ADDIS ABABA, Nov. 16 (AGCNewsNet) – Ethiopia’s vehicle tax reform, spurred by a call from the International Monetary Fund (IMF) to expand its tax base, has triggered significant changes in the country’s automotive sector. A 5 percent tax increase on combustion-engine vehicles may affect affordability in a country with one of the lowest vehicle ownership rates globally – only one vehicle per 100 people.

The reform aligns with Ethiopia’s bold January 2024 decision to ban internal combustion engine vehicle imports, making it the first country to enact such legislation. This pioneering move has positioned Ethiopia as a burgeoning market for electric vehicles (EVs), attracting interest from U.S. manufacturers.

"With the ban, Ethiopia is not only reducing emissions but also creating a lucrative space for international EV players," said Tesfaye Kebede, an economic analyst in Addis Ababa.

Ethiopia’s historic tax structure heavily taxed combustion-engine vehicles with up to 100 percent excise tax, 15 percent VAT, 10 percent surtax, and 3 percent withholding tax. In contrast, EVs enjoy incentives such as VAT and excise tax exemptions, alongside reduced customs duties of 15 percent or just 5 percent for partially assembled EVs.

The country’s EV ownership has already surpassed 30,000 units, comprising passenger and commercial vehicles. Projections indicate that by 2032, Ethiopia will host 148,000 passenger EVs and nearly 5,000 commercial ones, according to government data.

Addis Ababa, the capital city, has taken a leading role, investing $15 million in 110 electric buses in 2022. These developments are expected to accelerate further with increased electricity generation from the Grand Ethiopian Renaissance Dam.

"The tax incentives and growing energy supply offer a unique opportunity for Ethiopia to leapfrog into a sustainable transportation future," Kebede added.

While Ethiopia’s tax changes aim to bolster the economy and expand the tax base, observers highlight the potential strain on low-income households. Still, the shift toward EVs underscores the country’s commitment to building a green economy while fostering new opportunities for international partnerships.