Вы находитесь на странице: 1из 40









MAY, 2011
Above all thanks to the Almighty Allah who has helped me to go through all the
period and accomplish my academic successfully
I would like to extend my gratefulness to my advisor Dr Samuel Kifle who was
consistently checking up on my research guiding me in every aspect. He had
made several corrections to give strength to the paper.
Next my sincere thanks go to the employees of the VAT department of
Ethiopian revenue customer authority.
My family deserves my appreciation for their love and care. They coverlet me
down in the hardship I had come through during my studies. Especially I am
also thankful my brother fedlue who had provided the material which is needed
to accomplish this paper.

Even though value added tax is a recent phenomena in our country which was
introduced on the beginning of January 2003 E.C., it has the collection
problems in case of Ethiopian revenue and customs north Branch in Addis

The aim of the study is to give summarized back information about the newly
introduced tax (VAT) and to screen out the collection problems in Ethiopian
revenue and customs authority north branch in Addis Ababa.

The researcher use primary and secondary data collection technique in order to
reach the aim of the study and finally, to reach on some conclusion and
recommendation by haring the result.

Table of content
Title page No
Acknowledgement---------------------------------------------------------------------- i
Abstract --------------------------------------------------------------------------------- ii
Table of content ----------------------------------------------------------------------- iii
List of table ---------------------------------------------------------------------------- iv
Chapter one
1.1 Back ground of the study ------------------------------------------------ --1
1.2 Problem of the study ------------------------------------------------------ - 2
1.3 Objective of the study (both General and specific)--------------------- -2
1.4 Hypothesis of the research ------------------------------------------------- 3
1.5 Significance of the study --------------------------------------------------- 3
1.6 Scope and limitation -------------------------------------------------------- 4
Chapter two
Literature Review----------------------------------------------------------------------5-15

Chapter Three
Metrology of the study
3.1 Unit of analysis and population ------------------------------------------------ 16
3.2 Sample size and sampling technique applied -------------------------------- 16
3.3 Meted of data collection----------------------------------------------------------- 16
3.4 Mated of data analysis------------------------------------------------------------- 17

Chapter Four
Data presentation, Dissection and analysis-------------------------------------18-27

Chapter Five
5.1 Summery -----------------------------------------------------------------------------
5.2 Conclusion -------------------------------------------------------------------------- 28
5.3 Recommendation --------------------------------------------------------- --------- 30
List of table
Table 3.1 Characteristics of the respondents.

Table 3.2 Factors which may affect VAT collection.

Table 3.3 Factors which may affect VAT collection.

Table 3.4 Sufficiency of employees in VAT department of ERCA.

Table 3.5 Availability of persons cancelled from VAT register and shifted to

Table 3.6 Preference of VAT to sales tax.

Table 3.7 Adequacy of time given for payment of VAT liability.

Table 3.8 Evaluation of the extent of willingness of tax payers.

Table 3.1 In evolvement of executive in prevention of VAT evasion /avoidance.

1.1 Back ground of the study
One of the mechanism in which countries raise revenues to finance
government spending on the good and services that most of us demand is

As compared to the developing countries, the developed countries have been

able to generate substantial revenue through imposing of taxes one of reasons
for this has been the efficient tax system operating in the developing economies
which are characterized by weak monetary and low development of the formal

Value added tax (VAT) is a new system introduced in Ethiopia. This tax system
is not new to other countries.
Beginning with the adoption of tax sur, lavaliere adopted by France in 1954, it
was gradually been adoption by other countries (purhot,2000). The
development this tax system is so fast it has now bee employed by a large
number of Latin American, Asian, African and pacific countries value Added
tax (VAT) has become a major tax instrument worldwide. The global trend to
introduced VAT in more countries is continuing (Goode,1993). Ethiopians tax
reform program has introduced VAT since January 2003.

The Ethiopian government has introduce, VAT as part of the overall tax reform
program. The tax reform program is preceded by establishment of a new
ministry of revenue as a first step to improve tax collections and to combat
fiscal fraud.
The need for value Added tax (VAT) emanates from the very weakness of the
sales tax that it is intended to replace (purhot, 2000). VAT is an indirect tax
that is changed whenever at a taxable person make a taxable supply of goods
and services in the course of his business although it is finaly borne by
consumer (Hancock, 1998).
Service while other submit their VAT their VAT returns without payments.
There is also deliberate submission of nil returns non-issuance of VAT invoice
and entertainment provides and loaf operators refuse to use the VAT coupons.

1.2 Problem of the study

It is known that most of the nations in the world have applied value added tax
so as to develop their economy. Even if VAT is being observed since it is a
newly introduced type of tax, official and tax experts, VAT collectors and VAT
payers gave their own suggestions related to the implementation problems of
VAT. Therefore this study tries to answer the following principal questions.

