ABSTRACT

Developed and developing countries of the world generate most of their government’s revenues from
taxes. Taxes can be classified as direct and indirect taxes. Direct taxes are taxes that are directly
related to the taxpayers; whereas indirect taxes are taxes paid by an individual through the purchase
of goods and services. VAT is one of the indirect taxes levied on consumption where the value
ofgoods and services increases as they charge hands in course of production, distribution and final
sales to the consumer. Ethiopia has implemented the Value Added Tax in January, 2003 primarily to
raise more revenue, modernizing its tax administration and encourage investment and trades. The
Ethiopian Customs and Revenue Authority (ERCA), who takes the responsibility is facing with
a substantial problem of tax collections and implementations of tax rules. The authority
couldn’t collect sufficient revenue from the proper implementation of the Value Added Tax. This
study wasfocused particularly on identifying and assessing the problems rose in association
with the implementations of VAT by Daye town. To achieve this objective,the researcher used both
qualitative and quantitative descriptive research designs and a sample of taxpayers and employees
of the authority were selected using stratified random sampling method.
The researcher used questionnaires, Interviews and relevant documents to collect primary and
secondary data from the data sources. Pie charts, graphs, table, Percentages were used in analyzing
the collected data (findings). VAT is a tax system that has replaced the sales tax in Ethiopia and has
applied a uniform rate of 15% on most consumption of goods and services. Since VAT is applied on
the value added at each stage of production and distributions, it solves the tax cascading effect and
reduces tax evasion with its modern administration system that sales tax cannot. VAT is payable if
there are supplies made in Ethiopia, made by a taxable person, made in the course of making of
another business and is not specifically exempted or zero rated. VAT implementation in Ethiopia has
faced different challenges. The main problems that encountered are: misunderstanding of the public
in general and business community in particular regarding the VAT laws, resistance against
registrations for VAT by some traders, administration inefficiency from ERCA, provisions
of
understated financial statements, and non-issuance of invoices or issuance of illegal invoices
exercised by registered business enterprises. All these constraints hinder the smooth
implementations of VAT and achieve the desired objectives as possible. On the basis of these
findings, the study recommends that the authority should train the taxpayers about the rules and
regulations of VAT continuously, recruiting new employees and give nonstop training for the existing
once, delegate the tax authority to regional and city administration and it should also increase its
follow-up and investigation to control noncompliance enterprises, as well as effectively and
efficiently performing the tasks of identification of VAT taxpayers, processing of returns, controlling
collections, making refunds on time, auditing taxpayers, recognizing genuine taxpayers and levying
penalties to tackle the problems it has encountered. The business communities should also obey the
current VAT rules and regulations and they should perform their activities according to the current
VAT laws as well as start to work in cooperation with the authority in fighting against those
enterprises that are violating the rules and regulations of VAT.
 Table of Contents

Chapter One

1.Background Of The Study--------------------------------------------------------------------------1

1.1 Introduction----------------------------------------------------------------------------------------1

1.2 Statement Of The Problem------------------------------------------------------------------------2

1.3 Objectives Of The Study-------------------------------------------------------------------------2

1.4 Significance Of The Study------------------------------------------------------------------------3

1.5 Scope of the Study---------------------------------------------------------------------------------3

1.6 Limitations of the Study-------------------------------------------------------------------------5

1.7 Organization of The Paper-----------------------------------------------------------------------5

Chapter Two

2. Review of Related Literature----------------------------------------------------------------------6

2.1 What Is Vat-------------------------------------------------------------------------------------------

6

2.3 Need for Vat ------------------------------------------------------------------------------------9

2,6 Types Of Vat---------------------------------------------------------------------------------------11

2.8 Structure of Vat In Ethiopia--------------------------------------------------------------------15

Chapter Three

3. Research Methodologies---------------------------------------------------------------------------17
3.1 Data Collection Procedures----------------------------------------------------------------------
17

3.2 Method Of Data Analysis------------------------------------------------------------------------18

Chapter Four

4 Findings, Data Presentations and Interpretations--------------------------------------------19

4.1 Vat Rules and Regulations----------------------------------------------------------------------22

4.3 Clarifications about Vat Concept--------------------------------------------------------------22

4.4 Impact of Vat--------------------------------------------------------------------------------------23

4.9 Implementation Problems-----------------------------------------------------------------------27

4.17 Effects Of Vat-------------------------------------------------------------------------------------36

Chapter Five

5 Conclusions and Recommendations --------------------------------------------------------38

5.1 Conclusions-----------------------------------------------------------------------------------------38

5.2 Recommendations---------------------------------------------------------------------------------42

Reference

Appendix
CHAPTER ONE

1. BACKGROUND OF THE STUDY

1.1. INTRODUCTION

Value added tax (VAT) is an indirect consumption tax assessed on the value added to a
product at each point in the cycle of production and distribution. It is a consumption tax
because it is ultimately borne by the consumer, who pays a fixed percentage of the final sale
price of a product. A VAT is levied on the difference between the purchase cost of an asset
and the price at which it can be sold (i.e., the amount of value added to it). Producers and
distributors typically pass the cost of the VAT on to the final consumer in the form of price
increases. Tax is added to a product's price each time it changes hands until delivery to the
customer takes place, when the final tax is paid.

Value-added tax falls under the general category of a consumption tax, meaning taxes are
paid on what people buy rather than on their earnings, savings, or investments. VAT has
also been referred to as a sort of national sales tax, though it functions very differently. Sales
tax is imposed on the total. (Encyclopedia of Management, 2009)

VAT, levy imposed on business at all levels of the manufacture and production of a good or
service and based on the increase in price, or value, provided by each level. Because the
consumer ultimately pays a higher price for the taxed commodity, a VAT is essentially a
hidden sales tax. VAT was originally introduced in France (1954); it is now a major part of
the tax structure of most Western European nations as well as the rest countries of the
continents throughout the world. In the early 1990s the U.S. government considered
instituting a VAT to fund national health care programs.

This study has tried to assess the VAT implementation in the country specifically in Addis
Ababa (ERCA) on the title “Value Added Tax implementation and its related problems”.
The objective is to assess and analyze the implementation of VAT and problems associated
with, in Ethiopia. The respondents were those employees from tax administration
Daye town selected using stratified

1
random sampling techniques.

1.2. Statement of the problem

The value-added tax is the one method of collecting revenue that many conservatives
actually love. A VAT taxes each step in the chain of production, calculating the increasing
value of a commodity or service as it moves toward distribution. A sales tax, in contrast, is
levied at the final retail stage only. Popular in Europe, the VAT is an encumbrance that
conservatives would rather not have, of course, and they worry that it could be increased too
easily. But at least it hits the right sorts of people, consumers. The conservative ideal is for
taxes to be imposed on consumption rather than investment, and the VAT fits the bill. If
taxes are necessary (and even the most conservative commentators agree that they are), they
should at least provide an incentive for people to save and not to spend. The pool of capital
that's accumulated as a result of that incentive is what the right wing believes helps the
economy to grow. Conservatives also appreciate that a VAT acts economically very much
like a flat tax, which is a long-time right-leaner’s favorite.

Liberals have traditionally been wary of the VAT for some of the same reasons that
conservatives approve of it. The last thing a liberal wants is a tax that places a
disproportionate burden on the people who are least able to pay it. And the VAT, like all
taxes on consumption, is regressive at its core. Low-income people spend a much larger
percentage of their earnings on consumer goods than rich people do. Liberals prefer the
progressive income tax as a revenue source because the higher up the income scale people
go the higher tax rate they pay. From the vantage of the political left, a VAT is the wrong
way to go.

However, more and more people, including liberals, are pointing to a VAT as a better
solution. One reason is the realization, among left-leaning economists, that a VAT's
regressivity can be reduced, if not completely offset, by exempting staple such as food and
clothing. Another is the recognition that if a VAT is used to fund a major social program
otherwise unavailable to the middle class and working class (such as universal health care)
the overall effect will be progressive even if the tax itself is regressive. (Jeffrey H.
Birnbaum, 2007, p.1-2, retrieved on February 2011, http://superpages.com)
2
Therefore, this study attempts to assess the problems associated with VAT implementation
in It is very evident that many researches are being carried on the
same subject. The main purpose of this research is to address the following basic questions.

To what extent does the business community know the VAT rules and regulations?
Does the business community accomplish their business activities on the basis of the
business rules?
How strong enough is the tax administrating authority to administer and control
those noncompliance and delinquent tax payers?
What are the objectives of VAT imposition?
Does the implementation of VAT in Daye town meet its objectives?
Does the VAT encourage the growth of investment and export in the country?
What are the problems that hinder the implementation of VAT in D a y e
town
What measures has been taken to alleviate these implementation problems?
1.3. Objectives of the study
1.3.1General Objective
This thesis tries to assess and analyze the implementation of VAT and its related problems
in Daye town revenue authority.
1.3.2 Specific objectives
Specifically this study tries to address the following issues:
To assess whether the taxpayers are conscious enough about VAT concept;
To assess whether the taxpayers have sufficient knowledge about the VAT rules
and regulations;
To assess whether the taxpayers do their business with the compliance of the VAT
rules and regulations currently in use;

To assess whether VAT implementation effectively meets its objectives;

