Response to comments on “Eritrea needs a new tax system”

asmarahutBy Teweldeberhan Gebre

On December 26 2016, I posted an informative article on the subject of taxation system titled “Eritrea Needs a New Tax System”  also posted in Madote.com. As I decided to respond to some of the comments provided on Madote.com on the subject by fellow Eritreans it is appropriate to thank all those all involved and Madote for the opportunity. I wish I could respond to all the comments and suggestions posted in Madote.com. However, for the sake of time and space while my thanks goes to all those took part in the discussions I will limit my response to two chatters by the name Berhane and Eritrawee.  While Berhane argues taxing bank payments, transfers, financial transactions, and bank withdrawals cannot work in Eritrea, Eritrawee asks on the possibility of reforming the “2% diaspora tax”.To begin with Berhane’s comment while I fully agree with his points on people’s general tendency to evade tax, modernization of the banking sector, and the need for commercial code. However, I respectfully disagree on his view that my proposed tax system encourages cash transaction. No it is not. I say this for the following reasons:

  1. Businesses cannot afford doing transactions out of the banking norms because they have to show banks that they are viable businesses for accessing credits through their turnovers. Here, I am not proposing any petty transaction in the formal and informal businesses should be performed through banking or bank tools (such as checks). I agree this is not practical. What I am proposing is business-to-business transaction, business-to-government transactions, institutional payments and transactions with significant amounts must be done through banking. However, if the banking sector is modernized even petty transactions/payments at shops can be done through debit and credit cards if buyers prefer to pay using these bank tools. It is only a matter of time to go to that level.
  2. I mentioned in my article that salaries/wages need to be paid through banks and employers are beneficiaries of government investments on education and skills. Thus, employers need to indirectly contribute to that effect commensurate to their number of staff. As they transfer monthly staff salaries to the staff member’s account because it constitutes payment they need to be taxed accordingly. Employees will pay as they withdraw money from their accounts. In this regard, everyone pays tax. To avoid double taxation of employees I proposed for government to relinquish payroll tax. Bank withdrawal constitutes huge amount of money and taxing withdrawals discourages consumption while it encourages saving, a behavior that need to be encouraged in the economic sense.
  3. In the end, an improved taxation regulatory system is critical. It is not about liking or not liking to pay tax. Rather, it is about strengthening the institutions of taxation and working hard to uphold law and order. It may not be easy but decisions should not be made based on uncomplicatedness of the matter. In fact, dependence on old methods and practices should not be the way forward.

Berhane • 4 days ago

This is encouraging to see a fresh idea in this website and in regards to Eritrea.

I read the above article and I think while the content is good I don’t think the method would work in Eritrea. My reasoning is that, first and foremost humans don’t like to pay tax, therefore the method will encourage a cash basis transaction in the informal markets and majority service industries. Second, it requires a sophisticated system whereby banks are able to do things on millions of transactions a day….we have a long way to go to get there.

I agree with the author with his assertion that GOE must encourage entrepreneurial culture where SMEs flourish and use the traditional tax collection system, the tax revenue will increase exponentially in the next 5 years.

In 2017, to encourage entrepreneurial culture GOE must introduce a new commercial law and further banking system reforms to encourage investors primarily Eritreans. I believe these two areas are crucial steps in the right direction. The agro value add industry should be encouraged and a policy to this end coupled with emphasis on implementation will see the proper use of all the micro dams that have been built and some still under construction. I ask GOE to implement the commercial law ASAP. And to stick to the economic plan that is already drawn in 94/95.

To all the Madote congratulate and admin.

Have a wonderful holiday season and may the New Year become the beginning of the Eritrean economic success. Amen to that.

Another comment is by Eritrawee on the “2% diaspora tax” read as:

Eritrawee • 6 days ago

This is very interesting topic. We need people like Mr. Teweld to help us understanding our country economy and politics with balance view. I would like to see Mr. Teweld to help the GOE to reform the diaspora tax. The 2% diaspora tax is not working and need some change to help all the people to pay. I do not see the government would be able to collect 10 to 25 years unpaid individual tax with the old way. This 2% need a real reform I hope Mr. Teweld would lighting us up with his knowledge.

Unless the “2% diaspora tax” purpose is political, economically its contribution is minimal. We all understand that taxation comes with transparency and accountability of governments to tax payers. Most people question the diaspora tax not because of its legitimacy and its burdens on the tax payers. Of course, it is a burden because it involves double taxation elements. But, I think that is not an important question for Eritreans in the diaspora. The question is they don’t have any idea how and where this tax income is used. I believe Eritreans desire to do more to their country provided there is transparent and accountable usage of the tax. The GoE has failed to address concerns by the diaspora and the skeptical international communities about the “diaspora tax”.  In my humble view it is time to come up with a new approach for the diaspora to contribute to nation building.  My ideas are the following:

  1. Dismantle the “2% diaspora tax” because its contribution is so minimal
  2. Establish a national diaspora fund with clear governing body and objectives of the fund-you can name it “rural development fund” or anything like that
  3. Enforce “diaspora tax” annual minimum amount to the established fund – don’t call it tax rather call it a charity because some countries resist taxation on their citizens by another government
  4. Ensure transparency and accountability of the usage of the fund

Another method to involve the diaspora in nation building is project based approach. In this approach the government or the mass organizations such as NUESY, NUEW, and national disabled associations can come up with project proposals and appeal for funding by the diaspora communities. For instance, the government right now is involved in rural housing. Thus, the diaspora can be practically involved in rural housing projects provided the government comes with proposed housing projects in the rural area and appeals to the diaspora.

End.

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