1. What are the possible reasons that may encourage business enter prize
and individual business persons to evading VAT?
2. Is there any measures taken by Ethiopian revenue and customs
authority to control VAT evasion or avoidance?
3. What are the major problems of Vat collection?
4. Do executive bodies properly execute their duties in relation to avoidance
and evasion of tax?

1.3 Objectives of the study

1.3.1 General objective
The general objective of the study is to identify the major problems of VAT
collection faced by Ethiopian revenue and customer authority (ERCA).
1.3.2 Specific objectives
The specific objective of this paper are:-
1. Identify the factors affecting collection of VAT.
2. Identify measure taken by ERCA to control VAT evasion or avoidance.
3. Assess whether the collection of VAT has met is objective in generating the
expected level of government revenue and
4. Identify the performance of executive bodies is relation to avoidance and
evasion of tax by VAT payers.

1.4 Hypothesis of the study

Ho: There is possible reason that may encourage business enterprise and
individual to par VAT.
Ha: There is no possible reason that may encourage business enterprise and
individual to pay VAT.

Ho: There are problems in VAT collection.

Ha: there are no problems faced in VAT collection.

Ho: There are measures taken by government for VAT evasion or avoidance.
Ha: There are no measures taken by government for VAT evasion or avoidance.

1.5 Significance of the study

Government organizations like Ethiopian revenue and customer authority
(ERCA) business enter price, school and some VAT registered enterprises are
expected to be beneficiary from this study. Accordingly the research has the
following benefits.

1. The recommendations to be provided maybe useful in directing decisions to

ward controlling the problem of Ethiopian revenue and customs authority.
2. The issues discussed contribute to filling the literature gap on VAT.
3. It adds to poll of data available on VAT thus serves as a secondary source
4. It might initiate further studies to grate with and depth.
5. It will help to create responsible citizen.
6. It helps merchants and other parties to have abutter knowledge about VAT.

1.6 Scope of the study

This study focus on VAT collection problem of Ethiopia revenue and customer
authority. In the investigating the VAT system of ERCA (Ethiopia revenue and
customer authority) the study will compromise along with book, magazine,
proclamation news paper, are the basic points or source.

1.7 Limitation Of the study

In conducting this study the researcher faced several problems which have
negative impact on this paper. One of the problems that hinder the researcher
objective was UN availability of compiled documents in the office.

 Lock of sufficient time to collect data.

 Absence materials equipment and supplies that have to be provided by
the universities.
 Lack of sufficient data in the office.
2 Value added tax (VAT)
2.1 Introduction
VAT is a tax on the value added TAX to good services by enterprises at each
stage of the production and distribution processes. It arises whenever a
“taxable person” makes a “supply of goods or services” in the course of his
business. Thus in some countries it is called “good and services tax” or GST
VAT was invented by French economist in 1954 by Maurice lour director of the
French tax authority VAT was invented because very high sales taxes and
tariffs encourage cheating and smuggling. (Gebrie, 2008).

Unlike the turn over tax which is applied to the full value of a product every
time the item changes hands in the process of production and distribution the
VAT is assessed at each stage on only the increment in value acquired by the
product since the last taxable transaction. At the end of the chain the total
amount of tax paid on a given commodity is determined only by the tax rate
and the final price of the commodity, required less of the number of stages
through which is has passed what has been collected in fractional payments is
equivalent to a single stage tax on the value of the final product. The theory is
that the end consumer carves the burden of VAT not the business, which is
merely collecting the VAT on behalf of tax all Hority. But the reality is not quite
so simple (Gebrie, 2008). For fully taxable businesses VAT is not a cast but is
merely an accounting headache whatever you collect in output tax must be
handed over to tax authority whatever you collect in output tax must be
handed over to tax authority whatever you pay in put tax can be recovered
from tax authority (apart from the input VAT on personal passenger vehicle
and entertainment but on has taken care full on purchase and sales of taxable
supplies otherwise VAT will affect his/her cash flow (Gebrie, 2008).

2.2 Computation of vat

In modern taxation there are four types of value added taxation system there
a. Gross product value added tax.
b. Income type value added tax.
c. Capital exemption type value added tax.
d. Consumption type value added tax. (Gebrie, 2008).

2.3 VAT Administration in Ethiopia

The VAT replaced the current sales tax on manufactured and imported good
and service on January 1, 2003. The responsibility for the correct calculation
and timely payment of VAT rests on the tax payer himself. The VAT is a broad
based tax on the consumption of goods and services it is collected at all stage
in the production and distribution process beginning with the importers and
producers of raw materials and ending with the retailers cascading of the tax
(i.e tax on tax) is avoided by providing for a credit for the tax paid only to raw
materials used directly in the production of good under a VAT. Relief is a
granted for goods are not subject to the VAT. Removing that tax content (on in
puts) from exported goods makes the goods more competitive in international
VAT is at ax consumer expenditure it is collected on business transaction and
important most business transactions involve supplies of good or services and
VAT is payable if they are:
 Supplies made in Ethiopa
 Made by a taxable person
 Made in the course of furtherance of a business
 Are not specifically exempted or zero-rated-
Supplies are outside the scope of the tax if they are
 Made by someone who is not a taxable person or
 Not made in the course or furtherance of business

Curse or furtherance the way a taxable person has to carry out its activity to
develop advance and progress the taxable activity it refers to the normal and
expected events or processes to develop the taxable activity. Anything done in
connection with the commencement or termination of a taxable activity is
treated as carried out in the course or furtherance of that taxable activity
(Gebrie, 2008).

