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iop t ederalism is a system of government in which there is division of powers and
functions betweenfederal government and several regional governments, each of which in its
own sphere coordinateswith the others and each of which acts directly on the people through its
administrative
machinery.E t h i o p i a f o l l o w s a f e d e r a l g o v e r n m e n t s t r u c t u r e . T h e g o v e
r n m e n t i s d i v i d e d i n t o f e d e r a l government and nine regional governments, n
amely, Tigray, Afar,
Amhara, Oromiya, Somali, benishangul/ umu!, Southern nations "ationalities, ambela, an
d #arare. There are also twospecial administrations$ Addis Ababa and %ire %awa. The
form of government is parliamentaryhaving both Federal and state governments with
legislative, e&ecutive, and 'udicial powers.Federalism re(uires decentrali!ation of government
decision)ma*ing and implementation involvesdelegating more power to the decentrali!ed
divisions of the government. The goal of this strategy isto speed up government action and
to deliver a more suitable pac*age of services needed by thelocality. One
component of federalism is fiscal federalism which gives local governments
someta&ing power and e&penditure responsibility, and allows them to decide on the level and
structure of their e&penditure budgets. The main goal of fiscal decentrali!ation is to move
governance closer tothe people, and this does re(uire strengthening local
government finances. Fiscal decentrali!ationre(uires local governments with some
autonomy to ma*e independent fiscal decisions.Fiscal federalism has four components$

Revenue Assignment

Expenditure Assignment

Intergovernmental Transfer (subsidy)

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The division of ta&ation power is a principal aspect of the +onstitution
t h a t p r o v i d e s t h e l e g a l framewor* of the Ethiopian federal system. The +onstitution
divides the ta&ation power into threecategories, namely the federal power of ta&ation-
, the state power ta&ation- and the concurrent power of ta&ation-.The F% E
+onstitution under Article 0 enumerates the e&clusive
revenue sources of the federalgovernment
. They include$

Foreign trade ta&

Ta& from employees of central government and international organi!ations

1ersonal income ta&, value)added ta&, turnover ta&, and e&cise ta&es fr
o m t h e enterprises owned by federal government

Ta& on lottery and other chance winning

Ta& from air, rail and marine transportation

Ta& on rent of houses and properties owned by central government

Fee for services rendered and licenses issued by federal government

Revenue of Regional overnment!

Employment income ta& from employees of regional government and

from privateemployees

1ersonal income ta&, value)added ta&, turnover ta&, and e&cise ta&es from enterprisesowned
by regional government

Agricultural income ta& from farmers and rural land use fee

1rofit , value)added ta&, turnover ta&, and e&cise ta&es of individual traders