BY GETACHEW MINAS
There are several requirements for cross-border trade at regional level. These apply to Ethiopian traders engaged in the exchange of goods and services at the border area. One of the requirements is licensing and renewal of license. Entry into petty cross-border trade is not hampered, obstructed or impeded by cumbersome, awkward and burdensome regulatory procedures. The traders are required only to fill in a very simplified form with photographs and a fee to be paid in Ethiopian Birr to get the license. To avoid confusion and facilitate services, it is clearly indicated in all petty cross-border trade directives that, in matters not specifically covered by the directives, the Commercial Registration and Business Licensing Proclamation will be applicable.
The law requires that every Ethiopian engaged in cross-border trading is required to renew the license every year upon payment of a fixed fee in Birr. It is prohibited to use this license as a cover for illegal trading activities. Those traders who fail to adhere to the legal obligations stipulated in the law will have their license revoked. Following that a new license may not be given for a trader involved in such activity. A trader will be totally banned from conducting a petty cross-border trade if he commits such crime again. Illegal cross-border trade may lead to tax evasion which negatively affects the revenue of the government. With expansion of illegal trade, goods and services are expected more in both directions. Export items crossing the border may reduce the foreign exchange earnings of Ethiopia.
Traders that have secured a license to import or export have to undergo procedures of Customs. This means that they have to show their import licenses to customs officers who are in charge of checking and differentiating traders without the right permit. This is done to prevent illegal trading in which goods and services are brought into Ethiopia secretly. This illegal operation denies the country from collecting import taxes. If traders are successful in bringing goods into the country without paying taxes, it creates disruptions in the pricing of imports. Such imports are cheaper compared to those similar commodities imported legally. The market prices of legally imported goods are higher than those illegally imported. Consumers would demand cheaper goods even if they are illegally traded items.
Customs officers may try to discourage purchasers of illegal imports, but this effort is not productive. They find it hard to detect and snatch it from those who purchased it in the open market. But, illegally imported goods are exchanged underground and are difficult to detect. It is not only the government that is at a disadvantage but also legal market operators. These operators are at a disadvantage as they could not compete in a market where illegally imported goods are sold at cheaper prices. What is exchanged underground had to come to the open market to attract customers and consumers. The custom officials and controllers have no means of detecting or capturing illegally imported goods exchanged in the open market. Both legally and illegally imported goods end up in the same shops.
The regulatory requirement related to a letter of credit and hard currency for permitted items is very strict. Importers have to produce authenticated documents for importing goods. These documents have to be checked and verified by customs and bank authorities, based on the law of the country. Similar check and control apply for goods exported abroad. However, cross-border trade is treated differently as it plays a vital role in improving the livelihoods of Ethiopian traders. Ethiopia, as a country, has a long history of cross border trade agreement with neighboring countries. These agreements play a vital role in maintaining healthy and strong bilateral relations which foster the realization of legal trade flow among nations in accordance with international trade law.
Ethiopia has taken significant steps in enhancing bilateral relations in the fields of cross-border trade. The formal cross-border trade in Ethiopia involves “both” large-scale and small-scale trade. The large-scale cross-border trade is carried out by enterprises with large financial capacity. It consists of trade in goods or services carried out by legally registered traders. They have to fulfill all requirements of the trading countries involved. On the other hand, small-scale cross-border trade involves low-income individuals who live close to the country’s border engaged in trading activities. They may deal with export and import of a limited number of basic commodities. The government has reasons for allowing small-scale cross-border traders. These operators are encouraged to be owners of legal business at the borders of the country.
There are basic reasons for permitting small-scale cross-border trading at the Ethiopian borders. One reason is that the basic goods frequently used by the local people living near the border do not “reach” the area in sufficient quantity. Even when the goods reached these locations, their prices would be high due to transportation costs becoming unaffordable for the poor. The other reason is to curb illegal and informal trade across the border by allowing the people to freely import basic commodities. Ethiopia traded with neighboring countries to help the people, particularly women, residing on the borders. In Ethiopia, women are active partakers in cross-border trade. Their participation in this trade enhances and improves food security. It helps reduce poverty among the vulnerable groups of people.