2.4 VAT Refund

VAT registered person shall got refund
If at least 25% of the value of a registered persons taxable transactions for the
accounting period other registered person in a single transaction of
substantially all of the asset of a taxable activity provide a notice in writing
singnet by the transferred is finished with 21 days arter the supply taken place
is taxed at a zero rate the authority shall refund the amount of VAT applied as
a credit in excess of the amount of VAT charged for the accounting period with
in a period of two months after the registered person files an application for
refund accompanied by documentary proof of payment of the excess amounts.

In the case of other registered persons the amount of VAT charged for the
accounting period is to be carried for word the next five accounting period is to
be carried for word to the next five accounting periods and credited against
payment for these period and any unused excess remaining after the end of
this five month period shall be refunded by the authority with a period of two
month after the registered person files an application for refund accompanied
by documentary proof of payment of the excess amounts. Where the tax
authority satisfied for refund application in over paid tax the tax authority

 First apply the amount of the excess in reduction of any tax levy interest
of penalty payable by the person under the customs proclamation the
income tell proclamation and excise tax proclamation.
 The repay any amount remaining to the person if the amount to be
refunded is move than 50 by.

When registered person is entitled to refund and the tax authority is satisfied
but does not pay the refund with in specified date the authority shall pay the
person the refund plus interest set at 25% over and above the highest cam
mercies lending interest rate that prevailed during the preceding quarter
(Gebrie, 2008).

2.5 Registration
In Ethiopia, registration for VAT is categorized in two

2.5.1 A Obligatory registration

Any person conducting a commercial enterprise or intending to conduct a
commercial enterprise may apply to be registered for VAT. However if the
taxable turnover of the enterprise which is gross income for 12 calendar
months exceeds or is likely to exceed birr 500.000 the person conducting the
enterprise must register for VAT with FIRA. Turn registration is compulsory
(Gebrie, 2008).

The term any person for proposes of VAT registration includes

 Sole profiteer
 Company
 Partner ship
 Exmate of the decease
 Trust
 Incorporated body or unincorporated body
 Club or association

A commercial enterprise refers to any business of whatever nature and include

 Ordinary business e.g shop contractors manufacture whole salers etc.
 Trades and professions e.g Builders, Engineers, Accouters laurersete
 Activities of non-profit moving bodies e.g societies, Associations, sporting
club, etc.
The turn is calculated on an ongoing basis two periods need to be considered
the past 12 calendar months and the next 12 calendar mother-by month basis.
There is the need to estimate at the end of each trading calendar month the
total value of taxable goods and services supplies by all the business for the
past 12 months where the total exceeds birr 500.000 the then there is the real
utrement to register for VAT.

2.5.2 B Voluntary Registration

A person, who carried on taxable activity and is not required to be registered
for VAT max voluntarily apply to the authority for such registration if he/ she
regularly is supplying or rendering least 75% of his goods and services to
registered persons.

2.6 Benefits of voluntary registered

In put VAT can be recovered if a person registered it will therefore be beneficial

to voluntarily resister where the person makes mainly zero rated supplies in
such a case input VAT will be recovered and on VAT will be charged on zero
rated out puts (Gebrie, 2008).

2.7 Registration procedure

Application for compulsory as well as voluntary registration must be made on

application form called “application for VAT registration” on application for cale
and the authority is required to register the person in the VAT register and
issue a certificate of registration within 30 days of the registration containing
details of.

 The full name and other relevant details of the registered person.
 The date of issuance of the certificate.
 The data from which the registration takes effect and
 The registered person’s tax payer identification number.

If registration is disallowed FTRA will have to notify the applicator and the
reasons for the refusal. The tax authority many deny the application for
voluntary registration if the person.

 Has no fixed place of residence or business

 Does not keep proper accenting records
 Has no bank account
 Has previously been registered for VAT purposes but failed to perform his
duties under the VAT law (Gebrie, 2008)
2.8 Time of application
A person who carries on taxable activity and is not registered is required to file
an application for VAT registration it shall fill an application for registration on
later than the last day of the month after the end of the period if.

