Tax exemption through letters: issues of legality and equality

Tax exemption through letters: issues of legality and equality

Employment income is one source of income tax in Ethiopia. Employees, in addition to their periodic salary, may be entitled to other payments or gains in cash or in kind during the employment relationship. The main concern of this article is to assess whether payments other than periodic salary of an employee, particularly house and transportation allowances, are taxable or not.

The income tax proclamation, income tax regulation and income tax exemption directive provide employment incomes exempted from taxation. However, house and transportation allowances are not among those exempted. Practically, the writer traced that some federal government institutions (including ERCA) employees’ incomes received in the form of house and transportation allowances are exempted from taxation via letters written by the Office of the Prime Minister. The exemptions for the federal government institutions employees are granted following the request of their employers. These exemptions being made by bodies not authorized by law to grant exemption and the means of exemption, i.e., the letters raise basic questions of legality. The exemptions also violate the principle of equality as similar incomes of other institutions employees are not exempted.

The acts of those institutions that request exemption of tax liability and the office that grant exemption violates the income tax proclamation which imposes an obligation on them to cooperate in the enforcement of the proclamation. Particularly, ERCA, the principal body in the administration of tax, fails to respect and ensure compliance of tax laws.