Chapter Five

Accounting for Indirect Taxes

5.1 Accounting for Turn over Tax
Meaning of Turnover
The term turnover may refer to the amount of money one receives from the sale of its
products or rendering of its services to customers and others. Hence Turnover refers to total
sales or revenue receipts.
A turnover tax is an indirect tax imposed not on the value added but on total sales value of
goods and services. In Ethiopian case, turnover tax is tax imposed on goods supplied and
services rendered locally by the person not registered for VAT. The base for Turnover taxes
is income before the deduction of cost of goods sold and expenses
Purpose of Turn over Tax
The government of Ethiopia imposes an equalization of turnover tax on taxable persons not
registered for VAT with the following Purpose;
To equalize and enhance fairness in commercial relationship
To Allow non VAT Registered person fulfill their obligation
To complete coverage of tax system
Base of Turnover Computation
Turnover tax is chargeable from the customers by tax payers whenever a sale of goods or
service carried out by tax payers based on the gross receipt or selling price of the goods or
services.
Tax payers mean a taxable person who is obliged to collect and transfer turnover tax to tax
authority.
Rates of TOT
The Taxable transactions of non VAT registration sellers are subject to turn over tax with the
following rates.
 Goods sold locally are taxable at 2% of the base
 Service rendered locally in respect of contractors, Grain mills, Tractor and combine
harvest stores are taxable at 2% of the base
 Consultancy, Auditing, Printing, Advertisement, Legal advises, Training are Taxable at
10% of the base

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Accounting for TOT includes the following
 Computation of TOT amounts
 Recording of TOT related Transaction
Recording TOT related Transactions

I. At the Time when sale for cash is made, the Journal Entry will be;
Cash-----------------------XXX
Sales------------------------XXX
TOT Payable--------------XXX
II. If sale is made on Account, The Journal entry will be;
Account Receivable(N/R)------------XXX
Sales---------------------------XXX
TOT payable-----------------XXX
III. When TOT charged during period paid to Tax authority, the Journal entry will be;
TOT payable----------------------------- XXX
Cash---------------------------------XXX
Illustration
DYB Stationary trading PLC is not VAT registered as its annual sale is below limit birr
1,000,000. The following transactions were completed during the fiscal year.
1. Purchased various stationary items from Mega book store for cash of Br. 20,000 subject
to 2% TOT
2. Sold merchandise (stationary items) on credit to Admas university at Birr 22,000 subject
to 2% TOTS
3. Sold merchandise (stationary items) on cash to Admas University at Br 22,000 subject to
2% TOT.
4. Purchased Various books on account from Mega book store for Br. 75,000
5. Collect the outstanding amount from Admas university
Solution
1. Inventory …………… 20,400
Cash ……………………………..20,400

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 2. Account receivable------------------22,440
TOT tax payable (22,000 X 0.02) --------------440
Sale----------------------------------------------22,000
3. Cash------------------------------------22,440
Sales----------------------------- 22,000
TOT payable------------------------ 440
(2% X 22,000)
4. Inventory----------------------------75,000
Account payable---------------------------75,000
5. Cash-------------------------------------22,400
Account receivables------------------------22,400
5.2 Accounting for excise tax
Meaning of excise tax
It is also known as selective sales tax, is an indirect tax imposed on luxury goods, goods
that are hazardous to health and basic goods such as vehicles, jewelry, perfumes, alcoholic
products, tobacco products etc.
Purpose of excise tax
Different government levy excise taxes for different purposes.
 The Ethiopian government levies excise tax on selected imports and domestically
produced goods by means of excise tax proclamation No. 307/2002 with the following
objectives:
 To improve the government revenue by imposing the tax on luxury goods and basic
goods which are demanded inelastic and
 To reduce the consumption of goods that are hazardous to health and which are the cause
of social problems.
Rates of excise tax
Depending on the goods that are produced locally or imported, the rate of excise tax vary
from good to goods, however, the minimum rate is 10% while the maximum is 100%.
Tax payers of excise tax
The tax payers in Ethiopia for excise tax is importers, that is ,the person who imports goods
into Ethiopia, or the producer, that is the person who produce or manufactures goods locally.

