Reflections on tax crediting system under Ethiopian law

Reflections on tax crediting system under Ethiopian law

VAT refers to increase in value of goods and services at each stages of production. Therefore, VAT is basically a tax to be levied on the value added by an organization at each stage of its rendering services or producing goods. The tax is a levy on the final consumption of goods or services and is ultimately borne by the consumer although it is collected at every stage of production or distribution. The Ethiopian VAT law allows tax credit for all taxes paid by the registered person during purchase of goods or receiving services from third parties. In order to get the credit the taxpayer must be registered, the claim must be supported by VAT invoices and the purchase has to be for taxable transactions. In exceptional circumstances, our law has denied a credit for some purchases that has the potential to open up the door for tax abuse. Taxpayers normally get their credits by deducting the amount of credit they have from the amount of tax that they collect from the customers. Recently the introduction of withholding method may force taxpayers to sustain a negative cash float temporarily though.