CHAPTER ONE

1. Introduction
1.1 Back ground of the study
One of the mechanisms is which countries raise revenue to
finance government spending on the goods and service that most
of us demand is taxation.
Value added tax (VAT) is a tax on value added to good and
services by enterprises at each stage of the production and
distribution process (Gebrie, 2003). Value added tax is a tax not on
the total value of the good being sold but only on the value added to
it by the last seller (Bhatia, 2003).
Value added is one of taxing system that were introduced for the
first time in the world in France in 1954 by French economist
Maurice laurel director of the franc tax authority (Gebrie, 2006). It
was gradually has adopted for it consumption variety and selected
on its own exception area and multiple rate schedules (Bhatia,
2003). Late it was gradually expanding to African countries
especially countries which were colonies of France like cot-devour,
Senegal, Mali and other western country which were under colony
of franc.
The development of this tax system is fast it has now employed by
large number of Latin America, Asia, Africa and pacific countries
value added tax (VAT) has become a major tax instrument
worldwide. The global trend to introduced VAT In more countries is
countersuing. Ethiopian tax reform program has introduced VAT
since January, 2003 (Gebrie, 2008).

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The Ethiopian government has introduced, VAT as part proceeded
by tax reform program, the tax reform program is preceded by
establishment of a new ministry of renewed as the first step to
improve tax collections and to combat fiscal frond, The need for
value added tax (VAT) tenements from the very weakness of the sale
tax that is intended to replace (Purhot, 2000).
Value Added Tax is an indirect tax that is charged whenever a
taxable person make taxable supply of goods and services in course
of his business
Although it is finally bear by consumer (Hancock, 1998) service
while other summit their VAT returns without payments. There is
also deliberate submission of zero returns non issuance of VAT
invoices and enters trainmen provides and operations refuse to use
the VAT coupons (Alemayehu, 2009).

1.2 Back ground of the organization

The federal in land revenue authority was opened in MERKATO
NO.1 branch office in 2002 E.C with small number of employees. It
was herds the linearity Gradates and develops its performance in
the year of 2004E.C. It was high performed and collected VAT in
small amount compares that of expected (plan). The FIRA in
Merkato no.1 Brach administer sole proprietor plc, share
companies and micro enterprise. In 2005 E.C the register sole
proprietor was transferred their file to the regional government tax
authority. Since 2005E.C ERCA administer private limited
company shore company micro enterprise which are ordered by the
government.

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1.3 Statement of the problems
VAT administration pertains to how tax authorities discharge the
responsibilities entrusted them. The major activates in VAT
administration are identifying tax payers, processing returns,
controlling collections, making refund, auditing tax payer and levy
penalties and performed activities mentioned on the VAT
administration proclamation (285/2002). Even if value added tax
system is accepted by many countries and that introduced in our
country some problem is exited in Ethiopian Revenue and custom
authority (ERCA) Merkato no.1 branch thus the proposed research
will try to answer the following;
Basic research questions.
1. Do all businesses register for VAT in accordance with existing
criteria?
2. What are major problem related to VAT collection?
3. What does look like the present VAT administration system?
1.4 Objective of the study
1.4.1 General objective
The general objective of the study focuses on the problems of Value
Added Tax Administration for Ethiopian Revenue and Customs
Authority in Addis Ketema Sub City (Merkato No.1 branch office).
1.4 .2 Specific objective
In addition to the General objective the research specify try:
 To identify the reasons for not register for VAT in accordance
with the existing criteria.
 To assess what are major problems related to Value Added Tax
collection.
 To asses and evaluate the present VAT administration system.

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 1.5 Significance of the study
This research was conduct to indicate the existing operation of
Value Added Tax and its challenge therefore the result of the
research would be assets policy makers and tax payer in
understanding the need of Value Added Tax the nature and the
mechanism to determine Value Added Tax, understanding Value
Added Tax administration problem and create awareness to the tax
payer and decision maker to contribute their own shore for
developing of the county And to initiate other individual and
organization for further study.
1.6 Scope of the study
This study is delimited to assessing the problem of VAT
administration in Addis ketema sub city. The variable that are
considered as the base of the study were classified in cultural
variable (awareness) institutional variable (corruption and
implementation capacity tax law variable.
Structural variable which include the tax law (system) and tax
administration produces the data were gathered from interview of
the tax official based on significance and variability of data and
questionnaire from VAT payer and tax official.
1.7 Limitation of the study
limitation are those beyond the control of the researcher that may
place restriction on the conclusion of the study and their
application for other situations as well as probing area for future
study to be conduct to current study.
In General term limitations are what hinder the perfection of the
study. As result overcome most studies the finding of this research
may have been limited by some factors some of which are, It does

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not fully assess all factors involved in the determination of VAT
revenue more specifically/ issue such as all VAT payers and
revenue office of VAT authority are not examined unwillingness of
some respondents to give information related VAT that helps the
study was also cited as limitation of study.
However effort has been to ensure that this situation doesn’t the
completion and quality of the research work. As, a result the effect
of this limitation would be reduce barest minimum.

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 CHAPTER TWO
2. LITERATURE REVIEW
2.1 Value added tax (VAT)
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
when ever a taxable person make as apply of goods or services in
the course of his business. Thus in some countries it is called good
and services tax. VAT was invented by French economist in 1954
by Maurice lour director of the French tax authority. VAT was
insulted 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 processes of
production and distribution the VAT is assessed, at each stage, on
only the increment in value acquired by the product since the test
taxable transaction. At the end of the chain the total amount of tax
paid on good and 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 passed what has been collected in
fractional payments is equivalent to single stage tax on the value of
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 history. But the reality is not offsite so simple
(Gebrie, 2008).
For fully taxable businesses, VAT is not cast but is merely an
accounting headache. Whatever you collect in output tax must be
handed over the tax authority; whatever you pay input tax can be
recovered from tax authority (apart from the input VAT on personal

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passenger vehicle and entertainment). But on has taken car full on
purchase and sale of taxable supplies otherwise VAT will affect
his/her cash flow (Gabriel, 2008).
2.2 Features of VAT
VAT is an indirect tax in that it is levied and charged by a
government on consumers’ expenditure, which is directly collected
from business on their business transactions and from importers
on their imports. VAT is characterized by the following features.
(Misrak, 2006)
a) Indirect Tax

VAT is an “Indirect Tax”. This is because VAT is initially paid and

remitted to a tax authority (government) by the seller of goods or
services, who is called a taxable person or a taxable supplier, at the
time the seller purchases the goods or inputs for its business
activities.
b) General or Comprehensive Tax

VAT is a “general or comprehensive tax” that applies, in principle,

to all commercial activities involving the import, production and
distribution of goods and the provision of services.
c) Consumption Tax

VAT is a “consumption tax” because it’s borne ultimately by the

final or end-consumer. It is not a tax charge on business, unless
they are treated as end-users.
d) Broad based Tax

VAT is a “broad based tax” since the government collects such tax
from all sectors, that is, from import, manufacturing, wholesale
and retail sectors as well as service sectors. Hence, VAT
conceptually affects all commercial sectors.

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 e) A Percentage of price

VAT is “a percentage of price”, which means, the actual tax burden

is visible at each stage in the import, production, and distribution
chain.

f) Collected Fractionally

VAT is “collected fractionally” because each time the item changes

hands in the process of import, production and distribution, the
VAT is assessed and collected on the incremental value of the
product.
g) Neutral

VAT is “neutral” in the sense the regardless of how many

transactions are involved, VAT registered suppliers can deduct from
their VAT liability (the amount of VAT they collected on their sales)
the amount of tax they have paid to other persons on purchases for
their business activities.

h) The principle of tax credit system

Basically, VAT is a multi-point tax. However, it works on the

principle of ‘tax credit system’. That is, it provides for granting set
off (credit) of the tax paid at the earlier stage. Generally,
consumption type tax is related to selling price of product.
2.3 Forms of VAT
In modern taxation theory, there are four types of VAT based on the
determination of the ingredients of the value added by a supplier
(ingredient of tax base), namely, consumption, production, income,
and wage type VAT. (Misrak, 2006)

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 A. Consumption type VAT

To arrive at the value added by a firm (vat base) based on

consumption type of VAT, the firm is allowed to deduct from the
gross value of its product not only the non-capital inputs
purchased from other firms but also the capital assets purchased.
VAT Base= Sales Value – Total value of inputs (capital and non-capital) purchase

B. Production type VAT

To arrive at the value added by a firm based on production type of

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.
VAT Base=Sales Value - Total value of Non-capital inputs purchases

C. Income type VAT

To arrive at the value added by a firm in accordance with 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.
VAT Base=Sales Value - Total value of non-capital purchases + Depreciation on Capital Goods

D. Wage type VAT

In wage type VAT, a 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.
VAT Base = Capital – Net Earnings

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2.4 Principal components of VAT

1. Input VAT

It is the VAT payable by a taxable person on goods and services

supplied to him by VAT registered suppliers and on goods which he
imports for the purpose of a business carried on by him and for
which registered for VAT.
2. Output VAT

It is the VAT collectible by a taxable person at the time of sale of

taxable goods and services (taxable supply). It is the VAT charge
able on sales of taxable goods and services whenever a taxable
person supplies taxable goods or services to another person.
3. Net VAT

A VAT registered person pays VAT on its purchase and imports,

which is called input VAT; and the same person also charged VAT
on its taxable 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 net VAT payable to the
tax authority or net Refundable from the Tax authority.
([email protected])

Output VAT > Input VAT ----- Net VAT payable/ Net VAT liability
A refund may be made by the government after a certain VAT
period if input VAT still exceeds output VAT.
Input VAT > Output VAT ---- Net VAT Credit/ Net VAT Refundable

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2.5 Application for VAT Registration
In order to apply for VAT registration, a person (taxpayer) has to be
sure that fulfills the following requirements:
 The taxpayer must have fulfilled the obligatory VAT
registration criterion; or
 The taxpayer must have fulfilled the voluntary registration
criterion; or
 The taxpayer must have fulfilled the trade sector requirement
VAT registration criterion; or
 The taxpayer must have fulfilled the divisional VAT
registration criterion; and
 The taxpayer must have Taxpayer’s Identification Number
(TIN).

