According to the Ethiopian Income Tax Proclamation, employment income shall include any payments or gains in cash or in kind received from employment by an individual, including income from former employment or otherwise or from prospective employment.

The following categories of income shall be exempt from payment of income tax:

• Income from employment received by casual employees who are not regularly employed provided that they do not work for more than one (1) Month for the same employer in any twelve (12) months period;
• Pension contribution, provident fund and all forms of retirement benefits contributed by employers in an amount that does not exceed 15% (fifteen percent) of the monthly salary of the employee;
• Amounts paid by employers to cover the actual cost of medical treatment of employees;
• Hardship allowance;
• Income of persons employed for domestic duties

Managers/employers who pay allowances which exceed the amount exempted from tax are required to add the amount paid to the employee’s salary and deducting the tax, pursuant to the proclamation, they must deposit it in the Authority’s account on a monthly basis.

Allowances in lieu of means of transportation granted to employees under contract of employment;

Travel allowances shall be exempted from tax based on a clearly defined provision stipulated in the contract of employment between the manager/employer/ and employee. The allowance can only be exempted from tax if it is spent on travel directly related to the discharge of the employee’s work. However the income tax free transport allowance does not apply to transport expenses from office to home and vice versa, and to beneficial who use company cars.
This monthly travel allowances which are exempted from tax shall account for 1/4 of the employee’s gross salary and shall under no circumstances exceed 1000 ETB for federal tax payers and 15% and 600 respectively for regional tax payers. In case of daily travel allowances for an employee who travels outside of their regular work area to a place more than 25 kilometers away may be exempted if amount does not exceed 150 ETB. This amount shall under no circumstances exceed 4% of the employee’s salary.
Amounts paid to employees in reimbursement of travelling expenses incurred on duty; In accordance with the terms of the contract of employment, travel expenses incurred by an employee who is assigned to a new place of work or who is returning to their permanent place of work following a temporary mission/ assignment shall be reimbursed and this will be done based on evidence provided by the employee to demonstrate their out-of-pocket expenses. Under no circumstances can these expenses exceed the standard air/land fare.
Amounts of travelling expense paid to employees recruited from elsewhere than the place of employment on joining and completion of employment or in case of foreigners travelling expenses from or to their country, provided that such payment are made pursuant to specific provisions of the contract; Travel expenses paid to a foreigner when he/she leaves the country at the completion of his/her contract shall be made based on the work contract and taking into account air and land transport fare;
Allowances paid to members and secretaries of boards of public enterprises and public bodies as well as to members and secretaries of study groups set up by the Federal or Regional Government;
Read more...