Abstract
Ethiopia introduced various Economic Reform Programs including tax reforms since 1992 with the aim of encouraging trade, investment and hence development. Those reforms are geared towards promoting investment, supporting industrial development and broadening the tax base in the view of financing the need of government expenditure. However whether those government assumption and stated objectives were achieved is debatable and questionable. Therefore, one ways to address those issues is to analyze the cost and benefit analysis of tax incentives which is the objective of this article. To address those issues, this article employs both primary and secondary data. The primary data was collected through questionnaire from 800 respondents, and interview, and focus group discussion of officials and investors . Secondary data is gathered from different publication, documents, financial and non financial reports; and Ethiopian Investment Agency(EIA) & Ethiopian Revenue and Tax Authority (ERCA) rules, regulations and proclamations. Since measurement of the cost and benefit of tax incentives is hard, to arrive at the measurable definition of cost and benefit this article adopted the World Bank cost and benefit analysis framework of tax incentives. And the result revealed that, the objective of tax incentives is failed to meet its intended objectives. This is because, the amount of employment created is not much with what is planned, and from investors who take tax incentives only 20% in number and 15% in the amount of capital they registered are operational. Furthermore, most of the investments are in areas where they can be commenced without any tax incentive and the amount of revenue forgone for one birr additional investment is about 7 birr on average. And we can conclude that; there is large revenue forgone with low; realized investment, output growth, created employment opportunities, and export growth. Thus, this reduces the countries opportunities to invest in public infrastructure, public services, social support and poverty reduction programs. Keywords: cost and benefit, tax incentives DOI: 10.7176/RJFA/12-7-03 Publication date: April 30 th 2021
Highlights
UNCTAD defines tax incentives as reduction in the tax burden of investors aimed to encourage private investment in selected sectors and areas of a country
The primary data was collected through questionnaire from 800 respondents, and interview, and focus group discussion of officials and investors
Secondary data is gathered from different publication, documents, financial and non financial reports; and Ethiopian Investment Agency(EIA) & Ethiopian Revenue and Tax Authority (ERCA) rules, regulations and proclamations
Summary
UNCTAD defines tax incentives as reduction in the tax burden of investors aimed to encourage private investment in selected sectors and areas of a country. Egypt in 2005 eliminated all income tax exemptions and lowered the business income tax rate from 40% to 20% and owing to this as compared to 2004/2005 it was double the flow of FDI in 2005/6 tripled in 2006/7and quadrupled in 2007/8 (Narine,2013) Due to this mixed result, it requires empirical investigation through cost and benefit analysis framework which is the focus of this article. Tax incentives can be justified only if they bring net benefit to society as a whole or anticipated losses in revenue and economic efficiency and increased cost in administration have to be outweighed by the intended and achievable long-term economic and revenue growth This requires, appraisal before its introduction and evaluation on an on-going basis. This article try to analyze the cost and benefit of tax incentives based on different theoretical assumption & principles of tax incentives
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