Term paper assignment of Advanced public finance and taxation

Contents
1. Value added Tax in Ethiopia................................................................................................................1
1.1. Introduction.................................................................................................................................1
1.2. Value Added Tax policy analysis in Ethiopia..............................................................................2
1.2.1. Objectives of VAT.................................................................................................................3
1.2.2. Purpose of VAT....................................................................................................................3
1.2.3. VAT law................................................................................................................................4
1.2.4. Imposition of VAT................................................................................................................5
1.2.5. VAT Registration procedure.................................................................................................5
1.2.6. VAT exemptions...................................................................................................................6
1.2.7. Value Added Tax (VAT) rate..............................................................................................8
1.2.8. VAT Arrangement...............................................................................................................9
1.2.9. Penalties and Criminal Offences........................................................................................10
1.3. Issues that require maker’s attention..........................................................................................11
1.3.1. Zero-Rated Transactions....................................................................................................11
1.3.2. Tax Payable, Tax Credit Taxation and VAT Records........................................................12
1.3.3. VAT Records.....................................................................................................................13
1.4. Recommendations......................................................................................................................14
1.5. References.................................................................................................................................16

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1. Value added Tax in Ethiopia

1.1. Introduction

The history of taxation stretches thousands of years in the past. Ancient civilizations including
Greeks, Romans and Egyptians levied different taxes on their people to finance military
operations, public services and maintain key strategic reserves of food stocks, gold to mention
but a few.

In Europe the first approach to the income tax appears in some of the mediaeval town taxes,
where the earnings of artisans and tradesmen were taxed as evidence of their ability to pay
proportionally with property and land-owners. Some of the mediaeval states also taxed the rents
of land, official salaries and professional gains. The first general income tax in Europe was
imposed by William Pitt during the Napoleonic wars. In 1983 William Pitt become Britain’s
Prime minister and in 1799 Pitt introduced new income taxes. These included; 10% tax on
annual incomes over £ 200 and between 1-10% taxes on annual incomes between £ 60–200. In
time, though, the tax came to be accepted as a vital price for winning the war against Napoleon.

Taxation in Africa started long before colonialism. Kings and Chiefs would demand that their
subjects submit a portion of their harvest and/or livestock as a form of tax. Historical records
show that many once power empires or kingdoms that existed in Africa had a tax system that
supported or enabled these kingdoms to expand. The Zulu empire in southern Africa lead by
powerful kings such as Shaka Zulu is a classic example. Zulu chiefs demanded steadily
increasing tribute or taxes from their subjects in order to command/operate a mighty army that
subjugated neighboring chiefdoms confiscating livestock and other valuable products.54Houses
of Parliament U.K., Retrieved February 23, 2015 from Further, there is also the humanity aspect
to the issue of taxation. As individuals, any contributions (whether inform of cash or material
things etc.) we make towards promoting the common-good is encouraging and commendable. In
many African societies, a people are a people through “humanity” or “Ubuntu” and as such each
individual is expected to support any undertaking that enhances the common-good. Taxation is

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therefore needed to underpin the contemporary African version of ubuntuas one of the
fundamental responsibilities of every citizen.

Ethiopia introduced value added tax (VAT) in the year 2003 as a replacement to sales tax. VAT
is the principal source of revenue for the Ethiopian government. For instance, in the 2006–07
fiscal years, federal VAT revenue (on domestic transactions) accounted for about 41 per cent of
total federal revenues from domestic sources (EFIRA 2007). Further, since its introduction, VAT
has been more revenue productive than sales tax (Teferra 2004). To sustain VAT’s revenue role
in the government’s finance, it is important to ensure that the revenue generated by this tax is
raised as efficiently as possible. However, in Ethiopia revenues raised by VAT are usually
garnered at the expense of erosion in its salient features. This may be caused by factors including
poor VAT administration, i.e., the incapacity of tax authorities to implement the attributes of the
tax in practice. A good tax administration is essential in fully implementing the design features
of VAT and achieving government’s policy objectives at large (e-journal of Tax Research
(2008))