1. At the end of any period of 12 calendar month the person made during that
period, taxable transactions with a total value exceeding 500.000 birr or the
last day of the month of the period if
2. At the beginning of any period of 12 calendar moths when there is
reasonable around to expect that the total value of taxable transactions to
be made by the person during that period will exceed 500.000 birr (Gebrie,

2.9 Time of registration

Registration takes place on one of the following dates depending on which date
comes first.
 In case of obligatory registration on the first day of the accounting period
following the month in which the obligation to apply for registration arose.
 In the case of voluntary registration on the first day of the accounting
period following the month in which the person applied for registration or.
 On the date selected by the registered person on his application for a
registration person who conducts taxable activity in a branch or division
shall be registered only in the name of the registered person to register one
or more of its branches or divisions as separate registered person. The tax
authority allow when its satisfied on such case that divisions or branches
maintains and independent accounting system and can be identified by
the nature of its activities or location (Gebria, 2008).

2.10 Cancellation of registration

VAT registered person can apply for cancelation of registration
 If tax payer ceased to make taxable transactions.
 At any time after a period of 3 years of the date of his most recent
registration for VAT if the registration persons total taxable transactions
in the period of 12 months then beginning reasonable are expected to
be not more than 500.000 birr.

The cancellation of VAT registration takes effect

 At the time the registration person ceased to male taxable translation for
example, if one close down or sell his business. How over if one has more
than one business and is not closing down or selling them all he max not
be able to cancel it will depend on the level of taxable turn of remaining
 If the registered person has not ceased to do so at the end of the
accounting period during which the person applies to the authority for
cancellation of VAT registration.

When registered for VAT is canceled the authority is required to remove the
person’s name and all other details from the VAT register and the person is
required to return back the issued certificate of registration. VAT registered
person con not charge VAT or issue tax invoices for any supplies made and
cannot claim are fund of VAT incurred on any goods or services purchased
from the date of the registration is canceled (Gebrie, 2008).

2.11Advantage and Disadvantage of VAT

2.11.1 Advantage of VAT

The following are some of the main Advantage of VAT.

A. It Avoids cascading effect of tax (tax on tax)

VAT works on the principle of that when raw material passes through various
manufacturing stages and manufactured products passes through various
distribution stage, tax should be levied on the incremental value at each stage
and not on the gross sale price. This insures that some commodity does not get
taxed again and again and this, there is no cascading effect. Putting the
concept in simple terms, in vat system, each input is taxed only once.

B. It is major comprehensive and equitable tax system.

Even though the ultimate burden of VAT full on the final customer, VAT is
collected by the government from all sectors, that is from import
manufacturing, whole sale and retail sectors. Therefore, it is a more
compressive and equitable taxes system on the contrary; sales tax is normally
levied at one stage of the whole marketing (Misrak Tesfaye (msc))

C. It reduces the possibility of tax erosion

In the case of VAT. The taxes are divided in to several parts depending on the
number of stage of production and sales. In each stage every transaction is
made using VAT invoice approved by tax authority. In addition each VAT
registered person (supplier) has to maintain appropriate records on their sale
and purchase transaction. Those obligations make tax evasion difficult

It has less Tax burden

Under VAT system, the tax is collected is small fragments at different stage of
production and sale. Hence, the vat payers feel the burden of the tax less
(Misrak Tesfaye (2008)).

D.It us neutral
Regardless of the number of stage of production and distribution, VAT is
collected in each stage, therefore; VAT is expected to be perfectly neutral in the
location of resources in the form of production and commercialization. (misrak
Tesfaye, (msc)).
E. It Improves Productivity
In VAT system, a firm has to par tax even though it van in to loss. The firm
cannot claim any exception for loss because it pats taxes on the value
produced and not on profits. So, firms will always try to improve their
performance and reduce the cost of production. As a result, the overall
productivity of the country will be improved (Misrak Tesfaye, (2008).

F. It promotes capital investment and saving

VAT is a consumption tax since one pays VAT on its expenditure and has the
option to sure so as not to be taxed. Furthermore, relief from tax on capital
goods may encourage investment. Potential investors also consider tax
legislation as one of the factors in making investment decision (Misrak

G.It enhances exports

Exports of good and services in most countries that implement VAT are liable
to VAT. At zero rates this may make exports internationally competitive and,
thus encourage exports (Misrak Tesfaye, (2008).

2.11.2 Disadvantage of VAT

The following are some of the main disadvantage of VAT.

A. It is regressive in nature
A Straight forward single rate VAT with few exemptions would tax lower income
groups (the poor) more heavily than the higher income groups (the rich). It is,
thus incongruent with the basic.
Principles of taxation which states that reason should be taxed according to his
ability to par. This makes Vat regressive tax system. In order to compensate for
its regressive effect a number of countries have expected basic goods
particularly food items from VAT. (Misrak tesfaye, (msc)).
B. It require advanced economic structure
The proper implementation of VAT system required organization and advanced
financial and economic structure as it complicated system. VAT system also
requires proper record keeping of invoice at each stage of production and sale
by both the seller and buyer. Hence, it becomes, difficult to implement the
system in all types of economy (Misrak Tesfaye, (2008).

C. It put additional burden to tax authority.

In VAT system, the manufactures, whole sealers and retailers have to fulfill
various legal formalities in the form of manufactures various records, accounts,
books, etc. the verification of those formalities put additional burden to the tax
enforcing authorities. (Misrak Tesfaye (msc)).

