CHAPTER ONE

INTRODUCTION
1.1. Background of the study

Different attempts have been made by variants of writers in order to define the term „tax‟ since its

introduction. Dalton (1991) defines tax as “a compulsory contribution imposed by a public authority,

irrespective of the exact amount of service rendered to the taxpayer in return.” Bhatia

(2003) also defines the word tax “as a compulsory legal levy payable by an economic unit to the

government without any corresponding entitlement to receive a definite and direct quid pro quo from the

government for the contribution made .Tax is the money that you have to pay to the government so that it

can pay for public services. People pay tax according to their income and businesses pay tax according to

their profits. Tax is also often paid on goods and services (Oxford,2010).

Tax assessment refers to the initial review by the tax authority of the tax declaration and attached

supplementary documents submitted by a taxpayer and verification of the arithmetical and technical

accuracy of the declared tax liability and tax payable shortly after the submission of the declaration .once an

income declaration is checked and verified by the concerned tax authority through a process called income

tax assessment, hence, tax assessment is the end result of the process of ascertaining a tax payer‟s taxable

income and the tax payable on that income(Tesfaye et al,2014).

Tax collection is a collection of money from taxpayers based on the tax assessment declaration or

notification (Tesfaye et al, 2014). Tax administration refers to the identification of tax liability based on the

existing tax law, the assessment of this liability, and the collection, prosecution and penalties imposed on

recalcitrant taxpayers. Tax administration, therefore, covers a wide area of study, encompassing aspects

such as registration of taxpayers, assessments, and collection (Kangave, 2005).

Ethiopia‟s tax reform program has introduced VAT at the rate of 15% (fifteen percent) on January 1, 2003

to replace the sales tax proclamation that provides exemption for basic necessities and domestic

1
transportation and zero rating to encourage exports and capital investments. Subsequent to the introduction

of VAT, additional exemptions were extended to basic foods, agricultural fertilizers and to other products.

Unlike the sales tax, VAT provides relief of tax on all business inputs, including capital goods and business

expenditures and will provide further business incentives by zero rating exports and the international

transport of goods and passengers. Since domestically produced goods relieved of VAT, they will be more

competitive within international markets and may mean a shift from Ethiopia‟s dependence on foreign to

domestic trade, but it is too early to evaluate its impact. It is not, however, difficult to see that its

implementation is a challenge, owing to the predominance of small and informal operators in the country, its

history of tax evasion and corruption, lack of standard recordkeeping systems as well as the lack of

knowledge about VAT and a tax-base for its computation.

Like many developing countries, Ethiopian government revenue derives from different sources such as tax,

non-tax, loan (borrowing) and assistance. The main purpose of generating revenue from these various

sources is to finance government expenditure. These public expenditures are meant for public goods and

services that are very essential for the development and well-being of the society. Among the various

aforementioned sources of revenue are the primary and sustainable sources of government revenue

(Asamnew.n/d)

In Ethiopia, Ethiopian Revenue and Customs Authority (ERCA) is an autonomous federal government

agency having its own legal personality and whose basic duties include, but not limited to :( i) to implement

and enforce the tax and customs laws of the country and to administer the tax revenue of the federal

government, (EFDR proclamation No.587/2008). (ii) Provide necessary support to regions with a view to

harmonizing federal and regional tax administration systems and also in reference to Proclamation

No.587/2008. (iii) Establish and implement modern revenue assessment and collection systems providing

efficient, equitable and quality service with the sector which helps to implement awareness creation

programs to promote a culture of voluntary compliance of taxpayers in the discharge of their tax obligation,

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(iv) conduct study and research activities with greater emphasis to improve the enforcement of customs and

tax law (Federal proclamation No, 587/2008).

Taxes can be categorized in to direct and indirect. Direct taxes are taxes that fall on the same or a single

person, such taxes are entirely paid to the government by those persons on whom the taxes are initially

imposed or another. According to Dalton (1995) “A Direct tax is really paid by the person on whom it is

legally imposed”. Indirect taxes are taxes that are levied on consumption of goods and services and paid by

legally entitled individuals and business entities (Income tax Regulation No, 78/2002).

1.2. Statement of the Problem

Obviously, a properly designed and administered tax system is very vital in generating revenue as well as

increasing the tax base to the government of developed, developing, and transitional economics. As Bird

(2008) noted, it is unquestionable to ensure that the revenue collected from VAT should be raised in

efficient and effective manner although it is difficult without fear or favor in countries that are politically

fragile. However, the tax bases of developing countries are adversely affected by administration problems

including poorly conceived tax policies and lack of certainty regarding future policy changes. In addition,

tax administrations can also create problems for the taxpayers as they impose onerous reporting and record

keeping requirements, perform excessive assessment and collection, fail to deal with their corrupt

employees, and failure to provide transparency in the operations of tax administration (Baurer,2005). In

reality, under inadequate tax administration including insufficient and ineffective tax administration, the

potential amount of tax revenue in developing and transitional countries has not been collected in an

efficient and equitable manner Edmiston and Bird (2004). It is unmoving under a number of challenges

regarding its operation and administration that are not yet resolved. Weak tax administration may make the

tax system unfair in that honest taxpayers would bear heavier and disproportional burden. It, in turn, may

have impact on the efficiency of tax operation, and also may encourage businesses to work in the illegal

economy. In Ethiopia, taxation has been used for the purpose of raising as much revenue as Possible to

3
support the ever-expanding public expenditure needs of the different levels of government. It is also a

mechanism for reduction of inequalities in income distribution, promotion of capital investment and trade,

encouraging and/or discouraging certain industries depending on how suitable for country‟s economic

development program.

1.3. Research questions

For the purpose of this study, the researcher was intended to investigate VAT administration practice in

Sawla Town by seeking answers to the following research questions:

Q1. What is the VAT registration practice in Sawla Town in respect of category “A” taxpayers?

Q2. What is the VAT assessment practice in Sawla Town in respect of category “A” taxpayers?

Q3. What is the VAT collection practice in category “A” taxpayers in Sawla Town?

Q4 what is the challenge of VAT administration in Sawla town?

1.4. Objectives of the study

1.4.1. GENERAL OBJECTIVE

The main objective of the study is to investigate VAT administration practice in Sawla town administration.

1.4.2. SPECIFIC OBJECTIVE

Given the overall objective of investigating VAT administration practice in Sawla town administration,

specifically, the study focused on the following objectives:

1. To examine VAT registrations practice in respect of category “A” taxpayers in Sawla town.

2. To study VAT assessment practices in respect of category “A” taxpayers in Sawla town.

3. To investigate VAT collection practices in respect of category “A” taxpayers in Sawla town.

4. To identify the challenges of VAT Administration in Sawla town.

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 1.5. Significance of the study

The findings of this study can contribute in enhancing the VAT administration of the Sawla town

administration. The government will be able to adopt a comprehensive strategy, and step up VAT

registration, VAT assessment and VAT collection to increase tax revenue. The study has provided feedback

to taxpayers, tax authority, academicians and regulatory bodies regarding the application of VAT

registration, VAT assessment and collection practice. The study contributed in evaluating the prevailing

VAT administration, registration, and assessment and collection practice identifying the pitfalls and in

making improvements based on the findings on the existing tax administration systems. Finally, the study

might have invaluable importance for future researchers who need to conduct a study in this and related

fields.

1.6. Scope of the study

In light of the availability of data, finance and time consideration, the study is confined only to tax

registration, tax assessment and tax collection practice regarding value Added Tax (VAT ) in respect of

Category “A” taxpayers in Sawla Town administration.

1.7. Limitation of the study

The major limitation of the study was lack of time and it is obvious that adequate and reliable information is
important to undertake any kind of survey precautions. However, the unwillingness and carelessness of
some respondents while filling the questionnaires during data collection were considered as constraints to
the study.