2.6 Application Forms for VAT Registration

The certificate issued by the authority contains such details as: -
a) The full name, address and other relevant details of the
registered person;
b) The registered person’s VAT identification number;
c) The data of issuance of the certificate; and
d) The data from which the registration will be effective.

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 Value Added Tax Registration Certificate Form
FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA
ETHIOPIAN REVENUE AND CUSTOMS AUTHORITY
VALUE ADDED TAX REGISTRATION CERTIFICATE
Mr. /s. or Company Name ___________________________________
Trade Name (if any) _________________Address (region) ___________
Zone/sub city _____________Woreda ______ Kebele/Farmers
Association ____________
House No. ____________ Telephone No. _____________ P.O.Box
____________

Whose Taxpayer Identification Number (TIN) is ________________ has

been registered in accordance with VAT Proclamation No.
285/2002, Article 16 or Article 18 and hence, this VAT registration
Number _________________ has been issued starting from
_________________ .

_______________________
ERCA, Director General Addis
Ababa

2.7 Merits of VAT

The emergence and rapid spread of VAT is one among the most
important tax developments of later twentieth century and still
continues. If VAT is properly designed, implemented and
administrated, it is an efficient and fair source of revenue to a
government. Besides, VAT is supported by various experts and
scholars on the basis of the following advantages. (Misrak, 2006)

 Avoids cascading effect of a tax (tax on tax)

VAT works on the principle that when raw material passes through
various manufacturing stages and manufactured product passes
through various distributions, stages, tax should be levied only on
the incremental value (additional value) at each stage and not on

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the gross sales price of the transactions. This ensures that same
commodity does not get taxed again and again and, thus, there is
no cascading effect of a tax. Viewing the concept in simple terms, in
VAT system, each input is taxed only once in each business
transaction. However, this is not a situation in sales and excise tax
systems. A conventional sales tax compounds the tax as the sales
tax is computed on the gross the price of the transaction.
 A more comprehensive and equitable tax system
Even though the ultimate burden of VAT falls on the final
consumer, VAT is collected by the government from all sectors, that
is, from import, manufacturing, wholesale and retail sectors. On
the contrary, sales tax is normally levied at one stage of the whole
marketing. Therefore, VAT is a more comprehensive and equitable
tax system than sales tax system.
 Reduces the possibility of tax evasion
In the case of VAT, the tax is divided into several parts depending
on the number of stages of production and sales. In each stage,
every transaction is made using VAT invoice approved by the
appropriate tax authority. In addition, each VAT registered person
(supplier) has to maintain appropriate records on their sales and
purchases transactions. The output VAT of a seller becomes the
input VAT for the buyer. Those conditions and obligation make the
possibility of value added tax evasion difficult.

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  Less tax burden
Under VAT system, the is collected in small fragments at different
stage of production and sales (distribution). Hence, VAT tax payer
feels the burden of tax less.
 Neutral
Regardless of the number of stages of production and distribution,
VAT is collected in each stage. Therefore, VAT is expected to be
perfectly neutral in the allocation of resources in the form of
production and commercialization.
2.8 Demerits of VAT
VAT is not only bundle of advantages. It also seriously criticized by
its opponents for the following drawbacks.
 Regressive in nature
A straightforward single rate of VAT with few exemptions would tax
lower income groups (the poor) more heavily than higher income
groups (the rich). This is because the poor pay more, as a
percentage of their income, than rich. Hence, it is regressive in
effect.
 Not a simple and easy system to adopt
As VAT system is complicated system in its nature, the system is
not easy and simple to adopt specially in under developed countries
where the tax administrative set-up is inefficient and inexperienced
to understand any complicated tax structure.
 Uneconomical
VAT system involves high cost of administration, assessment,
verification, collection, etc. hence, it is highly uneconomical. It also
imposes high tax compliance costs on the legal VAT taxpayers.

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  Puts additional burden to tax authority
In VAT system, the manufacturers, wholesalers and retailers have
to fulfill various legal formalities in the form of maintain various
records, accounts, books, etc. the verification of those formalities
puts additional burden to the tax enforcing authorities. (Misrak,
2006)
2.9 Computation of VAT
In modern taxation there are for types of value added taxation
system. They are:
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).
2.10 VAT Administration in Ethiopia
The VAT replaced the current sales tax on manufactured and
imported goods and services on January 1, 2003. The
responsibility for the correct calculation and timely payment of
VAT rests on the taxpayer himself. The VAT is a broad based tax
on the consumption of goods and services. It is collected at all
stages in the production and distribution process beginning
with 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 material used
directly in the production of goods under a VAT. Relief is
granted for goods are not subject to the VAT. Removing the tax
content (on inputs) from exported goods makes the goods more
competitive in international markets.

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 VAT is a tax on consumer expenditure. It is collected on
business transaction and imports.
Most business transaction involved supplies of goods or services
and VAT is payable If they are:
 Supplies made in Ethiopia
 Made by a taxable person
 Made in the course or furtherance of a business
 Are not specifically exempted or zero-rated.
Supplies are outside the scope of tax if they are:
 Made by someone who is not a taxable person or
 Not made in the course or furtherance of business.
Course or furtherance- the way tax able person has to carry out
its activity to develop, advance and progress the taxable activity.
Anything done in connection with the commencement or
termination of a taxable activity is treated as curried out in the
course or furtherance of that taxable activity (Gebrie, 2008).
2.11 The VAT Regime in Ethiopia
The Federal Democratic republic of Ethiopia (FDRE) has adopted.
VAT in to its tax system in 2003. It has been introduced on
January 1, 2003, replacing the former sales tax system. The VAT
proclamation NO 285/2002/ (VAT law) has been ratified by the
house of peoples Representatives six months before VAT
implementation (July, 2002).
This VAT proclamation has thirteen (13) sections and sixty-six (66)
articles. In December, 2002 the VAT regulation No 79/2002 was
also issued by council of ministers pursuant to the Value added tax
proclamation for the implementation and regulation of VAT. The
VAT regulation has three chapters (3) and forty (40) articles.

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VAT is introduced in Ethiopia by proclamation NO 285/2002,
replacing sales tax with the following objectives:
a. To collect tax on the added value whenever a sales
transaction is conducted since the former sales tax system
(already replaced) did not allow collection of the tax on the
added value created whenever sales transaction is
conducted
b. 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
c. To enhance saving and investment as it is a consumption
tax and does not tax capital and;
d. To enhance economic growth and improver the ration
relationship between gross Domestic product and gross
revenue.
According to the newly implementation VAT law, supply of goods
and rendition of services in Ethiopia are subject to VAT at a single
standard rate of 15% is applied only to imports and domestically
manufactured goods. (Misrak Tesfaye, 2008, p 320)
Unlike the sales tax, VAT provides the relief of the tax on all
business inputs (taxable supply) including capital goods, operating
and administrative expenditures. The relief of the tax and zero-
rating also encourages investment and exports. The VAT system
that Ethiopia has implemented also gives exemption to basics and
necessities such as education, medical service, electricity, water,
kerosene, basic foods, transportation service, fertilizers, books and
printed materials, supply of goods or services in the form of
humanitarian aid, etc. (Misrak Tesfaye, 2006, p.616).

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2.12 Registration of VAT
In Ethiopia registration for VAT is categorized into two
I. Obligatory Registration
II. Voluntary registration
2.12.1 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 (present ERCA). Turns over related to
exempt supplies are not to be included in the total for deciding if
VAT registration is compulsory (Gebrie, 2008).
The term any person for purposes of VAT registration includes:-
- Sole proprietor
- Company
- Partnerships
- Estate of the deceased
- Trust
- Incorporated body or unincorporated body
- Club or association
A commercial enterprise: - refers to any business of whatever
nature and includes:-
- Ordinary business example, shop, contractors, manufactures
wholesaler, etc.
- Trades and professions example, Builders, Engineers,
Accountants, Lawyers etc.
- Activities of nonprofit making bodies e.g., Societies, Association,
Sporting clubs, etc

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The turnover is calculated on ongoing basis. Two periods need to be
considered- the past 12 calendar moths and the next 12 calendar
months on a month-by-month basis.

