A survey of the Ethiopian tax system (2025–26)

This report provides an updated and comprehensive overview of Ethiopia’s tax system in 2025–26. Produced by TaxDev researchers at the Institute for Fiscal Studies, it describes the structure of the tax system, examines recent trends in the level and composition of tax revenues, reviews major tax policy reforms implemented over the past five years, and compares Ethiopia’s revenue performance with that of other countries in sub-Saharan Africa. The report updates the previous survey of the Ethiopian tax system published in 2021.

Key findings:

1. Over the past decade or so, tax revenue collections (as a percentage of GDP) declined significantly before a recent partial reversal. Ethiopia’s tax-to-GDP ratio fell from 12.7% in 2014–15 to a low of 6.2% in 2023–24 – the largest relative decline recorded anywhere over this period (Nair et al., 2025). The decline was evident across every major tax category, even as the economy continued to grow. But in the last couple of years following the implementation of the reforms under the national medium-term revenue strategy (NMTRS), the tax-to-GDP ratio recovered to 7.8% in 2024–25 and is projected by the International Monetary Fund to reach around 9.5% in 2025–26 (International Monetary Fund, 2026b).

    

2. Direct taxes have become key revenue sources in recent years. Domestic direct taxes accounted for around 2.9% of GDP in 2023–24, ahead of indirect taxes (2.5% of GDP) and trade taxes (0.7% of GDP). A decade earlier, indirect taxes – value-added tax (VAT) in particular – were much more important revenue sources for the government.

    

3. Various tax reforms have been implemented in the last few years. These include the comprehensive VAT reform of 2024, the 2023 excise amendment extending the tax to new services such as internet and mobile services, the 2025 income tax amendment introducing important changes (such as the simplification of business income tax categories from three to two, the introduction of a minimum alternative tax and a digital services tax), a harmonised property tax legal framework in 2025, the introduction of a new social welfare levy on imports in 2022, and the phased implementation of preferential tariffs under the African Continental Free Trade Area.

    

4. Yet Ethiopia’s tax-to-GDP ratio remains low even by regional standards. Its tax-to-GDP ratio is comparable only to that of fragile states and a handful of resource-rich economies in the sub-Saharan Africa region, and well below regional peers such as Kenya, Uganda and Rwanda. The gap is only partly explained by economic structure; it also reflects administrative gaps and, to a lesser extent, policy choices such as a VAT rate below the regional median and incomplete implementation of statutory fuel taxes.

    

5. Meeting the NMTRS target will require large and sustained improvements in tax collection. The NMTRS, adopted in October 2024 and covering 2024–25 to 2027–28, sets out tax policy and administration measures intended to broaden the tax base, improve compliance and raise the overall efficiency of the tax system, with a central target of an additional 6.9% of GDP in tax revenue by 2027–28 (Federal Democratic Republic of Ethiopia, Ministry of Finance and Ministry of Revenue, 2024). This is an ambitious goal despite the 1.6 percentage points already added in 2024–25, the first year of the NMTRS. Closing the remaining gap will depend on continued political commitment, careful monitoring of the revenue impact of each reform and readiness to adjust course where reforms fall short.