We can see that your focus has shifted to hoteliers who abuse their duty- free privilege from VAT offenders and usurers. Was this based on a study? Check out the former minister's response.
Ethiopian Reporter, August 28, 2010
Melaku Fenta, director general, Ethiopian Inland Revenue and Customs Authority (ERCA), spoke to Meirafe Berhane and Wudineh Zenebe of The Reporter on the overall performance of the Authority and other related issues Excerpts.
Though enforcement measures have a lot of contribution, the success in revenue collection was a cumulative effect of many other things. ERCA carried out reforms in 2010. Last year, it hired more staff, worked on capacity building and implemented a new system. Having done that, we started enforcing the tax law. This made our work more visible. We have improved our ways of doing things, which enabled us to give a better service. The excellent services that we provided helped us to collect greater income than we had planned. Creating awareness throughout the nation is part of the big change. No matter how consistently we enforced the tax law, we were not flexing our muscle but literally enforcing the law that had never been applied properly. The decision that we made to penalize and cause tax offenders to be sentenced to prison terms was all about teaching the nation that taxes have to be paid, specially Value Added Tax (VAT).
How were you be able to do that?
The reason we chose VAT from other forms of tax is that it ropes in numerous people and is the best platform for the flow of a huge volume of vital information as well as a means of income for the government. We have also used the law to tackle usury. We know that there are many usurers out there. However, we have identified the important ones and have taken all necessary measures. We believe that our actions can teach as many tax offenders as possible. We just identified few of the risk areas that involve many. This technically allows us to give a lesson to many. That is how we are able to apply the tax law.
How much share do enforcement measures account for the overall revenue?
If I am not mistaken, two-thirds of the income is collected because of enforcement measures. Our prosecutors are making a huge difference.
You mentioned that every decision made by courts is intended to teach others. Some tax offenders were sentenced up to 25 years prison terms. How does this teach others? Some people say that the decisions are meant to warn others and that ERCA’s focus is only on a few business owners. What is your view on this?
The decision may possibly shock tax offenders. But at the same time it will teach others who resort to tax offences with or without their knowledge. I think the difference lies on who learns from it and who gets unduly alarmed. If some people think they can collect their house or building rent and not pay tax, they need to be shocked. A person who gets a jail sentence due to a tax offence and another who does the same needs to be shocked. However, it is our belief that this is the best platform for others to learn from past experiences.
Business persons who own big commercial organizations have been sued and punished for the mistake they never committed. And sometimes, they were even charged for transgressing the tax law even though they were overseas at the time of the offence. Wouldn’t this discourage them from respecting the tax law and cause them to cringe in fear?
Our identification of risk areas is always followed by intelligence work which involves investigative works. Taxation is not all about paying it on time, but also paying it the way it is supposed to be paid. Even though mistakes may happen frequently, the owner or the manager of the business may not be there. But the tax law blames all involved hierarchically. Whenever mistakes happen, every now and then, we enforce the law. Having done that it does not necessarily mean other big business owners will be scared. The other thing is every person should respect the law and apply it instead of being discouraged or cringe in fear.
The business community has complained that some of employees of ERCA are corrupt. Are the complaints true?
I can not say that our employees do not have problems. For that reason we have put in place special administrative rules. We have applied these rules from hiring to firing. Recruitment is processed in consideration of the ethics and capability of prospective candidates. Any employee who respects the rules and is ethical will be considered for reward and any other staff development schemes. However, an employee who is unethical and incompetent will be fired and will have no excuse for coming back. For instance, we have fired fifty employees so far and instituted criminal charges against some of them. We have managed to have them sentenced up to ten years in person. There are also seven employees who are facing criminal charges.
Because of last year’s inflation, surtax was levied by the authority. Currently, reports show that inflation has decreased, but the surtax is still there. Why is that?
Surtax is not a permanent tax. It helps to fill the gap that occurs due to some kind of a crisis. We have to make sure that the aim must be fulfilled. So we are studying that.
We can see that your focus has shifted to hoteliers who abuse their duty- free privilege from VAT offenders and usurers. Was this based on a study?
We are not only focusing on hotels but also on other sectors which have duty-free privileges. We carried out a study on 10 hoteliers and found that seven of them had abused their duty-free privileges. They have either sold the goods they imported duty-free or used them for the purposes they were not intended to. Duty-free privileges are high risk areas of tax offence as are VAT and usury. The government has forgone 19 billion birr due to goods imported duty-free. Currently, we are taking measures against such cases.
Next to hotels, which sectors are on the list?
So far our focus is not on developmental investors. It is on those who are contrabandists and those who actively took advantage of their duty-free privilege. We don’t believe that those investors involved in developmental investment would do such a thing. But if they attempt to do it it is our belief that they will learn soon. It is obvious that most developmental investors spend their money on land. So, we don’t think that they would gamble with abusing their duty-free privilege.
Every design of a hotel shows how much iron, cement, televisions, beds and other necessary materials are needed. In the first place, why did you let them import excess materials?
I think the sources of the problems are two. If every necessary document is attached with engineering certificate and submitted to our office, we would proceed to the next step, which is to provide them with an excellent service and allow them to import. Making sure the designer’s statement is correct or not is one thing.
The second problem is our own. We used to focus on speedy service, not monitoring. That is why we now also work hard on enforcing the law. What we are applying is a balanced approach in both monitoring and speedy service delivery. Our employees used to be corrupt. The trustworthiness of the business community, workers that approve requests for good to be imported duty-free, and engineering professionals is critical for our future success.