There is need to estimate at the end of each trading calendar

month, the total value of taxable goods and services supplied by all
the business for the past 12 months. Where the total exceeds birr
500,000 then there is the requirement to register for VAT.
If the turnover is below Birr 500,000 of business activity one may
apply for voluntary registration (Gebrie, 2008).
2.12.2 Voluntary registration
A person, who carried on taxable activity and is not required to be
registered for VAT, may voluntarily apply to the authority for such
registration, if he/she regularly is supplying or rendering at least
75% of his goods and services to registered persons.
2.13 Registration procedure
Application for compulsory as well as voluntary registration must
be made on application form called “Application for VAT
Registration’’ 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 registered person’s tax payer identification number
If registration is disallowed FIRA (ERCA) will have to notify the
applicant and the reasons for the refusal. The tax authority may
deny the application for voluntary registration if the person:

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- Has no fixed place of residence or business
- Doesn’t keep proper accounting records
- Has previously beech registered for VAT purposes but failed to
perform his duties under the VAT law (Gebrie, 2008).
2.14 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 file an
application for registration no 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 months 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 months when
there is reasonable grounds to expect that the total value of
taxable transaction to be made by the person during that period
will exceed 500,000 birr (Gebrie, 2008)
2.15 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 registration.

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A registered person who conducts taxable activity in a branch or
division shall be registered only in the name of the registered
person. However, upon application the tax authority may allow the
registered person to register one or more of its branches or
divisions as separate registered persons. The tax authority allow
when it is satisfied on such case that divisions or branches
maintains an independent accounting system and can be identified
by the nature of its activity or location (Gebrie, 2008).
Benefits of voluntary registration
Input VAT can be recovered if person registered it will therefore be
beneficial to voluntary register where the person makes mainly zero
rated supplies in case in put VAT will be recover and ho VAT will be
charged on zero rated out puts (Gebrie, 2008).
Cancellation of VAT Registration
A person who has registered for VAT may cancel his/her
registration by arrangement with FERA (present day ERCA)
deportment of VAT the reason for deregistration includes
1. If he/she has ceased or stopped to make taxable transaction
2. If the registered person’s to tally taxable transactions in the
period of twelve months then beginning reasonable are not
expected to be more than birr 500,000
3. If the business in sold
4. If the authority is required to remove the person’s name who
register for VAT and all other details from VAT register and persons
is required to retune the issued certificate of registration
5. If he/she has been registered or he/she stopped to taxable (VAT
proclamation no 285/2002).

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A VAT invoice a document executed in containing from stipulated
by ministry of revenue and containing the following information.
a) Full name of the register person and purchaser and the
registered person trade name if different from legal name
b) Tax payer identification number of the register person and
purchaser
c) Number and date of VAT registration certificate
d) Name of the good shipped or service rendered
e) Amount of taxable transaction
f) Amount of exercise on excisable goods
g) Sum of the VAT due on the taxable transaction
h) The issue date if the VAT invoice and
i) Serial number of the VAT invoice the register person is required
to issue the VAT invoice to purchase of good or serves up on the
supply or rendering but not later than 5 days after the
transaction (VAT proclamation no 285/2002, Article 22).
j) Recorded keeping requirement
The registered person or any other person liable for VAT under the
proclamation shall main taint 10 year in Ethiopia
- Original tax invoice deceived by the person
- Copy of all tax invoices issued by the person
- Custom do cementation relation to imports and exports
- Accounting record records and
- Any other records and may be prescribed by ministry of tenure
(VAT proclamation, 285/2002, article, 37).

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2.16 Administrative penalties
Penalties the following penalties are imposed for violations’ of the
VAT proclamation
A. where any person engages in taxable transactions without VAT
registration where VAT registration is required 100 percent of the
amount of tax payable for the enter period of operation without VAT
registration.
B. where any person issued incorrect tax invoice resulting in a
decrease in the amount of tax or increases in accredit or in the
event of the failure to issue a tax invoice 100 percent of the amount
tax for the invoice or on the transaction
C. where a person who is not registered for VAT issues a tax invoice
a penalty of 100% of the tax which is indicated in the tax invoice
and is due for transfer to the budget but has not been transferred;
and
D. where a person fails to maintain records required 2000birr for
each month or portion thereof that the failure continues.
2.17 VAT Refund
VAT registered person shall got refund:
 If at least 25% of the value of registered person’s taxable
transaction for the accounting period other than (a supply by
a registered persons to another registered person in a single
transaction of substantially all of asset of a taxable activity,
provided a notice In writing signed by the transferor and
transferee is furnished within 21 days after the supply takes
place) is taxed at 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
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 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
applied as a credit in excess of the amount of VAT charged for
the accounting period is to be carried forward to the next five
accounting periods and credited against payments for these
periods, and any unused excess remaining after the end of
this five month period shall be refunded by the authority
within a period of two months 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 shall:
 First apply the amount of the excess in reduction of any tax,
levy, interest, or penalty payable by the person under the
customs proclamation, the income tax proclamation and excise
tax proclamation.
 Then repay any amount remaining to the person if the amount
to be refunded is more than 50 birr.
When a registered person is entitled to refund and the tax authority
is satisfied but doesn’t 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 commercial lending interest rate that
prevailed during the preceding quarter. (Gebrie, 2008).

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2.18 Empirical Evidence
Assessing the relation between administrative effort and revenue
outcome is by no means simple: it is important, for example to
distinguish the extent to which revenue is attributable to the active
intervention of the administration rather than its relatively passive
role as recipient of revenue generated by other feature s of the
system There are three main elements in order to build a good tax
system, which includes state legimancy, tax payers’ willingness to
pay tax, and the effectiveness of the tax administration As Bird and
Gendron (2005) cited in yesgat, 2008) noted that low tax morale
and large informal sector are among the factors of weak tax
administration in developing countries Apart from weak tax
administration tax payers’ dislike to words tax in another factors
that Creates difficulty in the tax system of many countries
(Agapitos, 2005)
Late payment interest
1. If any amount of tax is not paid by the due date the person liable
is objected to pay interest on such amount for the period from
the due date to the date the tax is paid
2. The interest rate under sub article (1) of this article is set at 25%
over and above the highest commercial lending interest rate that
prevailed during the preceding quarter.
(VAT proclamation no 285/ 2002, article 45).
1. Except as otherwise provided in this proclamation a person who
fails to file a timely return is liable for penalty equal to 5% of the
amount of tax under payment for each month (or apportion
thereof ) during which the failure continues up to 25% of such
amount

Page 25 of 74
2. The penalty under sub article (1) of this article is limited to
50,000 birr for the fires month (or porting thereof ) in which no
return is filed
3. For purpose of this article an underpayment of tax is the
different between the tax required to be shown on the return and
amount of tax paid by the due date
4. In any event the penalty may not belles than smaller of the two
amount a, 10,000 birr b, 100% of the amount of tax required to
be shown on the retune (VAT proclamation 285)2002, article,
46).

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 2.19 VAT PROCLAMATION
Value Added Tax Proclamation No. 285/2002 or No. 285/1994

Section I Section II Section III Section IV

General Imposition of tax and Place, time & Time & value
provisions transactions exempted value of of imports
(Art. 1-6) from the tax supplies (Art. 14-15)
(Art. 7-8) (Art. 9-13)

Section V Section VI Section VII Section VIII

Registration Calculation of Administrative Powers and duties
(Art. 16-19) Tax payable procedure of tax
(Art.20-25) (Art.26-29) administration
(Art. 30-36)

Section IX Section X Section XI Section XII Section XIII

Records Appeal Administrative Criminal Miscellaneous
(Art. 37-39) procedure penalties offences (Art. provisions (Art.
(Art. 40-44) (Art. 45-47) 48-59) 60-66)
The frame work of value added tax proclamation no. 285/2002

In December, 2002, the VAT regulation No.

79/2002(VATR#79/2002) was also issued by the council of
minister pursuant to the value added tax proclamation for the
implementation and regulation of VAT. This VAT regulation has
three (3) chapter and forty (40) articles as shown in the below figure

Value added tax regulation No.79/2002 or No.79/1995

Chapter I Chapter II Chapter III

Supplies subject to
General provisions Exemptions zero tax rate
(Art. 1-19) (Art. 20-33) (Art 34-40)
The frame work of value added tax regulation no. 285/2002

CHAPTER THREE
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 3.1 Research design and Methodology
Research design
This study would be designed to evaluate the problem of VAT
administration ERCA in Merkato no.1 branch office. The study
will be expected take 3-4 Months it compulsory for researcher
went to the area to collect information required to answer the
major problem in VAT administration.
Source of data
Primary data and Secondary data source.
3.2 Method of Data collection
Primary data would be collected by the researcher through
interview and questionnaire prepared for employee of VAT
collector department and VAT payers. Secondary data collected
from book, magazine, Internet and VAT proclamation 285/2002
and other international proclamation.
3.3 Sampling method
The researchers would be used simple random sampling
because of each and every sample of population was give and
have equal charge being choose and also free from personal
basis because researchers did not exercise his dictionary
preference in choosing of population subject to questionnaire
and interview.

