I

CHAPTER ONE
1 Introduction
1.1 Back ground of the organization
Description the study area

Hawassa city was founded in 1954. And it is located in the south part of Ethiopia a in south
nation nationalities regional state. It located around 270ks south of capital Addis Ababa. The city
is capital of the region/south nation national people state. More over the city is an economic,
cultural and political hub in the region.

Hawassa city revenue authority branch office is one of governmental entity in Hawassa city and
it start its independent Bureau in January 2001 E.C by the implementation of BPR, Hawassa city
revenue authority found in the building of City Administration.

1.2 Background of the study

Tax is a financial charge or other imposed on an individual or legal entity by a government.
Taxation is a system of raising money to finance government expenditures. All government
requires payment of money taxes from people. Government use tax revenue to pay soldiers and
police. To build dams and roads to operate schools and hospitals, to provide food to the poor and
medical care to the elderly, and for hundreds of other purposes. Ethiopian tax system dates back
to ancient times, for example in the Axumite kingdom there was a practical of traditional
taxation. The traditional taxation provides for taxes on crops, live stock and live stock products
such as wool, butter and milk. The current Ethiopia tax system is composed of direct and indirect
taxes. The direct taxes include income tax (employment income tax and business income tax),
capital gain tax. And taxes on other income such as taxes on income from game. Income from
dividends, etc. the indirect tax are composed of Excises tax, turn over tax. Value added tax
(VAT) stamp duty and custom duties (Gebrie, 2006 page, 170)

Value added tax is an indirect tax charged on the supply of aid variety of goods and services. The
tax was introduced in 1973, but current registration is to be found in the VAT account, 1994 as
amended by subsequent finance amounts. VAT is levied on every business as a fraction of the

1
price of each taxable sale they make, but they are in Tunb used on their purchases, so the VAT is
applied to the value added to the goods at each stage of production (GEB, 2006)

Value added tax (VAT) is a general tax on consumption levied on the value added to
intermediate products of businesses. At each stage of production various formats of the VAT are
in use in more than 50 nations of the world including Canada Japan, Latin America countries and
all nations of the European Union (EU). (HYMAN, 2006)

1.3 Statement of the problem

VAT is a tax on consumer expenditure. It is collected on business transactions and imports. More
business transactions involved supplies of goods or services.
VAT is a tax on consumer expenditure. It is collected on business transactions and imports. More
business transactions involve supplies of goods or services.

VAT is an important source of public revenue and is being widely applied by more than 120
countries and area, with cover age from the under-development area in Africa and Asia to the
will developed western Europe and north America. it is declaimed as the most important of the
latter twentieth century and certainly the most breaking and with its significance on the
domestic economy and the government policies (ping z.206)

Most less Developing countries (LDCs) are currently dependent on external financial resources
to fund their development activities. As a result their budgetary problems become more
aggravated. To change this situation, these nations should exploit and strengthen their domestic
financial resource base in order to bring about sustainable development. Otherwise, it is difficult
to achieve profound growth with dependence external sources. External sources are instable and
outside investment cannot be reliable major source of income to support the nation.

VAT in Ethiopia is young. It come in to realization in 2003 (VAT in Ethiopia, 2012) and plays
an important role in the economy in terms of its contribution to ever increasing domestic
revenue and reducing budget deficit.

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1.4 Objective of the study
This paper has both general and specific objectives

The general objective of the study is to assess the implementation of VAT and its role in
improving to tax revenues for the government.
Specific objectives are as follows
 To assess awareness of tax administrators. Employees and tax payers toward the VAT
system.
 To assess the attitude of tax payers toward tax policy and killing of the deliration in time
or not.
 To assess implementation mechanism of Revenue authority over the tax payers.

