The digitalisation of the economy is rapidly growing across the world, and discussions about how to tax it are taking place at an international level within the OECD inclusive framework. While a multilateral solution is still on the table, unilateral solution to address the issue is gaining ground. The European Union has proposed its own solution, and many OECD member countries have also introduced their own solution to address the tax effects of digitalisation. In Africa, the African Tax Administration Forum has proposed its own solution, and individual countries have also introduced digital service tax as a solution in their tax systems. In Ethiopia, the government has announced the Digital Ethiopia strategy. The movement towards digitalisation of the economy in Ethiopia is expressed by the imposition of electronic payment for fuel transactions. Recently, the launch of TELLEBIRR and the introduction of the NEDAJ app further reveal the government’s intention to digitalise the economy. The ambition of the government to digitalise the economy is not coupled with showing interest in taxing the digital economy. The compatibility of the current tax systems to tax the digital economy needs to be addressed. Many countries are finding solutions to tax the digital economy at the domestic level. This paper aims to analyse the need to introduce a digital service tax in Ethiopia. By analysing the tax legislation and other laws, the paper attempts to address questions such as: Is the current tax system in Ethiopia capable of taxing foreign digital companies without permanent establishment in Ethiopia? Is there a need to introduce a digital service tax in Ethiopia? If so, how should the tax base be identified? How can the income be traced and what rate should the income is taxed? By analysing the laws and literature, the paper concludes that the current tax system is not capable to tax foreign digital companies without permanent establishment in Ethiopia. Even though the existing legal regimes create enabling conditions for the digitalisation of the economy, the issue of taxing the digital economy in Ethiopia is not well addressed. The writer believes that the introduction of a digital service tax will solve the problem. The issue of taxing the gross revenue or the net profit is also discussed. The author believes that taxing the provision of digital services based on transaction value is a better policy than imposing a minimum income criterion.