1.8. Definition of terms

The Ethiopian revenue and custom authority categorizes taxpayers in to three;

 Category “A” taxpayers (Large size taxpayers) first, business income taxpayers or rental income
taxpayers formed under the laws of Ethiopia or foreign laws that have separate legal personality
(share company, PLC, public enterprise, public financial Agency, and foreign body‟s business agent
residing and doing business in Ethiopia on behalf of the principal) regardless of their annual gross
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 turnover or revenues. Second, Any other business income taxpayers or rental income taxpayers
having an annual gross turnover of Birr 500,000 (Five hundred thousand Birr) or more (i.e. annual
gross turnover ≥ Birr .500, 000).
 Category "B" Taxpayers (Medium size Taxpayers) which includes, unless already classified in large

size, business income tax or rental income taxpayers with no legal personality and whose annual

gross turnover is more than Birr 100,000 but less than Birr 500,000 i.e. Birr 100,000< annual gross

turnover <Birr 500,000).

 Category "C" Taxpayers (small and Micro size Taxpayers) which includes any other business

income taxpayer or rental income taxpayers which are not already classified under large size or

medium size, business income taxpayers or rental income taxpayers having no legal personality and

whose annual gross turnover is estimated up to Birr 100,000 i.e. estimated annual gross turnover ≤

Br 100, 000 (Income tax Regulation No. 78/2002).

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 CHAPTER TWO

LITRETURE REVIEW
2.1. Introduction

This chapter presents a short review of existing theoretical and empirical literature view of tax registration,

tax assessment, and tax collection. At the end of the review, an effort is made to summarize the major

drawbacks of the existing empirical studies and to identify the knowledge gap or the focus of the current

research.

2.2. Theoretical view of Taxation

Taxation is a system of raising revenue by a government through tax. It is a method of collecting funds by a

government from tax sources to finance its operation. Taxes are in general the backbone of any politico-

economic regime. Constraints on its power to take are constraints on its power to act. The levying and

collecting of taxes are therefore the central function of governments in all countries .The levying and

collecting system and methods obviously, vary widely according to the political, economic and social

characteristics of individual countries (income tax proclamation, 78/2002). The objective of taxation can

therefore to raise revenue to finance government expenditure, redistribution of wealth and income to

promote the welfare and equality of the citizens, regulation of the economy thereby creating enabling

environment for business to increase (Nightingale, 2002; and Lyme and Dates, 2010).

2.2.1. Tax assessment and collection practice in other developing countries.

James and Abiola (2012) in their study entitled as impact of tax administration on government revenue in

the case of Nigeria have suggested that management and organizational approach in the implementation of

tax administration is very weak. They also approved these weaknesses could be traced to the use of poor

tools, inadequate staffing of the tax-collecting organization, poor funding, bad access road to the interior of

the rural areas, poor enlightenment, lack of knowledge about their job and periodic training. Due to these

practice most goal oriented agency tax officers are misfit for the job a result their employment is like putting
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a square peg in a round hole. If taxation is for public expenditure, public goods ought to have been

consumed equally. Laffer, (2009) cautioned that “A government simply cannot tax a country into

prosperity”. As important as tax revenue is to a nation, many people still find it difficult to comply with

their tax obligation. According to (Nightingale, 2002), “No one really likes paying taxes yet they are

inevitable for the provision of social welfare”. With the exception of countries like UK, America,

France and a few others where taxation seems to be the main sustenance of the economy, every other nation

almost look up to the government as the almighty provider. Some argue that payment of taxes to the

government is just a way of enriching the selected few political elites who have fortified themselves with

powers unquestionable. Others believe that they are not getting enough from the government in return for

what they are paying; a lot more believe that government is so rich that imposing tax on the people is

another way of exploiting the innocent citizens.

2.2.2. Tax assessment and collection practice in Ethiopia

As Fjeldstad, (2004) suggested and Yalemtesfa Taye, (2011) retrieved the question involves asking; why

should people pay taxes? For taxpayers, paying taxes to the state is a quid pro quo that is they expect public

services to be provided, which is basically „tax for service‟ people are more likely to pay taxes if they felt

that the government was providing services equitably, collecting revenue fairly and using the revenue to

provide service. They also stated as there is a tendency for the revenue and expenditure sides of the public

finance equation to be treated as separate silos.

Tax assessment refers to the initial review by the tax authority of the tax declaration and attached

supplementary documents submitted by a taxpayer and verification of the arithmetical and technical

accuracy of the declared tax liability and tax payable shortly after the submission of the declaration .once an

income declaration is checked and verified by the concerned tax authority through a process called income

tax assessment, hence, tax assessment is the end result of the process of ascertaining a tax payer‟s taxable

income and the tax payable on that income. (Income tax proclamation 78/2002).According to Gebeyehu

8
(2008) findings the main challenges of effective tax administration are ;(I) Lack of a taxpaying culture,(ii)

Weak accountability, (iii) Lack of transparency, (iv) unstable tax amendments,(v) employee turnover, (vi)

luck of awareness on tax rules and regulation,(vii) poor tax administration, (viii) lack of Knowledge about

tax rules and regulations, (ix) corruptions in both sides, tax officials and taxpayers.

2.3. Powers and Duties of the Ethiopian Revenue Authority;

1) Given by law, the authority shall have all the powers and duties to perform its activities.

2) Without prejudice to the above general statement the Authority shall have the following specific powers

and duties:

 Establish and implement modern revenue assessment and collection system;

 provide, based on rules of transparency and accountability, efficient, equitable and quality service

within the sector; properly enforce incentives of tax exemptions given to investors and ensure that

such incentives are used for the intended purposes;

 implement awareness creation programs to promote a culture of voluntary compliance of taxpayers

in the discharge of their tax obligations;

 carry out valuation of goods for the purpose of tax assessment and determine and collect the taxes;

 conduct study and research activities with greater emphasis to improve the enforcement of customs

and tax laws, regulations and directives and the collection of other revenues; and based on the result

of the study and research initiate laws and policies and implement the same up on approval;

 collect and analyze information necessary for the control of import and export goods and the

assessment and determination of taxes; compile statistical data on criminal offences relating to the

sector, and disseminate the information to others as may be necessary;

a) Enforce and implement tax laws, regulations and directives within the Region.

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b) Assess and collect tax revenues that are legally specified to be collected by the Regional Government,

and joint tax revenues of the Regional and Federal Governments in pursuance of delegation of power

from the Federal Government, upon the recognition of the Regional Government;

c) Carryout revenue research to broaden the revenue base on the basis of the economic activity of the

Region; and seek solutions to problems pertaining to tax administration of the Region

d) Direct and coordinate the implementation of tax reform program being undertaken in the Region;

e) Inspect documents found in any person‟s possession necessary for the execution of tax laws;

f) Develop and implement various taxpayers‟ education programs to promote a culture of voluntary

compliance of taxpayers in the discharge of their tax obligation; improve staff competence in adherence

to the tax administration through launching appropriate capacity building mechanisms;

g) Investigate tax offences, institute and follow up criminal proceedings in courts; for the discharge of such

responsibilities, organize and administer its own prosecutors and tax criminal investigators, and control

their implementation;

h) Establish and implement modern tax assessment and collection system based on the rules of transparency

and accountability, by providing equitable efficient and quality services; enforce tax incentives and

ensure that such rights are used for their intended purposes;

j) Without prejudice to Article (6), Sub-article (2) (i), in accordance with directives issued under this

proclamation, assess and collect municipality revenues and provide them the necessary technical

professional support (Proclamation 91/2004);

k) Collect and compile data necessary for tax assessment, and by using the same, assess and collect taxes

thereof;

l) Undertake studies, when necessary, to issue and amend tax laws, regulations and directives, and thereby

submit and implement the same to the Regional Government for approval;

m) Own property, enter into contracts, sue and be sued in its own name;

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n) Provide for taxpayers alternative institutions to pay their taxes

O) Prepare and submit the revenue‟s Authority short, medium and long term plan and budget, implement up

on the approval; and submit timely report to the council of Regional Government;

p) It may delegate and implement from the specified responsibilities of this sub articles, as necessary its

powers of tax criminal investigation and prosecution to the Regional police and prosecutor;

2.4. Tax Administration

Tax administration refers to the identification of tax liability based on the existing tax law, the assessment of

this liability, and the collection, prosecution and penalties imposed on recalcitrant taxpayers. Tax

administration, therefore, covers a wide area of study, encompassing aspects such as registration of

taxpayers, assessments, returns processing and collection (Kangave, 2005).

