Ethiopia to Copy Kenya’s Tax Tricks to Increase Revenue

Ethiopia is turning to regional peers such as Kenya to guide its sweeping tax transformation plans as the country grapples with a sharp decline in domestic revenue collection.
According to a recent report on Ethiopia’s tax-to-GDP ratio, the Ethiopian government has acknowledged that lessons from Kenya’s tax policies and administration could help close the growing gap.
One of the proposed measures is the introduction of taxation on financial services, mobile money transactions, and airtime, areas where Kenya has already made significant progress. The report pointed to Kenya’s experience with excise duty on mobile money transfers as a model Ethiopia could adapt to broaden its tax base.
Another reform under consideration is the designation of large private companies as Value Added Tax (VAT) withholding agents. Kenya has implemented a similar system that mandates big firms to deduct and remit VAT on behalf of smaller suppliers. The report noted that this measure could enhance compliance and raise collection efficiency in Ethiopia’s VAT system.
Ethiopia also intends to raise its VAT rate from the current 15 per cent to 17.5 per cent. The study observed that while Uganda applies an 18 per cent VAT and Kenya 16 per cent, Ethiopia has lagged in aligning with regional standards. The proposedincrease would place it closer to the East African norm.
The report further identified weaknesses in excise duty collections, especially on fuel. Ethiopia’s 2010 switch from an ad valorem tax (a percentage of the fuel’s value) to a fixed duty of Ksh2.20 (ETB 2.39) per litre significantly constrained revenue growth, as the tax no longer rose with prices and was left vulnerable to inflation. In contrast, Kenya retained an ad valorem system on fuel, which allows government revenue togrow automatically as fuel prices increase, making it a more sustainable policy.
Corporate income tax leakages also emerged as a key concern. The study pointed to Ethiopia’s generous capital deduction allowances, loss carry-forward provisions, and tax holidays as eroding the revenue base. It drew comparisons with Kenya, which recently tightened its rules on loss carry-forward to limit misuse and strengthen collections.
The analysis stressed that Ethiopia’s tax challenges are not limited to policy but also stem from weak administration. Here again, Kenya provided useful lessons, with the Kenya Revenue Authority’s (KRA) investment in digital systems, particularly the iTax platform, being noted as a benchmark in improving compliance and expanding the tax net.
The report emphasised that Kenya’s more diversified tax structure, including stronger reliance on consumption taxes, has helped sustain its collections despite economic pressures. Ethiopia’s heavy dependence on a narrow tax base is seen as a structural weakness that reforms must address.
At the political economy level, Ethiopia’s reforms are expected to face resistance from vested interests, a challenge that Kenya has also confronted. The report also noted that Kenya’s gradual but steady tightening of enforcement provides a template for navigating such resistance while maintaining reform momentum.
Ultimately, Ethiopia’s tax transformation is framed as critical to restoring fiscal stability. By borrowing tested approaches from Kenya and Uganda, the government hopes to boost its tax-to-GDP ratio to regional averages and secure a more sustainable path to development.
The report concluded that while Ethiopia’s reforms are ambitious, their success will depend on careful adaptation of regional experiences. Kenya’s example, it notes, offers not just policies but also lessons in sequencing and managing reform within a politically sensitive environment.
Between the fiscal years 2015/16 and 2022/23, Ethiopia’s tax-to-GDP ratio fell from 12.1 per cent to just 7.5 per cent, one of the lowest in Africa. This performance contrasts sharply with Kenya, whose tax-to-GDP ratio stood at 14 per cent in 2022, nearly double Ethiopia’s level.
The report warned that without corrective reforms, Ethiopia risks undermining its capacity to finance public services and reduce reliance on external borrowing.