Value added Tax policy/regulation was declared by the Council of Ministers Regulations No.
79/2002 as Council of Ministers Value Added Tax page 1979 dated December 31, 2002 E.C.
Later on, July4, 2002 Proclamation No. 285/2002 Value Added Tax Proclamation page 1832
again revised as called Proclamation No. 285/2002 Value Added Tax Proclamation. This
amendment is known as the Regulations issued by the Council of Ministers pursuant to Article 5
of the definition of Powers and Duties of the Executive Organs of the Federal Democratic
Republic of Ethiopia Proclamation No. 4/95 (as amended) and Article 64 of the Value Added
Tax Proclamation No. 285/2002. Therefore, VAT is a tax on consumer/expenditure tax charged
on the value added to goods and services by, importers, manufacturers and traders at each stage
of the production and distribution process and collected on business transactions & imports.
1.2. Value Added Tax policy analysis in Ethiopia

The Value -Added Tax (VAT) proclamation No 285/2002 which has rescinded and replaced the
sales and excise tax proclamation No. 68/1993 (as amended) and which has come into force as of
January 1st, 2003 is a consumption tax which is levied and paid as value added tax at a rate of 15
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percent of the value of every taxable transaction by a registered persons, every import of goods,
other than an exempt import and an import service rendered in Ethiopia for a person registered in
Ethiopia for VAT or any resident legal person by a non resident person who is not registered for
VAT in Ethiopia. (Article 7 (1) (a)-(c) and Article 23 (1) and (2)) A taxable transaction is a
supply of goods or a rendition of services in Ethiopia in the course or furtherance of a taxable
activity other than an exempt supply. (Article 7(3)) A taxable activity is any activity, which is
carried on continuously, or regularly by any person in Ethiopia, or partly in Ethiopia, whether or
not for a pecuniary profit that involves, in whole or in part, the supply of goods or services to
another person for consideration. (Article 6 (1) and (2)) Supply means the sale of goods or
rendition of services or both and rendition of services means anything done, which is not a
supply of good or money.

1.2.1. Objectives of VAT

The general objectives of Value Added Tax proclamation No.285/2002 and its regulation
No.79/2002 are;

a) To bring greater transparency to the tax system

b) To reduce the cascading (double taxation) of consumption taxes

c) To administer the consolidation of tax

d) To promote the economic growth by promoting better use of domestic resources and

e) To bring greater stability to tax revenues e.g. shifting tax collection dependency from
import to other sectors.

1.2.2. Purpose of VAT

The purpose of Value Added Tax proclamation No.285/2002 and its regulation No.79/2002

a) The current sales tax does not allow collection of the tax on the added value created
wherever a sales transaction is conducted

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b) The value added tax minimizes the damage that may be caused by attempts to avoid and
evade the tax and helps to ascertain the profit obtained by the taxpayers
c) The tax enhances saving and investment as it is a consumption tax and does not tax
capital
d) Replacement of the current sales tax by value added tax enhances economic growth and
improves the ratio relationship between Gross Domestic Product and Government
Revenue;

Currently, Ethiopian tax policy geared towards promoting investment, supporting industrial
development and broadening the tax base and decreasing the tax rate, at least maintaining the
current reduced tax rates compared to most other countries, in view of financing the ever-
growing needs of the government expenditure. On the other hand the policy is designed towards
discouraging certain production and consumption activities, which had /and will have bad effects
on health, moral, economic and social settings of the community. Ethiopia ministry of Revenue
has the mission for accomplishment of these policy objectives.
1.2.3. VAT law

(Article 2(17) and Art. 4(1)) For the purpose of the VAT proclamation the following are
considered as taxpayers on whom the VAT law is applicable. These are: -

(a) A person who is registered or is required to register for VAT;

(b) A person carrying out a taxable import of goods to Ethiopia;

(c) A non-resident person who without registration for VAT renders service in Ethiopia for any
person registered in Ethiopia for VAT or any resident legal person (Article 3(1), (a)-(c)-cum
Article 23 (1) and (2))

For the purpose of the VAT proclamation “person” means any natural person, sole proprietor,
body, joint venture, or association of persons. Article 2 (15) of the Proclamation, which deals
with definition, states that “Resident person” shall have the meaning given to it under the Income
Tax Proclamation.

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The new Income Tax law of Ethiopia Proclamation No 286/2002 defines and/or outlines who
and what constitutes a resident in Ethiopia.