Tax assessment refers to the initial review by the tax authority of the tax declaration and attached

supplementary documents submitted by a taxpayer and verification of the arithmetical and technical

accuracy of the declared tax liability and tax payable shortly after the submission of the declaration. An

inefficient tax administration weakens the willingness of the taxpayers to comply and create room for

political manipulation and in the process the government losses revenue.(Bird), According to Musgrave‟s

(1989),the solution to poor assessment and registration method is to employ well trained and skilled

personnel who are well paid and also to employ good equipment like computers. That is the basis for

efficient tax administration lies in the choice of appropriate technology and clear administrative procedures,

good methods of conducting tax payer registration, assessment and the provision of public goods. Alm

(1998) contents that some people do not pay taxes if they dislike the way the taxes are spent, if they feel

government is not providing public goods and services, if they do not participate in the decision making or

if they feel they are treated unfairly by the government. He later note that compliance increases with

indicators of the availability of public goods and services, and suggest that government can increase

compliance by providing goods that their citizens prefer more, by providing these goods in a more efficient

11
manner, or by more effectively emphasizing that taxes are necessary for receipt of government services.

Cavallo (2000) also argues that taxpayers tend to resist payment of taxes if they see no link between the

taxes paid and the services rendered by the government. Taxes are important sources of public revenue. The

existence of collective consumption of goods and services necessitates putting some of our income into

government hands. Such public goods like roads, power, municipal services, and other public infrastructures

have favorable results on many families, business enterprises, industries and the general public. Public

goods are normally supplied by public agencies due to their natures of non-rivalry and non-excludability.

The former is defined as the nature of consumption of public goods is such that consumption by one does

not reduce consumption for others. The later implies that consumption of public goods by an agent does not

exclude others from doing same. Such nature of public goods therefore makes them impossible for private

suppliers to avail them at market prices like other commodities.

Government intervention in the supply of public goods is therefore inevitable and can only be done if the

public pays taxes for the production and supply of such goods. Quasi-public goods are goods that are easy to

keep nonpayer from consuming, but use of the good by one person does not prevent use by others. Also

termed a near-public good, the trick with a quasi-public good is that it is easy to keep people away, and thus

you can charge them a price for consuming, but there is no real good reason to do so. From an efficiency

view, the more people who consume a quasi-public good, the better off society. This mixture of nearly

unlimited benefits and the ability to charge a price means that some quasi-public goods are sold through

markets and others are provided by government. For efficiency's sake, none should be sold through markets

example education, health, etc (Smart, M.2002).

2.5. Value Added Tax (VAT) Administration Practice

VAT is a tax on consumer expenditure. It is collected on business transactions and imports. A taxable

person can be an individual, firm, company, as long as such a person is required to be registered for VAT.

Most business transactions involve supplies of goods or services. VAT is payable if they are: Supplies made

12
in Ethiopia; Made by a taxable person; Made in the course or furtherance of a business; are not specifically

exempted or zero-rated. The Value Added Tax would be levied at the rate of 15% of the value of: Every

taxable transaction by a registered person; every import of goods, other than an exempt import; and Import

of services. A person who carries on taxable activity and is not registered is required to file an application

for VAT registration with the Authority if: At the end of any period of 12 calendar months the person made,

during that period, taxable transactions the total value of which exceeded 500,000 Birr; or At the beginning

of any period of 12 calendar months there are reasonable grounds to expect that the total value of taxable

transactions to be made by the person during that period will exceed 500,000 Birr (EFDR Proclamation

78/2002).

2.5.1. Types of VAT

Though there is legal and administrative frame work, the administration on VAT refund is still persistent

problem. The problems are attributed in one way or another to the existence of widespread of tax abuse and

reluctance on the part of tax officials. Bu t, one feature in VAT, as we discussed earlier, is the prevalence of

refund to business entities of the tax they paid in their business against their taxable sales. The treatment for

crediting or rebating varies. Accordingly, we have three types of VAT: Gross product type, Income type and

Consumption type Hailemariam Mamo (2011).

i) Gross product type

In this type of VAT, taxes paid on purchases of capital goods fixed capitals and depreciations there to are

not allowed to be refunded. If a person registered for VAT purchases equipments, buildings, different

machineries, though there exists obvious depreciation value rebut is prohibited this type of VAT is not

common as it raises stiff resistance on the part of tax payers

ii) Income type

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Here, again refund ion the purchase value of capital goods is prohibited like in case of goods product type of

treatment. But, unlike the previous one, it allows refund on the periodic allowance for the depreciation value

of capital goods.

iii) Consumption type

This type of VAT is the most used and widely accepted one. It is almost prevalent in most states of the

world. This is basically related with the fact that all business purchases including that of capital goods and

related depreciations are allowed to be rebated. Thus, it is accepted easily on the part of the community

subject to VAT registration. Stated otherwise in this kind of VAT, there is no discrimination among tax

payers.

2.5.2. Advantage of VAT

The following are some of the main advantages of using VAT

 it 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 distribution stages, tax should be levied on the incremental

value at each stage and not on the gross sales price. This ensures that same commodity does not get taxed

again and again and, thus, there is no cascading effect. Putting the concept in simple terms, in VAT system,

each input is taxed only once. However, this is not a condition in sales and excise taxes

 It is 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, who sales and retail sectors.

Therefore, it is a more comprehensive and equitable tax system. On the contrary, sales tax is normally levied

at one stage of the whole marketing Misrak tesfaye Msc, (2008)

 It reduces the possibility of tax evasion

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In the case of VAT, the tax is divided in to several parts depending on the number of stages of production

and sale. In each stage, every transaction is made using VAT invoice approved by the Tax Authority. In

addition, each VAT register person (supplier) has to maintain appropriate records on their sales and

purchases transaction those obligations make tax evasion difficult Misrak tesfaye Msc, (2008)

 It has less tax burden

Under VAT system, the tax is collected in small fragment at different stages of production and sales, hence,

the VAT payers feel the burden of the tax less Misrak tesfaye Msc, (2008).

 It is 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 Misrak tesfaye Msc, (2008)

 It improves productivity

In VAT system, a firm has to pay tax even though it runs into loss. The fir m cannot claim any exemption

for loss because it pays taxes on the value produced and not on profits. So, firm will always try to improve

their performance and reduce the cost of production. As a result, the overall productivity of the country will

be improved Misrak tesfaye Msc, (2008)

 It promotes capital investment and saving

VAT is a consumption tax since one pays VAT on its expenditure and has the option to save so as not to be

taxed. Furthermore, relief from tax on capital goods may encourage investment.

Potential investors also consider tax legislation as one of the factors in making investment decision Misrak

tesfaye Msc, (2008)

 It enhances exports

Exports of goods and services in most countries that implement VAT are liable to VAT at zero-rate. This

may make export internationally competitive and, thus, encourages exports Misrak tesfaye Msc, (2008)

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 2.5.3. Criticism on VAT

While elaborating points during introductory section to VAT, I have tried to see the rationales behind

replacing sales tax with VAT. By then we touched up on some advantages of introducing VAT in certain tax

system of state .VAT is not only with advantage scholars raise strong critics against having VAT in a state.

Some of the critics are Misrak tesfaye Msc, (2008)

 It is regressive in nature

A straightforward single rate VAT with few exemptions would tax lower income groups (the poor) more

heavily than the higher income groups (the rich). It is, thus, incongruent with the basic principles of taxation

which state that a person should be taxed according to his abilityto- pay. This makes VAT regressive tax

system. In order to compensate for its regressive effect, a number of countries have exempted basic goods

particularly food items from VAT.

 It requires advanced economic structure.

The proper implementation of VAT system requires organized and advanced financial and economic

structure as it is complicated system. VAT system also requires proper record keeping of invoices at each

stage of production and sale by both the seller and buyer. Hence, it becomes difficult to implement the

system in all types of economy.

 It puts additional burden to tax authority

In VAT system, the manufacturers, wholesalers and retailers have to fulfill various legal formalities in the

form of maintaining various records, accounts, books, etc. The verification of those formalities puts

additional burden to the tax enforcing authorities.

 It is uneconomical

VAT system involves high cost of administration, assessment, verification, collection, etc. hence, it is highly

uneconomical.

