Interest-free Banking and Taxation in Ethiopia: A Critical Analysis

  • Awet Halefom
Keywords: Interest-free banking, Mudharabah, Murabaha, Income Tax, Value Added Tax

Abstract

Barely a decade ago, Ethiopia adopted a directive that lay the ground for the operation of interest-free banking. The existing tax laws were developed within a framework of conventional financial transactions. Analyzing the Mudharabah and Murabaha services, this paper found out that there is a legal lacuna in the taxation of interest-free banking services in Ethiopia. In Mudharabah services, the status of the relationship between the bank and the customer, and the treatment of the profit gained from the contract on the income tax part as well as the VAT status of managerial service fee collected is not clear. In respect of Murabaha services, questions on whether profit received from Murabaha is treated as the interest in a conventional loan transaction or just as profit per se, the tax on the income status of the mark-up gain from the purchase or repurchase process of the Murabaha agreements as well as the VAT aspect thereof are not settled yet. Apart from other general solutions proffered, the article ends with a recommendation that a clear guideline/directive on interest-free banking be urgently put in place to take care of the tax aspect of these services in Ethiopia.

Published
2022-06-29
How to Cite
Halefom, A. (2022). Interest-free Banking and Taxation in Ethiopia: A Critical Analysis. Jimma University Journal of Law, 11. https://doi.org/10.46404/jlaw.v11i0.3816