3.4 Sample Size

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From a total population of Five Hundred (500) employees of ERCA
in Merkato no.1 branch office Fifty (50) employees were selected
sample sizes by using judgmental sampling techniques-Because
these 50 employees were especially engaged in the area of VAT
administration problem.
From a total population of two thousand five hundred (2500) VAT
payers of ERCA in Merkato no.1 branch office Thirteen (30) VAT
payers were selected sample sizes by using judgmental sampling
techniques.
3.5 Method of data analysis and interpretation
After necessary data were collected from the primary source and
secondary sources the data would processing and analyze. Data
processing is an activity which involves interpretation data to make
the data appropriate for analysis. Data analysis would be done both
by using qualitative and quantitative data processing from the data
get the data presenting would be descriptive data presentation by
using tables.

CHAPTER FOUR
Page 29 of 74
4.1 DATA ANALYSIS, INTERPRETATION AND PRESENTATION
The analysis and interpretation of this paper is based on primary
data and secondary data by using non–probability sampling
technique which is judgmental sampling based on researchers
experience. To collect information from revenue offices employees
and VAT payer in the Merkato no.1 branch office. The
questionnaire was distributed to 50 employees around the VAT
administration area and 30 Tax payers. The manager of VAT
administration was also selected to evaluate the problem of VAT
administration in Merkato no.1 branch office.
Table 4.1 Genders of respondents
N Genders No of respondents Percentage%
o
1 Male 32 64%
2 Female 18 36%
3 Total 50 100%
Source: - Researchers own computation of primary data
As it is shown in the above table of the respondents is male 64%
and female 36% are available in Merkato no.1 branch office.
Table 4.2 Ages distribution of respondents
N Ages No of respondents Percentage%
o
1 18-25 8 16%
2 26-33 23 46%
3 34-41 19 38%
4 42-59 - -
5 Above 60 - -
6 Total 50 100%
Source: - Researchers own computation of primary data
It is clearly observed from table 4.2 that 8 of the sample
respondents or 16% of them said that they are between the age of

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18-25 years old and 23 of the respondents or 46% of them replied
that they are between the age of 26-33 years old and the remaining
19 respondents or 38% said that they are between the age of 34-41
years old. This implies that the larger number/proportion of the
sample respondents is younger.
Table 4.3 Educational back ground of respondents
N Educational status No of respondents Percentage%
o
1 Less than 12 grade - -
2 Certificate 2 4%
3 Diploma 15 30%
4 First Degree 30 60%
5 Master and above 3 6%
6 Total 50 100%
Source: - Researchers own computation of primary data
As it is shown in the above table the respondent educational back
ground is leveled into five categories less than 12 grade 0%,
certificate 4%, diploma 30%, first degree 60% and master and
above 6%. Most of the respondents are first degree holders while
15, 2 & 3 of them is diploma, certificate & masters and above
holders respectively.
From the above table the researchers understand that in Merkato
no.1 branch office there is educated employees. Therefore the office
can serve its customer on time because of educated employees give
their Service to the customers when they need. This implies that
the customers are initiated to pay their VAT paid in this branch.

Table 4.4 Work experience of respondents

N Experience status No of respondents Percentage%
o
1 Less than one year 7 14%
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 2 One-three year 13 26%
3 Three-six year 26 52%
4 More than six year 4 8%
5 Total 50 100%
Source: - Researchers own computation of primary data
As it has been shown in the table above, the service years of the
respondents are categorized in four categories that is less than one
year, 1-3 years, 3-6 years and more than six years. Most of the
respondents (52%) have 3-6 years services. This implies, they are
familiar with Jobs and they have been experienced, these have a
great advantage for the control of effectively collect the VAT.
4.2 VAT Registration
If a supply is within the scope of VAT, the person who makes such
supply must register for VAT. Under the law of Ethiopia, any
person conducting a commercial activity or intending to conduct a
commercial activity may apply to be registered for VAT. The term
‘any person’ for a purpose of VAT registration includes sole
proprietor, unregistered partnership, registered partnership, share
company, public enterprise, public financial agency, corporate or
unincorporated profit making body, non-profit making body, trust,
estate of the deceased, joint venture, sport club, society, or
association. The term ‘commercial activity’ for VAT registration
purpose also refers to any business of whatever nature and
includes but not limited to, the following:
 Ordinary businesses and trades such as shops, contractors,
manufacturers, wholesalers, etc.
 Professions such as builders, engineers, accountants,
lawyers, etc.

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  Activities of non-profit making bodies such as societies,
associations, sporting clubs like any other countries that
adopt VAT system, VAT registration in Ethiopia is the has its
own legal provisions and procedures. The basis for VAT
registration in Ethiopia is the volume of taxable supplies by a
taxable person instead of his profit. That is, the annual gross
sales volume (turnover) of taxable supplies made by a taxable
person during a year. Sales (turnover) related to exempt
supplies as listed in the VAT law is not to be included the
gross sales value in deciding whether or not a person is
required to be registered for VAT. Hence, the annual gross
value is the sum of the value of all standard-rated supplies
and zero-rated supplies made by a taxable person excluding
VAT but including returns, allowances and discounts.
In determining whether a person has an obligation to register
for VAT or not, the tax authority may aggregate the value of
taxable transactions made by one person with the value of
another person if both person are related persons. ‘Related
persons’ has the same meaning given to it under the income
Tax proclamation No.286/2002. In addition a registered
person (head office) and a branch or a division of that
registered person which is separately registered are related
persons; and branches or divisions of a registered person
which are separately registered are also related persons for
VAT purpose in Ethiopia.
Types of VAT registration
As VAT is an indirect tax, it is eventually collected from end-users
and payable to a government through registered legal taxpayers.

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Accordingly, the VAT legislation of Ethiopia provides three types of
registration for its VAT administration purposes depending upon
some criteria to be met and the nature of business activities:-
mandatory, voluntary, and trade sector requirement registrations.
1. Mandatory (obligatory) VAT registration
Historical (past) or future (estimated) annual taxable turn over
(sales) is the ground for compulsory VAT registration in Ethiopia.
According to article 16 of VATP#285/2002 a person who cares on
taxable activity is liable to register for VAT.
2. Voluntary registration

Even if the annual gross turnover of a person is below the statutory

threshold, there is a room for the person to register for VAT
voluntarily. In accordance with article 17 of VAT #285/2002, a
person who carries on taxable activity but is not liable to register
for VAT (i.e. whose annual turnover does not exceed Br.500,000)
may voluntarily apply to the tax authority for such registration if
the following legal provision is met:-
 In any twelve-month period if the person regularly
supplies or renders at least seventy-five percent (75%) of
his taxable goods and/or services to VAT registered
persons (taxable persons).

Table 4.5 what is the advantage of VAT registration

No Item Respondent
Number %
1 Increment of the gov’t revenue 35 70
2 Controlled of inflation 5 10
3 Stabilization of the price goods and

Page 34 of 74
 services 8 16
4 Other reason 2 4
Total 50 100
Sources of primary data
Most of the respondents or 70% of employees are said increment of
the gov’t revenue is the advantage of VAT registration and some of
the respondents or 10% and 8% of the employees are said
controlled of inflation and stabilization of the price goods and
services are the advantage of VAT registration respectively. But the
few respondents or 4% of the employees are given other reason.
The respondents are to put other reason for the advantage of VAT
registration;
 To encourage saving and to expand investment.
E.g. VAT is laid (paid) most of the time on consumable goods
and it’s free from capital goods. So it increases government
revenue through investment.
 By stabilization of price goods and services increases
government revenue, to allocate resources, allocation and make
infrastructure for the country.

From these we can understand that VAT registration is the major

components of the incremental of government revenue. If the
government revenue is raised the economic level of our country also
developed. Such as; to facilitate road, health center, electric power,
and so on.

Table 4.6 what is the reason for all business organization

is not registered for VAT?
No Item Respondent
Number %
1 Lack of strong education program 12 24
2 Lack of awareness about advantage
of registration VAT 17 34
3 Lack of implement capacity of tax
authority 2 4

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 4 Lack of organized data 5 10
5 Lack of understanding the tax law
among the VAT payer 3 6
6 All 11 22
7 others - -

Total 50 100
 Sources of primary data
In the above table 4.6 all or 100% of the respondents are said lack
of strong education program, lack of awareness about the
advantage of VAT registration, lack of implement capacity of tax
authority, lack of organized data and lack of understanding the tax
law among the tax payer is the major reason for all business
organization isn’t registered for VAT.