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 Accounting for excise tax
Accounting for excise tax includes;
Computation of excise tax amount
1. Computation of excise tax on locally produced goods: to compute the excise tax payable,
a producer/manufacturer/ multiplies the cost of products (for excise tax purposes) by
related excise tax rate.
2. Computation of excise tax on imported goods: excise tax on imported goods; importer
multiplies CIF (cost, insurance and transportation cost) of imported goods by associated
tax rates.
Recording excise tax related transaction
Two main entries required by the importer or producers/manufacturer/ of goods locally.
These are:-
a. At the time when the amount of excise tax determined, the journal entry will be
Excise tax ----------------xxx
Excise tax payable ----------------- xxx
b. When payment to the tax authority make by importer or producer
Excise tax payable ---------- xxx
Cash -------------- xxx
Example
Ato Ali imported textile materials that worth (cost, insurance and transportation) at birr 120,000
and video camera that worth birr 25,000 from Chinese exporter.
Required
a. Determine the amount of excise tax that is due on the import
b. Who is liable to pay excise tax?
c. When the due date to pay to the tax authority
d. Prepare the necessary journal entry to Ato Ali.
Solution
a. The tax rate according to tax proclamation 307/2002 are 10% for textile, 40% for
video camera;
Amount of excise tax for textile = CIF value x tax rate
= 120,000 x 10%

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 = birr 12,000
Excise tax on video camera = CIF X rate
=25,000 x 40%
Birr 10,000
b. In accordance with Article 6 of proc.307/2002, Ato Ali (importer) is liable to pay
the excise tax in respect of the goods imported.
c. Under Article 6(2) at proclamation 307/2002, an importer pays the required excise
tax at the time of clearing the imported goods from the custom stations.
d. The accounting record by Ato Ali will be
To record excise tax liability
Excise tax on textile ---------------- 12, 000
Excise tax payable ------------------ 12,000
Excise tax on video camera ---------- 10,000
Excise tax payable ------------------- 10,000
To record payment to the tax authority:
Excise tax payable ---------------22,000
Cash -------------------------- 22,000
Type of Product Rate%
A. Any type of sugar (in solid from) excluding molasses 33
B. Drinks
 All types of soft drinks except fruit juices 40
 Powder soft drinks 40
 Water bottled or canned in a factory 40
C. Alcohol Drinks
All types of bear & stout
 All types of wine 50
 Whisky 50
 Other alcoholic drinks 50
 All types of pure alcohol 75
D. Tobacco and Tobacco Products
 Tobacco leaf 20
 Cigarettes, cigar cigarillos, pipe tobacco, snuff and other tobacco 75
products
E. Salt 30
F. Fuel Super Benzine, Regular Benzine, Petrol Gasoline and other Motor Spirits 30
G. Perfumes and Toilet Water 100
H. Textile and Textile Products

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  Textile fabrics, knitted or woven of natural silk, rayon, nylon & 10
 wool or other similar materials
 Textiles of any type partly or wholly made from cotton, which is grey, 10
white, dyed or printed, in pieces of any length or width (except
Mosquito net and ‘abudgedie’) and including blankets, bed sheets,
counterpanes, towels, table clothes and similar articles
 Garments 10
I. Personal adornment made of gold, silver or other materials 10
J. Dishwashing machines of a kind for domestic use 80
K. Washing machines of a kind used for domestic purposes 40
L. Video Decks, 40
M. Television and Video Camera 40
N. Television broadcast receivers whether or not combined with gramaphone,
radio, or sound receivers and reproducers 10
O. Motor passenger cars, Station wagons utility cars, and Land Rovers, Jeeps
Pickups, and similar vehicles (including motorized caravans), whether
assembled or unassembled, together with their appropriate initial
equipment
 Up to 1,300cc 30
 Up to 1,301 to 1,800 60
 Above 1,800 cc. 100
P. Carpets 30
Q. Asbestos and Asbestos Products 20
R. Clocks and watches 20
S. Dolls and toys 20

5.3. Accounting for value added taxes in Ethiopia

Value added tax (VAT) is also known as goods and service tax, consumption tax. It is
consumption or expenditure tax charged on the value added to goods and services by importers,
manufacturers and traders.
VAT is tax levied on sale of goods and service rather than income generated. VAT is a tax not on
the total value of goods sold or services rendered but only on incremental value by the last seller.
Characteristics of VAT;
VAT is characterized by the following features;
 VAT is general tax- That is Applies to all commercial activities involving the production
and distribution of goods and provision of services.
 It is consumption tax – It is levied on sale of goods and services rather than on income,
wealth or saving.