Article 5 defines and outlines the principle of residence. Accordingly under Article 5 (1) (a)-(b)
an individual shall be resident in Ethiopia. If he:

a. Has a domicile within Ethiopia;

b. Has a habitual above in Ethiopia; and or
c. Is a citizen of Ethiopia and a consular, diplomatic or similar official of Ethiopia posted
abroad.

Pursuant to article 5 (2) an individual, who stays in Ethiopia for more than 183 days in a period
of twelve (12) calendar months, either continuously or intermittently, shall be resident for the
entire tax period. With regards to a body, pursuant to Article 5 (3), a body shall be resident in
Ethiopia, if it;

a. Has its principal office in Ethiopia;

b. Has its place of effective management in Ethiopia and/or
c. Is registered in the trade register of the Ministry of Trade and Industry

It should be noted that according to Article 5(4) “Resident person” includes a permanent
establishment of a non-resident person in Ethiopia.

According to Proclamation No 285/94 the following persons/body is bound to pay VAT;

 Registered, according to Art 17, means one who voluntarily registered for VAT;

The one who should be registered is a person who carries on taxable activity and is not
registered, if the person:- at the end of any period of 12 calendar months made during that
period, taxable transaction to the total value of which exceeded 500,000 birr; or

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 At the beginning of any period of 12 calendar months there are reasonable grounds to
expect that the total value of taxable transactions to be made by the person during that
period will exceed 500,000 birr.
 The ministry of finance and Economic Development may be directive increase or
decrease the threshold. The rate of VAT is always 15% of the income.
1.2.4. Imposition of VAT

The VAT proclamation under Art 6 clearly states what kind of activity or transaction is subject to
imposition of VAT. Taxable activity is an activity which is carried on continuously or regularly
by any person, In Ethiopia, or (2) partly in Ethiopia whether or not for pecuniary benefit that
involves or is intended to involve in whole or in part, the supply of goods or services to another
person for consideration. Art 7(3) of the VAT proclamation provides that A “taxable transaction”
is” a supply of goods or a rendition of services in Ethiopia in the course or furtherance of a
taxable activity other than an exempt supply under. Art 8. Besides, from cumulative readings of
art 7(1)(a) and 7(3) we can appreciate that: Taxable transaction relates to a supply of goods or
rendition of services

Supplies made in Ethiopia

Made by a taxable person

Made in the course or furtherance of a business

Are not specifically exempted or zero-rated.

NB: - VAT is chargeable at a standard rate of 15% on all taxable supplies of goods and services
other than those zero rated (mainly exports). The standard rate of 15% of the value of:

 Every taxable transaction by a registered person;

 Every import of goods, other than an exempt import; and Import of services
1.2.5. VAT Registration procedure

The Authority shall issue a VAT registration certificate containing such details as:

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The full name and other relevant details of the registered person

The date of issuance of the certificate

The date from which the registration takes effect

The registered person's taxpayer identification number.

A person registered for VAT is required to use his taxpayer identification number on all VAT
invoices, and on all tax returns & official communications with the Authority.

Obligatory Registration; Articles 16-19/285/2002, A person who carries on taxable activity and
is not registered is required to file an application for VAT registration with the Authority if: At
the end of any period of 12 calendar months the person made , during that period, taxable
transactions the total value of which exceeded 1 million Birr; or At the beginning of any period
of 12 calendar months there are reasonable grounds to expect that the total value of taxable
transactions to be made by the person during that period will exceed 1 million Birr.

Voluntary Registration; A person, who carried on taxable activity and is not required to be
register for VAT, may voluntarily apply to the authority for such registration. If he/she regularly
is supplying or rendering at least 75% of his good and services to registered persons.
1.2.6. VAT exemptions

The sale or transfer of duelers used for a minimum of two years, or the lease of a dueling;

a) The rendering of financial service;

b) The supply of national or foreign currency and of security;
c) The rendering by religious organizations of religious or other related services;
d) The rendering by religious organizations of religious or at her related series;
e) The supply of prescription drugs specified in directives issued by the relevant
government agency and the renderings of medical services;
f) The rendering of educational services provided by educational institutions, as well as
child care services for children at pre-school institution;
g) The supply of goods and rendering of services in the form of humanitarian aid

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h) The supply of electricity, kerosene and water;

i) The provision of transport;
j) Permits and license fees- the supply of books; and
k) The supply of goods or services by a worker shop employing disabled individuals if more
than 60% of the employees are disabled. the minister of finance and economic
development may, by directive, exempt other goods and services so an income from
every goods treated under turn over tax, if they are sold within Ethiopia, shall be taxed by
2% and services rendered in Ethiopian such as construction, miles and tracker services
shall be taxed 2% for any other services the tax will be 10%.

