Every July, small businesses across Ethiopia visit tax offices to declare their income and pay taxes. In principle, this represents a simple engagement. In practice, however, the reality is very different. For most small businesses, July has become a period of tax notification rather than tax declaration. Many visit tax offices only to learn how much tax officers have determined they earnt and owe in tax liability under a decades-old method called “daily sales estimation”.
The widespread use of daily sales estimation as a principal assessment method shows a deeper structural problem in Ethiopia’s presumptive tax system.
Most presumptive tax systems rely on self-declaration and simple records
Despite questions around their cost-effectiveness, turnover-based presumptive tax systems are the most common form of presumptive taxation across the globe. About 60% of Sub-Saharan African countries adopt such regimes to tax small and informal businesses. Governments adopt these systems because they simplify taxation -and help small businesses transition to standard self-assessment regime.
Turnover-based presumptive systems typically rely on self-declaration supported by basic record-keeping, such as cash-based sales or turnover logs. Tax authorities then verify declarations using a combination of tools, including third-party information reporting, risk-based audits, external indicators, and sector benchmarks. Onsite visit-based estimations by tax officers are generally used only as a last resort. Because it can produce arbitrary outcomes and requires significant administrative resource, tax administrations typically only reply on these estimations when taxpayers fail to comply with basic record-keeping and reporting obligations.
In contrast, Ethiopia relies primarily on estimates instead of self-declaration
Ethiopia has effectively reversed this model. What is normally a last-resort assessment method has become the norm for determining turnover.
Under Ethiopia’s income tax law, small businesses are not legally required to keep and submit basic turnover records. In practice, tax authorities rely heavily on daily sales estimation to determine annual turnover. Tax officers visit business premises, observe transactions for a few minutes, and estimate average daily sales. They then convert these estimates into annual turnover figures and use them to calculate annual presumptive tax liabilities.
The problem extends beyond small businesses reflecting a structural problem
The reliance on estimation is not limited to small taxpayers. In 2025, tax authorities assessed nearly half of Addis Ababa’s medium and large taxpayers using presumptive methods rather than accounting records. When nearly half of the non-small taxpayers are assessed through estimation rather than books of accounts, the issue is no longer marginal. Rather, it reflects a fundamental problem affecting the country’s tax system as a whole.
Widespread reliance on daily sales estimation has created problems for taxpayers and authorities
1. Daily sales estimation undermines objective tax assessment
Assessments often depend on the subjective judgment of individual tax officers rather than verifiable data. This can lead to arbitrary outcomes and weaken taxpayers’ trust in the tax system. Businesses operating under similar conditions may receive inconsistent tax assessments and liabilities.
2. Wide administrative discretion creates corruption risks
The estimation approach relies heavily on face-to-face interaction and grants considerable discretion to tax officers. This creates opportunities for informal negotiations over tax liabilities and increases corruption risks. Many countries seek to reduce such risks by limiting direct interaction between taxpayers and tax officials. Ethiopia has not yet made this shift.
3. Arbitrary assessment damage trust between taxpayers and tax authorities
The system has also contributed to a strained relationship between taxpayers and tax authorities. During onsite visits, some taxpayers hide stock, provide inaccurate information, or avoid engagement altogether by placing unresponsive individuals, like small children, at business premises. While tax officials may view such behaviour as tax evasion, many taxpayers see it as a response to a system they perceive as arbitrary. When tax liabilities depend more on personal judgment rather than verifiable data, taxpayers often adopt defensive behaviours that further undermine compliance.
4. Onsite estimation imposes high administrative costs for tax authorities
Daily sales estimation also places a significant burden on tax administration. Tax officers must conduct labor-intensive field visits and evaluate multiple indicators, such as business type, goodwill, years of operation, customer profile, and the volume and price of goods or services. Applying these indicators to hundreds of thousands of small businesses is both resource- and time-consuming. As a result, tax administrations spend considerable effort producing estimates that may still be contested by taxpayers.
5. Onsite estimation can limit access to justice
Taxpayers who wish to challenge assessments often must make substantial upfront payments. In many cases, they must pay 50% of the disputed amount to access appeal commissions and 75% of the disputed amount to pursue litigation before courts. When initial estimates are inflated, this requirement can effectively prevent taxpayers from exercising their right to challenge decisions.
6. The system creates a difficult transition to the standard tax regime
The current system creates a significant transition problem. Because small businesses are not required to keep records, they often struggle when moving into the standard tax regime, which requires more comprehensive accounting and reporting. In many cases, this transition is triggered by high estimated turnover rather than actual business growth. The result is a sharp compliance cliff rather than a gradual progression toward formal taxation.
Ethiopia’s repeated reform efforts have focused on tax rates, bands and classifications
Over the past two decades, Ethiopia has repeatedly revised its presumptive tax system, with technical and financial support from international partners such as the International Monetary Fund and the World Bank.
The first major reform came with the 2002 income tax laws, which introduced a detailed standard assessment system. Small businesses were grouped into dozens, and later hundreds, of business sectors, with each sector divided into 19 turnover bands. Tax liabilities were determined according to sector-specific turnover bands.
The 2016/2017 income tax laws largely retained this structure while updating business classifications, turnover bands, and tax amounts.
The most significant change came with the 2025 income tax amendment law. It replaced hundreds of sector classifications and thousands of turnover bands and tax rates with a simplified system of five turnover bands applied to all small businesses.
Taken together, these reforms focused on redesigning tax bases, tax rates, and taxpayer classifications, while largely overlooking the need for effective mechanisms to report and verify turnover.
Without better turnover assessment, Ethiopia’s tax reforms remain incomplete
All of the reforms rely on turnover as the principal basis for taxation. Yet none established robust mechanisms for taxpayers to report turnover or for tax authorities to verify it objectively.
As a result, tax authorities continue to rely heavily on daily sales estimation to determine turnover. Consequently, many of the system’s longstanding problems – including subjective assessments, administrative discretion, taxpayer disputes, and high administrative costs – have persisted despite repeated rounds of reform.
Modernising the system requires better turnover reporting and verification
If Ethiopia is to modernise its presumptive tax system, reform effort must focus on how turnover is reported and verified.
First, self-declaration must become the foundation of turnover assessment. This requires gradually introducing basic record-keeping obligations, such as simple daily sales logs. Policymakers could begin with larger small businesses operating in urban areas before expanding requirements more broadly.
Second, tax authorities should verify taxpayer declarations using a combination of complementary tools, including third-party information, risk-based audits, sector benchmarks, and external indicators. Digital technologies, particularly electronic payment systems, can also support tracking transactions and payments.
Third, onsite estimation should remain available but only as a last-resort mechanism. Tax authorities should use it when taxpayers fail to meet basic record-keeping obligations and when other complementary methods fail to determine turnover or taxable income.
Finally, Ethiopia’s experience offers an important lesson for presumptive tax reform. Policymakers often focus on turnover thresholds and tax rates. These design features matter. However, a turnover-based presumptive tax system cannot function effectively unless it also includes credible mechanisms for reporting and verifying turnover.