To identify the main problems that hold back the VAT implementation practices in
Daye town; and
 -To provide alternative solutions that may help to tackle the problems identified.
3
1.4. Significance of the study
It is obvious that an economic development of a country can be certain by an effective and
efficient administration and collection of taxes. This is so because, when the implementation
and administration of tax system is effective, the government’s revenue that helps to fulfill
the socioeconomic needs of the society will be amplified. Hence this research can indicate
the ways that what the authority’s officials have to do in the future based on the views of the
taxpayers towards tax, it can provide the way for other researchers who want to conduct
further investigation on the area raised as a title, give some possible insights to the higher
officials of the authority to tackle the problems identified with this finding, initiates the
authority to give closer attention towards the administration and follow ups as well as
conduct awareness creation programs to achieve the desired objectives of VAT
implementation, inform the policy makers to take the problems identified in to account by
providing appropriate suggestions as well as it can serve as an additional source of reference
material for those who want to conduct a full time research.
1.5. Scope of the study
This study basically deals with the VAT implementation analysis and related problems in
Daye town the data used was gathered
from tax administration department of the ERCA and some taxpayers in Addis Ababa city.
While it is difficult to cover the whole registered taxpayers the study is delimited to some
Addis Ababa VAT registered taxpayers and employees of Daye. This is so because the
researcher strongly believes that some of the D a y e t o w n VAT payers and employees of
the authority will represent most of the VAT payers throughout the country and employees
of the ERCA as far as the tax rate and concept of VAT is considered as the same. The study
was conducted in Bensa woreda, in the Southern Nation, Nationalities and Peoples
Regional State (SNNPRS) of Sidama Zone, Southern Ethiopia. Daye town is the capital of
Bensa woreda and it is located 131km far away from Hawassa. Bensa woreda is bordered
on the south and noth by the ormia region with Bona zuria on the west Arbegona on
the North West, Chire on the east, and Aroresa on the south east.
According to 2004 report, Bensa had 101 kms all weather roads and no kms of
dry weather roads, for an average road density of 125km per 1000skm. Based on
the 2007 census conducted by CSA this woreda has a total population of 250727,
4
of whom 126959 are men and 123768 are women: 11588 or 4.62% of its
population are urban dwellers
1.6. Limitations of the study
It is obvious that adequate and reliable information is important to undertake any kind of
survey precautions. However, the unwillingness and carelessness of some respondents while
filling the questionnaires during data collection were considered as constraints to the study.
In addition, since VAT is a recent phenomenon, the absence of enough reference materials
regarding the VAT implementation and related problems in the authority, time and fund
constraints as well as lack of experience of the researcher were other limitations of
conducting this study.
1.7. Organization of the paper
This thesis attempts to identify, asses and analyze the VAT implementation and related
problems in Daye town. Accordingly, the paper is organized in a way that chapter one
deals with the Introduction of the study, chapter two presents the Review of the Related
Literature, chapter three presents the Review of the VAT Implementation and Development
in Ethiopia and the Research Methodology part of the study, chapter f o u r
presents the Data Analysis and Results of the Findings and the last chapter, chapter five,
deals with the Conclusion and Recommendation parts of the study under taken.
 5
CHAPTER TWO
2. REVIEW OF THE RELATED LITERATURES
2.1.What is VAT

VAT is an indirect tax levied on domestic consumption of goods and services imported. It is

designed to be paid on the value added which is the difference between the value of sales

and value of purchase at the point of transaction throughout the production and distribution

chain. Any producer owes tax only in the value added; in practice this means that the

producer will have refund for VAT paid on all the purchases or inputs.

Despite its name, the VAT is not generally intended to be a tax on value added as such:

rather it is usually intended as a tax on consumption. Its essence is that it is charged at all

stages of production, but with the provision of some mechanisms enabling firms to offset the

tax they have paid on their own purchases of goods and services against the tax they change

on their sales of goods and services.

Although this characteristic feature is very clear-cut, the VATs observed in practice show

considerable diversity as regards, among other things, the range of inputs for which tax

offsetting is available and the range of economic activity to which the tax applies (that is, the

base of the tax). Some major countries (such as china) currently do not grant credits for

taxes on capital goods purchases; moreover, of those that allow credits in respect of such

purchases, some do not refund excess credits (any excess of tax paid on inputs over tax

chargeable on outputs). Most countries exclude exports from the VAT, in the sense that tax

is not charged on sales for export but tax paid on inputs is recoverable, although some (in

the BRO region, the Baltic countries, Russia, and other countries of the former Soviet
Union, at least until recently) have systematically levied VAT on some exports. Some

countries extend the VAT only to the manufacturing stage; others do not levy it on services.

Practices also vary in how tax offsetting is implemented: by far the most common method is

through the use of invoices, but the same effect can be achieved on the basis of books of

account.

As a result of the diversity of practice, there can be disagreement as to whether a given tax is

properly called a VAT or not. For definiteness, though at the risk of creating the impression

of an overly sharp dichotomy, we take a VAT to be: A broad-based tax levied on commodity

sales up to and including, at least, the manufacturing stage, with systematic offsetting of tax

charged on commodities purchased as inputs-except perhaps on capital goods-against that

due on inputs. This leaves scope for dispute, but does highlight what is taken here to be the

key feature of the VAT: the tax is charged and collected throughout the production process,

with provision for tax payable to be reduced by the tax paid in respect of purchases. (Liam

Ebrill..., 2001)

Value added tax (VAT) is an indirect tax that is changed whenever a tax payable person

makes taxable supply of goods and services in the course of the business and imports,

although it is a tax on consumer expenditure. VAT is a tax not on consumer expenditure.

VAT is a tax not on the total value of goods being sold, but only on the value added to it by

the last seller who is liable to pay a tax not on its gross value, but on the value that is the

gross value minus the value of inputs.

2.2.Evolution of VAT

Value Added Tax or VAT, first introduced less than 60 years ago, and remained confined to

a handful of countries until the late 1960s.

Value added tax (VAT) was first started in France in 1948 G.C, where it was initially

applied up to the manufactured stage and give credit for tax on capital goods (Purhoit and

Mahesh, 2000). By 1969 only eight countries adopted VAT. Out of these eight countries,

Cote d‟Iviore is the first country in Africa to introduce VAT. Since 1979 the VAT spread

rapidly in industrialized as well as in the developing countries. Today, most countries have a

VAT, which raises, on average, about 25 percent of their tax revenue. This makes VAT is

the first tax system which spread quickly within a short time after its introduction.
As of 2003 from the 53 member countries of the African Union about 31 of them introduced
VAT. Following this, the government of Ethiopia introduced VAT with different
objective son January 1, 2003 by replacing sales tax. The following table depicts those
African countries with their rates and year of introduction. Table 1: African countries with
VAT
country Date Standard country Date Standard
introduced Rate (%) introduced Rate (%)
Algeria 1992 21 Mauritania 1995 14
Botswana 2002 15 Mauritius 1998 10
Burkina Faso 1963 18 Morocco 1986 20

Benin 1991 18 Mozambique 1999 17

Cameroon 1999 18 Namibia 2000 15
Chad 2000 18 Niger 1986 17
Congo 1997 18 Nigeria 1994 5
republic
Cote-Devoire 1960 20 Senegal 1980 20
Ethiopia 2003 15 Rwanda 2001 15
Egypt 1991 10 South Africa 1991 14
Gabon 1995 18 Sudan 2002 10
Ghana 1998 10 Tanzania 1998 20
Guinea 1996 18 Togo 1996 18
Kenya 1990 16 Tunisia 1998 18
Madagascar 1994 20 Uganda 1996 17
Malawi 1989 20 Zambia 1995 17.5
Mali 1991 15
Source: Misrak Tesfaye, 2008, Ethiopian Tax Accounting Theory and Practice (pp.310-311)
The following table again shows the VAT rates of some European and non-European
countries (other than African countries).
Table 2: world countries with VAT
country Standard country Standard country Standard
Rate (%) Rate (%) Rate (%)
Australia 20 Romania 19 Lebanon 10
Belgium 21 Slovakia 19 Moldova 20
Bulgaria 20 Slovenia 20 Macedonia 18
Cyprus 15 Spain 16 Malaysia 5
Czech 19 Sweden 25 Mexico 15
republic
Denmark 25 United kingdom 17.5 New Zealand 12.5
Estonia 18 Argentina 21 Norway 25
Finland 22 Australia 10 Paraguay 10

France 19.6 Bosnia & H 17 Peru 19

Germany 19 Canada 6 Philippines 12
Greece 19 Chile 19 Russia 18
Hungary 20 China 17 Serbia 18
Ireland 21 Croatia 22 Singapore 5
Italy 20 Ecuador 12 South Korea 10
Latvia 18 El Salvador 13 Sri Lanka 15
Lithuania 18 Guyana 16 Switzerland 7.6
Luxembourg 15 Iceland 24.5 Thailand 7
Malta 18 India 12.5 Turkey 18
Netherland 19 Israel 15.5 Ukraine 20
Poland 22 Japan 5 Venezuela 8
Portugal 21 Kazakhstan 14 Colombia 45
9
Source: Misrak Tesfaye, Ethiopian Tax Accounting Theory and Practice, 2008 (pp.311-312)
2.3.General Definition and Objectives of VAT
Taxes are a compulsory levy, imposed by government and those who are taxed have to pay
the sums of irrespective of any corresponding return of service or good by the government.
Taxes are important sources of public revenue. The existence of collective consumption of
goods and services necessitates putting some of our income into government hands. Such
public goods such as roads, power, municipality services, and other infrastructures have
favorable results on many families, business enterprises, industries and the general public’s.
Although the specific reasons for adopting the VAT differ from one country to another, the
main argument is that a properly designed VAT raises more revenue with less administrative
and economic costs than other broadly based taxes. A VAT with few exemptions can
generate revenues of some 0.4 percent of GDP for every percentage point of the rate.
Furthermore, a VAT does not influence the methods of doing business. The tax bill is the
same for a product made in the corporate or non-corporate sector with capital-intensive or
labor-intensive technology or for one made by integrated or specialized firms. The VAT also
ensures neutrality in international trade by freeing exports of tax and by treating imports and
domestic goods the same; this is an important attribute in an interdependent, high-tax world.