1.2.6.1. VAT Exempted Items

If you have wondered what things are exempted from payment of VAT the following items are
the ones provided by the Ethiopian Revenues and Customs Authority as lists of VAT exempted
transactions. If you want to know about these items here is the list.

1. The Sale or rent of a dwelling house which has been used for at least 2 years,
2. Financial service,
3. Local or Foreign currencies and warranty distribution or importation except for cents and
medals research services,
4. The import of Gold for the presentation to the National bank of Ethiopia,
5. Religious or spiritual related services given by religious institutions,
6. Educational services given by educational institutions and child care given by
kindergartens,
7. Electricity, kerosene and water supplies (does not include water processed by Factories),
8. Except for different services or commission fees, goods or services presented by postal
service institutions as per the authority given by its establishment proclamation,
9. Transportation Services,
10. Permit and license payments,
11. If 60% of the employees are disabled the goods and services supplied by the institution
employing these disabled individuals,
12. Books,
13. Food items,

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14. Goods like sealing plastic bags, sewing materials and fertilizers for making Insecticide-
treated bed nets for the prevention of malaria,
15. Transactions of pickles, wet blues and crust made by leather processing factories,
16. The import of chemically processed clothes used for the sewing of Insecticide-treated bed
nets for the prevention of Malaria,
17. Government imported wheat,
18. Palm oils used for food,
19. Sale of Milk and bread,
20. Drugs, medical supplies and equipments,
21. Agricultural fertilizers, pesticide chemicals, selected seed,
22. Pension fee Services.
23. The sale of Airplane tickets by travel agencies.
24. “Injera”.
25. Publication and printing of books.
26. Sale of Processed leather to Shoe factories by leather processing factories.
27. Manufacturing of Stoves.

N.B- Items not included in the above list are not VAT Exempted.
1.2.7. Value Added Tax (VAT) rate

This is a sales tax based on the increase in value or price of product at each stage in its
manufacture and distribution. The cost of the tax is added to the final price and is eventually paid
by the consumer.

The rate and impose of VAT:

1. The rate of VAT is 15% of the value for every taxable transaction by a registered person,
all imported goods other than an exempt import and an import of services;

2. The export of taxable goods or services to the extent provided in regulations for zero tax
rate are:

3. The export of goods or services to the extent provided in the regulation;

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4. The rendering of transportation or other services directly connected with international

transport of goods or passengers, as well as the supply of lubricants and other
consumable technical supplies taken on board for consumption during international
flights;

5. The supply of gold to the National Bank of Ethiopia; and

6. A supply by a registered person to another registered person in a single transaction of

substantially all of the assets of a taxable activity or an independent functioning part of a
taxable activity as a going concern, provided a notice in writing, signed by the transferor
and transferee, is furnished to the authority within 21 days after the supply takes place
and such notice includes the details of the supply.  

1.2.8. VAT Arrangement

VAT replaces the old business tax system of commodity and service taxes including the sales tax
and the withholding tax. The VAT rate is 15 percent of the value of every taxable transaction by
a registered person and all imports of goods and services other than those VAT exempted items
in Ethiopia. Taxable transactions which shall be charged with zero percent are: export of goods
or services to the extent provided in the regulations. The rendering of transportation or other
services directly connected with international transport of goods or passengers as well as the
supply of lubricants and other consumable technical supplies taken on board for consumption
during international flights.