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  It is a broad based tax- Since the government collects such taxes from all sectors, that is
from importer, manufacturing, whole sale and retail sectors.
 VAT is a percentage of prices, which means the tax is visible at each stage in production
and distribution chain.
Computation of VAT
The computation of the VAT liability from the manufacturer to the final consumer is presented
as follows.

 Manufacturer: Birr
Purchases of raw materials 2,000
VAT paid on raw material (15% x 2,000) 300
Cost of the material to the manufacturer 2,300
Sells to the wholesaler the finished goods 4,000
VAT (4,000 X 15%) 600
Total selling price 4,600
VAT liability of the manufacturer (600-300) Br 300
 Wholesaler:
Sells to the retailer at a price 5,600
VAT (5,600 X15%) 840
Total selling price 6,440
VAT liability of the wholesaler (840-600) Br 240
 Retailer:
Sells to the final customer at a price 8,400
VAT (8,400 X 15%) 1,260
Total selling price 9,660
VAT liability of the retailer (1,260 – 840) Br 420
Total VAT paid to FIRA (300+ 240+ 420) Br 960
` OR
Manufacturer Wholseller Rretailer
Sales ------------------------- 4,000 ------------------5,600 --------------8,400
Less: purchase ------------- 2,000 -------------------4000---------------5,600
Value added ---------------- 2000 -------------------1,600----------------2,800

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Value added tax (15%) ------300 -------------------240-------------------420
Total VAT= 300+240+420= 960
Principal components of VAT
There are two principal component of VAT. This is;
 Input VAT
 Output VAT
Input VAT: - Is the VAT payable by taxable person on goods and services supplied to him
and on the good which is imported for the purpose of a business carried on by him and for
which registered for VAT.
Output VAT: - Is a VAT collectable by taxable person at the time of sales of goods and
services (supply)
The logic of VAT is during VAT accounting period, A VAT registered person pays VAT
on its purchases, Which is called input VAT and a person charge VAT on its sales, which is
called output VAT.
The federal democratic republic of Ethiopia has adopted VAT into its tax system in 2003.
According to the VAT law supply of good and rendering of service in Ethiopia are subject to
VAT at standard rate of 15% except those exempted and determined by law. The standard rate
is applied to only to import and domestically manufactured goods.
VAT Registration
Under the VAT law, any person conducting a commercial enterprise or intending to conduct a
commercial enterprise may apply to be registered for VAT.
→The base for VAT registration in Ethiopia is gross annual sales value.
Types of Registration
The VAT proclamation of Ethiopia provides for two types of registration;
A. Mandatory (Obligatory Registration)
Historical and future (estimated) annual gross turnover is the ground for compulsory VAT
registration in Ethiopia. Article 16 of proclamation number 285/ 2002 of tax, a person is obliged
by law to register if one is doing any business, which is likely to have taxable turnover in 12
months exceeding Br 500,000. Thus to know whether a person must register for VAT it is
sufficient to consider the business turnover for the past 12 months. If during the past 12 months
its gross sales exclude tax exceeds Br 500,000 then it has to register for VAT. Besides, if one

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reasonably expects that during the next 12 months the total value of taxable supplies excluding
tax is likely to exceed Br 500,000 then the person needs to register for VAT.
B. Voluntary Registration
A person may voluntarily apply for registration even if his turnover is below Br 500,000 of
business activity. However, application for voluntary registration can be made only if the person
regularly supplies or renders at least 75% of his goods and services to registered persons.
Voluntary application for VAT registration can not necessarily result in acceptance by the
FIRA/VAT.
VAT payable and VAT refund
VAT payable: is the net VAT to be paid to federal Inland Revenue authority by tax person.
VAT payable = output Tax – Input Tax
VAT Refundable: is the net VAT that taxable person expected from Ethiopian Revenue and
Customs Authority when input VAT exceeds output VAT.
Example
DH GEDA flour factory VAT registered factory sold 500 quintal of wheat flours at VAT
exclusive price of birr 400 per quintal for BALE cooperative union, VAT Registered union , the
factory also imported chemical and raw material worth birr 100,000 VAT exclusion.
Required: - Determine the VAT payable (VAT refund) for the given month.
Solution
VAT output; 500 X 400 X 15% Br. 30,000
Less VAT Input paid for;
Chemicals and raw materials----------------------- 100,000 X 15%= 15,000
VAT payable (output tax > Input tax) 15,000
Journal Entries for VAT
The tax is levied on the taxable supply of goods and services and VAT must be collected from
customer on the basis of supplies.
The accounting Journal entry to record output taxes
Cash (Account receivables) …………….XXX
Sales………………………………………..XXX
VAT Account………………………………XXX

