Removing Taxes on Sanitation: The benefits outweigh the costs

Taxes are the lifeblood of any government, but there are instances where the value of a product or service to the community outweighs the benefits of the tax revenue. For that reason, the Government of Ethiopia has removed or reduced taxes for a range of products including solar panels, mosquito nets, plastic toilet pans, menstrual hygiene products etc. These tax exemptions are expected to make the products more affordable and therefore play a vital role in improving public health, upgrading toilets, protecting the environment, and enhancing the overall well-being of Ethiopia’s population. Finished sanitation products may include toilet slabs and pans made from materials such as concrete, plastic, ceramic/porcelain, and fiberglass. Additionally, plastic handwashing stations, household water filters, and the necessary raw materials for manufacturing these products fall into this category.

Currently, sanitation products are taxed at a staggering 35 percent import duty and 15 percent VAT. This raises a crucial question: is this rational? The answer is quite simple: no! Taxing sanitation products is a missed opportunity to making them more affordable and therefore accelerating the construction and use of adequate toilets. Access to proper sanitation is not only a basic human right, but also a key driver for economic development and social progress. It impacts health, education, and productivity, creating a ripple effect that benefits the entire community.

The Ethiopian government will soon launch a nationwide programme to end open defecation: the Total Sanitation to End open Defecation and Urination (TSEDU) programme. Its target is to reach 100 percent improved sanitation coverage by 2030. As part of the programme 20 million households that currently do not have adequate sanitation facilities have to be convinced to invest in the construction and upgrading of their toilets using their own resources. Households are expected to invest at least 50 billion Birr (more than 1 billion USD) for improving their toilets over the next seven years. The TSEDU Ethiopia 2030 Programme (concept note version of July 2023) is expected to invest approximately the same amount to support this change (approximately 2,750 Birr or 50 USD per household).

Affordability of sanitation products is a challenge for rural communities in upgrading their toilets. Tax exemption on low-cost toilet pans and plastic slabs is one of several solutions that will contribute to achieving universal access to sanitation. Households in Ethiopia are very sensitive to price reductions and, for instance, a reduction from 480 Birr (tax-loaded) to 290 Birr (tax-exempted) for a low-cost plastic toilet pan can spark demand and leverage additional investments for toilet upgrades from households. According to an assessment by USAID Water, Sanitation, and Hygiene Partnerships and Learning for Sustainability (WASHPaLS) Project, it is estimated that about 2.2 million households would invest in a toilet upgrade if it would cost 290 Birr, while only 200,000 would invest at a price of 480 Birr. In other words, the government can collect tax revenue worth about 24 million Birr from low-cost plastic pans from 200,000 households who are willing to pay the taxed price. Alternatively, the government can remove the tax (i.e., invest 24 million Birr) to trigger investments in toilet upgrades by an additional two million households (which is only 12 Birr per household and much less than the average of 2,750 Birr expected to be invested in the TSEDU programme).

According to the previously mentioned WASHPaLS assessment, every household in Ethiopia incurs, on average, health-related costs of ETB 2,374 annually due to diarrhoeal diseases. A meta-analysis by Fewtrell, L. et al. in 2005 estimated a 32 percent reduction in diarrhoeal diseases as a result of improved access to sanitation. Using the same proportion, the average annual health benefit due to shifting from unimproved to improved sanitation facilities is estimated at 760 Birr. Therefore, the tax exemption (expected to trigger 2 million households to build an improved latrine) will have an economic value of 1.7 billion Birr. This is 72 times the foregone tax revenue.

Sanitation products are currently highly taxed in Ethiopia. To align national policies towards achieving universal sanitation coverage, it is recommended to remove all taxes from low-cost toilet pans and slabs, but also from raw materials used to manufacture these products locally using the following two-staged approach:

• SEED THE MARKET. Allow importation of finished low-cost toilet pans and slabs at zero tax. Objective is to easily introduce a range of suitable low-cost products to show the private sector that there is a huge market in Ethiopia.
• LOCALISE THE MARKET. Allow importation of raw materials to manufacture low-cost toilet pans and slabs in Ethiopia at zero tax. The timeframe of tax exemption for raw materials is five years longer to incentivise the private sector to start local manufacturing after demand has been confirmed. Thanks to the tax exemption, local manufacturers will have a competitive advantage.

In a country where 18 percent of people practice open defecation and 65 percent use unimproved pit latrines, the lack of access to proper sanitation services has a huge negative impact on public health. The burden of disease due to inadequate WASH services causes more than 45,000 deaths in Ethiopia every year - about a third of them among children younger than five.  This situation also imposes huge costs: the annual economic cost of inadequate sanitation is estimated at approximately 15 billion Birr. Therefore, the removal of all taxes from sanitation products and services makes them affordable. This is a good investment for everyone!

This blog was written by Tsegaye Yeshiwas, Publications and Knowledge Management Officer, IRC Ethiopia and originally posted on IRC WASH. 

Related Resources

• Ethiopia TRANSFORM WASH