Revisiting Grain Movement Control and Taxation in Ethiopia: A Policy Brief

The current sales tax collection system is affecting negatively the producers income, traders’ profit margins and consumers purchasing power. While the conventional wisdom in Ethiopia is that the tax on grain sales falls on traders, the evidence indicates that in large part these taxes are passed on to farmers in the form of lower producer prices and to consumers in the form of higher retail prices. In some cases, the taxes collected are unregistered and do not appear to be fully channeled to the government treasury. There are regional variations in the rules and regulations regarding the implementation of grain taxation which impose price risks and uncertainty on grain traders in moving grain from one to another region. These costs and risks reduce the amount of grain traded nationally and impede the potential contribution of spatial arbitrage and regional interdependence in improving national food security. While the objective of collecting tax revenue for regional governments is clearly justified and necessary, during lean grain harvests such as in 1997/98, replacing a grain sales tax with taxes on other commodities produced and consumed more by higher-income groups may be advisable. Grain makes up a large share of poor consumers expenditures. Further study is advised to identify potentially taxable commodities that are produced and/or consumed disproportionately by relatively middle- and higher-income groups. Moreover, making tax rates more uniform throughout the country may also reduce the uncertainty as to correct tax rates and thereby reduce the scope for unregistered payments that do not contribute to regional tax revenue. On the part of traders, the tradition of compliance to tax rules and regulations is also not well-developed and the traders must be made more aware of why taxes are collected through appropriate information dissemination. Collection of tax revenues from traders may also improve if local governments are more successful in showing that tax funds are in part used to upgrade marketing infrastructure such as the development of new market places for grain trading. [author]