Major products traded at the borders contribute to the wellbeing of the people in that area. These products include agricultural produces, livestock, sanitary and beauty products, medicines, footwear and textiles, cereals, processed and semi-processed foodstuffs. These include pasta, sugar, wheat flour, and tea. Other products such as kerosene, charcoal and khat are also exchanged. The trading of these goods benefits Ethiopian women engaged in small-scale cross border trade. It serves as a means of livelihood for their families, particularly their children. Such trade enhances food security and reduces poverty. However, this trade has its challenges for cross-border traders. They face the high cost of transportation, which is discouraging small businesswomen. They are also confronted with lack of marketing information, which is very useful in fixing prices.
Small-scale cross-border traders in Ethiopia are faced with shortage of finance to run their business. There also suffer from lack of access to credit. In this situation they fail to buy goods traded at the border areas. They are deprived of the opportunity to store goods when prices are low. Added to this problem is the absence of marketing infrastructure for delivery of goods along the border areas. If goods are not delivered to the market on time, the petty traders miss the opportunity for selling goods. Lack of marketing infrastructure creates inefficiency in the marketing system. Inefficiency causes loss of business and closing of petty enterprises. This will be accompanied by unemployment and frustration among small business operators, particularly women entrepreneurs involved in border trade. Unsuccessful border trading creates high risk including loss of business, income and revenue.
Taxes imposed in the “formal large-scale” cross border traders vary in their nature. These are customs duty, excise tax; value added tax, surtax and withholding tax. Customs duty is a tax imposed on imports and exports of goods. The rates of customs duties are either specific or ad valorem. The supply of goods and services by registered persons is subject to a 15% VAT for all goods and services. Some products and services are exempt from VAT. These include financial services, educational services, and healthcare and transportation services. Customs duty is a kind of an indirect tax that is imposed on both exported and imported goods and services. The tax imposed on the import of goods is known as the import duty. Whereas the tax imposed on the export of goods is known as export duty.
Excise tax is a tax on the production, sale or consumption of a commodity in a country. Such taxes may be imposed on the manufacturer, retailer or consumer, depending on the specific tax. It is charged on excisable goods manufactured in Ethiopia by a licensed manufacturer, excisable goods imported into Ethiopia, and excisable services supplied in Ethiopian by a licensed person. Generally, the rates of excise duty range between 5 percent and 500 percent. The 500 percent applies to goods such as old motor vehicles.
Value Added Tax (VAT) is also charged in Ethiopia. It is a consumption tax that is charged on the supply of taxable goods or services made in Ethiopia and on the importation of taxable goods or services into the country. The standard VAT rate is 15 percent and applies to goods and services that are neither exempt from VAT nor zero-rated. In other words, it is a tax, which is payable on sales of goods or services exchanged within the territory of a country. It is ultimately payable by the final consumer of the goods and services. There is, however, a difference between taxable supplies and exempt supplies. Where the supplies are taxable, the registered person is required to charge VAT but is also eligible to recover VAT incurred on such supplies as input tax. VAT incurred on making exempt supplies is not recoverable as input tax.
Surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. In other words, it is a tax levied upon another tax, also known as tax surcharge. It is an additional tax levied on incomes exceeding a certain amount. It is used to fund a specific program of the government and this can be ascertained in the form of a percentage of a specific amount or it can be charged as a flat amount. A net investment income tax is charged as surtax on a portion of the gross income. Withholding is the income an employer takes out of an employee’s salary and remits to the federal or local government. It is calculated based on the amount of income earned, the taxpayers’ file, the number of allowances claimed, and any additional amount requested by the employee.
In Ethiopia, withholding tax is the current payments of income tax at the time of goods imported and payments made on account of goods and certain services. Withholding tax is meant to curb income tax evasion and it is not a separate tax on its own. In contrast, VAT is a separate type of tax. VAT is a consumption tax payable on the goods and services consumed by any person whether government agencies, business organization or individual.
Withholding tax encourages voluntary compliance. It reduces cost of collection effort. It prevents delinquency and revenue loss and it prevents loss in the fiscal conditions of the government by providing revenues throughout the taxable period. In the last six months, the Ethiopian Customs Authority caught over 780 delinquent traders at the borders and saved forty billion Birr. These cross-border traders who failed to adhere to the legal obligations stipulated in the law will have their license revoked. Cross-border trading does not mean double-crossing, cheating and abusing the law of the country. All the laws related to border trading and taxation has to be respected by business persons, border traders and by concerned authorities.
Editor’s Note: The views entertained in this article do not necessarily reflect the stance of The Ethiopian
THE ETHIOPIAN THURSDAY 9 MARCH 2023
