Ethiopia’s Ministry of Finance announced on August 19, 2025, that it will maintain the national value-added tax (VAT) rate at 15%, opting against a proposed increase to 17.5% a decision that underscores a strategic choice to prioritize administrative reform and equity over simple rate hikes
Rate Decision and Revenue Implications
A collaborative study conducted by the Ministry and the Institute for Fiscal Studies revealed that Ethiopia’s VAT revenue ratio currently hinging on a 15% standard rate lags behind sub-Saharan Africa’s 17.5% average and substantially trails the over‑20% levels found in developed economies. An alignment with regional benchmarks could unlock an extra 0.4% of GDP in revenue, but the government concluded that maintaining affordability at the household level is paramount.
Strategy: Administration Over Expansion
Central to Ethiopia’s decision is a fundamental shift: instead of raising rates, the government will modernize tax infrastructure. Analysts highlight that the VAT gap estimated at around 2.5 percentage points is less a function of policy design and more due to weak enforcement. Of this gap, 1.4 points stem from compliance failures and administration, while just 0.1 points are attributed to structural design flaws
Equity in Focus
Facing the regressive nature of VAT, Ethiopia is mitigating its impact on low-income households by exempting essential goods from taxation. This includes staple foods and other necessities, aligning with economic fairness goals while safeguarding revenue mobilization
Anchoring Long-Term Revenue Goals
The VAT retention aligns with the government’s broader 2024/25–2027/28 Medium‑Term Revenue Strategy, which aims to mobilize domestic revenue through smart reforms rather than blunt rate increases. Priorities include modernizing tax administration, improving compliance, and shielding vulnerable populations through targeted exemptions
Broader Reform Context
Ethiopia’s VAT architecture already includes coverage for remote digital services provided by nonresident firms. A new regulatory framework requires foreign digital suppliers to register and apply a 15% VAT, bringing entities like streaming platforms and online content providers into the tax base
Meanwhile, the standard VAT provisions remain unchanged, covering domestic supplies and imports except for items explicitly exempted per the prevailing VAT Proclamation
Bottom Line
Ethiopia’s decision to retain the VAT rate at 15% signals a nuanced fiscal approach one that values systemic improvement and social equity over quick wins through rate hikes. While the VAT shortfall relative to peers is notable, the emphasis is on plugging administrative gaps, protecting low-income households, and aligning tax modernization with long-term development targets.