From these we can understand that the major reason for all
business organization is not registered VAT is shortage of
awareness about advantage of VAT registration. This implies the
revenue agency is not fully giving training to the employees and
VAT payers.

4.3 VAT collection

VAT is being implemented in Ethiopia with the aim of increasing
revenue of the government compared to the sales tax consequently.
VAT has 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

Page 36 of 74
introduction of VAT according to equation presented to the VAT
department of ERCA.
Table 4.7 VAT Collection
Do you think your response Number of Percentage
organization is properly employee %
Yes 8 16%
collecting the VAT?
No 42 84%
Total 50 100%
Source: - Questionnaire

According to the response of the respondents most of them are said

the organization is not properly collecting the VAT. Because the
reason is: -
 Lack of employee.
 Lack of organized VAT administration system.
 The majorities of the people are lack of awareness to pay tax.
 The organization doubt on the traders since they are not
service by issuing the receipts.
 The customers have no knowledge about the purpose of
receipt.
 Most sellers are not willing to collect VAT. Traditionally they
are afraid to give invoice (VAT invoice).
 The tax organization can’t control the tax payer effectively and
efficiently.
 The complexity of the trade area and the society cannot bring
and ask the receipts.
 Tax payers are not properly use cash registration system as
well as manual receipt during their transaction.
 There is no full facility in the organization to collect the VAT
and law enforcement for those who violate the law (regulation).

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  Modern technological system to control illegality.
 Most importers don’t use their transaction through bill or
receipt.
 The tax payers not register VAT on time when his/her business
opened.
 Lack of voluntary compliance
 Low awareness of the customer and in the company side there
is lack of proper working condition.

Interview: - some VAT payers are not paid their VAT liability within
the given period of time.
As the researchers observe from table 4.6 above 84% (42) the
respondent response were the organization is not properly
collecting the VAT and 8 (16%) are said that properly collect. There
for the organization or tax authority take response give Education
for tax payer and advise for used cash register machine and
controlled illegal trader that can’t issue the VAT invoices.
The researchers forward the statement tax official to know VAT
official and tax payers respondents indicate that agreed with the
statement lack of awareness about from the tax payer a key factor
for poor VAT collection and the tax officially agreed with statement
that creating awareness to tax payer and other concerned bodies
help to increases the tax revenue and number VAT register
business organization.
This implies creating awareness to tax payers and other concerned
body help to increase tax revenue by solving the problem of
collection of VAT in addition the above result the respondent put
the following major reason for the problem of VAT collection in the
study area the level of awareness among the tax payer and cities

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whole before laying and colleting VAT lack of organized
administration system of the tax authority on taking legal
measurement against those who can’t comply the low..Interview
from tax official for the question what factor for poor VAT revenue
collection / problem of VAT collection in this organization also the
lack of awareness of VAT payer about revenue of input VAT &
know their contribution for the country development that is most
of the people that are found in Merkato area do not have any
knowledge about tax systems specially the advantage of registration
of VAT due to this the attitude of the society towards the tax system
is negative and some not issued the sale invoice to evade the
government. Therefore the result show that lack of awareness is a
major problem of VAT collection problem due to try to get high
profit without paying expected VAT for the government .There is no
awareness creation form or activity also by tax authority to VAT
payers and citizen as whole to receive the sale invoice in the
purchase goods and services.
From this we can understand that since awareness creation on the
existence tax law and regulation and in forcibility are very poor it is
one of serious cause of constraint for the performance of VAT
collection in study area.
Table 4.8 VAT collection of utilization
Does employees properly response Number of Percentage
utilization the VAT collection employee %
Yes 43 86%
in your organization?
No 7 14%
Total 50 100%
Source: - Questionnaire

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In the above table 4.8 most of the employees or 86% of respondents

said our organization is properly utilizing VAT collection. But some of

the employees or 14% of respondents said don’t properly utilization

the VAT collection in your organization. The respondents are to put

the reason for not properly utilize of VAT collection is;

 The country being under development and capacity problem.

 Lack of skilled employee’s.
 Lack of modern tax administration.
 They have no fully knowledge about the collection of VAT.

As we can see in this revenue agency most employees are properly

utilize the VAT collection system, while some employees are not
properly done for the above reason.

Table 4.9 what are the main problems related to VAT

collection procedures?
No Item Respondent
Number %
1 Locating of tax payers 5 10
2 Unqualified collection information
statement 29 58
3 Lack of planning interview 1 2
4 Lack of trust VAT payer to pay 10 20
5 All 5 10
6 Other reason - -
Total 50 100
 Sources of primary data
In the above table 4.9 all or 100% of the respondents are said
locating of tax payers, Unqualified collection information statement,

Page 40 of 74
 lack of planning interview and lack of trust VAT payer to pay is the
main problems related to VAT collection procedures.
Table 4.10 VAT administration system
How do you see the present response Number of Percentage
VAT administration system? employee %
Good 40 80
Bad 10 20
Total 50 100%
Source: - Questionnaire

In the above table 4.10 most or 80% of respondents are said the
present VAT administration system of Merkato No. 1 branch office is
good. But some or 20% of respondents are bad VAT administration
system.
In our opinion most respondents or employees said that the reason
for good administration system for the comparison of past
organization performance. However, the present VAT administration
system need varies need restatement.
Table 4.11 employee of the VAT department

Is the number of employee of response Number of Percentage

the VAT department sufficient employee %
Yes 15 30
to collect VAT efficiently?
No 35 70
Total 50 100
Source: - Questionnaire

In the above table 4.11 most of or 70% of respondents are said the
number of employees in the VAT department is insufficient to
collect VAT effectively. But some of or 30% of respondents are
sufficient.
According to the response from the employees to the question is
shortage of human resource in the VAT department (70% believe
Page 41 of 74
that there is scarcity of human resource any 30% think that it’s
sufficient).
4.4 Cancellation of VAT registration (or De-registration)
Condition for De-registration
Once a person is registered for VAT, it does not mean that it is a life
time registration. after a certain period of time following the date of
registration, a registered person may cease making taxable
transaction and the business may be shut down; or may cease
supplying goods and/or services subject to VAT charge (taxable
transaction) but may continue making non-taxable transaction; or
may continue making taxable transaction but below threshold limit
for VAT registration.
Due to such and other various reasons, a person registration for
VAT may be cancelled through written application to the tax
authority by the registered person, or the tax authority May itself
initiate and compulsorily de register the registered person. Hence,
there are two conditions for cancellation of VAT registration in our
homeland: compulsory and voluntary:-
Compulsory De-registration
If a VAT registered person has ceased making taxable transaction
(i.e., supplying goods and rendering service subject to VAT charge)
temporarily or permanently, the registered person must apply in
writing for cancellation of registration within thirty (30) days of the
date the person ceased making the taxable transaction.
Voluntary De-registration
After three year of the date of a registered person’s most recent
registration for VAT is the registered person’s total taxable
transaction (sales revenue) in the next 12monthes are reasonable

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expected to be not more than birr 500,000, the registered person
may apply in writing for cancellation of registration at any time
after the three years limit.

Table 4.12 Personal cancelled from VAT registered?

Do you think there are Response Number of Percentage
personal cancelled from employee %
Yes 8 16
VAT registered and
No 42 84
shifted to other type of
tax?
Total 50 100%
Source: - Questionnaire

In the above table most of or 84% of respondents are said there

aren’t personal cancelled from VAT registered and not shifted to
other type of tax. But some (16%) of respondents said there are
personal cancelled from VAT registered and shifted to other type of
tax because of this reason;
 To turnover tax and other taxes
 The tax payer shifted his/her business
E.g. his/her annual sales below 500,000 or may be transfer
from other business face from VAT like:-milk, enjera, teff, etc.
 <500,000 business opened

Page 43 of 74
In this revenue agency most of the VAT registered do not cancel
and shifted from other type of tax but some of a registered person
may cease making taxable transaction and the business may be
shut down; may cease supplying good or services subject to VAT
charge. But may continue making non-taxable transaction; or may
continue making taxable transaction but below the threshold limit
for VAT registration and other various reason, a person’s
registration for VAT may be cancelled.