 It has ream loopholes for tax evasion

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Although VAT system requires proper record keeping of invoices at each stage of production and

distribution by both the buyer and seller, it has ream loopholes for tax evasion. This may include the

following:

 Taxpayers could over report sales of zero rated goods;

 Taxpayers could use invoices they received for personal purchase to claim tax credit;

 It enables buyers and sellers to strike secret deals with regards the issuance of receipts;

 It could lead to the formation of forged companies‟ receipts to claim tax credit on input VAT, etc.

2.5.4. Registration Procedure:

A person applying to register for VAT is required to do so in such a form as is established by the

implementation directives issued by the Ministry of Revenue; When a person carrying out taxable

transactions files an application to be registered for VAT, the Authority is required to register the person in

the VAT register, and to issue certificate of registration within 30 days of the registration; A person

registered for VAT is required to use his taxpayer identification number on all VAT invoices, and on all tax

returns and official communications with the Authority. There is a VAT invoice prepared by the Ministry of

Revenue containing the following information: Full name of the registered person and the purchaser, and the

registered;

Person‟s trade name, if different from the legal name; Taxpayer identification number of the registered

person and the purchaser; Number and date of the VAT registration certificate; Name of the goods shipped

or services rendered; Amount of the taxable transaction; Amount of the excise on excisable goods; Sum of

the VAT due on the given taxable transaction; Issue date if the VAT invoice, and Serial number of the VAT

invoice. The registered person is required to issue the VAT invoice to the purchaser of goods or services

upon the supply or rendering, but not later than 5 days after the transaction Misrak tesfaye Msc, (2008).

2.5.5. Record Keeping Requirement

A registered person or any other person liable for VAT under the proclamation shall maintain for

17
10 years in Ethiopia: Original tax invoices received by the person; Copy of all tax invoices issued by the

person; Customs documentation relating to imports and exports; Accounting records; and Any other records

as may be prescribed by the Minister of revenue by directive.

Administrative Penalties, Where any person engages in taxable transactions without VAT registration where

VAT registration is required –100 % of the amount of tax payable for the entire period of operation without

VAT registration; Where any person issued incorrect tax invoice resulting in decrease in the amount of tax

or increase in accredit or in the event of the failure to issue a tax invoice –100 % of the amount of tax for the

invoice or the transaction;

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 where a

person fails to maintain records required – 2,000.00 Birr for each month or portion thereof that the failure

continues. A person who fails to file a timely return is liable for a penalty equal to 5% of the amount of tax

underpayment for each month (or portion thereof) during which the failure continues, up to 25% of such

amount. The penalty‟s limited to 50,000.00 Birr for the first month (of portion thereof) in which no Return

is filed. If any amount of tax is not paid by the due date, the person liable is obliged to pay interest on such

amount for the period from the due date to the date the tax is paid. The interest is set at 25% over and above

the highest commercial lending interest rate that prevailed during the Preceding quarter Misrak tesfaye Msc,

(2008).

2.5.6. Tax payable and Tax Credits

Obviously, in introducing VAT, the government is aspiring to generate better amount of revenue than what

was collected during sales tax system which had served for more than four decades but with insignificant

place to become basic means of income from taxation in Ethiopian history. In short, tax payable is the

amount that is expected to be collected from person registered for VAT in Ethiopia.

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Art 20 in this regard runs the amount of tax payable for any accounting period by a person who is registered

or is required to register is the difference between the amount of tax charged on taxable transactions

creditable tax stated otherwise, under VAT proclamations, though taxable transactions are subject to VAT.

There are also deductible/creditable taxes. In this case, the amount required from the person is the simple

arithmetic difference obtained by deducting creditable taxes from all taxable transactions. Instances of

creditable/ deductible taxes, indicated under Art 21, includes among others:

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

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

purpose of the registered persons taxable transactions with in the time limit indicated under Art 11 of

the proclamation.

Therefore, once creditable items are identified, it is simple to calculate the total amount expected from tax

payer Misrak tesfaye Msc, (2008).

2.5.7. Reverse Taxation/Reverse Charge)

It is a situation where tax is imposed if a non-resident person who is not registered for VAT renders services

to the taxable person who is resident in Ethiopia; In this case, the person who received the service has the

duty to withhold VAT payable to the service provider.

In this regard, the cumulative reading of Art 23(1) and (2) tells that. If a non-resident person who is not

registered for VAT in Ethiopia renders services in Ethiopia for a person registered in Ethiopia for VAT or

any legal business entity, the rendering service is subject to taxation Unlike the previous duties which are

directly imposed upon the person that supplies goods or services, here, the obligation to withhold and pay

tax is imposed on service receiver that is what it is called as reverse taxation.

When the customer, who received the service and withhold the VAT, the withhold tax is payable at the time

of filing of the VAT return for the accounting period in which the. Transaction takes place. The payment

document for payment of the withhold tax is considered to be a VAT invoice and gives the customer the

19
right to VAT credit. It should be noted that, in reverse transaction if the invoice value doesn‟t explicitly

indicate the amount of VAT, the value would be deemed to have been inclusive of VAT Tax Invoice.

Whenever you supply standard rated goods or services, which are transactions subject to tax, you must give

them a document showing certain information about what you have supplied. This document is known as

VAT invoice. Tax invoice is imposed on tax payers subject to VAT. But it is also a right conferred upon

such personnel, for the fact that a non-registered person cannot issue Tax invoice. Like other documents, tax

invoice for VAT is a document that clearly shows the amount of VAT payable. Issuing this document by the

registered person is mandatory imposed so as to have better implementation of VAT. As per Art 22(2) - the

VAT invoice as a document is required to contain the following information‟s.

 The full name of the registered person and the purchaser and the registered person‟s trade name if

different from the legal name.

 The respective identification numbers of the registered person and the purchaser.

 The number and date of the VAT registration certificate

 The name of the goods shipped or service rendered

 The amount of transaction

 the amount of excise on excisable goods

 sum of the VAT due on the given taxable transaction

 the issue date in the VAT invoice and;

 serial number of the VAT invoice

As can be logically inferred, the corollary obligations behind the particularities indicated above is, the

registered recipient who has not received a tax invoice can request from the supplier and the supplier shall

comply with the obligation.

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

 VAT collection receipt

20
  list of items sold

 credit of sales invoices

 receipt for sale of zero rated supplies

 receipt for sale of exempt supplies

2.5.8. Powers of Levying and Collection Enforcement for VAT

In federal states like Ethiopia, concurrent powers of taxation are given both to federal (central) governments

and regional states. As we have seen at the beginning, the F DRE constitution divides powers of taxation

between and among the federal and regional governments in the following manner.Powers exclusively given

to federal government, powers exclusively given to regional governments, and concurrent powers of

taxation. With respect to new taxes, that might be introduced in the future in reaction to societal needs and

technological advancements the constitution submits the issue to be decided by the joint session of the house

of federation and the house of peoples representatives (art.99 of the FDRE constitution.) When VAT is

introduced in 2002 power of taxation was resolved by similar procedure and the joint session decided in

favor of the federal government. Thus it is only the federal government that has power to levy VAT in

Ethiopia.

One open fact here is persons subject to VAT reside both federal and regional states. Since VAT requires

cooperation, regions are given delegations to collect returns from VAT.

Regarding collection enforcement mechanisms, the FIRA (federal Inland Revenue authority) is entrusted

ways the duty of implementations of the VAT proclamation and regulation issue to supplement the

proclamation.

Thus, FIRA is authorized to investigate any statements records, books of accounts submitted by any person

at any time. The authority can send duly accredited inspectors to check the statements, records and books of

accounts or any vouchers stocks or other material items at the person‟s place of business, requiring the

21
person, or an employee who has access to produce the same. The person is duly bound to answer questions

related with the collection of taxes in

VAT. For this purpose any municipalities‟ body, financial institution, department, or agency of federal or

regional governments is required to render full information to the authority. The power is extended even up

to seizure of the properties of the person liable to pay tax and failed to comply with his obligation to pay tax.

2.5.9. Appeals

Anybody that feels his rights are jeopardizing by administrative tribunal or regular courts can bring his case

before competent organ. Appeal is a constitutional right as far as made in accordance with law. The VAT

system is not exception to these rules. A tax payer under VAT,

Who is aggrieved by the decision of tax authorities, may lodge his complaint to a body competent to hear

and decide on such application. The aggrieved parts have two options: tax appeal commission or regular

courts. The tax payer objecting the assessment by revise committee while taking appeal to Tax Appeal

Commission is required to deposit 50% of the additional tax assessed Art 43(1).)