The Ethiopian Tax System, arrangement follows the dual structure in which all the three
branches of government (legislative, executive and judicial) co-exist in respect of the Federal and
Regional powers. This, in taxation, means in principle that both the Federal Government and the
Regional States enjoy full legislative, executive, and judicial powers with respect to taxation
powers reserved to them. In practice, however, the Federal Government has had the most
dominant presence in the legislation of taxation, respecting not just “federal exclusive taxes” but
also “concurrent taxes” and at times even “regional exclusive taxes.” Although Regional States
have the prerogative to issue their own tax laws with respect to tax sources reserved to them by

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the Constitution, many of the Regional States for a while used federal tax laws to levy and
collect regional taxes. The Regional States did not immediately exercise their legislative powers
of issuing their own tax legislations. Some of the Regional Governments have begun issuing
their tax legislations recently. However, the exercise of the legislative power over taxation still
remains a formal matter because the Regional Governments have yet to fully exercise their
taxation powers. Many of the Regional States that have issued their own tax laws have used
federal tax laws as models with the result that there is virtually no difference in substance
between federal tax laws and regional tax laws. One of the striking features of the Ethiopian
Constitution on matters of taxation is the unusual specificity and detail of provisions that assign
taxation powers between the Federal Government and the Regional States. Since the Ethiopian
Constitution is unusually concrete and specific in the area of tax powers, its language in this
respect leaves very little room for argument about which layer of government has what tax
powers nonetheless, some issues remain contentious.
1.2.9. Penalties and Criminal Offences

In your course, introduction to Law, one basic feature of law is sanction unless a companied by
punishment/civil or criminal, the enforcement of laws remains at stake. The existence of
sanction, from its nature, implies that there exist actually persons that do not respect the law.
Likewise, under VAT proclamation penalties are imposed and failure to observe the VAT
proclamation and regulation is criminal offence as tax law is part of public Law.

The tax authority has the duty to monitor and supervise tax payers, hence administrative
penalties are inherent consequences on tax players that fail to comply with tax obligations under
VAT. The failures to comply are related to administrative penalties and criminal offences.
Instances of administrative penalties include, among others.

 engaging in taxable transactions without registration

 issuing incorrect invoice

 issuing invoice without registration for VAT

 Failure to maintain tax records, file timely etc.

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The degree of penalty imposed is directly related to the impact of the fault up on the
enforcement of VAT in Ethiopia. Criminal offences on the other hand are tax offences violations
of the criminals Law of Ethiopia and thus are subject to charge, prosecution and appeal in
accordance with criminal procedure law. Under the VAT proc 285/2002, the following conducts
of tax payers are considered criminal offences.

 tax evasion

 making false or misreading statements

 obstruction of tax administration

 failure to notify changes in business address and business live

 unauthorized VAT collection, improper tax debit and credit notes,

 aiding or abetting

 offences by entities

 offences by tax officers

 offences by receivers

The penalties imposed vary per gravity of the offence. The authority is also given power to
publish the list of persons who have been convicted of offense, by notice in the Gazzete,
basically to deter others for them. Coming to the practical assessment, there is poor execution of
tax offences. Thus, training, development of staff of the authority and raising the awareness of
tax payers shall be given emphasis.
1.3. Issues that require maker’s attention

The government of Ethiopia like other government seeks to raise revenue mainly in order to pay
its expenditures especially on infrastructure development, designed VAT expected revenue
projections, support capital investment, development are issues that require attention for the
legislation is intended to achieve the simplify its administration for the tax authority and the

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business community and lower income population. Therefore, VAT revenue performance and its
neutrality and efficiency are also the reasons for superiority of this tax in contrast to other
common tax instruments such as the turnover tax. The emerging conventional wisdom, based
largely on practice and numerous country case studies, suggests that a single rate VAT (with the
rate between 10 and 20%), with very few exemptions and, therefore, a broad base is superior to a
VAT with multiple rates and many exemptions which reduce its base and complicate
administrations. Ethiopia's standard VAT rate of 15% and 10% equalization for services and 2%
for goods have to be studied in the medium term whether or not they could broaden the tax base
and register high revenue performance.
1.3.1. Zero-Rated Transactions

As the name indicates, a zero-rated transaction is a taxable transaction that is taxed at zero-rate
of tax. In other words, the transaction by itself is taxable subject to VAT in the sense included
under Art 7(3) “taxable transaction” But, the Law has given blessings so that the transaction
(supply of goods or rendition of services) are completely free from tax.