4.5 Sales tax

A sales tax is a tax paid to a governing body for the sales of certain
goods and services. Usually laws allow (or require) the seller to
collect funds for the tax from the consumer point of purchase.
4.5.1 Comparison of VAT and Sales tax
The following are the basic difference between VAT and sales tax.
A. Multiple stage Vs one stage
VAT is tax which is levied and charged by a government on the
newly created value added at each stage of import, production and
distribution process .it is charged and collected at each stage of the
production and distribution process, beginning with raw materials
provider and importer and ending with retailer on the contrary,
sales tax is tax which is levied on the gross sales price of the
product at one stage of business activity right from the
manufacturer to the retailer or wholesaler.
B. Broad-based Vs one-time imposition
VAT allows the tax system to be more browed based and, thus, to
yield greater revenue to a government. Like any other tax, the
revenue productivity of VAT depends on its design (the rate, the

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coverage, etc.) and the effectiveness with which it’s enforced. As a
result, compared to the sales tax, VAT is broad base tax which can
raised more government revenue as it has uniform rate, limited
scope of exemption and is charged in different stage of the import,
production and distribution chain rather than a one-time in
position on sales price.
C. Whole stage risk Vs Last stage risk
Under sales tax the whole tax is at risk but under VAT, only the tax
own values added by the retailer at the last stage are at risk.
D. Value added Vs Final sales value

VAT, which tends to increase the final sales value to the consumer
cumulatively, is a tax not on the total value of the good being sold,
but only on the value added to the good by the last seller. A general
sales tax is a tax which is applied on the total value of the sale
transaction.
E. Cascading effect Vs Refundable effect

Value added tax avoids cascading effect, which involves taxing any
ingredient of the final product more than once. This is because VAT
is charged on the newly created value at each stage of the business
transaction rather than on the total value of the transaction.
However, a conventional sales tax has cascading effect as the sales
tax is levied on the total price of the transaction.
Table 4.13 sales taxes
Is VAT advantage than Response Number of Percentage
the replaced sales tax? employee %
Yes 37 74
No 13 26
Total 50 100%

Page 45 of 74
 Source: - Questionnaire

In the above table 4.13 most (74%) of respondents answer is VAT is

advantage than the replaced sales tax. But some (26%) of
respondents answer is VAT isn’t advantage than the replaced sales
tax.
In our opinion VAT is more advantages than sales for tax is
collected and remitted to the government as different stages, the
ability to raise increased revenue, less evasion, to eliminate
cascading effect …etc.
Table 4.14 Seller’s responsibility
Are all the sellers responsible response Number of Percentage
for collecting VAT and employee %
Yes 8 16%
transfer to the tax office?
No 42 84%
Total 50 100%
Source: - Questionnaire

In the above table 4.14 most of the employees or 84% of respondents

answer is ‘No’. All sellers are not responsible for the collecting VAT
and transfer to the tax office the reason is below;
 Transaction is hidden (both seller and buyer)
 Many the customers are mislead behave and lack of awareness
through collecting VAT
 Only the tax payer who is register for VAT is only collect VAT
not all sellers.
 Not all the sellers are responsible but only registered for VAT is
responsible.
 The sellers depend in the category of registration the VAT
registration the daily sellers above 1700(one thousand seven
hundred) birr under this scale are not collecting VAT. But the

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 seller interest is important that means under 1700 birr by
interest collecting VAT this means doesn’t mandatory.
 Not only the sellers but also the tax authority have the role to
control the to give invoice and collecting VAT.
 Lack of organized VAT collecting system.
 Lack of tax awareness in the society (on VAT).
 The sellers lack awareness on the VAT collection and also they
don’t have interest to sell with VAT.
 Some sellers can’t transfer the tax because they want huge
income and they may be selfish.
 They are not responsible to collect tax where as they looking to
the tax authority’s activities.
 Not only the seller and the buyer also responsible for collecting
VAT when purchasing goods.

As we can see observe from respondents and our environment not

all sellers are only responsible for the collection of VAT but also the
tax authority and the customers are responsible for the control of
VAT. Generally most sellers and customers (buyers) are not
voluntary to give and take the VAT receipt.

Page 47 of 74
4.6 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 later than the last day of the calendar month following the
accounting period.
Table 4.15 Types of VAT payer
In the collection system which VAT Number of Percentage
have the highest VAT payer in payer employee %
high 17 34
your organizations?
medium 21 42
small 8 16
other 4 8
total 50 100
Source: - Questionnaire

In the above table 4.15 most of the respondents said in Markato

No. 1 branch of ERCA there are different types of VAT payers. But
the highest VAT payer is medium type of VAT payer.

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From our observation from the data the organization higher tax
payer is medium. From this the researchers concludes that the
organization itself is medium tax payer center and the researcher
cannot say the organization gets high tax because the number of
tax payer in the organization is not high.

Table 4.16 Majority of the people believed that awareness

of VAT payers in the town is low?
No Item Respondent
Number %
1 Lack of knowledge about VAT in the 23 46
town
2 Insufficient tax authority employee 8 16
3 Miss implementation of the tax law 6 12
4 All 13 26
5 Others - -
Total 50 100

From the above table 100% of the respondents said lack of

knowledge about VAT in the town, insufficient tax authority
employee and miss implementation of the tax law is the major
reason for the majority of the people believed that awareness of the
VAT payer in the town is low.

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4.7 CLOSE END QUESTIONS
This section deal with analyzing and discussing the data collected
especially Focus on VAT administration system and tax official
respondent through questioner and interviews. The questioner is
close ended.
Table 4.17 Administrative weakness of the VAT authority
The government believed Response Number of Percentage
that administrative employee %
Strongly agree 13 26
weakness of the VAT
Agree 30 60
authority is a key factor Neutral 4 8
for poor VAT collection in Disagree 3 6
the Merkato no.1 branch Strongly disagree - -

office.
Total 50 100%
Source: - Questionnaire

Most respondents agree with the government believe that

administration weakness of the VAT authority is a key factor for
poor VAT collection in your organization.
According to the table 4.17 86% of respondents were agree with the
weakness of VAT administration is a key factor for poor VAT
collection. This means in this revenue agency there is a lot of
administration weakness with the collection of VAT.

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Table 4.18 good collection system

If your answer strongly Response Number of Percentage

agrees for the above employee %
Strongly agree 13 26
question a good collection
Agree 30 60
system is direct outcome Neutral 7 14
of effective VAT Disagree - -
administration? Strongly disagree - -
Total 50 100%
Source: - Questionnaire

The possible solution for those problems is;

 Capacity building of ERCA employee.
 Learn tax payer.
 High controlling mechanism.
 Give training and increase the number of employees.
 The sellers collecting VAT from customer does not report by
period. That means tax collecting is very weak.
 Implementing a good collection system awareness creation.
 The administration had strongly give solution to the sub-
sectors (and create suitable because working environment to
the internal and external customers).

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Table 4.19 lack of implementation
Lack of implementation Response Number of Percentage
capacity from tax employee %
Strongly agree 16 32
authority is a problem of
Agree 23 46
VAT collection? Neutral 5 10
Disagree 6 12
Strongly disagree - -
Total 50 100%
Source: - Questionnaire

In the above table 4.19 most of the respondents agree with the tax
authority is a problem of lack implementation for VAT collection.
The reason of these problems;
 Lack of knowledge about tax.
 Training the existing employees and hiring qualified
persons, but the right person to right place to implement
the tax law.
 Lack of employee.
 Human resource is not enough to serve tax payer.
 The employee has not enough knowledge about the law.
 Misinterpreting of the tax law.
 Lack of training to the employees.
 Sellers always the VAT report for monthly report by this
mandatory of sellers by this lack of implementation from
tax authority and sellers have not transparent seller and
customers.

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  In Merkato area there are many tax payers are use illegal
way of doing such as; - transaction without receipt and
under invoicement.

Based on these reason the possible solution for the above problem
is;
 Generally these problems are not solved with one body.
I.e. tax authority however government as a whole and regards
body should be participated to solve the problems from its
resources.
 High control mechanism.
 Increasing employee number.
 The solution of the tax law is poor and administration
weakness of the VAT authority.
 Create awareness on customers (tax payers) mind about the
advantage of VAT for the personal and for the country
development.
 Give training and education for employees.
 Taking investigation on the area of the trader’s shops.
 The tax authority and the seller must do work together to be
perfect for VAT collection.

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 4.8 Analysis of Data Gathered From VAT payers

4.8.1 VAT Payers Feeling and Payment Period of VAT

VAT payer are those people who are registered for VAT payment to
the government and there is May party to the VAT payer like trade
and merchants. VAT payers has different attitude about VAT.
Therefore some of VAT payer has positive attitude and most of
other has negative attitude about VAT. Because of the VAT payer’s
knowledge about VAT are not equal. Payment period of VAT means
payment schedule of VAT and the table below describe about VAT
payer attitude and payment period of VAT.
Table 4.20 VAT Payers Feeling and Date of VAT Payment
Question Response Number Percentage
(%)
How do you feel about As obligation 13 43.3
As responsibility 11 36.7
VAT?
As useful 6 20
Total 30 100
When do you pay VAT When I receive 18 60
assessment notification
liability?
Before due date 7 23.3
After due date 5 16.7
Total 30 100
Source: primary data.
Indicate in the above table most of VAT payers feel VAT as an
obligation, by considering the enforcement and command from the
government. The reason to pay VAT liability is they did not pay the
VAT liability their company closed. Most of or 60% of the VAT
payers pays their VAT liability when they receive assessment
notification.