As a transactions tax, which must be shown on invoices, the VAT is harder to evade than an
income tax. (Sijbren, Cnossen, 1998)
2.3. Need for VAT
The need for VAT emanates (originates) from the very weakness of the sales tax that it is
intended to replace (Purhoit, 2000). First, sales tax has a cascading effect as a result of the
fact that it is levied on the gross value without allowing any credit or set off the taxes paid
on inputs. As a result, consumer’s price will increase by an amount higher than accrues to
the exchequers (government department in charge of revenue) by way of revenue from it.
Secondly, VAT has the advantage of reducing the cost of production of industries through
its inherent refund system and the fact that it does not burden exports.
Thirdly, it offers total transparency of the incidence of tax as VAT is multistage sales tax
levied as proportion of the value added. A very important thing that quotes in need of VAT
is less tax evasion. This happens because the tax is divided into parts and therefore the
10
inventive to evade tax by any one firm is reduced. If any firm understates its output, it will
be caught by the disclosures of the firms buying inputs from it. In general it is argued that
VAT would take away all the above problems and would avoid the distorting economic
effect.
2.4. The Comparison between VAT and Retail Sales Taxation
The VAT is of course not the only possible form of consumption tax. It is natural to
compare it, in particular, with the retail sales tax (RST). As a single stage tax levied in
principle at the point of sale of the final product, the RST may appear to be a simpler way
achieving the same key effects-preserving production efficiency and avoiding cascading-as a
VAT. Among the key points of comparisons of RST and VAT the following are the most
one:
In practice, it is difficult to ensure that RST does not fall on business inputs. Ring (1989)
estimates (for 1989) that in the U.S. states that have a RST about 40 percent of the
revenue collected was from business purchases.
On the other hand, the alleged “self-enforcing” feature of the invoice credit VAT- the
notion that the purchasers will help enforce the VAT as a consequence of their interest in
obtaining a proper invoice from their suppliers-is not as important in practice as has
sometimes been argued: purchasers do not care, for instance, whether tax has actually
been paid by their suppliers, only about the acceptability to the authorities of the

invoices they hold. There is evidently a potential problem in the claiming of credits on
the basis of fraudulent invoices.
What does appear important in securing revenues, however, is the collection of revenue
at many points under the VAT rather than simply at the final stage under the RST. This
renders the RST much more vulnerable to evasion.
These features are reflected in something of conventional wisdom among tax practitioners:
while the RST may work well at relatively low rates, below say 5-10 percent, at higher rates
it proves too vulnerable. This has certainly been widely argued by FAD: Tanzi (1995), for
instance, believes that “10 percent may well be the maximum rate feasible under an RST.”
There are of course those who argue for the superiority of the RST over the invoice-credit
VAT, including those currently advocates it for the United States. On balance, however, the
judgment appears to be that expressed as: “… although… some of the advantages of the
11
VAT have been exaggerated by its proponents, it seems difficult to argue that the VAT is
not on balance superior to the standard RST.” In any event, it is indeed notable that very few
RSTs are set at rates above 10 percent while few VATs are set at rates below. (Liam
Ebrill…., 2001)
2.5.Has the VAT Raised More Revenue than the Sales Taxes it replaced?
The performance of a tax must be gauged by more than the revenue it raises. It must also be
assessed in terms of the efficiency and fairness with which it raises that revenue, and the
costs incurred by government and taxpayer in doing so. Nonetheless, revenue needs are
often a key concern in the introduction of a VAT. At the time of its introduction, the VAT is
generally perceived as an explicit replacement for some preexisting sales tax. It may also be
that VATs have been adopted at times when fiscal difficulties are so pressing that a
significant increase in tax levels becomes politically feasible, and could have been achieved
even under the predecessor tax system. Some upward trend in tax revenues can, moreover,
be expected as development proceeds. And, not least, in those cases in which a VAT is
introduced both to replace a sales tax and tariff revenues lost as a consequence of trade
liberalization, any increase in revenues might in part reflect the fact that the VAT is
substituting for both sales tax and tariffs. For a longer-term perspective, one should compare
the revenue performance of the VAT with the broad set of possible alternative taxes to
the VAT rather than with just sales taxes.

Despite these caveats, the extent of the revenue gains with VAT system is impressive. The
average revenue increase in the West African countries, in particular, is more than 1 percent
of GDP.
Comparing the two or three years either side of introduction, and subject, of course, to the
same caveats-for a wider range of countries: all that have adopted VATs since 1985 and for
which sufficient data are available to compare revenue over the two or three years after the
introduction of the VAT with that from the predecessor indirect tax.
This confirms the impression of a gain, on average, in sub-Saharan Africa. The apparent
gain is even larger in the Africans and, especially, the Small Islands. The reduced tax share
in CBRO is striking; however, in these cases the VAT was introduced against the
background of a trend decline in the ratio of tax revenue to GDP associated with the
economic transaction itself. Excluding the CBRO countries, the share of VAT revenues in
12
GDP exceeds that of the predecessor tax, on average, by about 1.1 percent of GDP.
2.6. Types of VAT
In the modern world there are four types of VAT, namely, consumption, production, income
and wage VAT.
2.6.1. Consumption VAT
In this type of VAT, the firm is allowed to deduct from the gross value of its product not
only the non-capital input purchased from other firms but also the capital equipment
purchased. Thus, in consumption type VAT, tax base is the difference between gross value
and total value of inputs purchased (capital and non-capital).
2.6.2. Production VAT
In the production type VAT, the value of the inputs purchased by the firm from other firms
is not deducted in full. Only the value of non-capital purchase is deducted. Furthermore, no
depreciation is permitted on the purchase of capital goods even in subsequent years. Thus,
the tax base in production type VAT is equal to gross value less value of non-capital goods
purchased.
2.6.3. Income VAT
According to income type VAT, the firm is allowed to deduct the depreciation on the capital
goods (during the year) apart from the full value of its non-capital purchases. Here, firms

cannot deduct the entire value of the capital goods purchased during the year but they can
deduct the respective amount of depreciation attributable to that year.
2.6.4. Wage VAT
In wage type VAT, the firm is able to deduct the net earnings from its capital in order to
arrive at the tax base. It is unlikely to be used for taxation by any government.
2.9.Principal Components of VAT
There are two principal components of VAT. These are Input VAT and Output VAT.
2.6.1. Input VAT
Input VAT is the VAT payable by a taxable person on goods and services supplied to him
and on goods which he imports for the purposes of a business carried on by him and for
which registered for VAT. Viewing the concept from the other angle, it is the VAT payable
on purchase of taxable supply including capital goods and operating and administrative
expenditures. For a VAT registered person (taxable person) input VAT is not a component
13
of the cost of purchase/import rather the registered person is entitled to take input VAT
deduction against the VAT charge on sales or is recoverable from the Tax Authority. Hence,
input VAT is a receivable for a registered person.
2.6.2. Output VAT
Output VAT is the VAT collectible by a taxable person at the time of sale of taxable goods
and services (supply). It is the VAT chargeable on sales of taxable goods and services
whenever a taxable person supplies taxable goods or services to other person. VAT must be
included in the price charged for those taxable goods or services. This is the output VAT for
the supplier. Output VAT is not a component of the sales price rather it is a liability to the
taxable person which is collected on behalf of the Tax Authority.
The logic of VAT is that during a VAT accounting period, a VAT registered person pays
VAT on its purchases, which is called input VAT; and the person charges VAT on its sales,
which is called output VAT. At the end of the VAT accounting period, the difference
between the amount of output tax and input tax represents either VAT payable to the Tax
Authority or VAT Refundable from the Tax Authority.
If the output VAT exceeds the input VAT, the VAT registered person has collected more tax
from its sales and, thus, the excess VAT collected (net VAT) must be paid to the Tax
Authority, say ERCA, at the end of the VAT accounting period.

Output VAT > Input VAT →VAT payable/VAT Liability/

If the input VAT exceeds the output VAT, the difference results in VAT refundable or VAT
credit. A VAT credit may be allowed to be carried forward and offset against periods output.
A refund may be made by the government after that if input VAT still exceeds output VAT.
Input VAT > Output VAT → VAT Credit/ VAT Refundable/

2.7 Administrative and Compliance Costs of VAT

There are two broad types of resource cost associated with the operation of any tax:
administration costs-incurred by the tax authorities, and compliance costs-incurred by
taxpayers. Taken together, they are referred to here as collection cost. Administration costs
are akin to a reduction in tax revenues and appropriately viewed as such. Compliance costs,
however, should be weighted rather less heavily than administration costs when evaluating
the costs and benefits of a tax: the purpose of taxation being to transfer resources from the
14
private to the public sector; $1 left in the private sector is worth less than $1 accruing to the
public sector. This is simply to say that, in the jargon of public finance, that the marginal
cost of public funds generally exceeds unity.
High collection costs are not necessarily a sign of a bad tax, but may simply reflect
inefficient or corrupt administration. Nor are low administrative costs (even relative to
revenue raised) necessarily a sign of a good one, since one could, for instance, raise
substantial revenue under a VAT with low administration costs by assigning few resources
to the payment of refunds. Indeed such is the potential role of the VAT as a catalyst for
organizational and cultural change both within the tax collection agencies (spearheading, for
instance, the modern use of information technology and the development of audit methods)
and among taxpayers (developing a culture of record-keeping) that there is an important
sense in which is a successful VAT is in some circumstances bound to involve substantial
collection costs, especially in its early years.
Collection cost figures must thus be interpreted with care. The even more fundamental
difficulty, however, is obtaining such figures. In terms of administration costs, the
organizational structure and reporting practices of tax authorities may make it difficult to
isolate costs attributable to the VAT. The exercise may be especially difficult in function-
based organizations, where VAT is administered along with other taxes, by the same people
in the same offices. Even when a separate VAT department is in place, there may be genuine
common costs arising, for instance, from joint auditing for VAT and income tax purposes. In
terms of compliance costs, a tailored survey of taxpayers is needed to extract accurate
information. These difficulties mean that even for developed countries hard numbers on
these matters are relatively difficult to come by. In developing countries, it is almost entirely
unavailable. It has not been possible, within the resources of this study, to rectify this
important gap.
Absent such information, some guide is nevertheless provided by various studies of VAT
collection costs that have been conducted for OECD countries (usefully reviewed by
Cnossen, 1994).
Administration costs for a broadly “best-practice” VAT are put by Cnossen at around
 $100 per registrant per annum. These costs vary widely, with the general perception that
they are significantly lower where the VAT is simpler: they are estimated at around $50
15
per registrant in New Zealand (with a single nonzero VAT rate) and $200 in the United
Kingdom (where there are two rates and substantial zero-rating).
Compliance costs for a best-practice VAT are estimated by Conssen at around $500 per
registrant per annum. For Singapore, Jenkins, and Khadka (1997) estimated continuing
compliance costs to be about $700. Since these are largely fixed costs, independent of
the amount of tax payable, they fall especially heavily on smaller traders: Cnossen
(1994) puts them in the order of 2 percent of turnover for those with turnover below
$50,000, falling to about 0.3 percent for those with turnover above $500,000.
These dollar figures will overestimate the corresponding cists in developing countries, since
they largely reflect labor costs-including those of the taxpayer. Nevertheless, it is clear that
compliance costs in particular can be significant for smaller traders. Suppose the threshold is
set at $50,000, for instance, and that traders at this level do indeed incur compliance cost of
2 percent tax on turnover. With a profit margin of 20 percent on sales, this is equivalent to a
10 percent tax on income. This implicit tax may be to some degree passed on to consumers
in the form of higher prices, though insofar as smaller traders naturally tend to have
relatively little market power much of the burden will remain with them. There is thus the
possibility of some regressive impact.