D.It is un economical
VAT system involves high of administration, assessment, verification collection,
etc, hence, it is highly un economical (Misrak Tesfaye (msc)).

E. It has reams loopholes for tax evasion

Although VAT system requires proper record keeping of invoices at each stage
of production and distribution by both the buyer and sealer, it has ream
loopholes for tax evasion. This may include the follwinwg.

 Tax payers could over report sales of zero rated goods

 Tax payers could use invoices they received for personal purchase to
tax credits.
 It enables buyers and sellers to strike secret deals with regards the
issuance of receipts .
 It could lead to the formulation of forged ponies’ receipts to claim
tax credit on input VAT, etc (Misrak Tesfaye (msc)).


4.1 Unit of analysis and population

The study were be conducted in Ethiopian revenue customer authority
northern branch in A.A in order to identify and determine the VAT collection
problems. The data that are require to achieve the objective of the study was
primary and secondary data primary data was collected from the employee
of the ERCA questionnaire.

4.2 Sample size and sampling techniques

The total sample size is employees of the ERCA selected. The No of
questionnaire for each employee are depends up on engage on VAT. the
judgmental, sampling method were used for the selection of the respondent
to the questionnaire b/c all employees of the ERCA employees. Do not know
above VAT and its problems. The judgmental sampling method were used
on the nature of the ERCA.

4.3 Method of data collection

The researcher was used different type of data collection on the study. The
used data collection methods vary accordingly to the source data collection.
The researcher was used questionnaire to collect primary data in the
questionnaire method of data collection questions were prepared and asked
the respondent which take as a sample from the total employee under the
The question used has two format that were opened and close end
questions,. Both questions were carefully analyzed, discussed and achieved
the conclusion. The question was in such a way that the objectives of study
were easily accessed and investigated of in detail. The secondary data
conducted from certain proclamation about the VAT.

4.4 Method of data analysis

The method of data analysis that we used, was percentage compellation and
qualitative expressions moreover, we have used tables.


In this chapter the data collected using questionnaires offered to the employees
of (ERCA) concerning problems of VAT collection are presented and analyzed is
employees have filled the questionnaires and properly returned, while 2
employees did not. The data presentation involves table.

This section presents data presentation and analysis that is gathered from
questioners distributed to the employee of ERCA, 13 employee have filled the
questionnaires and properly returned, while 2 employee did not problems of
VAT faced by ERCA several problems which affect VAT collection are identified
these are summarized as follows. First, there are organizations of private
sectors which are running businesses and registered for VAT. These are of
course which have an annual sales income or birr 500,000,000 and above so
the problem which can be mentioned as a big a factor is in identifying those
organization or private sectors that should pay VAT. This is due to the fact that
there is no willingness among the sellers to expose themselves of earning an
annual income of the mentioned amount. On the other hand, it is raised that
some sellers are not issuing Vat invoice to the buyers, that is under invoicing
in which they provide only a limited amount of VAT to the VAT collectors some
organizations are not declaring their Vat on monthly basis (being non –
declaring) or stop declaring totally (non – fillers) so most of them are always
credit declaring rather than payment declaring.


In this chapter, the data collected using questionnaires afford to the employees
of ERCA concerning problems of VAT collection are presented and analyzed 13
employees have filed the questionnaire and properly returned 2 employee did
not. The data presentation involves tables.

Table 3.1 Characteristics of the respondents

1 Gender
Alternative No of respondent Percentage %
Meal 8 61.53
Female 5 38.47
Total 13 100%
2 Age
Alternative No of respondent Percentage %
( 18 -30) 4 30.76
31-40 5 38.46
41-55 3 23.1
>56 1 7.69
Total 13 100%
3 Marital status
Single 4 30.07
Marred 9 69.23
Total 13 100%
4 Education level
Certificate 0 0
Diploma 3 23.1
Degree 9 60.23
2nd degree and above 1 7.69
Total 13 100%
5 Service in the commission
0 -5 2 15.38
6 - 10 3 23.07
11 - 15 4 30.76
Above 15 4 30.76
Total 13 100%
6 Income level
450 – 750 1 7.67
751 - 1000 2 15.38
1001 - 1500 3 23.07
1501 - 2000 3 23.07
Above 2000 4 30.76
Total 13 100%

As it can be observed from the above out the total 13 respondent 4 (30.76) were
between 41-55 and the rest 1(7.69) were above the age of 55. Regarding the
gender of respondents 8(61.53%) were males while the remaining 5(38.47%)
was female. The educations status of respondents as shown by the above table
0(0%) were certificate holds 9(69.23%) were degree holder 3(23.7%) diploma
hold and the other 1(7.69%) was were 2 nd degree and above. The service in the
commission of respondents as shown by the above table 2(15.38%) was, were
between the (0 – 5 ) year, 3(23.07%) was, were between 6 -10 year, 4(30.76%)
was were between 11-15 year the other are 4(30.76%) were above 15 year. The
income level respondent as shown by the above table 1(7.69%) was between the
450-750 birr. 2 (15.38%) was between the 751-1000 birr. 3(23-07%) was
between 1001-1500 birr. 3(23.07%) was between the 1501-2000 birr.
4(30.70%) was above 2000 birr of income level.

