss statements for the particular year.[15] Their income tax liability will be assessed based on the books and accounts kept by the taxpayers. The same administrative penalties apply if Category “B” taxpayers fail to keep books and accounts.
Category “C” Taxpayers
Category “C” is the third and the last category. Small businesses are the main types of businesses incorporated in this category .All taxpayers with annual turnover income less than 100,000 Ethiopian Birr are grouped as category C taxpayers. [16]These categories of taxpayers are not required to keep books and accounts. Their income tax liability will be determined through a special procedure known as presumptive taxation. They are required to pay an income tax from their incomes they generate based on the schedules attached at the back of the income tax regulation.[17]
[1] See art. 18 of the Income tax regulation.
[2] Ibid.
[3] See art.18 (1) (a) of the Regulation.
[4] According to the Commercial Code the minimum capital requirements for a share company is 50,000 while for a private limited company it is only 15,000. Nonetheless for some businesses there are separate minimum capital requirements for instance for banks it is 500,000,000.
[5] See article 19 of the Income tax Regulation.
[6] Id.
[7] Article 89 of the Income Tax Proclamation.
[8] Id.
[9] See article 89(1)(a) of the Proclamation.
[10] Id. art.89(1)(b).
[11]Id. Article 69(1).
[12] See art.18 (2) of the Income Tax Regulation.
[13]Id. art.19 (2).
[14] Id.
[15] Id.
[16] See art.18 (3) of the Regulation.
[17] See the attached schedules at the back of the Income tax Regulation.
Administrative convenience requires classification of taxpayers into different groups at it is not possible to extend the same treatment to all taxpayers at the same time. In addition, principle of economy also requires the tax system to concert tax efforts on those taxpayers with high revenue potential. For this purpose, taxpayers must be classified into different categories. Taxpayers are classified into three categories according to their annual turnover they generate during a particular tax year. The Ethiopian income tax law classifies taxpayers into three categories.[1] Book keeping, declaration of income and other obligations differ from the taxpayer to taxpayer depending on the category they belong.
Category A taxpayers
Category “A” taxpayers are composed of two groups. The first group comprises of those taxpayers whose annual turnover for a single tax year is 500,000 or more.[2] In addition, any company incorporated under the laws of Ethiopia is a category “A” taxpayer irrespective of their annual turnover.[3]The rational for incorporating companies under category “A” irrespective of their annual turnover seems to dwell upon the idea that given the present local and international business environment by the time companies are established they must have at least 500,000 as a starting capital.[4]
Category “A” taxpayers are required to keep books and accounts. The books and accounts among other details must include the following[5]:-
- Gross profit and the manner in which it is computed.
- General and administrative expenses
- Deprecation
- Provisions and reserves.
- Business asset and liabilities
- Date lost of acquisition and the current book value of the good.
- All purchases and sales of goods and services related to the business activity … etc.
Keeping books and accounts is a mandatory requirement for Category “A” taxpayers.[6] Consequently, failure to keep books and accounts shall result in the payment of an administrative penalty.[7] Accordingly, if the taxpayer failed to keep books and accounts for one year he shall pay 20% of the tax assessed as an administrative penalty.[8] If the taxpayer failed to keep proper books and accounts for consecutive two years, the license of the taxpayer will be suspended.[9] Suspension of the license will force the taxpayer to be out of the business for the period during which the licenses is suspended. This penalty may extend to the extent of revoking the license of the taxpayer depending on the gravity of the act of the taxpayer.[10]
The books and accounts kept by the taxpayers will later be used as a means of determining their tax liability for the tax period for category “A” and “B” taxpayers. In addition to administrative penalties, failure to keep books and accounts results in determination of the tax liability of the taxpayer through estimation[11]
Category “B” Taxpayers
Category “B” taxpayers are those taxpayers with annual turnover greater than 100,000 but less than 500,000 Ethiopian Birr.[12]Like category “A” taxpayers’, category “B” taxpayers are also required to keep proper books and accounts.[13] Nevertheless, the books and accounts to be kept by category B taxpayers are less complicated compared to category ‘A’ taxpayers.[14] Thus, they are required to keep an account incorporating mainly profit and loss statements for the particular year.[15] Their income tax liability will be assessed based on the books and accounts kept by the taxpayers. The same administrative penalties apply if Category “B” taxpayers fail to keep books and accounts.
Category “C” Taxpayers
Category “C” is the third and the last category. Small businesses are the main types of businesses incorporated in this category .All taxpayers with annual turnover income less than 100,000 Ethiopian Birr are grouped as category C taxpayers. [16]These categories of taxpayers are not required to keep books and accounts. Their income tax liability will be determined through a special procedure known as presumptive taxation. They are required to pay an income tax from their incomes they generate based on the schedules attached at the back of the income tax regulation.[17]
[1] See art. 18 of the Income tax regulation.
[2] Ibid.
[3] See art.18 (1) (a) of the Regulation.
[4] According to the Commercial Code the minimum capital requirements for a share company is 50,000 while for a private limited company it is only 15,000. Nonetheless for some businesses there are separate minimum capital requirements for instance for banks it is 500,000,000.
[5] See article 19 of the Income tax Regulation.
[6] Id.
[7] Article 89 of the Income Tax Proclamation.
[8] Id.
[9] See article 89(1)(a) of the Proclamation.
[10] Id. art.89(1)(b).
[11]Id. Article 69(1).
[12] See art.18 (2) of the Income Tax Regulation.
[13]Id. art.19 (2).
[14] Id.
[15] Id.
[16] See art.18 (3) of the Regulation.
[17] See the attached schedules at the back of the Income tax Regulation.
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