 To assess structure of the tax administration

1.5 Significance of the study

The paper was used by the entity as abuse to make further implementation regarding to the
problems. Which the entity facing how on VAT implementation. In addition the paper is
significant to compare the theoretical aspects with the practical aspects in Hawassa city
administration Menaharia sub-city Revenue Authority Office . The branch and point out the major
point of VAT implementation. Where management attention disservice, finally it is important in
that its provides possible remedies in order to tackle problem. So that the desired goals can be
achieved.

1.6 Delimitation (scope of the study)

Due to the shortage of time cost other the study is conducted in VAT implementation in Hawassa
city administration Menaharia sub-city Revenue Authority Office . Even though there is important to
assess the VAT implementation in all ERCA branches due to financial and time limitation this
research is limited to VAT implementation in Meneharia branch only. And the research is only
limited to VAT implementation aspect only.

1.7 Limitation of the study

While conducting this study researcher may faces the following challenges:

 Lack of information
 Lack of resource, like computer, internet access, references etc
 Lack of finance and enough time

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  Lack of experiences and lack of consistent data since it is new phenomenon to our
country.

1.8 Organization of the paper

This paper consists of five chapters. The first chapter presents introduction. The second chapter
describes review of related literature relevant to the major them of the study. Chapter three of
this paper describes methodology. Chapter four of this paper focuses on the analysis and
interpretation of the data, the last chapters five consists of concussions and recommendations.
Which are suggested for the problem on an assessment of vat implementation among
merchandizing business a case of hawassa city administration meneharia sub-city revenue
authority sub branch office.

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CHAPTER TWO
2 LITRATURE REVIEW
2.1 OVERVIEW OF VALUE ADDED TAX
VAT first introduce in France in 1954-55 accepted by E.E.C. countries in 1963 and fully
implemented by 1971 and now used by most other European as well as South American
countries. This is the form now most widely proposed for a Federal sales tax in the United States
and incorporated in bill introduced into congress in 1979 (John F.Due, 2006, p-418-19).

Therefore, VAT invented by French economist in 1954 by Maurice Lanred director of the French
tax authority, The VAT is a general tax on consumption levied on the VAT intermediate
products by business at each stage of production. Various forms of the VAT are in use in more
than 50 nations of the world including Canada, Japan, Latin American countries, and all nations
of the European Union (EU). The French National Government first adopted the tax in 1954,
when a nation is admitted to the European Union. It is required to introduce the VAT as a
condition of membership. In the United States a type of VAT was used by the state of Michigan
between in 1953 and 1967 was readapted in 1957 as a “single business tax” (Hyman 2005, p
629-630).

However, VAT was administered by HM customs and excise until the merger of the Inland
Revenue and HM customs and excise in April 2005. The tax is now administered by HM
revenue and customs (HMRC) (Mellville 2006, P-477).

The spread of VAT appears to have been desirable and successful. It requires good design and
implementation. Not only when first adopted but also for many years after. If value added tax is
correctly designed. It will live up to the expectation as an efficient and source of revenue.

2.2 Meaning of value added tax

The value added tax is simply a multistage sales tax that exempts the purchases of intermediate
goods and services from the tax base; value added is the difference between sales proceeds and
purchases of intermediates goods and services over a certain period.

Total transaction less intermediate transactions (that is purchases made from firms by other
firms) is equal to the sum of wages, interest, rent, and other input payment in the nation summing
up to GDP. This may be expressed as the following identity;

Value added= Total Transactions-Intermediate Transactions

= Final sales= GDP

= Wages+ Interest+ Profit+ Rent+ Depreciation

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When intermediate transactions represent purchases by firms of goods and services to be further
proceeds in production. (Hyman 2005, p 632-633)

2.3 Evolution of the value added tax

The value added tax offers several potential advantages:

1. For many countries, the possibility of avoiding the adverse consequences of the turn over
tax, without concentrating the impact of the tax at any one stage in production and
distribution. The value added tax produces no economic distortions or loss of efficiency if
properly designed. The advantages of the retail sales tax are fully attained: yet a large
portion- more than half of the revenue is collected at pre-retail levels. This is of no great
important in the United States but is great merit in many countries.
2. Under other forms of sales tax, exclusion of sales of for business use requires check up
on both the seller and customer, with the value added tax; all sales among the business
firms are taxable: the purchaser takes credit for the tax paid on purchases. Therefore, that
audit must be made only up on the purchaser. Not up on the seller.
3. The cross audit check, tax reported as paid by one firm to its suppliers. For which it takes
credit against its own tax liability, should appear as tax paid to the government by the
supplier. This cross check is not automatic- but is can be made, by auditor or ultimately,
by computer (John F.Due 2006, p 420-21).

2.4 Types of value added tax

Three major type of value added taxes (corresponding to the gross national product.net national
product. In addition, consumption bases) may be distinguished. Although only the consumption
type is up for practical consideration

1. GNPTYPE gross national product. Were subject to general sales tax. The tax would be
application to both consumer and capital goods. It would be paid by the seller. When the
product was sold to its last purchaser. Whether a consumer ,a firm which adds to its
inventory, gross receipts minus the cost of purchasing intermediate goods from prior
producers in production line. The tax base at each stage would thus equal depreciation,
wage,interest,profits and rent, it would be the most comprehensive form of value added
tax .and may be referred to as a value added tax of the GNP type as noted it is equivalent
to sales tax applicable to both consumer and capital goods, with its impact point.
2. Income type this value added approach, as previous noted, may also be used to
implement a sales tax on net product, suppose that the intent is to tax net national product
equal to GNP, minus capital consumption allowances or depreciation such a tax may be
imposed in multiple-stage form by taxing the net value added by each firm, with net
value added defined as gross receipts minus purchases of intermediate goods and
depreciation. The same result may also be accomplished by general income tax, since the
bases of a new product and an income tax are impact the same. The value added tax of

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 the income type those differs from that of the consumption type in that the former permit
the firm to deduct depreciation.
3. CONSUNPTION TYPE: the last method is referred to as the consumption type of value
added tax. The base of the value added tax is now defined as the firm’s gross receipts
minus the value of all its purchase of intermediate product (material and goods on
process) as well as its capital expenditure. We are left with value of consumer goods
output only. Such a tax is therefore equivalent to a general retail sales tax on consumer
goods the two differing in administrating procedure only (Musgary, 1989, p 400-401)

2.5 Why taxes are necessary

Government imposes taxes for those purposes:

 To cover the cost of administration ,maintain law and order in the country and for
defense, but now government’s expenditure pattern changed and gives service to the
public more than these basic purposes and it restore social justice in the society by
providing social, services such as education, public health, employment, pension,
housing, sanitation and other public services.
 To enforce government financial policy, such as in controlling and encouraging
investment in industry (Gebrie, 2006, p-16)

2.6 The general nature of the value added tax

value added tax is a common method of indirect taxation in the European Union and, subject to
variations of treatment amongst the member states, is made obligatory by a directing of the
council of the European union. In the UK, it takes the form of a charge on the invoiced value of
applicable goods and services, made by traders who are not exempted. The amount so charged to
customers may be set against the vat suffered by the trader on his/ her purchases: in some cases,
this calculation may lead to a repayment of tax to the trader. The tax suffered by a business on its
purchase is called “input tax” and that which is charges its customers is called the “output tax”.

Most of levies are extended through the retail level, but others do not apply beyond the last
wholesale transaction. A tax using the value added principle but on time confined to the
manufacture sector is usually referred to as a type of manufacturer’s sales tax. The value added
taxes also: in the usual, called the consumption type, credited is allowed all for tax paid on
purchases for business use, and therefore, multiple taxation of the final product is completely
eliminated.

