Presumptive Tax on Small and Microenterprises with a Gender Lens in Ethiopia

Governments often use simplified business tax systems, such as presumptive tax regimes, to register and tax small and microenterprises. Despite concerns about how such regimes could disproportionately affect female-owned and low-revenue entrepreneurs, there is a lack of empirical analysis examining the tax burden. The presumptive tax in Ethiopia has a complex assessment system, where the tax liabilities are determined according to the activity type and turnover (99 activities and 19 turnover bands), and some activities do not have a tax-free threshold. This paper uses two rounds of data in the Ethiopian Socioeconomic Surveys and the tax code to analyze the equity and gender implications of the presumptive tax on small and microenterprises by imputing the effective tax rates. There are three key findings. First, the effective tax rates are higher for businesses in the lowest quartile at 4.3 percent of turnover compared to 1.5 percent for businesses in the highest quartile, using the most recent survey, resulting in a regressive system. Second, male-owned businesses tend to operate in sectors without a tax-free threshold and are more likely than female-owned businesses to face higher tax rates. Third, the effective tax rates are high for businesses in food and beverage services, which is female-dominated, and for transit services, which is male-dominated, due to the lack of a tax-free threshold for these sectors. The study finds that an alternative presumptive tax system with a single tax rate on turnover and an exemption for all low-revenue businesses would be simpler for tax assessment and more progressive.