In Ethiopia, two rates are recognized on taxable transactions: Standard rate and zero-rate, where
the standard rate is 15% and zero rate 0%. It is common, under VAT laws and regulations, to see
transactions as; standard rated zero-rated and exempt transaction. Pursuant to Art 7(2) of the
VAT proclamation, the following transactions are zero rated.

 export of goods and services

 The rendition of transportation or other services connected with international goods or

passengers, as well as the supply of lubricants, consumption, during international flights.

 The supply of gold to the National bank of Ethiopia.

 Transfer of a business from one registered person to another registered person as going
concern.

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This kind of incentive is allowed basically to encourage export. A close look at with the listings
tells us that zero-rated transactions are directly or indirectly connected with export goods or
services to make domestic exporters more competent before international arena.
1.3.2. Tax Payable, Tax Credit Taxation and VAT Records

Unless there is strong cooperation between tax payers under VAT, and the tax authority,
implementation of the newly introduced VAT in Ethiopia will not be as such attractive so as to
play significant role in generating revenue for the government. To this end, the proclamation
incorporates rights and duties upon persons registered for VAT. Understanding the following
related concepts will facilitate to have proper enforcement of VAT. Tax payable, Tax credits, tax
invoice, Reverse taxation and tax records. One can understand that some of them like tax pa
yment, preparation of tax invoice, tax records and reverse taxation are obligations, the are
expected to be discharged on the part of persons registered for VAT. Whereas tax credit
(deductible tax) is an incentive that encourages persons to be participant in VAT enforcement.
Now, let us have separate discussion on each of the terms indicated above in the following
manner. Obviously, in introducing VAT, the government is aspiring to generate better amount of
revenue than what was collected during sales tax system which had served for more than four
decades but with insignificant place to become basic means of income from taxation in
Ethiopian history. In short, tax payable is the amount that is expected to be collected from
person registered for VAT in Ethiopia.

Art 20 in this regard runs the amount of tax payable for any accounting period by a person who
is registered or is required to register is the difference between the amount of tax charged on
taxable transactions creditable tax stated otherwise, under VAT proclamations, though taxable
transactions are subject to VAT. There are also deductible/creditable taxes. In this case, the
amount required from the person is the simple arithmetic difference obtained by deducting
creditable taxes from all taxable transactions. Instances of creditable/ deductible taxes, indicated
under Art 21, includes among others:

Imported goods that are entered to customs declaration during the current accounting
period; and

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Taxable transactions (supply of goods or rendition of services) that are used or to be

used for the purpose of the registered persons taxable transactions with in the time
limit indicated under Art 11 of the proclamation.

Therefore, once creditable items are identified, it is simple to calculate the total amount expected
from tax payer.
1.3.3. VAT Records

Pursuant to Art 37, a registered person for VAT or any other person liable to pay tax is under
obligation to maintain for 10 yrs in Ethiopia:

 original tax invoice received by the person,

 a copy of all tax invoices issued by the person

 customs documentation relating to imports and exports by the person

 accounting records; and

 Any other records as may be prescribed by the ministry of revenue by

directive.

The above mentioned taxpayers are generally duty bound to have purchase book and sales book
and maintain them properly. The purchase books helps to record:

 value of purchases and related VAT

 value of foreign purchases and related VAT

 Value of other purchases from non-registered persons and value of VAT

exempt or zero rated purchases.

On the other hand sales book clearly shows details of:

 sales value of standard rated supplies and related VAT

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 value of zero-rated supplies and

 value of exempt supplies

Besides, the following source documents are required to be filed appropriately:

 VAT collection receipt

 list of items sold

 credit of sales invoices

 receipt for sale of zero rated supplies

 receipt for sale of exempt supplies

1.4. Recommendations

This section provides some recommendations that mitigate the operational problems of VAT
practice and policy design, VAT has a significant role in the revenue system of the Ethiopian
government. To sustain VAT’s revenue role in the government’s finance, it is crucial to ensure
that the revenue generated by this tax is raised as efficiently as possible. Nevertheless, in
Ethiopia revenues generated by VAT are usually garnered at the expense of a compromise in its
salient features. This is usually caused by factors including weaknesses in the administration,
that is, the incapacity of the administration to put the attributes of VAT in practice.