The value added by business firm is the difference between the receipts from the sales of the
firm’s product and the sum of the amount paid by the firm for goods and services purchased
during the period from business firms: it is equal to the sum of the factor payments made by firm
(including the profits of the owners)

The value added tax extending through the retail level is identical. Basically, to a retail sales tax,
except that the tax is collected in increments through the production and distribution channel,
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instead of entirely from the retailers, with a given tax rate and coverage, the revenue yield would
be the same as that of a retail sales tax (John F. Due, 2006, p-419-20)

Many categories of goods and services are “Zero-rated.” This also means that the trader dealing
in such goods cannot change customers with the tax but can claim credit for relevant input tax.

2.7 Taxable supplies

Any supply of goods or services that is not an exempt supply is at a taxable supply, and it is with
this category that vat is primarily concerned. Taxable activity means an activity, which is carried
on continuously or regularly by any person: in Ethiopia or partially in Ethiopia, whether or not
for a pecuniary profit, that involves or is intended to involve, in whole or in part the supply of
goods or services to another person for considerations.

- Samples and promotional gifts are taxable at the cost to the supplier, vat can be recovered
on the cost of gifts over the limit if a certificate indicating that output tax will be accounted
for a companies’ them, industrials sample for testing and market research are also tax free.
Whatever their cost or value, provided they are not of the kind obtainable in the market
place.
- Goods supplied on hire purchase are taxable on their cash price, i.e. excluding interest or
hire purchase charges, which are not subject to vat (Gebrie, 2006, p-178).

2.8 Time of supply (the tax point)

Vat is normally accounted for on monthly basis, so it is important to know the time of supply to
identify the month of if falls in. Generally, a supply occurs when a vat invoice issued for that
transaction. This is known as the basic tax point. The basic tax point is amended into two
situations:

If a vat invoice is not issued within fixe days after the basic tax point, the supply is
treated as taking place.
 At the time the goods are made available to the recipients sold on transferred,
or the service are rendered; or
 In the case of a delivery of good, that involves shipment of these goods, when
the shipment starts.
If the payment is made in advance of the time described in (a) or (b) and if a vat invoice
is not issued within 5 days often the date of payment, the supply will be considered as
having taken place by the time at the time payment is made. If two or more payments
are made for a supply, which payment is treated as made for all separate supply to the
extent of the payment.
If services are rendered on a regular or continuing basis, a rendering of services is
treated as taking place on each occasion. When a vat invoice is issued in connection
with such services or. If payment is made earlier, at the time when payment made for
any part of such services.

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 In the case of supply of goods or rendering of services to employees, including
gratuitously in course or furtherance of a taxable activity. The time of a supply is the
time when the use or consumption of goods or services begins.
In case of vat registration is canceled, the time of supply is immediately before the
cancelation takes effect.
In the case of a supply for a consideration in many received by the supplier by means a
machine mater or other devices operated by coin, note or coupon occurs when the coin
note or coupon is taken from that machine meter or other device by or on behalf of the
supplier (Gebrie, 2006, p 179-180).

2.9 Rate of Tax

The amount and rate of value added tax vary from country to country and some countries have
two or more tax rate. In Ethiopia case, tax able supplies are charge at zero or standard rate of
15%

2.10 VAT ADMINISTRATION IN ETHIOPIA

The vat replaced the current sales taxes 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. It is collected at all stages in the production and distribution process
beginning with the importance and producer of row materials and ending with the retailers
cascading of the tax (I.e. tax on tax) is a valid by providing for a credit for the tax paid at the
preceding level. Unlike the sale tax system, where by relief is granted only to row materials used
direct in the production of goods. Under a vat, relief is granted for the tax paid on capital goods.
Distribution and administration input sale of exported goods are not subject to the vat. Removing
the tax contact (on inputs) from expected goods make the goods more competitive in
international markets (Gebrie, 2006, p 174-175).

2.10.1 Registration
In Ethiopia, registration for a vat is categorized in to two

o Obligatory registration
o Voluntary registration
Any person conducting a commercial enterprise or intending to conduct a commercial enterprise
may apply to be registration for a vat. However if the taxable turnover of the enterprise, which is
gross income for 12 calendar month. Exceeds or likely to exceeds birr 500,000, the person

9
conducting the enterprise must registration for vat with FIRA. Turnover related to exempt
supplies are not to be including in the total for deciding. If vat registration is compulsory.