2.6. Empirical view on tax assessment and collection practice

Considering the significance of tax administration, many studies have been conducted in some developing

and transitional countries with respect to the main VAT administration tasks. These studies include

Jantscher (1990), Edmiston and Bird (2004), Bird and Gendron (2005), Grandcolas (2005) and Bird (2005).

These papers assessed how VAT administrators in developing and transitional countries perform their duties

and how the effective taxpayer requirements differ from the legislation. More specifically, the analyses

focused on practices of different developing countries with respect to taxpayer identification, invoicing,

filing and payment process, control of filing and payments, refunds, audits and penalties. In addition, the

costs of VAT administration were briefly examined in the case of Jantscher‟s (1990) study. The main

conclusion of these studies is that VATs prevailing in developing countries were quite different from the

broad based tax discussed in public finance literature and that administrative problems have a major

22
contribution to this divergence. Administrative problems, in turn, may be partly caused by administrative

resources constrain.

2.7. CHALLENGES OF VAT ADMINSTRATION

2.7.1. Tax Evasion

A person who evades the declaration or payment of tax, or a person who, with the intention to defraud the

government; applies for a refund that is not entitled to commit an offence. So, if a person does this may be

prosecuted and on conviction be subject to a term of imprisonment of not less than five years, (proclamation

No.285/2002, Art.49).

2.7.2. Making False or Misleading Statements

During VAT activities, a person makes or misleads statements by making a statement to a tax officer of the

Authority. Where the statement or omission is made without reasonable excuse, and if the inaccuracy of the

statement were undetected may result in under payment of tax by an amount not exceeding 1,000 birr, to a

fine of not less than 10,000Birr and not more than 20,000 Birr. In addition, imprisonment for a term is not

less than one year and not more than three years. If the under payment of tax is in an amount exceeding

1,000 Birr, to a fine of not less than 20,000 Birr and not more than 100,000Birr and imprisonment for a term

of not less than three years and not more than five years. Where the statement or omission is made

knowingly or recklessly:

(a) If the inaccuracy of the statement were undetected may result in an underpayment oftax by an amount

not exceeding 1.000 Birr, to a fine of not less than 50,000 Birr and not more than 100,000 birr. On the other

hand, imprisonment for a term of not less than five years and not more than ten years.

(b) If the underpayment of tax is in an amount exceeding 1,000 Birr, to a fine of not less than 75,000 Birr

and not more than 200,000 Birr, or imprisonment for a term of not lessthan ten years and not more than

fifteen years, (proclamation No.285/2002, Art.50).

23
 2.7.3. Failure to Notify

A person who fails to notify the Authority of a change considered commits an offence and is liable on

conviction:

 Where the failure was made knowingly or recklessly, to a fine of not less than 10,000 Birr and to

imprisonment for one year; or

 In any other case, to a fine of not less than 5,000 Birr and to imprisonment for six months,

(proclamation No.285/2002, Art.52).

2.7.4. Improper Tax Debit and Tax Credit Notes

A registered person, who fails to provide a tax credit note or tax debit note as required by VAT

Proclamation commits an offence and is liable on conviction, to a fine of 10,000 Birr and to imprisonment

for one year. A person who provides a tax credit note or tax debit note otherwise than as provided for in this

Proclamation commits an offence.

2.7.5. Offences by Entities

1) Where an entity commits an offence, every person who is a manager of that entity at that time is treated

as having committed the offence and is liable to a penalty.

2) Where an entity commits an offence by failing to pay an amount of tax, including an amount treated by

VAT Proclamation as though it were tax, every person who was manager of that entity at that time or was a

manager within six months prior to the date of commission is jointly and severally liable with that entity and

that other person to the Authority for the amount.

24
 CHAPTRE THREE

RESEARCH METHODOLOGY

3.1. INTRODUCTION

This chapter presents details of the research design and methodology. This includes the research design,
sample size and sampling technique, data source and collection method, and procedure of data collection.
At the end the method of data analysis was presented.

3.2. Study Area

Sawla also known as Felege Neway is a town in Southern Ethiopia. Which was located in Gofa Zone of
Southern Nations Nationalities and peoples‟ Region? It is the capital city of Gofa Zone. It is 514 K.M from
the capital city of Ethiopia (Addis Ababa), it has a latitude and longitude of 16˚18ꞌN 36˚53ꞌE with an
elevation of 1395 meters (4577ft) above sea level. It is surrounded by Demba Gofa woreda. This study will
be conducted in sawl atown administration to assess the factors that influence rental taxpayers‟ compliance
with tax system.

3.3. Research approach

The researcher will use both qualitative and quantitative research approach. Qualitative research will used

to describe or explain what is happening within a study area. Qualitative method mainly includes three

kinds of data collection: in-depth interview, direct observation, and written documents (Patton, 2003). For

this study, data will collect through in-depth interview and documentary analysis.

3.4. Sources of data

The researcher makes use of both primary and secondary data from respondents as it relates to the “VAT
registration, VAT assessment, and VAT collection practice “in Sawla Town administration. The Primary
Data will be collected through standard questionnaires which will developed by Gloria Mesiku (2011) and
self-structured open ended interviews will distributed to the respondents. Secondary data will be collected
through review of articles in the journals, publications, regulatory books. Text books, Sawla Town
administration revenue office documents are reviewed.

25
 3.5. Research Design / Sampling Procedure/

The study adopted a cross sectional design and the research approaches; qualitative and quantitative were
used in which quantitative methodology was a dominant. By this method I used Carvalho sample size
determination method. The total sample size is 274. Out of the total I decided to take 32 taxpayers of the
sample size. The reason why used from the total sample size is Carvalho sample size determination
method. In addition descriptive and quantitative research design has been used.

3.6. Sample size and Sampling technique

The sample size of VAT taxpayers has been determined by using Carvalho sample size determination
method. Out of 274 taxpayers, 40 were selected as a sample. After the samples of taxpayers have been
determined, the researcher used the following sample size determination formula to determine the sample
size of the population in sawla town. The formula was developed by Carvalho. It is calculated as follows:

3.7. Sample Size

Table 3.1. Carvalho sample size determination method

Population Sample size

Law Medium Large
51 – 90 5 13 20
91 – 150 8 20 32
151 – 280 13 32 50
281 – 500 20 50 80
501 – 1200 32 80 125
Table 3.1 Carvalho sample size determination method

I selected the Medium for the research. In addition to this, 1 head of the office, 2 vice head offices and 5
internal auditors are used as sample size. Because, they are directly relationship with tax payers. So the
total sample size was 40.

3.8. Data Collection Instruments

Primary data will be obtained from the selected category VAT register taxpayers using self - administered
close ended questions targeted to the selected category VAT register taxpayers found in Sawla town
administration. The questionnaire will be designed according to the objectives and study variables and
26
responses to the questions are anchored on a five (5) point Liker scales ranging from 5 – strongly agree to 1
- strongly disagree. Part one of the questionnaires will be used to gather biographic information. This
instrument will be adopted, because it allows systematic collection of information about the objective of the
study.

3.9. Data Analysis and Presentation

Data will be collected from primary sources will analyzed using descriptive analysis like tables, figures,
charts, bar graphs and others. In addition to this, the researcher will also concern with the interpretation and
representation of justification. Frequency counts and percentage will used to analyze various characteristics
of the result.

27
 CHAPTER FOUR

RESULTS AND DISCUSSION

The pervious chapter, the research methodology has been discussed, and the methods adopted for the study
to attain the objective have been stated. This chapter presents the result and analysis of the data collected
using different methods. It organized in four sections, first presents characteristics of respondents, than VAT
registration practice, the third section presents VAT assessment practice, the fourth section presents VAT
collection practice than interview result section and present summaries of findings. Currently, the
government of Ethiopia, like many other governments, seeks to raise revenue mainly through taxation in
order to cover its expenditures on infrastructure development in particular.