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 The Accounting Journal to input VAT
Purchase…………………………………..XXX
VAT Account……………………………..XXX
Account payable(Cash)……………………..XXX
Example
The following were selected from among the transactions completed by ENDOD, A VAT
registered merchandising firm, During November of current year.
 November 1: - Purchase machinery for cash birr 50,000 subjects to VAT of 15%.
November 2: - Purchase merchandise for cash birr 100,000 from XYZ, subject to VAT of
15%
 November 5: - Sold merchandise for cash VAT exclusive price of birr 400,000.
 November 10: - Purchase merchandise on account from ABC Company Birr 30,000
subject to VAT of 15%
 November 20:- Sold Merchandise on account at VAT exclusive price of Br. 10,000.
 November 30:- Paid VAT to Tax Authority
Required: - Record the journal entry?
34,500
Zero - Rating
Zero-rated goods or services are business transactions, which VAT is chargeable at 0%. In effect
zero-rated means no VAT is charged. However, from tax perspective zero rate supplies are
taxable supplies although no tax is charged and the value of these supplies forms part of the
taxable turnover for registration purposes. Remember from the explanation given earlier that if a
business makes zero-rated supplies, it does not charge VAT on sells but can reclaim full input
tax credit (VAT paid on purchases) related to its zero rated supplies from VAT Administration
Office/VAT.
Goods and services, which attract the zero rate of VAT, include:
i) The exports of goods or services. However, Goods are treated as exported from Ethiopia if the
goods are delivered to or made available at an address outside Ethiopia as evidenced by
documentary proof from Ethiopian custom Authority acceptable to the VAT Services are treated

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as exported if the services are supplied for use or consumption outside Ethiopia as evidenced by
documentary proof from Ethiopian Custom Authority acceptable to the ERCA/VAT.
ii) The rendering / supply of transportation or other services directly connected with
international transport of goods or passengers, as well as the supply of lubricants and other
consumable technical supplies taken on board for consumption during international flights.
iii) International transport of goods or passengers occurs where the goods or passengers are
transported by road, rail, water or air and also transportation must be:
 From a place outside Ethiopia or another place outside Ethiopia where the transport or
port of the transport is across the territory of Ethiopia, or
 From a place outside Ethiopia to a place in Ethiopia
 From a place in Ethiopia to a place outside Ethiopia
iv) The supply of gold to the National Bank of Ethiopia.
v) A supply by a registered person to another registered person in a single transaction of
substantially all of the assets of a taxable activity or an independent functioning part of a taxable
activity as a going concern, provided a notice in writing signed by the transferor and transferee is
furnished the Authority within 21 days after the supply takes palace and such notice includes the
details of the supply.
VAT Exemptions
The supply of certain goods and services is exempt from VAT. Exemption from VAT means that
the persons engaged in the exempt activity are not liable for VAT on their receipts and are not
entitled to a credit or deduction for VAT borne on their purchases. In another word the suppliers
of exempted goods and services are not permitted to charge VAT and do not get credit for input
VAT on purchases for the exempt goods and services. If it makes taxable and exempt supplies it
cannot reclaim the VAT paid on purchases of such exempt supplies.
However, if a business makes only exempt supplies it cannot be registered for VAT as it is out of
the tax system. The goods and services that are exempted from VAT as indicated in Art 8 of the
proclamation are:
 The sale, transfer or lease of immovable property, except for the following:
o The sale or transfer of hotel or holiday accommodation;
o The sale or transfer of newly constructed residential properly, unless the properly
has been occupied as a residence for at least two years.