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As indicate above table 4.20 43.3% of respondents were feeling the
VAT as an obligation. This show that majority of VAT payers are
considering VAT as an obligation. Further understand from those,
most of VAT payers have no knowledge and no awareness about
VAT and they understand a government render enormous good and
service for general and command benefit to the people as whole.
And 36.7% of respondents was feeling the VAT as an responsibility
this is because some people is understand about VAT, And also,
20% of respondent was feeling the VAT as an useful because of the
government collect VAT from VAT payer for economic development
of the country.
Table 4.20 further indicate that 60% of respondent pay their
expected VAT liability when they receive assessment notification,
related with this majority of VAT payers want to pay when they
receive assessment notification. From these we understand the
most of VAT payers are loyal to pay VAT collection body of
government. And 23% of respondents pay their VAT liability after
due date and also only 17% of respondent pay their VAT liability
before due date. From these we can understand that those VAT
payer are not loyal to pay their VAT liability and related with these
lack of understand about VAT.
4.8.2 Comparisons of Present VAT System and Annual
Income VAT Payers.
Introduction present VAT system is a system provide by present
government which is acceptable and suitable by majority of VAT
payers and employees. For example present VAT considers ability of
VAT payers. Below table describe about present VAT system and
annual income of VAT payment.

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Table 4.21 Comparison of present VAT system and annual
income of VAT payers.
Question Response Numbe Percentage
r
How do you see the resent Good 14 47 %
Need restatement 16 53 %
VAT system?
Bad - -
Total 30 100 %
How much your 5,000 - -
5,000-10,000 2 7%
organization annually
Above 10,000 28 93%
income? Total 30 100
Is the VAT payment period Yes 19 63 %
No 11 37 %
is enough?
Total 30 100%
Source: primary data.
As shown in the above table 4.21 present VAT systems in Ethiopia
case considered as need restatement because from all respondents
47% have positive about present VAT system and the 53% feel need
restatement. For the same question submitted for VAT payers the
majority of them have need restatement for the present VAT
system.
According to the above table 4.21 show 47% of respondents look
the presentation system as a good. This show that VAT collection
system was considers ability of VAT payers. Further understand
from these each VAT payers pay their VAT liability based on their
ability and has positive understand and awareness about VAT. But
53% of respondents are considering the present VAT system as
needed restatement. From this we understand that tax payers show
poor understand about VAT related with these lack of knowledge
and awareness from side of VAT payees therefore, they considers as
government impose heavy burden only on them.

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 Table 4.21 further shows that 63% of respondents consider as a
given period is enough to pay their expected VAT liability. But only
37% respondents were not agreed with the period given to them to
pay their expected VAT liability. From these we can understand
that, almost majority VAT payers voluntary to pay their expected
VAT liability within given period of time. This realizes that range of
time that given for payment is enough.
4.8.3 Problems Related With VAT Payment
Introduction VAT payers face such problem when they want to pay
their expected VAT liability. Therefore most of VAT payers has
negative attitude on VAT collection body of government. Below table
shows that problem related with VAT payment period.
Table 4.22 Do you face any problem when you pay your
VAT liability?
Question Response Numbe Percentage
r
Do you face any Yes 21 70 %
No 9 30 %
problem when you
Total 30 100 %
got to pay VAT
liability?
Is your answer is Absence of employees in 13 43.3%
‘yes’ for the above the office
Waiting for long time 17 56.7%
question what type
Total 30 100
of problem?
Source: - primary date
According to the table 4.22 30% of respondents were share their
idea to us as not faced problem related with VAT payment when
they go to pay their expected VAT liability. From these we can
understand that this revenue authority as provided partial

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standard assessment to collect VAT from VAT payers. But 70% of
respondents said that, as major problem they would have faced
when they go to pay their expected VAT liability. Further indicates
on table 4.22 43.3% of respondent as faced with problem of
absence of employees (tax collector) in the office. This might they
went office after an employee had left the office to have lunch,
meeting or other purpose and 56.7% of them faced with waiting
problem for long time. It also might be over crowing office with
other tax payers. If there is many tax payers top wait on all them it
may take much time.
As researchers personally discussed with some of revenue authority
employees there are the problem of low scale of salary which they
get monthly and motivation in the VAT assessment and collection
in Merkato, which lead to carelessness and misstatement of VAT
payers.
Table 4.23 when you going to paying VAT are there a good
customer handling?
Response Total No of respondent Percentage
Yes 5 17%
No 25 83%
Total 30 100%
Source: primary data.
For the above table 83% of the VAT payers tell us there is no
customer handling when they pay their VAT liability and 17% of the
respondents there is a good customer handling.
From our observation in this revenue agency there is poor
customer handling. This means;
 There is no safe waiting area
 There is no give full information to the customer

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  There is no transparency.

Generally we conclude that Merkato no.1 branch office most

employees are not politeness and Integrity.
4.8.4 The Relation of VAT Paid Amount and the Service
Which Rendered from Government
Government provide such good and service to public as whole,
such as road, infrastructure, water, electric and health center and
school … etc. By considering all these service which rendered from
government VAT payers satisfied with those service then
willingness to pay their expected VAT liability to government. Below
table describe about relation between amount of VAT paid and
service of government render to public as whole.

Table 4.24 VAT payment related with service

The amount of VAT that Response Number of Percentage

you pay is related with employee %
Strongly agree 14 47
service you VAT receive?
Agree - -
Neutral 10 33
Disagree 6 20

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 Strongly disagree - -
Total 30 100%
Source: primary data.
From the above table 4.24 most of or 80% of the respondent tell us
strongly agree and 20% of the respondent are disagree.
Table 4.24 further indicate that 80% of respondents were satisfied
from the service is receive in turn to paid VAT to the government.
From these we can understand that, respondent known service
rendered from government as related with the VAT liability they
paid. And only 20% of respondent were slightly satisfied from the
service is receive in return to pay VAT to the government. With
regard to the amount of VAT payment 80% of respondent were
agreed on amount that majority of respondents has positive from
government. Only 20% of respondents were disagree with rendered
service from government. That means those respondents as lack of
awareness about VAT.

Table 4.25 the problem of hand to hand receipt system

Response Total No. of respondent Percentage
Yes 22 73.3%
No 8 26.7%
Total 30 100%
From the above table 4.25 most of (73.3%) tax payers tell us there
are many problems are happening in the announcement to the tax
authority for the use of hand to hand receipt. these problems are;
 They are not answering the office phone.
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 The office of the tax authority is far from the working place
and so on.

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 CHAPTER FIVE
5. Summary of finding, Conclusion and Recommendation
5.1 Summary of finding
The study was designed to assess VAT administration and related
problem in the Merkato no.1 branch office revenue authority. It is also
intended to suggest possible solutions to the problem identified on the
basis of the data collected from information that obtained from
respondents; the study has come up with the following findings
presented under this chapter. As shown in the result analysis and
discussion section, in Merkato area VAT payers and employees are the
main participant by paying their expected VAT liability to the tax office.
Therefore, VAT was the main source of revenue to the government,
authority to the tax office.
 These revenue agency of employees more familiar with jobs and
they have been experienced.
 In this organization collection of VAT is not properly done.
 There is good utilization in the VAT collection system.
 Knowledge of VAT payers about VAT is very poor.
 The present VAT assessment and collection system are need
restatement.
 Most VAT payers are not personal cancelled from VAT registration
and they are not shifted to other type of tax in this organization.
 The government believed that administrative weakness of the VAT
authority is a key factor for poor VAT collection for ERCA in the
Merkato no.1 branch office.

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 In Merkato no.1 branch office faced a problem in service delivery by
the reason of the VAT payers are waiting for long time and absence
of employee in the office.
 The main reason for all business organization is not registered for
VAT is lack of strong education program about advantage of VAT
registration.
 The main problem related to VAT collection is lack of awareness of
VAT payer.
 The number of employees in the VAT department is not sufficient to
collect VAT.
 Not only all sellers are responsible for collection of VAT.
 In this revenue office most of VAT payers feel VAT as an obligation
and has negative awareness to VAT.
 Majority of VAT payers satisfied from service received through
government based on VAT paid.
 When the use of hand to hand receipt there is a lot of problems are
happen.
 In this revenue agency there is a poor customer handling.

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5.2 Conclusion

As far as government has existed and performed various activities it

should come up with means of financing its activities. There are four
method of financing sale of goods or service, borrowing, printing paper
money and taxation. From these sources, taxation is the main source to
rise necessary fund for payment of expenditures which incurred by the
government. Taxation (VAT) is the most common way of financing
government activities.
 In this organization the highest number of VAT payer is medium
type of VAT payer.
 Most VAT payer’s annual income is above 10,000 birr.
 The major advantage of VAT registration is to increase the gov’t
revenue and stabilization of price goods and services.
 Both employees and VAT payers were agreed that the VAT payment
period is enough.
 VAT is more advantages than sales tax.
 The VAT payers pays their VAT liability when receive assessment
notification.
The general objective of this study is the problem of VAT administration
for ERCA in Merkato no.1 branch office based on the analysis and
interpretation the researchers based on this general objective the above
points are concluded.