The term any person for the purpose of vat registration includes:

 Sole proprietor
 Company
 Partner ship
 Estate of the deceased
 Trust
 In corporate body or union corporate body
 Club or Association

A- Commercial enterprise: - refers to any business whatever natural and includes:

- Ordinal business e.g. shop, contractor, manufacture, whole seller, etc.

- Trade and professions: e.g. building, engineering, Accountants, a lawyer, etc.
- Activity of non-profit making bodies e.g. societies, Associations, Sport club, etc.

The turnover is below birr 500,000 of a business activity in many apply for voluntary
registration.

B-Voluntary registration: - any person who carried on a taxation activity and is not required to be
registered for vat. Many voluntary apply to the authority for such registration, if she or he
regularly is supplying or rendering at least 75% of his good and services to registered persons
(Gebrie, 2006, p 185-187)

2.10.2 Recording and Tax invoice

If taxable person makes a taxable supply to one other person: tax invoice: must be issued. The
purpose of this invoice is to provides documentary evidence of the transaction, so allowing the
person receiving the supply to reclaim the input tax related to that supply .they required
contents of valid tax invoices (which may be on paper or issued electronically) are;

 The invoices number, date and tax point

 The name, address and vat number of in supply
 The name and address of the customer
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  For each invoices item, a description of the good or services supplies
 For each description, the quantity of good or service, the unit price ,the amount payable
(before VAT)and the rate of vat applicable.
 The total amount due before vat
 The rates any cash discount available
 The total amount of vat chargeable

Every taxable person must keep such record as are required by HM revenue and customs. The
main records, which must be kept, are as follows:

The usual business and accounting records (e.g. cash box, till rolls, paying-in slips, book
statements, purchases and sale book, order and delivery notes. Business
correspondences, annual accounts etc.)
A vat account
A copy of each tax invoice issued
All tax invoices received, through tax invoices are not required for payments or lass
relating to telephone calls, parking fees or purchase made through coin operated nations.
Documentation relating to imports and exports (Melville, 2006, p 497-498)

2.10.3 Returns and payments

Returns showing the input and output tax for the period must normally submitted to the
authorized office at a specific monthly declaration and those claims will show the amount of tax
to be paid or repaid.

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2.11 Briefly Explanation of Value Added Tax (VAT in Ethiopia)
2.11.1 What is Value Added Tax (VAT)
Vat is a tax on consumer expenditure. It is collected business transaction and import.

Most business transaction involved supplies of goods or services.

Vat is payable if they are:

 Supplies made in Ethiopia

 Made by taxable person
 Are not specifically exempted or zero rated
 Importers of goods and services
 Supplies that are made in Ethiopia which are not exempt are called taxable supplies

A taxable person can be an individual firm company, as long as much a person is required to be
registered for vat (Gebrie, 2006, p 174-175)

2.11.2 Over view of the Value Added Tax proclamation and regulation of Ethiopia
Value Added Tax proclamation number 285/2002 was issued on 4 th July 2002 by the council of
representative who become in to force as 1st January 2003.

The proclamation has 13 sections and 66 articles.

According to this proclamation, taxpayers are those persons registered or required to be

registered: person carrying out taxable import of goods to Ethiopia, non-resided persons who
perform service without registration for Value Added Tax and who are subject to taxable
according to the proclamation. As to this proclamation, all persons who are registered are
taxpayers from the time the registration took effect and certification on registration with issued.
Persons who are not registered but who are required to be registered are also considered as
taxpayers from the beginning of the accounting period following the period in which the
obligation to apply for registration arose. The registration for Value Added Tax is both
obligatory and voluntary. Under the obligatory registration, a person who carries on taxable
activity and is not registered is required to file an application for registration if his annual taxable
transaction exceeds birr 500,000.00 (fife hundred birr).Those person who are required to
registered are also expected to fill an application for registration. Persons, who carry on taxable
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activity and are not required to be registered for Value Added Tax, may voluntarily apply for
registration, if they regularly supply or render at least 75% of their goods and services or
registered persons.

