Introduction

In preparing the 2018 Ethiopian fiscal year (2025/26 G.C.) budget, the Government of Ethiopia has incorporated a set of anticipated tax policy measures that form the basis for key revenue assumptions within the fiscal framework. These measures cover multiple areas of the tax system, including the introduction of a Minimum Alternative Tax (MAT), revisions to withholding tax rates, adjustments to fuel excise and VAT regimes, expansion of stamp duty coverage, implementation of municipal property taxes, and introduction of a motor vehicle circulation tax. Collectively, these reforms are designed to broaden the tax base and enhance domestic revenue mobilization.

Minimum Alternative Tax (MAT)

The fiscal framework envisages the introduction of a Minimum Alternative Tax, under which businesses would be subject to a minimum tax liability calculated on turnover, regardless of deductions, exemptions, or reported losses. The objective is to expand the corporate income tax base and address profit shifting and base erosion.

Although directed at corporate taxpayers, the measure may have secondary effects on consumer prices if businesses adjust pricing strategies to offset additional tax liabilities. Low-margin industries and capital-intensive sectors could be particularly exposed to liquidity pressures.

Adjustment to Withholding Income Tax Rates

Revisions to withholding income tax rates are foreseen, increasing the rate on payments for goods and services from the current 2 percent to a slightly higher rate. This modification seeks to enhance upfront revenue collection, minimize accumulation of tax arrears, and improve tax compliance. While strengthening collection efficiency, the measure may create additional working capital constraints for businesses, especially small and medium enterprises (SMEs), with possible downstream effects on consumer prices.

Adjustment to Excise Tax on Fuel

The fiscal package includes upward revisions of excise tax rates on petroleum products, including gasoline, diesel, and kerosene. In addition to revenue generation, the measure supports environmental policy objectives by discouraging excessive fuel consumption. However, higher fuel prices may exert upward pressure on transportation and food costs, disproportionately impacting lower-income populations reliant on public transport and basic consumer goods.

Introduction of Property Tax in Selected Cities

A municipal property tax is expected to be introduced in selected regional cities, assessed on the value of real property holdings. This measure aims to diversify subnational revenue sources and promote more efficient urban land use. Property owners will assume additional financial obligations, with potential for partial cost pass-through to tenants, potentially placing additional financial pressure on renters, especially within lower-income segments.

Implementation of Motor Vehicle Circulation Tax

The policy framework includes the introduction of an annual circulation tax on motor vehicles, structured according to vehicle type, engine size, and usage. This measure is intended to secure sustainable revenue for road infrastructure development and maintenance. While private vehicle owners bear the direct tax burden, potential fare adjustments by public and commercial transport providers may indirectly affect consumers.

General Economic Implications

Cumulatively, these fiscal measures are designed to strengthen revenue mobilization, enhance fiscal sustainability, and modernize Ethiopia’s tax system. Nevertheless, several provisions may contribute to higher living costs for households, particularly among vulnerable populations, due to inflationary effects on fuel, transportation, housing, and essential goods.