Subnational Value Added Tax in Ethiopia and Implications for States’ Fiscal Capacity

This report recognises the fact that unwinding the current separation of tax administration powers would be difficult to achieve in the current political climate. It suggests a process of gradual reform, commencing with better coordination, standardisation and communication between state and central administrations. It similarly recognises that for similar reasons the current entitlement of states to 100 per cent of VAT revenue remitted by unincorporated businesses, and 30 per cent of VAT revenue remitted by companies, would be difficult to change. It suggests, however, that a clearing house system could be established to redistribute entitlements between states so the share of VAT revenue to which states are entitled is ultimately based on a ‘fiscal equalisation’ calculation, with the aim of enabling all states to provide equal value programmes and benefits to their citizens. Transitional rules that gradually increase the proportion of VAT revenue subject to a fiscal equalisation formula can smooth the impact of shifts of revenue that result from the change.