Table 3.2 Factors which may affect VAT collection

No Item Respondent
Number %
1 Absence of tax payers 2 15
2 Inefficiency of tax payers 4 31
3 Both absence and inefficiency of tax 6 46
4 payers 0 0
5 3rd treatment 1 8
No reply
Total 13 100

Sours of primary data

According to above table 4.2, 15 of the respondents filled abbess of tax pares is
among the first problem during VAT collection. On the other hand 31% of
respondent lose that there is inefficiency claimed by the tax payers and usually
they return bare hand and, also 46% of the respondent said there are both
absence of tax payers and inefficiency of tax payer. No one among the
respondents replied to 3rd treatment towards VAT among the pavers they ting
that vat is a new type of tax collection system and it is more complex.

Table 3.3 factors which may affect VAT collection

Number %
No Item
1 Good 10 77
2 Bad 3 33
Total 13 100
Source primary data
Considering the above table 3.3 described situation of the VAT collection
system in present time as to the respondent 27% or the respondent is good and
the 23 or the respondent said bad.

Some of the VAT payers are mentioned task for improper VAT refund while the
other uses the money for private purposes.

Table 3.4 Sufficiency of employees in VAT department of ERCA

No Item Respondent
Number %
1 Yes 1 8
2 No 2 92
Total 3 100

Source Primary data

In table 3.4 above it is tried to present the sufficiency or employee or the VAT
from the organizations and private sectors that are obliged to par VAT in Addis
Ababa city.
According to the response from the employee to the question there is shortage
of human resource in the department (92% believe that there is scarcity of
human resource any 8% think that it is sufficient.

3.2 Action taken by ERCA to control the problem

ERCA has taken several actions to control the problems described above.
Firstly ERCA has created awareness to the VAT payer using different
mechanism. These include discussion on meetings, through communication
media (Video, television), distribution of published paper, etc.
Table 3.5 Availability of persons cancelled from VAT register and
shifted to other

No Item Respondent
Number %
1 Yes 12 92
2 No 1 8
Total 13 100

Source primary data

Considering the above table 3.5 described situations in to account the result
from the questionnaire showed that there are persons cancelled from the VAT
register and shifted to other types of tax payers. As to the respondent 92% they
answered that they have the knowledge of shortage of resource in their
department while the rest 8% consider that it is sufficient.

3.3 VAT collection and payment

3.3.1 VAT collection

VAT is being implemented in Ethiopia with the aim of increasing revenue of the
government compared to the sales tax consequently. VAT shown a better
contribution to the growth to revenue. Before January 2000 i.e. before the
introduction of VAT the average monthly sales tax collection was about birr
180.5 million (birr 70.1 million on domestic goods) during the period 1999 and
January 2003. But birr 3.93 billion was collected within 14 month after the
introduction of vat according to equation presented to the VAT department of
ERCA. The advantage of changing the previous tax (sales tax) in to VAT is that
there is no cascading of the tax (tax to tax), unlike the current sales tax system
were by relief is granted for tax paid on capital good. Distribution and
administrations in puts.
 Sales of exported good are not subject to Vat removing the tax content
(on inputs) from exported goods makes the goods more competitive in
international market.
 Domestically produced goods will more competitive with imported good
 Relief from tax on capital goods will encourage investments.

Responsibility for VAT collection.

Table 3.6 preference of VAT To sales tax

Number %
No Item
1 VAT preference 13 100
2 Sales tax preference 0 0
Total 13 100%
Source primary data

So as to compare the previous, sales tax with the value added tax the tax
collector have been asked to show their preference over the other. All of the
respondent have answered that they prefer vat to sale tax.

3.3.1 VAT payment

According to article 26/1, of proclamation number 285/2002, every registered
person is required to file a vat return with ERCA For each accounting period,
whether or not tax is payable in respect of the period by the dead line for filling
the VAT return According to article 26/2, the VAT return for every accounting
period shall be filed no latter than the last day of the colander month following
the accounting period.

Table 3.7 Adequacy of time given for payment of VAT liability

No Item Respondent
Number %
1 Adequate 13 100
2 Not-adequate 0 0
Total 13 100

Source primary data

As present in table 3.6 above the tax collector are asked relation to the
adequacy of the time for payment of VAT liability responded that the time is

Table 3.8 Evaluation of the extent of willingness of tax payers

No Item Respondent
Number %
1 High willingness 0 0
2 Average 11 85
3 Low willingness 2 15
Total 13 100

Source primary data

In addition the employees are asked to evaluate the extent of willingness to pay
the VAT liability in a given period of payment among the tax payer. 15% of the
respondents believe that there is low willingness among the tax payers well
85% of respondent that there is an average willingness. According to their
answer there is no high willingness from the tax payers.