4.1. Characteristics of respondents

Table 4.1: Distribution of the Gender, Age and Education group of respondents

Variables Values Frequency Percent

Male 32 87.5
Gender Female 8 12.5
Total 40 100
22-31 5 12.5
32-41 18 45
Age 42-51 8 20
Above 51 9 22.5
Total 40 100
Primary completed 7 17.5
Secondary completed 14 35
Education Diploma 10 25
Degree 9 22.5
Total 40 100
Source: survey, 2012 E.c

The survey result in (table 4.1) above shows that majority of respondent‟s 87.5 percent were male and 12.5
percent were female. This indicates that in Sawla town administration revenue authority most category Vat
register taxpares were male. Tittle e etal, (1980) pointed out young taxpayers are more willing to take risks

28
and are less sensitive to endorsements as well as age is a factor for intentional evaders, with younger
taxpayers less complain. In addition noncompliance is significantly less common and of lower magnitude
among householders in which either the head or the head‟s spouse is over age 22 to 31; all these attributes
may promote higher tax compliance. In line with (Tittle e tal, 1980) the survey result in table 4.1 above
shows 45% of the respondents were the ages of 32-41 years old, 20% respondents were the age of 42-51
years old, 22.5% of the respondents were the age of greater than 51 years and 12.5 % of the respondents
were the age of 22-31 years of old. This indicates that most of Vat register taxpayers in Sawla town were
32-41 years who were promote higher tax compliance.

The above table confirmations more of the respondents (35%) had a qualification of Secondary level
education, (25%) of the respondents were Diploma, and (22.5%) of the plaintiffs were Degree level and the
remaining (17.5%) of the respondents were Elementary. From this characteristic more of the respondents are
secondary education. This depicted that most of Vat payers in Sawla town were educated. Education, as a
demographic variable relates to the taxpayers “ability to comprehend and comply or not comply with the tax
laws” Groenl and Veldhoven, (1983). The job opportunity for highly educated peoples is high that means
literate peoples are highly joining in the trade or market, while less educated people are out of the market.

4.2 Types of Business

Table 4.2: Distribution of the type of business, Sales, VAT and Capital

Variables Values Frequency Percent

Merchandise 13 32.5
Service 12 30
Business Manufacturing 10 25
Others 5 12.5
Less than 100,000.00 10 25
100,000.00-500,000.00 9 22.5
Annual Sales
500,000.00-1,000,000.00 11 27.5
1,000,000.00-5,000,000.00 6 15
Above 5,000,000.00 birr 5 12.5
Less than 50,000.00 birr 16 40
50,000-100,000.00 birr 19 47.5
VAT
100,000-150,000.00 birr 3 7.5
150,000.00-1,000,000.00 2 5
Less than 100,000.00 - -
100,000.00-500,000.00 2 5

29
 CAPITAL 500,000.00-1,000,000.00 5 12.5
1,000,000.00-5,000,000.00 21 52.5
Above 5,000,000.00 birr 12 30
Source: survey, 2012 E.c

In table 2 above shows distribution of the type of business 32.5% were merchandise, 30% were service ,
25% were manufacturing business and the reaming were 12.5% other businesses, from this respondents
characteristics the merchandise business is the dominance one and the manufacturing business is the least
one. Which indicates the merchandise business can be done with small capital and which is easy to
administer relative to others sectors.

In the above table shows that majority of the respondents (27.5%) have business turnover ranging from
500,000.00 to 1,000,000.00 and (25%) respondents have business turnover of less than 100,000.00, and
(15%) respondents have business turn over between 1,000,001.00 – 5,000,000.00 and the rest( 12.5%) were
above 5,000,000.00.This indicates that most of category A taxpayers are in between 500,000-1,000,000
which is fair because a tax payer is considered as Category “A “ if and only if their annual sales turnover is
greater than or equal to 500,000 except some special cases like forced VAT registered taxpayers even if
their sales turnover is less than 500,000 they can be considered as Category “A” taxpayers.

In the above table shows that the respondent‟s initial capital of in between 100,000.00 -500,000.00 were
5%, 500,001.00-1,000,000.00 were 12.5%, 1,000,000.00-5,000,000.00 was 52.5%, and above 5,000,000.00
birr were 30%. Therefore most of the taxpayers initial capital were 1,000,000.00-5,000,000.00 which
implies that most of the taxpayers are running their business with less amount of capital that is why their
annual sales also less. Regarding VAT, the table shows that majority of respondents are in between 50,000-
100,000.00 were 47.5%, less than 50,000.00 were 40%, 100,000-150,000.00 were 7.5%, 150,000.00-
1,000,000.00 were 5%. Therefore most VATs are not paid properly.

30
 4.3. NUMBERS OF EMPLOYEE THE BUSINESS HAS
Graph.4.1. Number of employee

Namber of employee

80.00%
60.00%
Axis Title

40.00%
20.00%
Series1
0.00%
less than 5 between 5 and more than 10
10
Series1 72.72% 12.73% 14.55%

In the above chart shows distribution of employees in the taxpayers of 72.72% of respondents have less than
5 employees, 12.73% of respondents were 5-10 employees, and 14.55% were greater than 10 employees.
There for most of the business organization having less number of employees

4.4 DURATION OF BUSINESS

Graph.4.2 Time of Duration

60%
business duration
54%

50%

40%

30% 27%
Series1
19%
20%

10%

0%
les than 2 Year 3-5 years greater than 5 years

31
In the above chart shows the respondent‟s experience in the business, 54% of the respondents were between
3-5 years, and 27% were less than 2 years, 19% were greater than 5 years.

From this almost all of the taxpayers have an experience of less than 5 years. This indicates that most
categories “A” taxpayers are less experienced which may be less turnover of the business sector and the
ownership of the business.

4.5. VAT REGISTRATION PRACTICE

Graph 4.3. VAT Registration Practice

VAT Registration Practice

6000%
5000%
4000%
Axis Title

3000%
2000%
1000%
0%
When I
Tax payer
The way the registered I
I registration is
registration was allocated
voluntarily normally Total
exercise is a tax
registered conducted by
conducted. identification
rule.
number
percent 18% 10.50% 22% 49.50% 100%
respondant 10 6 12 27 55

Source; survey, 2016

Standard deviation is the most frequently calculated measure of variability or dispersion in a setoff data
points. The standard deviation values represent the average distance of a set of scores from the mean or
average score. A smaller standard deviation represents a data set where scores are very close to the mean
score (a smaller range). A data set with larger standard deviation has scores with more variance (large
range). Average grand mean and standard deviation regarding VAT registration dimension result from the
above (table 3) were 2.80 which shows below average mean according to best standard and grand average
standard deviation of VAT registration deviates 0.513 from its mean and which indicates that there is small
variation in VAT registration practice because taxpayer registration is not normally conducted in good way,

32
taxpayers voluntarily registered as a taxpayer with tax admin office, taxpayers are not absolutely
confidential about the legitimacy of the claims in their VAT return, unclear registration procedure which
have been complex procedure and also which confirmed through interview result and when taxpayers
registered tax identification number were allocated . VAT registration procedures are long, tedious. The
other problem contrary to the survey result observed from the interview result made was that there are
taxpayers owing different business entities but with different TIN numbers. Furthermore the prevalence of
firms performing business without being registered or having TIN created duplication and falsification of
address and there is a less use of technology like computers in obtaining data of taxpayers.

4.6. VAT ASSESSMENT PRACTICE

Graph 4.4. VAT assessment

VAT Assessment
180
160
140
120
Axis Title

100
80
60
40
20
0
The Tax
The tax
I take full Office
Assessment office
responsibility respects
of VAT is consults
for assessing each TOTAL
based on widely about
my own VAT individual’s
declaration how they
liability. rights as a
might.
citizen.
% 9 54 18.5 18.5 100
RESPONDENT 5 30 10 10 55

Source, survey, 2016

From the above (table 4), the researcher conducted that the grand average mean and standard deviation are
2.69 + 0.637 respectively which have variability. Regarding VAT assessment dimensions resulted from the
above table the average grand mean of the VAT assessment were 2.69 which show average/moderate mean
according to best standard and standard deviation regarding VAT assessment dimensions which deviates
0.637 from its mean. This has small variability in VAT assessment according to the study through
questionnaire instrument survey. Some of the possible reasons of the variability based on the survey study

33
were the tax officials give un equal treatment to the view of all taxpayers, there were no clear guideline on
procedures of appeal, the assessment of VAT was not based on the capacity to pay principle, the tax office
could not consider the concern of average citizens when making decisions which is contrary to adam smith
(1776), posit that a good tax should have the qualities of equitability, efficiency, neutrality, flexibility and
simple. And the tax office does not go to a great length in consulting the taxpayers over changes in the tax
system and the interview result confirms the survey result as it shows were lack of awareness; tax officers
do not understand the tax rules and regulations, they dislike paying VAT which is in line with
(Nightingle,2002) concludes that no one really likes paying VAT yet they are inevitable for the provision of
social welfare.

