Powdered Infant Formula Not Exempt From VAT, Says Ethiopia’s Customs Authority

Powdered infant formula is subjected to value-added tax (VAT) levies according to a recent ordinance by the Ethiopian Customs Commission (ECC).

A letter signed by Deputy Commissioner of Operations Muluwork Derese last week in response to inquiries from the Qaliti Customs Branch office settled an apparent confusion about taxing baby formula.

The Commission’s letter cites the popular baby formula Liptomil to suggest that items categorized as milk inputs would not qualify for the exemption extended to the final product.

“They can’t be deemed as milk,” reads the letter.

Several points of contention have arisen between the Commission, finance ministry, and importers since the amended VAT proclamation began enforcement in August. Freight trucks carrying wheat imports to supply millers and flour-based food were stranded for days at several customs branch offices four months back.

The central points of contention have primarily stemmed from ambiguity over which items would continue to be granted exemption following changes made by the Finance Ministry Directive 1006/2024.

Ethiopia’s government is targeting a marked increment in domestic revenue mobilization in the 2024-25 fiscal year as it moves away from decades of direct borrowing from the central bank to finance the budget deficit. A tax revenue target of 1.5 trillion birr, which is nearly double the previous fiscal year’s collection, has necessitated a slew of new taxes and an accelerated broadening of the tax base.

While Ethiopia’s total tax revenue jumped from 85.7 billion birr in 2011/12 to 477.7 billion birr a decade later, it dwindled as a share of GDP from 11.5% to 8.8% over the same period. It fell to dismal lows of around 6.4% just last year. As part of the four-year economic program prescribed by the International Monetary Fund and endorsed by a mix of international creditors, Ethiopia looks to grow its tax-to-GDP ratio to about 18% in the coming few years.