Taxes and tariffs imposed on sanitation products significantly increase their consumer price, which reduces their affordability
In a series of posts, we will present the main challenges that businesses face when expanding the range of WASH products and services available to households in Ethiopia. After describing these challenges, we will recommend specific regulatory and/or policy actions to address those issues, and which also are intended to improve the overall business climate in the country – so that enterprises can more easily start, grow, and serve their communities sustainably.
This fourth of eight planned articles addresses taxes and tariffs on sanitation products and their impact on the market.
Why does this matter?
Currently, only nine percent of Ethiopians have access to basic sanitation services – a serious situation that affects public health, education, and many other aspects of the country’s economic and social well-being (JMP, 2020). Achieving universal access to basic WASH facilities cannot be done by government or NGOs alone; it will require a strong contribution from the country’s private sector. The Government of Ethiopia recognizes this and is working to strengthen private sector businesses that offer WASH products and services (including household sanitation) as a key element of its greater focus on hygiene and environmental health (FMoH, 2016). These measures are necessary because the cur-rent market only meets a small fraction of the country’s enormous needs.
To gain insight into how these challenges can be addressed, and to do so in a manner that ensures the solutions are affordable to all, the USAID Transform WASH team spoke with a wide range of experts – including business owners, government officials, and technical specialists in Ethiopia and other East African countries – to get their advice and recommendations on how to develop and expand Ethiopia’s WASH market. The post that follows is largely based on these experts’ reflections.
To explore this topic in more depth, follow this link to the full Learning Note.
Overview of tariffs and taxes
One of the primary challenges that businesses face in Ethiopia is taxation, which significantly increases the cost of goods to customers, particularly for imports (levied taxes can comprise up to 50 percent of a product’s retail price). To promote domestic manufacturing, the Ethiopian government follows an “import substitution” model, using import tariffs (duties) to raise the cost of imported finished goods and selectively reducing duties on imported raw materials to encourage manufacture of those goods domestically. In the price-sensitive WASH market, relatively low demand can prevent businesses from achieving profitability when introducing or expanding a WASH product and service portfolio. As both imports and domestically produced products are key components of building any emerging market, current levels of taxation should be considered a major impediment to market growth.
Goods imported into Ethiopia are subject to up to five different types of tariffs and taxes, including customs duties, value added tax (VAT), surtax, excise tax, and withholding tax – all of which generally are added into the retail sales price paid by consumers.
- Customs duties are applied to imported goods and can range from zero to 35 percent, de-pending on how government classifies the item as a raw material which will be further developed locally or a finished product to be sold directly.
- Excise tax is typically levied on items considered “luxuries” (e.g., perfumes) or goods that are hazardous to health (e.g., tobacco products and alcoholic beverages).
- Value added tax (VAT) of 15 percent is levied on imported goods, as well as on all domestic sales transactions where products are sold and change hands.
- Surtax is a flat 10 percent fee used to raise additional revenue on certain products. It is based upon the sum of customs value, customs duty, excise tax, and VAT. Some products have been exempted from surtax, including fertilizer and petroleum (Kebede, 2019).
- Withholding tax is applied to a range of payments, including salaries, dividends, interest, royalties, and management fees. For domestic payments, a rate of 2 percent generally applies; for payments involving non-residents, rates of 5 to 10 percent may apply.
Tariff and tax relief and reform
An example of how taxes and tariffs affect the sanitation sector is provided by the SATO pan, a low-cost toilet improvement option, which is currently sourced from a manufacturer in Kenya and imported into Ethiopia at a unit cost of about 150 ETB (US$ 3.25). SATO pans are classified as “finished products” so they are subject to the following tariffs and taxes:
- Customs duty of 30 percent
- VAT of 15 percent
- Surtax of 10 percent
- Withholding tax of 3 percent.
With all relevant tariffs and taxes applied to this product (and no credits applied for previous VAT payments), as well as profit margins, the pan’s final retail price can rise to nearly 500 ETB (Kebede, 2019). This poses a significant challenge to SATO retailers – as many customers are unwilling or unable to purchase the product at that price level.
In the interest of keeping the price of SATO pans as affordable as possible and help establish them as a new market entry in Ethiopia, the government has permitted the first few rounds of bulk imports to be exempted from customs duties; however, a long-term solution is not yet in place.
The government also is engaged with interested parties regarding proposals to reduce or eliminate customs duties and taxes on a range of WASH products, such as low-cost sanitation items, menstrual pads, and household water treatment products. In early 2021, Ethiopia recognised menstrual hygiene management products as essential items and reduced custom duties from 30 percent to 10 percent (MoFEC, 2021).
A long-term solution to the issue of tariffs and taxes on WASH products will require that the Ethiopian Revenues and Customs Authority (ERCA) and the Federal Ministry of Health (FMoH) get involved to re-classify certain products as “priority” items, and take any other steps needed to keep the cost of these products as low as possible.
VAT is another challenge due to its importance for government revenue as well as its complicated implementation procedure. VAT accounts for over 40 percent of total federal domestic revenue, and is applied on both goods and services, including imported products. It typically is applied at a product’s initial sale, as well as in all subsequent transactions.
Some outlets and retailers may be exempt from charging VAT (e.g., when annual turnover is less than 1 million ETB), and instead pay a “turnover tax” (similar to a sales tax) of two to 10 percent. In principle, it should be possible to deduct VAT charges paid in previous transactions throughout the value chain. However, in practice, the detailed record-keeping and reporting required to implement this procedure are typically not followed. Also, many businesses lack a full understanding of how the VAT process is administered (Kebede, 2019). Ultimately, it is the consumer who must cover the cost of VAT and all other applied taxes.
Recommendations
Steep import tariffs and a range of domestic taxes can greatly increase the cost of sanitation and other critical WASH products. This lowers overall demand and places additional economic burdens on poor households. The following actions are recommended to help ensure these products remain as affordable as possible:
- Complete ongoing research to understand the effects of lowering tariffs and taxes on sanitation products, including influence on consumer demand and government revenues.
- Review and revise the classification of imported WASH products to ensure critical items can be readily imported.
- Review import tariff and domestic taxes on critical WASH products and reduce the rates (or eliminate them entirely) wherever possible.
- Provide training to WASH businesses and consumer advocacy groups on VAT accounting and reporting processes to help reduce any unnecessary applications of this tax.
About Transform WASH
USAID Transform WASH aims to improve water, sanitation and hygiene (WASH) outcomes in Ethiopia by increasing market access to and sustained use of a broader spectrum of affordable WASH products and services, with a substantial focus on sanitation.
Transform WASH achieves this by transforming the market for low-cost quality WASH products and services: stimulating demand at the community level, strengthening supply chains, and improving the enabling environment for a vibrant private market.
USAID Transform WASH is a USAID-funded activity implemented by PSI in collaboration with SNV, Plan International, and IRC WASH. The consortium is working closely with government agencies, including the Ministry of Health, the Ministry of Water, Irrigation and Electricity, the One WASH National Program, and regional and sub-regional governments.