2.8 Structure of Value Added Tax in Ethiopia

VAT is increasingly being used throughout the world, including many African countries to
raise government revenue with less administrative and economic costs. It is believed to be a
good means to raise government revenue when relatively poor administered. Ebrill and Keen

(2001) also strengthen this idea empirically. They found that in the countries that have
adopted VAT, revenue from this source accounted on average 27% of the total tax revenue
or 5% of the GDP. And about 70% of the world’s population now lived in countries with a
VAT. This implies that VAT is a key source of most government revenues in the world.
As per different empirical evidences, VAT is a major source of revenue in most of African
countries. The share of VAT in total tax revenue it ranges from 17.4% to 42.4% Ebrill and
keen (2001). This share is higher in Ethiopia compared to other African countries. This is so
because, Ethiopia’s GDP is lower than other sub Saharan African countries. The VAT to
GDP ratio ranges from 2.7% in Egypt to 6.5% in Tunisia with an average 4.6% similarly
16
Many sub Saharan African countries have also experienced an increase in revenue
from VAT. The revenue performance of VAT as measured by the ratio of VAT to
GDP in Ethiopia which is 5.7% in much higher than then the African average (4.6%) and
stood the fourth among the selected African countries. This implies that VAT in Ethiopia is
showing a good revenue performance but this does not mean VAT is collected potentially.
The ratio of VAT to GNP or disposable income is still insignificant because the ratio is
only between 2 and 3.6% from 1988 to 2001 E.C.

2.9VAT Implementation Problems in Ethiopia

After the introduction of VAT, VAT revenue collection has shown growing trends as
compared with the replaced sales tax. The impact of VAT on government tax revenue is also
shown in the structure of tax. The contribution of VAT on domestic goods and services as
well as foreign trade shows a substantial increase though the domestic source is by far lower
than that of foreign trade. This might be associated with administrative difficulty to collect
the tax from the domestic economy and the existence of illegal practices on VAT. VAT
collection from imported goods is easy since it is collected at entry point.
In principle, VAT is collected from consumption of goods and services. So, the maximum
potential that can be collected from consumption expenditure is VAT rate multiplied by
consumption expenditure of a particular year.
Problems that are observed during the implementation of VAT related with external and
internal factors.
The external problem associated with the illegal practices of the taxpayers. Even though
intensive education program has been undergoing by the tax administration, the following
illegal practices are observed:
Some VAT registered business enterprises have collected the tax with illegal invoice and
retain the tax for themselves, some eligible business entities have not yet registered for
VAT,
Some did not declare the tax they collected as per the law, and etc.
The weakness of tax administration highly attributed to the above illegal practices. The tax
administration is weak in the area of auditing, follow-up and enforcement though the VAT
department of ERCA has computerized its tax system. (Demirew Getachew, 2004).

17
CHAPTER THREE
3 RESEARCH METHODOLOGIES
This study was conducted in Daye town to investigate problems associated with the
implementation of
Value Added Tax. The sources of the data used in the analysis were both the primary and
secondary sources.
In the primary data collection section interviews, questionnaires and schedule (interview
questionnaires) were used as appropriate tools to gather relevant information for the problem
under study.
On the other hand in the secondary data collection section the data were collected from the
organizational documented materials and different publications as well as reports on the tax
administration departments, Ministry of Finance and Economic Development (MoFED) and
different statistical bulletins and websites has referred.
3.1. Data collection procedures and Sampling techniques
From the total population of the VAT registered taxpayers o f D a y e t o w n
and employees of the authority
(ERCA), the researcher selected about 450 (350 and 100 from both VAT registered
taxpayers and employees of ERCA respectively) samples using stratified random sampling
techniques. The researcher uses this sampling method because it is more reliable, valid, as
well as each individual (respondents) has an equal probability of being selected and the
sample can be generalized to the larger population and they have experienced the central
phenomenon. Farther for this research the researcher uses a questionnaire as the best data
collecting tool. This is so because questionnaire is more reliable and valid for the study as
well as it is least expensive, time saving and encourage the respondents to fill their feeling.

3.2.Method of Data Analysis

After the researcher make discussions about the proposing research deeply, and review
related literature, the researcher proceeds to the preparation of questionnaires. Hence the
questions were:
1. Yes/No that the respondents can answer easily
 2. Small in number

18
3. not time consuming and

4. Do not need the creativity of the respondents

The procedures followed in gathering the data includes:
A) By asking the willingness of the respondents
B) By telling the respondents to give answers and encourage to fill their feelings
C) By insuring that their response will not be identified from others
D) By insuring that their response will not touch their dignity and will keep as
confidential
E) By giving heart full thanks for their cooperation in giving their responses and golden
time
The collected data were analyzed by adopting the statistical methodology. Based on
percentage, tables and figures the statistical analysis has conducted. Farther quantitative
methods of data analysis were adopted in the case of descriptive statistics.
 19
CHAPTER FOUR
4. FINDINGS, DATA PRESENTATION AND INTERPRETATIONS
4.1.Introduction

The nature of this research is descriptive type that incorporates fact finding inquiries and

surveys with regard to the Value Added Tax implementation and its related problems. The

main aim (objective) of this research is to assess and analyze the implementation of VAT

and its related problems in Ethiopia, specifically in Addis Ababa. This may give some

possible insights to tax related policy makers to give closer attention towards tackling the

problems raised in association with the VAT implementations by providing appropriate

suggestions. Quantitative analysis techniques, ranging from creating simple tables or

diagrams that showing the frequency of occurrences through establishing statistical

relationships between variables to simple statistical modeling, are used to analyze the

collected data. Thus the analysis of the data is accessible by means of percentages, tables

and figures with simple mathematical calculations.

The study analyzed the data collected through a questionnaire from the selected Large VAT

registered taxpayers, D a y e t o w n VAT registered taxpayers and sole proprietor

VAT registered taxpayers as well as the selected employees of B e n s a w o r e d a

r e v e n u e o f f i e as a result the

analysis is concerned on the practical application and the challenges faced on the

implementation of VAT and suggesting relevant and more appropriate recommendations

considered as an suitable solutions for the constraints (problems) being raised in relation to
the issue.
The survey was conducted by distributing questionnaires to both VAT registered taxpayers
(LTO, A.A Branch office and sole proprietorship) and employees of Bensa woreda .Close
and open ended questionnaires were prepared for both respondents on the basis of

20

simplified lists of Yes or No and detailed information requirements along with any kind of
comment given by the respondents. The questionnaires distributed to both VAT registered
taxpayers and Bensa woreda revenue office employee respondents were prepared with an
Amharic version so as to avoid language barriers and minimize response biases due to
misunderstanding.

From the total sample of 450 (350 and 100 from VAT registered taxpayers and employees of

ERCA respectively), 352 (78%) responses were gathered (i.e. 263 (75%) from VAT

registered taxpayers and 89 (89%) from employees Bensa woreda Among the 350

selected VAT registered taxpayer respondents, 80(23%) were from the LTO, 150(43%)
were from the A.A branch and 120(34%) were from the sole proprietorship selected
using stratified random sampling technique. Among 352 respective respondents that
give their reply properly, 263 were from the VAT registered taxpayers which
incorporates55 (21%) Large VAT taxpayers, 125(47%) A.A Branch VAT registered
taxpayers and 83 (32%) sole proprietor VAT registered taxpayers. The large taxpayers
includes the taxpayers of share companies, partnerships, joint ventures, etc whose annual
turnover is equal to or greater than birr 5 million. Whereas A.A branch VAT taxpayers
includes share companies, partnership, joint ventures and the like but their annual turnover is
less than birr 5 million. Among the 100 respected respondents from the authority employees,
23(23%) were from the authority’s VAT and audit department, 32(32%) were from the
Large tax officers and 45(45%) were from the A.A branch office. Coming to the responses
provided by employees of ERCA among the 89 respondents, the employees of VAT and
audit department shares 20 (23%), employees of large taxpayers takes 28 (31%) and
employees of A.A branch VAT registered taxpayers takes the largest share of 41(46%)
of the total. The following table summarizes about the respondents from both sides.

VAT registered taxpayer respondents, 80(23%) were from the LTO, 150(43%) were from
the A.A branch and 120(34%) were from the sole proprietorship selected using stratified
random sampling technique. Among 352 respective respondents that give their reply
properly, 263 were from the VAT registered taxpayers which incorporates 55 (21%) Large
VAT taxpayers, 125(47%) A.A Branch VAT registered taxpayers and 83 (32%) sole
21
proprietor VAT registered taxpayers. The large taxpayers includes the taxpayers of share
companies, partnerships, joint ventures, etc whose annual turnover is equal to or greater than
birr 5 million. Whereas A.A branch VAT taxpayers includes share companies, partnership,
joint ventures and the like but their annual turnover is less than birr 5 million.
Among the 100 respected respondents from the authority employees, 23(23%) were from the
authority’s VAT and audit department, 32(32%) were from the Large tax officers and
45(45%) were from the A.A branch office. Coming to the responses provided by employees
of ERCA among the 89 respondents, the employees of VAT and audit department shares 20
(23%), employees of large taxpayers takes 28 (31%) and employees of A.A branch VAT
registered taxpayers takes the largest share of 41(46%) of the total. The following table
summarizes about the respondents from both sides.
Table 1: employees of ERCA and VAT registered taxpayer respondents
Employees of ERCA Sample % Number of respondents %
Size who provide their reply
Employees from VAT and audit department 23 23 20 23
Employees from Large Tax Office (LTO) 32 32 28 31

A.A. Branch VAT payers office 45 45 41 46

Total 100 100 89 100

VAT payers
Large VAT registered taxpayers 80 23 55 21
A.A. Branch VAT registered tax payers 150 43 125 47
Sole proprietor VAT registered taxpayers 120 34 83 32

Total 350 100 263 100

TOTAL 450 352
Source: computed from survey data, 2008

respondents replied as they know nothing about both taxes (VAT and sales tax). The
following figure shows the responses provided by VAT registered taxpayer respondents:
 22