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5.3 Recommendation

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

administration of VAT. Therefore, to minimize these problem. We have to
forward the following recommendation.
 The organization is properly collect the VAT it shall be by
increasing the number of employees or the tax authority take
response give Education for tax payer and advise for used cash
register machine and controlled illegal trader that can’t issue the
VAT invoices. Man power is the most important resource that
should be given special attention.
 This revenue agency may use modern technology for the effective
and simple service giving to their customer.
 The employee shall be available on time in the office at working
time and carefully give service to the customers.
 The tax authority and the buyer may take responsible for the
collection of VAT.
 To create and improve deeply the awareness of the public it should
educate the society using TV and Radio programs in weekly basis.
 Improve implementation capacity from tax authority.
 To change the present unsuitable working environment.
 It shall be give sufficient training to employees and oriented the
VAT payer.
 The VAT payer announce the tax authority for the use of hand to
hand receipt may the organization create newly technology. Such
as software application and internet access.
 It shall be the revenue agency to prepare waiting area and parking
lot for VAT payers, give fully information to the customers…
Finally, the organization to be create good customer handling to the
VAT payer. Because, VAT is the essential source of the government
revenue.

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 Reference
 Alemayehu (2009) problem and prospects of implementation
of VAT in Ethiopia
 Gebrie Worku Mengesha,2008 Tax accounting in Ethiopia:
and 2nd , Addis Ababa, Alem printing enterprise
 H.L Bhatia (2003) public finance 24th edition
 Internet http://www;mor gov kt / tira web power htm (date
2016/6/14)
 Misrak Tesfaye, 2008,Ethiopa Tax accounting Theory and
practice, Addis Ababa: Mega printing enterprise
 Negrit Gazzeta, proclamation No 285/2002,Addis Ababa
 Takele.fufa @aau.edu.et

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 Appendix
RIFT VALLEY UNIVERSITY
College of business and Economics
This of questionnaire is designed to collect information requiring the
problem of VAT administration at Addis Ketema Sub city.
Dear respondent
This study is conducted in partial fulfillment of the requirement for BA
degree in Accounting. The researcher request You to answer the question
truly all information You provide will be kept with Confidential and will not
be used for other purpose except for intended research purpose. So please
answer the question as honestly and objectively as possible.
Part I personnel Information place provide some information about yourself
and your organization by putting a tick mark (√) in the provide box?
1 Gender Male Female
2. Age 18-25 26 -33 34-41
42-59 above 60
3. Status of education
Less than 12 grade Certificate
Diploma First degree
Post graduate degree (Master and above)
4. Work experience
Less than one year one- three year
Three- six year More than six year

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 Part II Question related to respondent general knowledge about Assessment
and problem of VAT administration four and more than four scales choose
with reasonable question. Please choice the one which is related cause and
related problem if they choice other gives reason space provided.

1. What is the advantage of VAT registration?

- Increment of the gov’t revenue
- Controlled of inflation
- Stablization of the price goods and service
- Other reason
2. If question No. 1’s answer is ‘other reason’ please explains
___________________________________________________________________________
___________________________________________________________________________
_______________________________________________________
3. Do you think your organization is properly collecting the VAT?
- Yes - No
4. If question No. 3’s answer is ‘No’ please explain the reason
______________________________________________________________________________
______________________________________________________________________________
___________________________________________________________
5. Are all the sellers responsible for collecting VAT and transfer to the tax
office?
- Yes - No
6. If question No. 5’s answer is ‘No’ please explain the reason
______________________________________________________________________________
______________________________________________________________________________
____________________________________________________________

7. Does employees properly utilization the VAT collection in your organization?

- Yes - No

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8. If question No. 7’s answer is ‘No’ please explain the reason
______________________________________________________________________________
______________________________________________________________________________
____________________________________________________________
9. What is the reason for all business organization is not register for VAT?
- Lack of strong education program
- Lack of awareness of about advantage of registration VAT
- Lack of implement capacity of tax authority
- Lack of organized data
- Lack of understanding the tax law among tax payer
- Others
10. If the question No. 9’s answer is ‘other’ please expresses your suggestion.
________________________________________________________________________
________________________________________________________________________
______________________________________________________
11. What are the main problems related to VAT collection procedures?
- locating of tax payer
- Unqualified collection information statement
- Lack of planning interview
- Lack of trust VAT payer to pay
- Other reason
12. If the question No.11’s answer is “other” please explain the reason.
________________________________________________________________________
________________________________________________________________________
______________________________________________________
13. Majority of the people believed that awareness of VAT Payers in the town is
low?
- Lack of knowledge about VAT in the town
- Insufficient tax authority employee

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 - Miss implementation of the tax law
- Other reason
14. If the question No. 13’s answer is “other” please explain in the reason?
______________________________________________________________________________
______________________________________________________________________________
___________________________________________________________
15. How do you see the present VAT administration system?
1. Good 2. bad
16. Is the number of employee of the VAT department sufficient to collect
VAT efficiently?
1. Yes No
17. Do you think there are personal cancelled from VAT registered and shifted
to other type of tax?
1. Yes 2. No
18. If you answer for question number 17 is yes what is the reason of shifting
from VAT to other tax?

19. Is VAT advantages than the replaced sales tax?

1. Yes 2. No
20. in the collection system which have the highest VAT payer in your
organization?
1. High VAT payer
2. Medium VAT payer
3. Small VAT payer

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Part III. The following question is closed end question
21. The government believed that administrative weakness of the VAT
authority is a key factor for poor VAT collection in the Merkato no.1 branch
office.
Strongly agree Agree Neutral
Disagree Strongly disagree

22. If your answer strongly agrees for the above question a good collection
system is direct outcome of effective VAT administration?
Strongly agrees Agree Neutral
Disagree Strongly Disagree

23. Based on question No. 22 what do you think the possible solution for
these problems?
______________________________________________________________________________
_________________________________________________________________
24. Lack of implementation capacity from tax authority is a problem of tax
collection?
Strongly agree Agree Neutral
Disagree Strongly disagree
25. If you answer is strongly agree /agree what a resources of these problem?
___________________________________________________________________________
___________________________________________________________________________
_________________________________________________________
26. Based on question No. 25 what do you think the possible solution for the
above problem?
___________________________________________________________________________
___________________________________________________________________________
_________________________________________________________

Page 71 of 74
 መጠይቅ
ሪፍት ቫሊ ዪኒቨርሲቲ
ቢዝነስ እና ኢኮኖሚክስ ኮሌጅ
አካውንቲንግ ዲፓርትመንት
1. ስለ ተጨማሪ እሴት ታክስ ምን አይነት አመለካከት አላችሁ?
- እንደ ግዴታ
- እንደ ሀላፊነት
- እንደ ራስ ጥቅም
2. የተጨማሪ እሴት ታክስ የምትከፍሉት መቼ ነው?
- የክፍያ ቀኑ እንደፀደቀ ነው
- ከቀኑ በፊት ነው
- ከቀኑ በኃላ ነው
3. አሁን ያለው የተጨማሪ እሴት ታክስ አሰባሰብ እንዴት ታዩታላችሁ?
- ጥሩ ነው
- ማስተካከያ ይፈልጋል
- መጥፎ ነው
4. የእሴት ታክሱ ክፍያ ቀነ ገደቡ በቂ ነው ወይ?
- አዎ - አይደለም
5. የተጨማሪ እሴት ታክስ ልትከፍሉ በምትሄዱበት ጊዜ የገጠማችሁ ችግር አለ?
- አዎ - አይደለም
6. የ 5 ኛው ጥያቄ መልሱ አዎ ከሆነ ምን አይነት ችግር ገጥሞችሁዋል?
- የሰራተኞች ቢሮ አለመገኘት
- ረጅም ጊዜ መጠበቅ
- በቂ ሰራተኛ (የሰው ሀይል) አለመኖር
7. የድርጅታችሁን አመታዊ ገቢ ምን ያህል ነው?
- 5000
- 5000-10000
- ከ 10000 በላይ
8. የተጨማሪ እሴት ታክስ ልትከፍሉ በምትሄዱበት ወቅት ጥሩ የሆነ መስተንግዶ ታገኛላችሁ?
- አዎ - አናገኝም(አይ)
9. የምትከፍሉት ተጨማሪ እሴት ታክስ መጠን ከሚሰጣችሁ አገልግሎት ጋር ይዛመዳል?
- በጣም ያስማማኛል - ያስማማኛል - መወሰን አልችልም
- አልስማማም - በጣም አልስማማም
10. የቫት ማሽኑ በሚበላሽበት ወይም መብራት በሚጠፋበት ጊዜ የእጅ በእጅ ደረሰኝ ለመጠቀም
ለባለስልጣኑ መ/ቤት በማሳወቅ ሂደት ውስጥ የሚገጥማችሁ ችግር አለ?
- አለ - የለም

Interview Questions
1. Do you think that our society is fully awareness of VAT?

Page 72 of 74
2. What are the problem do you identifies in the VAT administration?
3. Is there a problem that lack of understanding the VAT (tax
proclamation)?
4. Do you think that the time given for VAT payer is sufficient?
5. What are the main problems that face you on collection of VAT and
administer it?
6. Is all VAT register is prepared accounting recorded properly?
7. Is there problem related in corruption?

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Page 74 of 74