The tax assessment and collection officials do not respect taxpayers as citizens when given decision and it
also erode the trust of the tax payer‟s interest to pay. From the interview result taxpayers have rent seeking
ideology, and the members of the appeal commission at every level shall be appointed from among persons
having good reputation, acceptability, integrity, general and professional knowledge and from among
persons who have not committed any offense in connection with VAT administration but in the case of
Sawla town administration revenue office the appeal committees which is not applied which means simply
appointed by the Mayer. Tax administration team in particular VATs assessment and collection officers
resign themselves from their position because of job insecurity. From this research interview result the
researcher observed that, less experienced tax officers, and taxpayers changing their business type and
falsification of address, Lack of a taxpaying culture, Weak accountability, Lack of transparency, unstable
tax amendments, tax officers turnover, luck of awareness on tax rules and regulation, lack of Knowledge
about tax rules and regulations, corruptions in both sides, tax officials and taxpayers which is in line with
the study by Gebeyehu (2008). Luck of awareness on tax rules and regulation, lack of Knowledge about tax
rules and regulations were in line with Mihiret, (2011).

34
 4.7. VAT COLLECTION PRACTICE

Graph 4.5 VAT collection

VAT Collection Practice

It is everyone’s responsibility to pay

the correct amount of vat.
I have never attempted to avoid VAT
12% 10%
40%
I pay actual VAT assessed.
4% 9%
I always pay my VAT in time.
5%

I always file my taxes in time.

Total

Source: survey, 2016

In the above (table 4.5) shows that taxpayers Grand average mean regarding VAT collection dimensions
result were 3.48 which show good/high mean according to best standard and Grand average standard
deviation in VAT collection dimension were 0.52 deviates from its mean which show insignificant relative
to some of the possible reasons that makes the variability low is that taxpayers fill their tax on time,
taxpayers have not exaggerated the amount of VAT return according to the survey result but in the interview
result taxpayers minimized the amount of VAT payable, taxpayers that paying fair tax is everyone‟s
responsibility in contrary to the interview results from tax officials, which indicates that in category “A”
taxpayers were not responsible to pay the correct amount of VAT and in the previous study by (Asaminew,
nd), which confirms the result. Tax officials are less confidential in rules and regulations and there is
frustration of investigation and intelligence officers because those intelligence officers miss exercise their
power and inform to anticorruption commission and to Inland Revenue authority and the authority have
absolute power to fire tax officers without any evidence and material mistake.

35
 4.8. INTERVIW RESULT

This study employed in-depth interviews with higher tax officials. In the context of the above data sources,
the following section presents the results of in-depth interviews with 4 higher tax officials. As far as this
study is concerned on the issues of practice and challenges of VAT administration, the participants some
ideas. Accordingly, from the different tax administration dimension, 25 percent of interviewees showed that
taxpayers had fair opinion towards the current tax administration practice, whereas 75 percent of them
however were unhappy with the prevailing VAT system. This aimed at obtaining the officials and tax
payer‟s awareness on tax registration practice, the tax assessment practice and tax collection practice on
VAT system and the effect of tax knowledge and tax procedures complexity on VAT administration. In the
study, higher tax officials in the VAT payers response that they share the problems or the variances that is
shown in practice, the tax officers in the detail interview responded that there is a problem of staff
experience on rules regulations and new amended proclamations and the tax officials are less confidential
because of job insecurity because some of the employees were fired without any material mistake as a result
the majority of the employees particularly VAT assessment and collection officers are in frustration and
aggressive in administering and there is no training at all for all tax officials , there is no consistent VAT
rules and regulation , there are also intelligence and investigation officers. They exercise their duty wrongly
that means they add frustrations by looking and informing immaterial things i.e. tax notifications to
anticorruption commission due to this fact tax officials develop less confidence and they leave their work,
and the tax appeal committees are not professionals and they do not now the tax rules and proclamations due
to this taxpayers are not satisfied enough and also tax officials said that there is a problem of rent seeking
ideology on the side of the taxpayers. This all makes the VAT administration practice in Sawla Town
administration revenue office less compliance with tax laws.

36
 CHAPTER FIVE
CONCLUSIONS AND RECOMMENDATIONS
5.1. Introduction
The main objectives of this research have been to assessing the challenges of VAT administration in the
case of VAT register tax payers of Sawla town administration revenue office. Both survey and interview
techniques were employed to investigate the existing VAT administration practice of the selected Sub city.
Based on the presentation and analysis of the data obtained, the main conclusions and recommendations are
summarized in this chapter.

5.2. SUMMARY OF FINDINGS AND CONCLUSION

The previous chapter presented the results and analysis of the study. This chapter provides the conclusions
and recommendations in line with the findings of the study. The chapter is structured in to two sections. The
first section deals with conclusions whereas the second section presents some recommendations suggested
that have been identified in the study. Thus, the study examined the VAT registration, VAT assessment,
VAT collection practice in Sawla Town administration revenue office (the case of VAT registration
taxpayers) the study was conducted to investigate the VAT assessment, collection and registration practice.

The study adopted the primary and secondary data and the primary data were the dominant one specifically,
the techniques used in the study include survey with taxpayers and interviews with tax officials.

5.3. FINDINGS FROM THE DISCUSSIONS

The findings from the discussions are concluded in the subsequent paragraphs.

o The tax assessment and collection officials do not respect taxpayers as citizens when given decision
and it also erode the trust of the tax payer‟s interest to pay.
o Regarding tax assessment staff, there is no competency assessment model and there is no training
and less emphasis is given for continuous upgrading the capability and knowledge of staff resources
once they have given and held a particular position. There is also higher staff turnover in the tax
authority, tax assessment team in particular.
o The authority fails to retain proficient and well-trained VAT assessment. As a result, Sawla town tax
administration office does not have experienced and proficient tax assessment and collection

37
 officials especially the tax office needs especially trained employees who have knowledge on VAT
rules and regulation.
o There is poor VAT administration practice in Sawla Town administration revenue office the case of
VAT registration taxpayers. The research concluded that lack of education on VAT constitutes the
nucleus of the key challenges faced both VAT collectors and tax payers.
o VAT administrations practice is not at the required level of operational capability to conduct VAT
assessment and professional capability to give appropriate services to taxpayers.

5.4. RECOMMENDATION

Based on the above mentioned findings, the writer forwards the following points as recommendations;

The higher tax officials should respect and treat equally all taxpayers in the office.
Tax officers and taxpayers need continues training on awareness creation on tax rules and
regulations to improve VAT administration.
From the interview result most of the core tax coordinator in tax administration office was not
professionals therefore which has to be improved by the concerned party.
According to interview result VAT assessment and collection practice were not following the
appropriate rules and procedures, category “A” taxpayers can be assessed not based on the actual
VAT receipts or the financial documents which violets the tax rules and regulations and also which
opens the door of corruption.
VAT registration procedures are long and tedious there for which should be improved.
The tax authority should make guarantee for his employees job security to do their jobs
confidentially and give continues training.
To avoid unnecessary VAT registration procedures, Sawla Town administration revenue office
should consider the inherent factors in specific sector and economic conditions and should have
well-established accountability to alleviate the risk of corruption.
Tax administration office should sufficiently use an investigative approach to check and it should
use an investigatory approach to establish the completeness, accuracy, timeliness, credibility and
validity of taxpayer‟s VAT declarations, disclosures, and other financial arrangements.
The sub city administration revenue office should increase the number and improve the capability of
total tax assessment staff members to achieve required VAT assessment quality that might improve
overall administration and future VAT revenue performance. There should be appropriate need
assessment and employees should have been given training based on the gap identified. Staff should
38
 have been given continuous training so that their skills are kept up-to-date and relevant. Further, the
authority should supply sufficient computers and should have well established tax systems which are
suitable to taxpayers. The authority should also found a mechanism to retain the qualified tax
officials.
Tax administration team in particular tax assessment and collection officers resign themselves from
their position because of job insecurity which should be seen by legislative and judiciaries.
This study did not show all gaps of challenges of VAT administration due to short period of time so
that it is important for further study in this area.