Figure 3: comparing the advantages of VAT with sales tax

11%

more advantageous
less advantageous
34% 55% know nothing

Source: computed survey data, 2014

As can be observed from the above figure most of the respondents 145(55%) replied that
VAT is more advantageous than the sales tax. They started to say so by putting as it (VAT)
is a refundable tax when input tax exceeds output tax and it doesn’t affect the business
community since it is collected from the consumer as a reason. But the rest of the
respondents including those who know nothing are puzzled with the difference between and
has got a difficulty of comparisons. So the authority should give the respective taxpayers
intensive awareness creating trainings so as to make them clear more about the merits of
VAT.
Further, the survey was also conducted by asking the employees of ERCA whether VAT is
more important than the sales tax on their point of views. From 89 employee respondents of
the authority, 60(67%) replied that VAT is more advantageous than the sales tax. The rest
29(33%) of the respondents from the authority know nothing about the sales tax so that they
say nothing about the difference between VAT and the sales tax. As mentioned by the
majority of the respondents, VAT is more advantageous than the sales tax. This is so
because, VAT avoids double taxations, it is easy to control tax frauds and reduces the
possibility of tax evasions, generates more revenue to the government (since it is collected
from all sectors), and avoids cascading effect of tax (tax on tax).
From the points mentioned by both respondents (taxpayers and employees of ERCA) above,
we can say that VAT is more advantageous than the sales tax. This is so because VAT
 23

42.VAT rules and regulations

According to the VAT proclamation of Ethiopia, introduced in January 1st, 2003, VAT is
payable and would be levied at the rate of 15% if: the supplies are made in Daye town,
made by a taxable person, made in the course or furtherance of a business and are not
specifically exempted from tax or zero charged. With this point of view the survey was
carried by asking both the VAT registered taxpayers and employees of the authority on
whether they are familiar with the VAT rules and regulations. For this question, from
263 taxpayer respondents, 95(36%) respondents said that they know very well the rules
and regulations of VAT, 147(56%) of them replied as they know little about the rules
and regulations of VAT and 21(8%) of the respondents replied that as they know
nothing about the rules and regulations of VAT. On the other hand, almost all, 87(98%)
of the respondents from the authority are more familiar with the rules and regulations of
VAT. The rest 2(2%) of the respondents know little because of the fact that they have
stayed with the authority as an employee for short periods. Though majority of the
ERCAs employees are familiar with the VAT rules and regulations, the dominating
number of taxpayers are not clear with the VAT rules and its implication.

Therefore, due to the presence of innocent but in doubt business community about VAT

laws, the implementation of VAT in the country becomes more difficult. So the employees

of Daye who are very familiar with the VAT laws should work more on the areas of

awareness creation about the concept, advantages and roles of VAT rules and regulations to

the society’s welfare and entire economic growth and development of the country.

43. Clarifications about VAT concept

Both respondents were also asked whether the authority had made sufficient clarifications to
the public about the implications of the VAT concepts. Among the 263 taxpayer
respondents, 76(29%) of them replied that as they believe the explanations conducted by the

authority about VAT are sufficient, 105(40%) replied that even though the authority had
24
made clarifications to the business community it cannot be considered as it is enough and
sufficient and 82(31%) replied that the authority had made sufficient clarifications to the
community at all. From this we can understand that the authority is highly expected to

conduct sufficient awareness creation programs so as to create taxpayers feeling happy

because of the tax payments they made.

On the other hand the employees of Bensa Woreda were also asked to reflect their
views whether

they believe that the authority had made sufficient clarifications to the public about the VAT

concepts or not. From the 89 respondent employees, 37(42%) replied that the authority had

made sufficient clarification to the society, 44(49%) respondents replied that the programs

conducted to aware the society about the values and benefits of VAT to the government

revenue were not done satisfactorily. There are also about 8(9%) respondents that have said

No or know nothing about the activities conducted by the authority to inform the public

about the merits of VAT. Both respondents agree that the explanations carried out by the

authority to the public about VAT are not considered as that much of note. This shows that

the authority is highly expected to conduct additional programs to update the society about

the concepts, laws, advantages and uses of the Value Added Tax.

4.4. Impact of VAT

Some of the major objectives of introducing the Value Added Tax by replacing the sales tax

are to enhance saving and investment as it is a consumption tax and does not tax capital; and

to enhance economic growth and improve the ratio relationship between Gross Domestic

Product and Gross Revenue. Based on these ideas one of the important issues raised by the
researcher towards the VAT registered taxpayers and employees of Bensa Woreda
Revenue Office were about the impact of VAT in relation to investment and export.

25

The survey was conducted on VAT registered enterprises to know their views about the

importance of VAT for the growth of investment and export. Out of the 263 taxpayer
respondents, 163(62%) replied that VAT is important for the growth of investment and
exports, 66(25%) respondents respond that VAT encourages only investment, 21(8%)
respondents replied that VAT discourages both investment and exports and the rest
13(5%) respondents replied that they have no idea on the change of investment and exports.

As can be observed from the above figure 163(62%) respondents agree that the objective of

VAT in relation to investment and exports is encouraging. But there are respondents that are

uncertain with the VAT objectives towards investment and exports on the other side. From

this finding we can say that majority of the taxpayers have better understanding about the

importance of VAT in relation to investment and exports. But the authority is still
expected to convince the taxpayers that has a doubt about the objectives of VAT rules and
regulations with regard to the encouragement of investment and exports.

The survey further was conducted by asking the ERCA employees to give their opinion
about the impact of VAT on the investment and international trades. Out of the 89 employee
respondents that replied the questionnaires properly, 87(98%) respondents replied that VAT
encourages investment and exports, 2(2%) respondents replied that it doesn’t encourage
investment and exports. For more details the question was raised in the form sated in the
following table.
Table 2: impact of VAT
Survey Question Items Total
Do you believe that the Encourages investment Discourages
implementation of VAT is and export investment
important for the development and exports
investment and international
trade?
 87(98%) 2(2%) 89(100%)
Source: computed survey data, 2014

As can be observed from the above table, almost all of the respondents, 87(98%), replied
26
that the implementation of VAT encourages both investment and exports. The respondents

who said yes were further asked to give their reasons how value added tax encourages
investment and export and they put as:
Since VAT is tax standard accepted by most countries throughout the world, it paves
the way for companies to invest any where they go and become internationally
competitive
It encourages an export by making the input tax at zero rating
It allows a fair competition exist in the market
It allows a refund when the input tax exceeds the output tax
Allow potential investors to consider tax legislation as one of the factors in making
investment decision
Encourage investment by giving relief from tax on capital goods.
4.7. Contribution of VAT

Although the specific reasons for adopting the VAT differ from one country to another, the
main argument is that a properly designed VAT raises more revenue with less administrative
and economic costs than other broadly based taxes. Hence money collected from taxes and
custom duties is one of the major sources of the government revenue. So the respondents of
the authority employees were asked whether they believe that the current VAT contribution
to the governments revenue is sufficient or not. The question was raised like in the manner
illustrated in the following table.
Table 3: Contribution of VAT

Survey question Items Total

Do you believe that the current VAT contribution to the Yes No
Government’s revenue is sufficient? 28(31%) 61(69%) 89(100%)
Source: computed survey data, 2011
As can be observed from table 3, out of the 89 respondents, 28(31%) replied as they believe
that the VAT contribution to the government revenue is sufficient and 61(69%) replied as
they don’t believe that the revenue collected through VAT to the government is sufficient.

The respondents who said the contribution of VAT to the government revenue is not
27
sufficient list down their reasons as follows:
Lower alertness of the society about the benefits of VAT to the government’s
revenue and the country’s economy
Weak tax administration and follow-up systems by the authority against both
compliance and disobedience taxpayers
The higher level of the threshold that doesn’t govern all business entities
Lack of skilled manpower and equipments
Less efforts of identifying and rewarding genuine enterprises by the authority
Existence of unethical employees and taxpayers refrain some interested business
entities from their intention of registration for VAT

Therefore, the authority has to solve all of these problems so as to attract the taxpayers and
achieve the desired objectives of collecting huge amount of money from the increasing
number of registrants and business enterprises entering to the market.
4.8. VAT assessment and collection

Since the government’s main source of revenue is money collected from taxpayers, the
system using to collect this money needs to be effective and efficient in assessing and
collecting mechanisms. Voluntary compliance needs timely filing and reporting of the
required tax information, the current self assessment of taxes owed, and the timely payment
of those taxes without any reminder, notice, or enforcement actions. Having this in mind the
authority’s employee respondents were asked whether the VAT assessment and collection
mechanism followed by the authority is effective and efficient or not. Out of the 89
respondents, 37(41%) replied that VAT assessment and collection mechanism currently
followed by the authority are effective, 22(25%) replied that the assessment and collection
mechanisms are not effective and efficient and 30(34%) replied that the collection
mechanisms and assessment requires additional efforts to be effective although it shows a
little progress. The main reasons that the respondents put are associated with the
inconveniency of the system (SIGTAS) that the authority is using to decide and collect the
tax, the presence of corrupted auditors in the authority, weak performance and inefficiency
of the employees and lack of consciousness of the taxpayers about the responsibilities that
they do have in relation to taxpaying. Therefore the authority has to pay a considerable
28
attention to improve its tax administration, auditing, follow-up and enforcement systems.
market competition and balance the revenue generated from the tax. This can be carried out
by hiring more qualified and professional employees and reducing the threshold to the lower
level as well as strengthen its enforcement and follow-up activities.
4.9 Implementation Problems

The contribution of VAT on domestic goods and services as well as foreign trade shows a
substantial increase though the domestic source is by far lower than that of foreign trade.
This might be associated with administrative difficulty to collect the tax from the domestic
economy and the existence of illegal practices on VAT. In principle, VAT is collected from
consumption of goods and services. Like it has been observed in many developing countries,
VAT implementation in Ethiopia has faced different problems at the initial stage. Problems
that are observed during the implementation of VAT related with external and internal
factors. With this perspective the survey was conducted by asking the employees of ERCA
about the bottlenecks that hinder the smooth implementation of VAT in Ethiopia. The
question was raised in the form that can be seen from the table below.