Tax evasion
Tax evasion involves a fraudulent or deceitful effort by a tax payer to escape a
legal tax obligation this is a direct violation of tax law. Tax avoidance in
contrast does not violet the law. It occur when tax payer arranges his/her
economic behavior in such a manner as to maximize his/her post tax economic
passion that is to minimize the amount if tax awed this may be accomplished
in the short run by the advantageous use of existing tax law provision and in
the long run. By influencing tax legislation though the support of lobbies and
pressure groups which represents the special interest of tax payers tax
avoidance is lawful tax evasion in not (p. Herber. In 1999)

Business enterprise and individual business persons have evading VAT. The
possible reasons that encourage them to evading VAT are discussed bellow.

Lack of awareness among the VAT payers can be taken as a reason to evading
VAT. But those who have the awareness are also evading vat due to the fact
that there is weakness in enforcement schemes from ERCA in addition, there
are low enforcement measures by the tax office and the No of enforcement
offices that supervise those illegal tax payers is less.

The tax office is not implementing each and every aspect of the tax
administration function especially the penalty part.

As for the tax payer, the lack of frustration of law and taxpaying cultural value
and among the reasons for evading VAT, in addition, by seeing other VAT
evaders, and out of having the desire to be rich illegally with in short time, they
act similarly.

Table 3.9 Involvement of executive bodies in prevention of VAT

evasion /avoidance

No Item Respondent
Number %
1 High cooperative 2 15.4
2 Fairly cooperative 4 30.8
3 Less cooperative 7 53.8
Total 13

The employ of the VAT department at ERCA are asked whether the executive
bodies are cooperating in preventing vat evasion and VAT avoidance among the
tax payers. Therefore, the analysis shows that 15% and 30% of the
respondents thing that the executive bodies are highly and fairly involved in
cooperating prevention of VAT evasion and avoidance respectively while 53.8%
mentioned that they and less cooperative.

Measure against VAT evasion / avoidance

Although not satisfactory, a number of measures have taken against tax
evaders by ERCA. These include supervision penalizing of those illegal tax
payers by imprisonment and random checking at the premise of the tax payer.

In addition test purchase have been conducted in order to check the attitude of
the tax payer towards VAT currently, a strong intelligent department has been
established the role of which is supervise those illegal tax payers.


VAT is a transduction tax collected on goods and services at all stages of
production and distribution. This tax is collected on the value added at each
stage. Value added is the difference b/n the sales and the value of purchase at
the stage.

VAT was introduced in Ethiopia in 2002 under proclamation member 285 2002
in replacement of sales tax. ERCA (Ethiopian revenue customer authority) is
authorized to administer this tax Vat payers are person who are registered for
VAT and carry on taxable activity. The total values of transduction birr
500,000,00 are obliged to pay VAT.

VAT is levied and paid at the rate of 15% of the value of every taxable
transaction by a registered person and every import of good, other, than
exempt import and an import of services. Analysis is made in the preceding
section of this study on the bases of this analysis therefore, I have concluded
the following.

 There is a scarcity of human resources in VAT department of ERCA. The

department is understaffed so that there is a burden of job to each
 Certain persons are cancelled from the VAT resister because of such
condition as their annual sales become less than the threshold (Br
500,000.00); they intended to obtain hiah profit by performing illegal trade.
This cancelled person shifted to other types of trade in order not to be vat
 Most of the tax collectors said that tax payers are registered both voluntarily
and forcedly. This is because the taxpayers assumed they would be
complied to be registered if they would not do that by themselves.
 Tax evasion involved a fraudulent of deceitful effort by a tax payer. Business
enterprises and individual business persons are evading VAT due to the
fact that there is weakness in enforcement schemes from ERCA.

As to the study conducted, there are certain problems related to collection of

VAT. Therefore, to minimize these problem. I have for warded the ff

 ERCA has to set affixed monthly timetable for vat payers to reduce the
burden of both tax collectors and tax payers, meaning certain huge
organization like Ethiopian Telecommunication Corporation, etc should pay
their vat liability according to a program set by ERCA so that the burden can
be reduced.

 ERCA has to prepare seminars, workshop, magazines or new papers do

disclose current issue and the revenue collected from VAT so that the tax
payers and the public become aware of VAT. Besides disclosing collected
amount and introducing current issues make the anther its transport.

 To make the society aware of vat and to prevent tax found mode by the tax
payers, education of tax should be given in schools as a subject. This can be
done communicating with the ministry of education, meaning ERCA has to
communicate with ministry of education for the purpose of formulating
curriculum that includes education of tax.

 ERCA has to be staffed with sufficient number of employees, so, as long as

the number of tax payers is increasing and facilitated service is required, the
number of employee of ERCA should grow so that service can be given
effectively. Therefore the staff of vat department should be equipped with
enough employees including auditors if the department has enough auditors,
tax evasion and avoidance can be controlled.

