Cost and Benefit Analysis of Tax Incentives in Ethiopia

Abstract

Ethiopia introduced various Economic Reform Programs including tax reforms since 1992 with the aim of encouraging trade, investment and hence development. Those reforms are geared towards promoting investment, supporting industrial development and broadening the tax base in the view of financing the need of government expenditure. However whether those government assumption and stated objectives were achieved is debatable and questionable. Therefore, one ways to address those issues is to analyze the cost and benefit analysis of tax incentives which is the objective of this article. To address those issues, this article employs both primary and secondary data. The primary data was collected through questionnaire from 800 respondents, and interview, and focus group discussion of officials and investors .  Secondary data is gathered from different publication, documents, financial and non financial reports; and Ethiopian Investment Agency(EIA) & Ethiopian Revenue and Tax Authority (ERCA)  rules, regulations and proclamations. Since measurement of the cost and benefit of tax incentives is hard, to arrive at the measurable definition of cost and benefit this article adopted the World Bank cost and benefit analysis framework of tax incentives. And the result revealed that, the objective of  tax incentives is failed to meet its intended objectives. This is because, the amount of employment created is not much with what is planned, and from investors who take tax incentives only 20% in number and 15% in the amount of capital they registered are operational. Furthermore, most of the investments are in areas where they can be commenced without any tax incentive and the amount of revenue forgone for one birr additional investment is about 7 birr on average. And we can conclude that; there is large revenue forgone with low; realized investment, output growth, created employment opportunities, and export growth. Thus, this  reduces the countries opportunities to invest in public infrastructure, public services, social support and poverty reduction programs.

Keywords: cost and benefit, tax incentives

DOI: 10.7176/RJFA/12-7-03

Publication date: April 30^th 2021