Table 4: implementation problems

Survey Question Items Total

Do you believe that VAT Yes No Have no
implementation is smooth in idea
this country? 23(26%) 62(70%) 4(4%) 89(100%)
Source: computed survey data, 2011
As can be observed from the above table, out of the 89 employee respondents of the
authority, 23(26%) said yes there is no problem that the authority faces during the
implementation of VAT in Ethiopia, 62(70%) of the respondents said the implementation of
VAT in this country is not easy or smooth and 4(4%) of the respondents kept from giving
their views. From the responses given by the majority respondents, 62(70%), the
implementation of VAT in Ethiopia is not an easy task. Taking these responses into account
the respondents were asked to provide what they think are the problems that hinder the
smooth implementations of VAT system. The respondents replied that the major problems
that hinder the smooth implementation of VAT are the absence of efficient VAT
29
administration system, existence of eligible business entities that have not yet registered for
VAT, existence of some VAT registered business enterprises that have collected the tax with

illegal invoice and retain the tax for themselves, the presence of taxpayers that did not
declare the tax they collected as per the law, low level of tax awareness of the community,
existence of VAT registered business enterprises that offers customers an opinion to pay or
not to pay VAT for the purchases they made in the market and provisions of forgery VAT
invoices as well as the lower level of the purchasing power of the community which
increases the needs of searching goods and services that excludes VAT value from its prices.
Hence, in order to alleviate these challenges, the authority has to recruit sufficient and
capable employees, devote time on consistently educating the taxpayers through different
Medias, improve the collection network and strengthen in the areas of auditing, follow-up
and enforcement as well as consistently follow the implementation procedures and taking
serious actions over those who provide understated financial statements and forgery VAT
invoices.
In order to gather more detailed information’s in addition to the problems identified and
stated on the above paragraphs, some interviews has been conducted by the researcher with
some selected higher officials of the authority. This was maintained by asking them what are
the root causes that hider the proper implementations of the VAT rules and regulations.
Accordingly the respected higher officials of the authority put the following factors as the
major problems of VAT implementations in the country:
Shortages of skilled manpower and materials that are needed for the facilitations of
VAT administration
Weaknesses raised from the authority to enforce those noncompliance business
enterprises
the insignificant recognition given to the benefits, rules and regulations of VAT by
the taxpayers since some of them are illiterate
The ascendancy of nonregistered business entities existing in the market
Voluntary compliance of the tax payers registered for VAT is very low
 Weakness raised from the authority in identifying and recognizing those genuine
taxpayers
30

Misunderstanding of the society as a whole to pay tax and the reasons of paying
taxes.

4.10. VAT administration

The Ethiopian Revenue and Customs Authority administer the Value Added Tax nationally
as per the joint decision made by the house of representative and council of federation.
Although VAT is administered centrally by ERCA, the revenue is shared between central
and regional governments based up on the established revenue sharing. ERCA established a
separate VAT department in D a y e t o w n and organized with appropriate material and
human resources. The main tasks that must be performed by any department in charge of
VAT are: identification and registrations of taxpayers, processing returns, controlling
collections, making refunds, auditing taxpayers, investigation for tax frauds and evasion or
levying penalties. In order to administer these tasks, the department in charge has to be well
organized and conduct publicity taxpayer’s education and information during the moment in
time.

The survey was conducted by asking the officials of the authority whether the tax
administration is strong enough to control non-registered and illegal activities of VAT
payers. Among the 89 respondents from the authority, 20(22%) replied as yes that the VAT
administration capacity is strong to control illegal activities, 63(71%) replied that it is not
strong, and 6(7%) kept themselves from giving their ideas. For those majority, 63(71%),
respondents who said the authority’s VAT administration capacity is weak, the researcher
asked why they have said the administration is weak and what the authority has to do to
strengthen its administration capacity. The reasons that they put for are:

Less motivations observed on some employees of the authority due to less

remunerations
Lack of sufficient number of ethical, trained and skilled employees
Accelerations of rotating the employees within the authority and firing of senior
officials
 Absence of strong enforcement activities
The difficulties that the authority has faced to distinguish the between honest and
31
disobedient traders
Provisions of weak service qualities by the authority
The absence of strong controlling system against the frauds and evasions performed
by some noncompliance enterprises.

From the results of the survey we can say that the VAT administration of the authority is not
strong enough to bring those nonregistered enterprises to be registered and to the control
illegal activities of VAT payers. Therefore the authority should work strongly to alleviate
the existing bottlenecks and achieve the desired objectives by improving the service
qualities it is rendering, solving the problems raised in association to frauds, auditing
activities and tax evasions promptly, recognizing the activities of genuine traders, hiring
qualified manpower and improving the collection system and strengthen its follow-ups.
4.11 Businesses not registered

The survey was also conducted by asking the officials of Bensa Woreda Revenue
Office whether there are eligible business enterprises in the market whose annual
turnover are more than or equal to the threshold but have not yet registered for VAT.
Out of 89 employee respondents 87(98%) replied that yes there are business entities whose
annual turnover are more than the threshold but not registered for VAT and the rest 2(2%)
replied as they don’t think that there are enterprises whose turnover are equal to or more
than the threshold but not registered for VAT. From this we can conclude that there are
business entities in the market whose annual turnover is equal to or more than the threshold
of Birr 500,000 but not registered for VAT. By taking the responses provided by the
officials of the authority in to consideration the researcher also asked them why such
enterprises don’t want to register for VAT but have to be. They put their reasons for this as:

Some enterprises fear that registration for VAT may lose their customers due to the
price differences of purchasing goods and services from VAT registered and

unregistered

The absence of uniform registration system followed by the authority

 Low level of awareness of the business community and the public as a whole

32

In order to reduce the obligatory registrants and promote voluntary tax compliance, the
Bensa Woreda Revenue Office should engage in continuous awareness creating programs
to educate the public aiming to awake the business community on various VAT issues. In
addition the authority

has to improve the quality of services provided to taxpayers, follow uniform VAT
registration systems, consistently examine and take actions over those unethical workers,
identify and recognize those honest and genuine enterprises as well as their activities, and
enforce those business enterprises that their annual turnover is equal

to or above the threshold but are not yet registered for VAT to be registered. The
business community should also obey the VAT rules and regulations and so they should
register for the VAT according to the registration process of the VAT without any
enforcement actions taken over

them by the authority as well as the public have to work in harmony with the authority to
bring the noncompliance enterprises to the court front.

4.12Number of Registered vs. Nonregistered

Further respondents from the authority were asked whether they agree that the number of
non-VAT registered business enterprises exceeds the number of VAT registered taxpayers in
the country. Among the 89 respondents, 50(56%) replied as they agree with the idea that the
number of non-VAT registered exceeds the registered ones and the rest 39(44%) do not
agree that the number of non-VAT registered is more than the VAT registered business

entities. The following figure portrays the responses that respondents said Yes/No.

4.13 VAT collections

Except the value of goods and services exempted by the VAT proclamation all imported
materials, locally produced items and services rendered are taxed by 15%. Export of goods
and services, international transport of goods and passengers, gold supplied to National

Bank of Ethiopia, transfer of organization on movement are zero rate taxed goods and
services. The purchase of goods and services for economic, social and institution of the
country’s development are exempted.

33

VAT is considered as a credit invoice method because it is a tax system in which issuance of
invoice serves as a cornerstone for the tax collection process. VAT proclamation No.

285/2002 Article 22/1 stipulates that a person registered for VAT is required to issue a VAT
invoice for a taxable transactions, but a person who is not registered for a VAT does not
have the right to issue a tax invoice. Therefore VAT registered enterprises

perform their business transactions using an invoice. Hence the tax administration would
not be expected to estimate the total sale or purchase made for levying the tax rather the
invoice would depict the taxable sales and the buyer claims on what he has paid on his input.
Nevertheless this proclamation has seen violated by some business entities as the
information that the researcher obtains from the officials of the authority and tried to be
displayed in the table below. This is so because of the fact that several number of VAT
registrant do not issue VAT invoices properly during transactions. This means that the tax
collected by taxpayers is not paid to the tax authority and the normal tax operation system
becomes jeopardized as the buyers could have no evidence for offsetting the tax paid in the
course of business activities.

Having this as an appetizer the survey was conducted by asking the officials of
B e n s a W o r e d a R e v e n u e O f f i c e whether there are VAT registered business
enterprises that have collected the tax with illegal invoices or not. The question was raised in
the manner depicted in the table below:

Table 5: Value Added Tax collection

Survey Question Items Total

Are there VAT registered Yes No Know

business enterprises that noting

have collected the tax with 84(95%) 2(2%) 3(3%) 89(100%)
illegal invoices?

Source: computed survey data, 2008

As can be observed from the above table, out of the 89 respondents, 84(95%) replied that
yes there are traders in the market that collect the tax with illegal invoices, 2(2%)

34

As can be observed from the results of the findings, most of the business entities have not

comply with the laws and regulations of VAT and they committed illegal activities by
preparing fake invoices and they remitted the tax income for themselves rather than to pay
the government. And when we see on the side of the authority, it is incapable to identify and
control business enterprises that are noncompliance with the laws and regulations of VAT.

This is because of the absence of sufficient and well equipped manpower.

Therefore the authority should strengthen its follow-up, appraise the performance of existing
and recruit qualified new employees, strengthen its controlling mechanisms, improve its
administrative systems and prepare programs to provide intensive education to the society

about the benefits, rules and regulations of taxes specifically VAT. In addition to these tasks
expected to be performed by the authority, the society should also accept and obey the
existing VAT rules and regulations.

4.14 Customers willing

In addition the taxpayer respondents were asked whether there are customers in the market
who are not willing to purchase goods and services with VAT. Out of the 263 respondents,

113(43%) replied that yes there are customers who are not willing to purchase VAT
inclusive goods and services, 108(41%) replied that there are no customers that are not
willing to purchase goods and services with VAT and 42(16%) replied that they know
nothing about. The majority of the respondents, 113(43%), agree with the idea that there are
customers in the market that are not willing to pay for the goods and services they have
purchased with VAT. And the respondents put the reasons why these customers are not
willing to purchase goods and services that include VAT rate in to its prices. The main
reasons are related to the purchasing powers and awareness of the society regarding VAT.

The currently increasing level of inflation affects the purchasing power of the society and
manifests the customer’s need of searching goods that doesn’t incorporate VAT value in its
prices. On the other hand there are also customers that purchase goods and services that
exclude the VAT value in its prices intentionally made by the sellers providing falsified

35

invoices.

4.15 The authority’s manpower

The survey was also conducted by asking the taxpayer respondents whether they believe that
the authority has adequate number of and skilled manpower or not on their views. Out of
the263 respondents, 124(47%) respondents agree that the existing number and skills
of employees of the authority is excellent and 139(53%) do not believe that the number
and quality of the employees of the authority are sufficient. Based on the responses of
the majority of the taxpayer respondents, the authority is expected to increase its manpower
by recruiting literate and qualified manpower as well as appraise the performance and skills
of the existing employees through trainings and preparing awareness creation programs as
well as workshops so as to match its

performing capacity with the increasing number and consciousness of the society.

