Ethiopia is turning to lessons from Kenya and other East African nations as it seeks to reverse a steep decline in its tax-to-GDP ratio, which has fallen from 12.1 percent in 2015/16 to just 7.5 percent in 2022/23 among the lowest in Africa. A recent report highlights that without urgent reforms, the country risks undermining its ability to finance public services and reduce dependence on external borrowing.
One key proposal under consideration is expanding taxation into new areas such as financial services, mobile money, and airtime. Kenya’s success in taxing mobile money transactions through excise duty is seen as a model Ethiopia could replicate to broaden its tax base.
Another measure being explored is designating large private firms as Value Added Tax (VAT) withholding agents. Kenya’s adoption of this system has improved compliance by requiring big companies to deduct and remit VAT on behalf of smaller suppliers. Ethiopia also plans to raise its VAT rate from 15 percent to 17.5 percent, aligning it more closely with Uganda’s 18 percent and Kenya’s 16 percent.
Fuel taxation is another weak spot. Ethiopia’s 2010 shift from an ad valorem tax to a fixed duty of ETB 2.39 (Ksh2.20) per litre has constrained revenue growth by decoupling collections from fluctuating fuel prices. Kenya’s retention of an ad valorem system allows its fuel tax revenues to rise with market prices, providing a more sustainable stream of income.
The report also flagged corporate income tax leakages arising from generous allowances and tax holidays. In contrast, Kenya has tightened rules on loss carry-forward provisions to reduce abuse and safeguard collections.
Beyond policy, Ethiopia’s revenue challenges are rooted in weak administration. Kenya’s investment in digital systems such as the iTax platform was cited as a benchmark for improving compliance and expanding the tax net.
While Ethiopia’s reforms are expected to face political resistance, Kenya’s gradual tightening of enforcement offers a roadmap for navigating such hurdles. Ultimately, the report stresses that Ethiopia’s fiscal transformation depends not only on policy changes but also on adapting successful regional experiences to its own political and economic realities.