Bahita H.L --- 1998, Public finance, Vikas publishing 19th ed, 1998.
Gills Malcolm et al., 1990, value added tax in developing counties, A world
symposium. The WORD BANK sune 1990.
Hancock Dore, 1998, Taxation policy and practice. Hapman and Hall, 3 rd,
1998. Misrak Tesfaye (msc), 2008 first edition.
Purhot, Mahesh 2000, value added tax: the need of the new millennium
Tanzi Vito and Howell zee, 200l tax policy for developing countries
IMF, www. Imf . org.
Questionnaire VAT collection problems
Questionnaire prepared to collect for the investigation of vat collection problem
of Ethiopian revenue and customs authority north branch in Addis Ababa
1. Gender status of the employee
Male Female
2. Age
18-30 41-58
30-40 >56
3. Marital status
Single married
4. Educational level
12th completed Diploma
Certificate Degree
2nd Degree and above
5. Service in the commission
0-5 years 11-15 years
6-10 years above 15 years
6. Income level (salary)
450-750 1801-2000
751-1000 2001-3000
1001- 1500 above 3000
7. Is there any problem you were facing when you go out to collect VAT?
Yes No
8. If your answer for question number 7 yes what are the problem?
9. How do you see the present VAT collection system?
1. Good 2. bad

10. Is the number of employee of the VAT department sufficient to collect VAT
1. Yes No
11. Do you think there are personal cancelled from VAT registered and shifted
to other type of tax?
1. Yes 2. No
12. If you answer for question number 11 is yes what is the reason of shifting
from VAT to other tax?

13. How do you evaluate willingness of tax payers to pay their VAT liability on
1. High 2. Low 3. Middle

14. If you answer of question number 13 is low what measures are to be taken
to correct the problem:

15. Are executive bodies cooperative in preventing avoidance and evasion to

1. Highly cooperative
2. Less cooperative
3. Fairly cooperative
4. Meddle cooperative
16. Is VAT advantages than the replaced sales tax?
1. Yes 2. No
17. Is the time given payment of VAT liability adequate?
1. Yes 2. No
ጅማ ዩኒቨርስቲ
ቢዝነስ እና ኢኮኖሚክስ ኮሌጅ
ዲፓርትመንት አካውንቲንግ
1. ጾታ?
ወንድ ሴት
2. ዕድሜ?
ከ 18-30 ከ 30-48 ከ 42-58 58 በላይ
3. የጋብቻ ሁኔታ?
ያገባ ያላገባ
4. የትምህርት ደረጃ?
12 ኛ የጨረሠ ሰርተፍኬት ዲፕሎማ ዲግሪ
ከሁለተኛ ዲግሪ በላያ
5. የሥራ ልምድ?
ከ 0-5 ዓመት ከ 6-10 ዓመት ከ 11-15 ከ 15 ዓመት በላይ
6. ገቢ?
ከ 400-750 ከ 750-1000 ከ 1001-1500 ከ 1801-
ከ 2000-3000 ከ 3000 በላይ
7. የተጨማሪ እሴት ታክስ በሚሰበሰብበት ጌዜ የገጠመሽ/የገጠመህ ችግረፍ አለ?
አዎ አይደለም
8. ለ 7 ኛው ጥያቄ መልሱ አዎ ከሆነ ምን አይነት ችግር ገጠመሽ/ገጠመህ?

9. አሁን ያለው የተጨማሪ እሴት ታክስ አሰባሰብ ምን ይመስላል?

10. የተጨማሪ እሴት ታክስ አገልግሎት ሰጪ በቂ የሆነ የሰው ሀይል አለው?

አዎ አይደለም
11. የተጨማሪ እሴት ታክስ ከፋይ የነበሩ አሁን ግን ወደ ሌላ ታክስ ከፋይነት የተለወጡ
አዎ አይደለም
12. የ 11 ኛው ጥይቔ መልሱ አዎ ከሆነ ከተጨማሪ እሴት ታክስ መውጣታቸው ምክንያት ምንድነው?

13. የከፋዮቹ የተጨማሪ እሴት ታክስ ክፍያ ፍላጎት ምን ይመስላል?

ከፍተኛ መካከለኛ አነስተኛ
14. የ 13 ኛው ጥያቄ አነስተኛ ከሆነ ችግሩን ለመቅረፍ ምን መደረግ አለበት?

15. ታክስ አስተዳደር ታክስ በማግለልና በማጭበርበር ላይ ለመከላከል ይተባበራሉ ወይ?

በጣም ይተባበራሉ ዝቅ ያለ ነው ደህና ነው መካከለኛ ነው
16. በሽያጭ ታክስ ላይ የተጨማ እሴት ታክስ መለወጡ ጥቅም አለው?
አዎ አይደለም
17. የእሴት ታክሱ ክፍያ ቀነ ገደቡ በቂ ነው ወይ?
1. አዎ አይደለም