39
 REFERENCES

B.Lal& N.VASHISHT, 2006. Direct Tax, income Tax, wealth tax and planning 6thedition. -B.Lal

and N.vashisht, Direct Tax, Income Tax, Wealth Tax and Tax planning 6thedition, 2006. -Based on

the works of Lumumba, Migwi and Obara, (2010), Bird (2010), Cullis and Lewis (1997), Wenzel,

(2004), Murphy (2004, Tyler, (1997), Baurer, (2005).

BekureHerouy ((2004), on his study of“The VAT Regime under Ethiopian Law”,distinct

ValueAdded Tax (VAT)

Council of ministers, 2002, Income tax proclamation no 286/2002, NegaritGazetta,

FDRE.Dictionary Oxford university press, 2010.

Council of ministers, 2002, income tax proclamation no. 78/2002, NegaritGazetta,

FDRE.Encyclopedia Britannica Article, 2007. History of taxation.

ERCA proclamation, No 587/2008.

FDRE (2002) Value added tax proclamation no 285/2002, NegaritGazetta.

FDRE (2002) value added tax proclamation no. 79/2002, NegaritGazetta.

Federal Democratic Republic of Ethiopia constitution, 1995.

Getanehmihiret. Tax audit practice in Ethiopia, June, 2011 Addis Ababa University.

Gloria Mesiku, November, 2011, Tax administration, procedural justice, taxpayer‟s attitude andtax

compliance among small business income earners in ARUA district Maker ere university.

Gupta A, 2001.public Finance and Tax planning 1th edition.

H L Bhatia, 24 revised Edition, 2003 public Finance,

HailemarimMamo (2011) Implementation of Value Added Tax and Its Related Problems in

Ethiopia.

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 Hectors Deleon, 2000.The Fundamentals Taxation.https://en.wikipedia.org/wiki/Value-added_tax

International monitory fund, (IMF2006.)

James and Abiola Moses Asiweh Leicester , 2012.Impact of Tax Administration on

GovernmentRevenue in a Developing Economy A Case Study of Nigeria Business School De

Montfort University Department of Accounting and Finance Leicester, UK International Journal of

Business and Social Science Vol. 3 No. 8 .

MesfinGebeyehu, 2008.Tax assessment practice and its significance in increasing revenue inEthiopia

the case of Federal government.

MisrakTesefaye, 2014.Ethiopian taxation system and principle, publisher.

Mugo JEREMIAH MUNENE 2009 Effects of internal controls on financial performance oftechnical

training institution in Kenya. Nairobi.

Odd-HelgeFjeldstad Collette Schulz-Herzenbergand Ingrid HoemSjursen October

2012.ICTDWorking Paper 8, People‟s Views of Taxation in Africa: A Review of Research on

Determinants of Tax Compliance

ResinstLikert 5 point scale 1935.

Richard Bird, 2003.Encouraging Tax Compliance for Improved Revenue Mobilization

RielCDFranzsen Professor and Director: African Tax Institute University of Pretoria South Africa.

Wollela (2008) Value added tax administration in Ethiopia

WollelaAbehodie&prof.odd.HelgeFjesdstad,surveying taxpayers in Ethiopia ICTD

AnnualMeeting 2012, Institute for Security Studies (ISS) Cape Town, South Africa.

Wollela(2009) decentralization of VAT revenue and its administration in Ethiopia

Wubishet Aborat, 2012 “Taxpayers‟ perception towards fairness: personal business profit taxpayers

in Addis Ababa”.

41
 GOFFA UNVERSAL COLLAGE
DEPARTMENT OF ACCOUNTING

TOPIC: ASSESING THE CHALLENGES OF VAT ADMINISTRATION IN THE CASE OF VAT

REGISTER TAX PAYERS; IN SAWLA TOWN ADMINISTRATION.

Dear respondents:

This questionnaire is prepared to collect data for the fulfillment BA degree of Accounting which can be
conducted by ENDALSHIW SILESH with the above research topic in college of business and economics.
The information given to as is highly privileged and will only be used for academic research purpose. Every
information‟s which will be provided by you is kept confidential. The finding will help to identify the
factors that challenges of VAT administration.

Thank you in advance of your cooperation.

Note: Do not write your name

For the questions requiring your opinion, please make tick (√) in place provided, where you feel correct and
write your explanations opinions when you are requested on the space provided make it clear and precise.

Part - 1

1/ Gender

Male ------------------------------------------------------------------------------------
Female -------------------------------------------------------------------------------

2/ Age

Less than 20 year --------------------------------------------------------------------

Between 20 and 50 year -----------------------------------------------------------
Above 50 years ---------------------------------------------------------------------

3/ Education: What is the education level you attend?

Primary level ---------------------------------------------------------------------------

42
 Secondary level -------------------------------------------------------------------------
Diploma level ----------------------------------------------------------------------------
Degree level ----------------------------------------------------------------------------
Others: you specify -------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------

4 / Business: what type of your business?

Merchandise/ retail shop, kiosk, sugar and oil, cloth/ ------------------------------

Service/ saloon, restaurant, clinic, garage/ -------------------------------------------
Manufacturing/ food and beverage/ --------------------------------------------------
Others: you specify -------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------

5. Sales: what is the size of your business as regards to annual sales volume?

Less than 100,000.00 birr ------------------------------------------------------------

100,000.00-500,000.00 birr -----------------------------------------------------------
500,000.00-1,000,000.00 birr ---------------------------------------------------------
1,000,000.00-5,000,000.00 birr -------------------------------------------------------
Above 5,000,000.00 birr ----------------------------------------------------------------

6 / Income: How much average annual VAT do you pay?

Less than 50,000.00 birr ---------------------------------------------------------

50,000-100,000.00 birr ----------------------------------------------------------
100,000-150,000.00 birr ----------------------------------------------------------
150,000.00-1,000,000.00 birr ---------------------------------------------------

7/ Capital: how much capital did you have to start this business?

Less than 100,000.00 birr -------------------------------------------------------

100,000.00-500,000.0 birr -----------------------------------------------------
500,000-1,000,000.00 birr ------------------------------------------------------
1,000,000.00-5,000,000.00 birr ------------------------------------------------
43
 5,000,000.00-10,000,000.00 birr ----------------------------------------------

8/ Employee: How many employees you have run your business?

Less than 5 ------------------------------------------------------------------------

5-10 people -----------------------------------------------------------------------
Above 10 people -----------------------------------------------------------------

9/ Duration: How long you have been stay in your business?

Less than 5 year---------------------------------------------------------------------

6-15 years----------------------------------------------------------------------------
More than 15years------------------------------------------------------------------
Part -2

10/ The data in this section will be used to measure VAT registration practice, VAT assessment and VAT
collection. For each of the statements please indicate your agreement or disagreement by using tick
mark in the provided space.

10.1. VAT registration practice, how do you registration for your VAT?

1. I voluntarily registered. -----------------

2. Tax payer registration is normally conducted by rule.-------------
3. The way the registration exercise is conducted. --------------
4. When I registered I was allocated a tax identification number. -------------

10.2. What are your VAT ASSESSMENTS?

1. I take full responsibility for assessing my own VAT liability. ---------------

2. Assessment of VAT is based on declaration. ---------------
3. The tax office consults widely about how they might. ---------------
4. The Tax Office respects each individual‟s rights as a citizen. ---------------

10.3 What is your VAT collection looks like?

1. It is everyone‟s responsibility to pay the correct amount of vat. ----------

2. I have never attempted to avoid VAT. ----------- 4. I always pay my VAT in time. -----------
3. I pay actual VAT assessed. -------------- 5. I always file my taxes in time. -----------
44
45