4.16 Actions taken The survey has also conducted by asking the taxpayers whether the
authority has taken some measures to alleviate the existing problems or not. Out of the
263 taxpayer respondents,205(78%) said that the authority has taken some measures to
alleviate the problems of VAT implementation committed by illegal business enterprises,
10(4%) respondents replied that the authority did not take corrective measures to
alleviate the problems, 48(18%)respondents have no idea regarding the measures taken
by Bensa Woreda revenue office to minimize the problems faced during the
implementation of VAT. From this we can conclude that the authority has taken different
actions in order to alleviate the problems that has faced though additional measures are
also expected to be done. Therefore it is highly advisable for the authority to take more
actions over those enterprises that are not convenient for the proper
implementations of the VAT system in the country. This can be maintained by recruiting
additional and capable employees, conducting continuous discussions between the tax payers
and the authority, providing continuous and intensive trainings to the existing taxpayers and
its employees, improving the system (SIGTAS) that the authority is using, enforcing those
business enterprises that scored their return equal to or above the threshold to register for
VAT and recognize and encourage those genuine traders as well as it should take legal
action over those noncompliance business enterprises.

36

4.17 Effectiveness of VAT

The main objectives of VAT implementation was to collect tax on the added value whenever
sales transaction is conducted; to minimize the damage that may be caused by attempts to
avoid and evade the tax and to ascertain the profit obtained by the taxpayers; to enhance
saving and investment as it is a consumption tax and does not tax capital; and to enhance
economic growth and improve the ratio relationship between Gross Domestic Product and
Gross Revenue.

From these points of view the employees of ERCA were asked about whether they believe
that the implementation of VAT is successful and achieve its objectives or not as shown in
the following table.

Table 6: Effectiveness of VAT

Survey Question Items Total

Do you believe that the implementation of VAT Yes No
is successful and achieve its objectives? 42(47%) 47(53%) 89(100%

Source: computed survey data, 2014

As can be observed from the table above, among the 89 employee respondents, 42(47%)
replied that the implementation of VAT for the last consecutive years was successful and the
rest 47(53%) replied that it is difficult to say the implementation of VAT in this country was
successful and achieve the desired objectives. As per the findings, majority of the
respondents agree that the implementation of VAT requires more effort to achieve the
desired objectives effectively. This is so because:

the society is less conscious about VAT rules and contribution of VAT to the
country’s growth and development,

tax administration system of the authority is weak,

the way and methods of fraudulent activities and tax evasions on VAT by taxpayers
are increasing from time to time and

The attitude of the business community towards VAT is still negative.

37

Therefore the authority has to work more on the areas of awareness creations, strengthening
enforcements, upraising the capacities of the employees, updating the system under use,
educating the public using different Medias to make them develop taxpaying as their culture
and strengthen the activities of identifying illegal business enterprises from the legal ones
and taking corrective legal actions over the illegal traders.
 38

CHAPTER FIVE

5. CONCLUSION AND RECOMMENDATIONS

5.1. Conclusions

These days the best instrument which government can use as a source of revenue is taxation.

It is obvious that an economic development of a country can be certain by an effective and

efficient administration and collection of taxes. A good tax system should have one or a
combination of desirable characteristics as economic efficiency, administrative simplicity,

flexibility, political accountability and fairness for the purpose of good tax system. This is so
because, when the implementation and administration of tax system is effective, the
government’s revenue that helps to fulfill the socioeconomic needs of the society will
be \amplified. It is possible to say that the major function of taxation is to marshal the
necessary funds to finance the increasingly expanding level of public expenditures.

VAT is an indirect tax levied on domestic consumption of goods and services as well as on
imported goods. It can be considered as the most important tax innovation of the second half
of the twentieth century. VAT is primarily collected by business firms or individuals at all
stages of production and distribution beginning with importers and producers of raw
materials and ending with retailers. In line with this perception, VAT is implemented in
many developed as well as developing countries.

Following the an increasing number of developing countries that have converted their sales
tax to VAT, the government of Ethiopia has introduced VAT on January 1, 2003 replacing
the sales tax aiming to raise more revenue, modernize its tax administration and encourage
investment and trades. The replaced sales tax was collected only at the point of sales; as the
result it is exposed for double taxation and had severe tax evasion problem. VAT on the
other hand is applied on the value added at each stage

of production and distribution. This means that the producer will be refunded for VAT paid
on all the purchase of inputs.

As per the VAT proclamation, VAT will be levied on most consumption goods and services

39

with the exception of exports and exempted goods and services charging a uniform rate of
15% of sales. The taxpayers required to be registered for VAT has both obligatory and
voluntary behaviors. Under the obligatory registration a person who carries on taxable
activity and is not registered is required to file an application for registration if his annual
return exceeds or equals to the threshold level (Birr 500,000). The voluntary VAT registered
business enterprises are eligible to claim input tax while nonregistered are not given this
opportunity. For those business enterprises whose annual turnover of taxable goods is less
than the VAT registration threshold, are required to pay a turnover tax at a rate of 2% for
goods and 10% for service.

As it was discussed repeatedly, VAT is a broad tax and this nature of the tax enables to raise
more government revenue. The rate of VAT is uniform and the scope of exemption under
this tax is limited and it is applied at each stage of production and distribution i.e. whenever
additional value is added the tax is applied. After the implementation of VAT in Daye
town VAT collection has shown an increasing trend in the government revenue as
compared to the replaced sales tax. This is because of the fact that VAT has the advantage of
reducing the cost of production of industries through its inherent refund system and the fact
that it does not burden exports; and it offers total transparency of the incidence of tax
as VAT is multistage sales tax levied as proportion of the value added. A very
important thing that quotes in need of VAT is less tax evasion. VAT in Ethiopia could be
helpful in simplifying and modernizing the tax administration with its invoice based
characteristics and its requirements for the registrants to hold a systematic book of
accounting. Economically, VAT does encourage investment by providing a refund for
a tax paid on inputs and encourage export by zero rating items exported. With the very
concept of VAT, output tax is charged at each stage of production and distribution to ensure
that only final consumption is exposed to be taxed.

In Ethiopia, the implementation of VAT which is a new and sophisticated tax that

differs significantly from the classical tax schemes with which the people were familiar
with the formerly existed taxes is not an easy task. Hence, various misconceptions
regarding its impact, its application, and its benefit to the national economy and its

40

advantage to simplify the tax administration system were normal in the initial phase of

its application. These misunderstandings pave the way for the researcher to think
about the gap of the implementation of Value Added Tax and the problems it is
encountering.

Accordingly a survey was conducted to identify, asses and analyze the implementation of
VAT by distributing questionnaires for information’s gathered from VAT registered
taxpayers and employees of Bensa Woreda Revenue Office. Based on the results of
the findings, VAT implementation has faced different problems when it comes to the
ground. The major once are: administration inefficiency to control noncompliance
taxpayers, lack of cognizant taxpayers, existence of reluctant enterprises to register for
VAT, existence of registered enterprises issuing illegal VAT invoices, existence of
unwilling customers to buy goods and services priced with VAT, the authority’s weak
follow-ups and controlling mechanisms against those taxpayers registered but doesn’t
use proper VAT invoices and those nonregistered enterprises but have a transaction of
more than or equal to the threshold level,

inability of the authority to render quality services and weak audit technique, failing of
some taxpayers to notify the collection of VAT to the tax offices, and existence of many
important sectors, most notably services and the wholesale and retail sectors, that have left
out of the VAT net, the existence of taxpayers that refuse to honor their debt obligations to
the VAT service while others submit their VAT returns without payments, the deliberate
submission of nil returns and non-issuance of VAT invoices by the business enterprises.

The main causes of these problems were raised not only from the tax laws and
proclamations but also from lack of awareness and deliberate resistance not to comply with
the VAT laws of the business community, absence of sufficient materials and skilled
manpower, the negative attitudes of some business societies

towards VAT, weak purchasing powers of the society forcing to search goods and services
that exclude the value of VAT

from its price, and weak system of auditing performance. Hence the whole tax system in
Ethiopia is faced with such problems as there is high cost of tax compliance, extensive

41

evasion overzealous and corrupted tax collecting employees. As the result of these
constraints the implementation of VAT in D a y e could not meet its objectives as
effectively as it was desired. Identifying taxpayers, assessment on VAT execution (includes
identifying taxpayers and tax evades as well as the registered and unregistered
taxpayers among the business communities), processing returns, controlling
collections, making refunds, auditing taxpayers, and levying penalties are the major
activities in VAT administration. However, due to the absence of sufficient manpower
the authority could not perform its activity properly, so some taxpayers couldn’t Obey
The Existing VAT Rules And Regulations. As Perth Results Of The Survey The
Authority Has Taken Legal Measures Against People Who Doviolate The VAT Laws.
Some Of The Measures That Has To Taken To Solve The Problemsstated Above Were:
Conducting Intensive Taxpayers Ben s a W o r e d a R e v e n u e
O f f i c e Education Programs, Conducting Implementation Seminars, Rendering
Taxpayers Advisory Services (Tax Audit), Release Information Through Medias,
Conducting Forced Registration Campaigns, Trying To Strengthen The Tax Administration
Systems, And Increasing The Investigation Operations Over Illegal Movements Of
Taxable Goods As Well As Upgrading The Performing Capacity Of Employees And
Improving The Networking Capacity Of The Standard Integrated Government
Tax Administration System (SIGTAS).

Currently The Numbers Of Tax Registrants Are Increasing Throughout The Country.
Taking This Into Account The Authority Has Delegated Regional/City Administrations To
Collect The Tax And Administer Taxpayers With Their Respective Jurisdiction And Act As
The Revenue Organ. This Can Help To Reduce Mal-Practices Exercised Against The Tax
System Such As Reluctance To Register, Failure To File Returns, Non-Issuance Of VAT
Invoices And It Helps In Maintaining Uniformity Of VAT System

Among Regions, It Enhances Service Delivery, It Increases The Number Of VAT

payers as region/city revenue offices have more access to the transactions of the traders with
their vicinity, thereby increase tax revenue and it enhances tax administration skills of
regions tax officers through transfer of knowledge and application of information
communication technology as well as sharing of experiences.

