Ethiopia'S Tax Expenditure Report On Imported Goods

This report provides a comprehensive analysis of Ethiopia's tax expenditures (TEs) on imported goods, focusing on indirect taxes such as customs duties, excise taxes, value-added tax (VAT), and surtax. The study, conducted for the 2016 Ethiopian fiscal year (July 2023–July 2024), quantifies the revenue foregone due to various tax provisions, including exemptions, deductions, and preferential rates, and evaluates their alignment with Ethiopia's economic and social objectives. The report introduces three new components to enhance the accuracy of TE estimations: (1) border exemption substitutions for duty drawbacks, (2) border exemption substitutions for VAT credits, and (3) the estimation of behavioral changes resulting from tax provisions. Key findings reveal that customs duties account for the largest share of tax expenditures (53.83%), followed by VAT (34.05%), surtax (8.90%), and excise taxes (3.23%). The analysis highlights the significant role of "Special Permissions," which constitute 72.83% of total TEs, raising concerns about potential misuse and inefficiencies. The report also identifies the sectors and commodities that benefit most from tax incentives, with agriculture, manufacturing, and health receiving the largest shares of TEs. Electrical machinery, fertilizers, and base metals are among the top commodity groups contributing to TEs. This report underscores the need for enhanced transparency, accountability, and periodic evaluation of tax expenditures to ensure they align with national development goals. Policy recommendations include stricter monitoring of Special Permissions, redirecting resources to high-impact sectors, and introducing sunset clauses for temporary exemptions. The findings aim to inform future tax policy reforms, promoting fiscal sustainability and maximizing the developmental impact of tax expenditures in Ethiopia.