In our term paper we have observed the tax system and tax policy design in Ethiopia, A good
VAT administration is critical in fully implementing the design attributes of the tax and reducing
gaps between the effective taxation and what it is purported to be in the legislation. More
broadly, a good tax policy, VAT administration in this case, is important to achieve the policy

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objectives of a government. Therefore, to improve VAT administration practice and to meet the
revenue needs of the government of Ethiopia, the following recommendations are;

 The term paper writer’s may advice Ministry of revenue Ethiopia should be identifies key
problems including lack of sufficient number of skilled personnel and gaps in the
administration in such areas as policy design requirements. The paper suggests that in
Ethiopia attempting to implement what is legislated in the main areas (such as principles
of good tax policy) deserves the government’s due attention.
 Tax-exempt goods and services are supplies on which VAT, both the standard rate and
zero-rate tax, are not paid on. If a person who is engaged in a taxable activity that fully
falls under the tax-exempt category, such a person cannot register for VAT. If a person is
engaged partially in a tax exempt category activity and partially in a taxable activity, such
person cannot register for VAT and be legible for tax, On the other hand, VAT
exemptions granted by the VAT law does not allow for the collection or entitlement of
VAT. Therefore, VAT policy and clear administrative should be declared on such as.
 The VAT situation needs to be discussed at create length with the view of creating
awareness and forging a common position, understanding and outlook which is a
prerequisite for any engagement with state actors and tax authorities of the land. This task
must commence at the earliest convenience.
 If we can get the issue of priority out of the way and focus on the VAT regime, there are
also a host of other equally important issues that we need to consider and take an in-depth
look in to, one of these issues relates to the need of providing empirical data on VAT paid
to date and payable by NGOs. We need to solicit the cooperation of all NGOs who are
willing and ready to furnish this vital input for articulating and building a solid
foundation for requesting a favorable VAT treatment.
 In other words, if the VAT rate is 15 percent, NGOs (and others) will collect and pay
over nothing on the zero -rated goods and services that they provide. They will have to
pay the 10 percent VAT tax included in the price of the goods and services they purchase,
but they may seek refund for those amounts. This is generally considered a more
beneficial option for NGOs.

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 Assume that VAT rate is between 2-5%, as other countries practice attest; this system of
VAT exemption is practicable by some countries and has found to offer NGOs beneficial
tax treatment. So, why it is difficult to practices in the Ethiopia.
 Both the decentralization of VAT revenue and the administration do not appear to be with
thorough consideration of the distortions, the inherent administrative difficulty of the tax
and weaknesses in the tax administrations, especially, at regional governments’ level. In
this regard, it is suggested that before the tax has further consequences in the form of
revenue losses and undesirable inter-governmental relationships it is worth to reassess the
decentralization. That is, the assignment of VAT revenue and the decentralization of its
administration ought to be re-examined in light of the design features of the tax, the
constitutional inter-governmental fiscal relationships, the experiences in other developing
countries and the capacity of the country in implementing sub-national VATs. This issue,
therefore, could be future research agenda.

1.5. References

 Council of Ministers – Federal Democratic Republic of Ethiopia 2002, ‘Value Added Tax

 Council of Ministers Regulation No. 79/2002, Federal Negarit Gazeta, Addis Ababa,

Ethiopia.

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 Term paper assignment of Advanced public finance and taxation

 Ethiopian Delegates 2006, ‘Value added tax in Ethiopia’, Speech at the 9th Value Added

Tax Administration in Africa (VADA) Forum, Zimbabwe.

 FDRE 2002, ‘Value Added Tax Proclamation No. 285/2002’, Federal Negarit Gazeta,

Addis Ababa, Ethiopia

 Excise Tax Proclamation No. 307/2002

 Smith, Richard L., and Janet Kiholm Smith. Entrepreneurial Finance. Wiley, 2000.

 FDRE 1995, Constitution of the Federal Democratic Republic of Ethiopia, The Ethiopian

Federal Government, Addis Ababa.

 Abate, M. T. 2014, ―Tax accounting principle and practice: 2ndedition Alpha

University College Ethiopia which is available in the any book store in Ethiopia.

 Belete, B. 2003, ―Practices and Challenges of VAT Implementation in Ethiopia.‖,

<http://aau.edu.et.,

 Ethiopian ministry of revenue http://www.mor.gov.et

 Text books (power point) of advanced public finance and taxation, by Dr. Dejene. M

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