42

To tackle the obstacles for the implementations of VAT in the country, the public at

large and the government have to reach an agreement to work together to increase the
taxpaying habits of the society. Since the ultimate goal of tax specifically VAT is to collect
sufficient amounts of money that significantly be able to help the government to finance
social and economic development and reduce poverty by introducing a new tax culture
which actually demands an alliance with all taxpayers and organizational strength and
efficiency from the side of the tax administrations. ERCA has also take actions to manage
the adverse situations, such as education campaign, strengthen tax administration functions,
forced registration for enterprises that its annual business transaction is over or equal to
the threshold level, and increases the controlling system for those taxpayers who are
strongly violate VAT laws and regulations as well as strengthen its follow-ups and
upgrading the performance of its employees.

5.2.Recommendations

The major recommendations that come out from the survey result goes towards both the
authority and the business community. The recommendations to the authority are:

VAT is increasingly being used throughout the world to raise government revenue with
less administrative and economic costs than other broad based taxes. Like it has been
observed in many developing countries, VAT implementation in D a y e t o w n has
been facing different problems at the initial stage. Since a poorly administered VAT
raises less revenue that can change the very nature of the tax resulting in unintended
economic distortions, the B e n s a W o r e d a revenue and Customs Authority has to
build it administration capacity on both human and material resources to carry out its duties
and responsibilities effectively and efficiently. This can be maintained through hiring of
more qualified employees, provision of consistent training and development for staffs
who will join and who have joined and using advanced information and communications
technology so as to improve its administration capacity and control those noncompliance
VAT payers.

There is a strong believe that well-informed taxpayer society can be considered as an

important asset for the tax authority. Therefore, the authority should conduct a consistent

43

awareness creation programs to update the business community and the

society at large

about the concepts, rules and regulations, advantages and uses of the Value Added Tax.
This can be carried out by intensively educating the public using mass-medias like
television, radio, news papers, creating accessible websites, distribution of broachers,
preparations of different seminars and workshops on a regular basis to increase
awareness. Even though the primary objectives of VAT implementation in D a y e is to
rais government revenue, to encourage investment by providing a refund for a tax paid on
inputs and encourage export by zero rating export items, VAT has not been implemented
effectively and meet its objectives as desired as possible. This is because of the existence of
taxpayers that are not compliance with the current VAT laws and inefficient tax
administration to control those noncompliance taxpayers. Therefore to tackle these
constraints and achieve the desired objectives ERCA should strengthen its tax
administration by delegating responsibilities to regional/city administration revenue
collection organs to administer taxpayers with their jurisdiction and also the taxpayers
should comply with current VAT rules and regulations. When the authority delegates
responsibilities to city or regional administrations they start acting as an agency; the
reluctance of business enterprises to register for VAT, failure to file returns, non-
issuance of VAT invoices violations of VAT laws will be highly reduced, uniformity of
VAT system among regions, quality service delivery, the number of VAT payers as
region/city revenue offices have more access to the transactions of the traders with their
vicinity will be enhanced, thereby increase tax revenue and it enhances tax
administration.

A threshold for VAT registration has been put in place for administrative purpose. The

current threshold level (500,000 birr) is high and hence allows most business
communities whose return is below the threshold but actively participating in the market

competition to stay unregistered. Therefore the current threshold level should be

adjusted into more rational level by considering the increasing number of entities

44

engaging in different businesses and should be minimized to incorporate at least those

business enterprises that are actively participating in the market competition and balance

the revenue generated from the tax. This can be carried out by hiring more qualified and

professional employees and reducing the threshold to the lower level.

The VAT ensures neutrality in international trade by freeing exports of tax and by

treating imports and domestic goods the same; this is an important attribute in an

interdependent, high-tax world. Even though VAT as a transactions tax, which must be

shown on invoices, is harder to evade than an income tax, there are results that show the

violations of VAT proclamation by some business entities in Ethiopia because of the fact

that several number of VAT registrants do not issue VAT invoices properly during

transactions. This means that the tax collected by taxpayers is not paid to the tax

authority and the normal tax operation system becomes jeopardized as the buyers could

have no evidence for offsetting the tax paid in the course of business activities.

Therefore the authority should strengthen its follow-up, appraise the performance of

existing and recruit qualified employees, strengthen its controlling mechanisms, improve

its administrative systems and special focus should be paid in strengthen its audit and

enforcement wings. In addition to these tasks expected to be performed by the authority,

the society should also accept and obey the existing VAT rules and regulations.

To reduce the undesirable consequences that may undermine the whole reform

program, the organizational and human resource should be adjusted in order to cope
up with the increased number of VAT registrants that currently is observing.
Particularly, manpower requirement should be given special attention since the business
community is in advance in searching for shortcomings of the tax administration. The
result of the survey shows that the non-taxpayers are very large in number and most

45

registrants as VAT payer claim credit. To tackle this problems investigation and

enforcement work should be strengthened and measures on those taxpayers who are

constantly failing to comply with the tax rules and regulations should be taken.

In general the implementation of Value Added Tax in Ethiopia has faced

various problems such as tax evasion and fraud, false invoices prepared by enterprises,
increased number of enterprises that collect VAT for their selves, selling products by
offering invoices of VAT inclusive and VAT exclusive, resistance from the business
community against registration for VAT, preparations of understated financial
statements and making a business transaction reports under threshold level after it
has launched.

However, to sustain the VAT system as a good means to raise government revenue,
the Ethiopian Revenue and Customs Authority should take actions such as: train the
taxpayers about the rules and regulations of VAT continuously, recruiting new
employees and give continuous training for the existing once, delegate the tax authority to
regional and city administration and it should also increase its follow-up and
investigation to control noncompliance enterprises, as well as effectively and efficiently
performing the tasks of identification of VAT taxpayers, processing of returns,
controlling collections, making refunds, auditing taxpayers, and levying penalties to
tackle the problems it has encountered. The recommendations forwarded towards the
taxpayers and the public are:

In addition to the tasks performed by the tax authority, the business communities should
also obey the current VAT rules and regulations, develop the culture of taxpaying as a
sign of modern thinking, pay attentions towards the government’s

effort to collect and fund the long run projects carrying out all through the country,
take into account as the government’s main source of income to fund to the social
and public affairs is the wealth collected and accumulated from taxes, consider paying
tax as a means of directly or indirectly putting one’s own contribution on changing the
life of each citizen and they perform their activities according to the current VAT laws
as well as start to work in cooperation with the authority in fighting against those
enterprises that are violating the rules and regulations of VAT.
46
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2. Alan J. Auerbach and Roger H. Gordon, 2002, “Taxation of Financial Services under
a VAT,” pp. 415-416
3. Arega Hailu, 2004, “Assessment on the VAT implementation in Ethiopia”
4. A. Mohammad Salmeen, 2010, “ Goods and Services Tax: Problems and Effects of
Implementation”, Business e-Bulletin,Vol.1, pp. 62-62
5. Bekure Herouy, 2004, “the VAT Regime under Ethiopian Law with emphasis on tax
exemption,” the Ethiopian and international experience on tax exemption, pp. 6-9
6. Byrd, Chen and Jacobs, 1996/7, “Canadian tax Principles,” Clarence Byrd University
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35, pp. 559-615
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Compliance,” pp. 255-256
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Carl S. Shoup, and Gerardo P. Sicat, a World Bank Symposium, Washington, D.C.
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Implementation in Singapore,” International VAT monitor

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modern VAT,” IMF, Washington, D.C.
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D.C. American Enterprise Institution
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Added Tax: Conceptual Issues and Country Practices,” Tax Notes International
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International Tax and Public Finance, Vol.5
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31. http://www.mofed.gov.et
 APPENDIX
MISHQEN COLLEGE

Appendix 1 Questionnaires for VAT registered taxpayers

Dear participants:
You are being asked to participate in a survey that intends to assess VAT implementation
and related problems Bensa Woreda. The purposes of the study are to:
assess and describe the practice of VAT in Ethiopia, identify the inductive factors and
investigate the possible problems for the adoption and implementation and recommended
solutions to help the program implemented successfully.
I respectfully request your kind cooperation in answering the questions that follow a clearly
and frankly as possible and your response will be highly confidential.
Thank you in advance for your kind cooperation
Section I: Classification/identification questions
Answer by putting a thick (√) in one of the blank spaces corresponding to each item.
1. Age group (in year): 20-30_____, 30-40_____, 40-50_____, 50+_____
2. Sex: Male______, Female______
3. Level of education: below 12 grade _____, certificate____, diploma_____, bachelor
degree____, masters and above____
4. Type of the business/unit_____
5. Your status/position in the unit/business____
6. Year of experience in the specific office/units____
Section II: survey questions
Select an appropriate answer from the given alternatives and circle it, for other questions
please provide your answers on your own words.
1. Do you think that the introduction of VAT in Ethiopia is necessary by replacing the
 sales tax? A) yes B) No C) I have no idea
2. As a taxpayer, do you think that you/your organization are familiar with VAT
proclamations and regulations?
A) Yes B) to some extent C) no D) I have no idea

3. The intention of VAT implementation in Ethiopia is:

A) Encouraging investment and export
B) Discouraging investment and export
C) Encouraging investment but not exports
D) I have no idea
4. Are there measures taken by the ERCA to alleviate the problems associated with the
implementation of VAT?
A) Yes B) No C) I have no idea

5. Do you think that the threshold of VAT (500,000) is fair?

A) Yes B) No C) I have no idea
If your answer for question no.5 is No, what do you think of it should be?

Why?_____________________________________________________________________

6. Do you think that VAT is more advantageous in comparison with the replaced sales
tax?
A) Yes B) No C) I don’t know
If your answer for question no.6 is yes, can you mention how it could be please?

7. Do you believe that ERCA had made sufficient explanation to the public regarding
 VAT?
A) Yes B)to some extent (little) C) No
If your answer for question no.7 is „B’ or „C’ what do you think of the Authority to do?

8. Do you believe that the process of VAT registration is smooth and easy for
taxpayers?
A) Yes B) No
If your answer for question no.8 is No, what do you think of the reasons?

9. Do you agree with the idea that most of the VAT payers are registered obligatorily?
A) Yes B) No
If your answer for question no.9 is yes, what do you think of the reasons why they are not
voluntarilyregistered?________________________________________________________

10. Do you think that the VAT refunding processes being made are on time effectively?
A) Yes B) No
If your answer for question no.10 is No, what do you think of the reasons?
 11. Do you believe that the declaration process is easy and effective?
A) Yes B) No

If your answer for question no.11 is No, what do you think of the problems that makes it
difficult?