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  The rendering of financial services. Financial services means:-
Granting, negotiating and dealing with loans, credit guarantees, and any security for money,
including management of loans, credit or credit guarantees by the grantor.
o Transactions concerning deposits and current accounts, payments, transfers, debts,
cheques and negotiable instruments other than debt collection and factoring;
o Transactions relating to share, stocks, bonds, and other securities other than custody
services;
o Management of investment funds.
 The supply or import of national or foreign currency (except for that used for numismatic
purposes) and of securities.
 The import of gold to be transferred to the National Bank of Ethiopia
 The rendering by religious organizations of religious or church-related services,
 The rendering of medical services,
 The rendering of educational services provided by educational institutions, as well as
child care services for children at pre-school institutions,
 The supply of goods and rendering of services in the form of humanitarian aid, as well as
import of goods transferred to state agencies of Ethiopia and public organizations for
purpose of rehabilitation after natural disasters, industrial accidents, and catastrophes,
 The supply of electricity and water,
 The supply of goods for the official use of diplomatic missions,
 Post office operations and the provision of public transport permits and license fees.
Difference between Zero-Rated and Exempt Supplies
It is necessary to identify the difference between exemption and zero-rating. These terms appear
to have the same meaning, but only to the extent that both exempt and zero-rated supplies do not
attract what is referred to as a positive rate of VAT. That is both mean that there is no VAT
charged on the supply, so what is the difference? To the final consumer there is very little
difference as no VAT will be charged to them, but to a business the difference is very important.
Dealing in taxable supplies, including zero rate supplies allows a business to reclaim input tax;
dealing in exempt supplies does not. Because zero-rated supplies are taxable supplies, a VAT
registered business dealing in making only zero-rated supplies is still entitled to reclaim input tax
on purchases made (supplies received). This means that most suppliers dealing in only zero-rated

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supplies will have input tax, which exceeds their output tax, and they will claim for refund from
ERCA. Because exempt supplies are not taxable supplies, a business dealing only in making only
exempt supplies is not entitled to register for VAT. This means that this business will have no
opportunity to reclaim input tax on purchases (supplies received).

5.4 Stamp Duty

Stump duty is the payment of Stamp duty under Birr 50 that shall be effected by affixing stamp
of appropriate value to the instrument. Whoever executes or receives an instrument bearing an
adhesive stamp shall at the time of execution cancel the same, so that it cannot be used again.
The responsibility arising from the non-cancellation of the stamp shall be on the person
executing or receiving the instrument bearing an adhesive stamp not the person submitting the
document for execution. According to the Ethiopian stamp duty proclamation no. 110/1998, The
instruments that shall be chargeable with stamp duty are:

- memorandum .and articles of association of any business organization, cooperative or

any other form of association;
- award;
- bonds;
- warehouse bond;
- contract and agreements and memoranda thereof;
- security deeds;
- collective agreement;
- contract of employment;
- lease, including sub-lease and transfer of similar rights;
- notarial acts;
- power of attorney, and
- Documents of title to property.

Time and Manner of Payment

 The stamp duty would be paid on:

- memorandum and articles of association, before or at the time of registration;

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 - awards, before or at the time of issuance of the award;
- contracts or agreements, before or at time of signature;
- leases or sub-leases, before or at the time of signature;
- notarial acts, at the time of issuance;
- security deeds, before or at the time of signature, and
- documents of title to property, before or at the time issuance is effected

5.5 Customs Duty

 Custom duty refers to the tax or tariff imposed on the activities of
imports and exports of goods and service.
 The purpose of the custom duty is mainly designed to raise revenue to
the government and to prevent illegal imports and exports.
 In accordance with custom duties regulation NO. 280/2002 the
customs duty shall apply to all goods imported to Ethiopia and
exported from Ethiopia except those exempted by the law.
 The custom duty paying value at any importer or exporter goods,
which is the base to compute customs duty, shall be the actual total
cost of the goods.
Rates of customs duty

According to the customs proclamation 60/89, article 47, duties of customers

are levied on goods imported or exported from Ethiopia at the tax rates range
from 0 – 35% to different either imported or exported.

Example

The tax rate for live animals is 5%

The tax rate for machinery, equipment and mechanical appliances 5% - 35%,
the tax rate for vehicle 30% etc.

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