According to Article 22 of the Value Added Tax proclamation, all persons registered for Value
Added Tax are required to issue a Value Added Tax invoice the person who received the goods
or services. There are assessing where a receipt or simplified form of Value Added Tax invoice
may be used depending on the value of transaction and type of transaction involved. Those
unregistered do not have the right to issue a Value Added Tax invoice.

2.11.3 Over view of the value added tax proclamation and regulation of Ethiopia
The value added tax proclamation number 28512002 was issued on 4 th July 2002 by the council
of representative to become in to force as 1st January 2003.the proclamation has 13 section and
66 articles.

According to this proclamation tax payer are those persons registered or required to be
registered; Person carrying out taxable import of goods to Ethiopia non-registered person who
perform service without registration for value added tax and who are subject taxation according
to the proclamation. As to this proclamation all person who are registered are tax payers from the
time the registration took effect and certification of registration is issued. Persons who are not
registered but who are required to be registered are also considered as tax payers from the
beginning of the accounting period following the period in which the obligation to apply for
registration arose.

 The registration for value added tax is both obligation and voluntary under the obligatory
registration a person who carries on taxable activity and is not registered is required to file an
application for registration if his annual taxable transaction exceeds Birr 50,000,000(Five
Hundred thousand birr) Those persons who are required to register are also expected to fill an
application for registration. Persons who carry on taxable activity and are not required to be
registered for value added tax May voluntarily apply for registration, if they regularly supply
or render at least 75% of their goods and services for registered persons. According to
Articles 22 of the value added tax proclamation all persons registered for value added tax are
required to issued a value added tax in voice the person who receive the goods or services.
There are asses where a receipt or simplified from of value added tax in voice may be used
13
 depending on the value of transaction and type of transaction involved. Those unregistered
do not have the right to issue a value added tax invoice.
 Subject to this proclamation supply of goods means sales of goods a grant of the use of or
right to use goods; and a transfer of prevision of thermal or electrical energy gas or water. A
rendition of services also include anything done which is not supply of goods or money
including the granting assignment, cessation, or surrender of any right or making available a
facility or advantage.
 As to articles 7.1 of the value added tax proclamation every taxable transaction by
registered person and every import of goods (other than an exempt import) and an import
of services by any value added tax registered customer in Ethiopia or any resident legal
persons is liable to a value added tax of 15%. However, the export of goods and services to
the extent provided in the value added regulation the rendering of international transaction of
good. Passengers as well as the supply of lubricants and other and other consumable
technical supplies taken on board for consumption during international flights; the supply of
gold to national bank of Ethiopia a supply by a registered person to another registered
person in a single transaction of substantially all of the assets of a taxable activity or an
independent functioning part of a taxable activity as going concern are zero rated.
Due to social, economic and developmental reasons, exempt transaction from value added
tax includes:-
 The rendering of financial services
 The import or supply of drugs
 The supply of goods and rendering of services in the form of humanitarian aid
 Educational services
 The supply electricity, kerosene, water
 Post office
 The rendering of religious services, etc.

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2.11.4 Main objective of value added tax administration in Federal In land Revenue Authority
 Identification and registration of tax payers
 Controlling collection
 Securing of delinquent tax payers and collection of tax arrears
 Auditing tax payers
 Levying penalties
 Investigation for tax fraud and evasion
 Processing returns

2.11.5 Value added tax implementation in Ethiopia

The FIRA established a separate VAT department and two new regional offices administer.

 Taxpayer identification number system (TIN)

To make tax collection easier to administer FIRA is developing the TIN application
software
 FIRA organization
In view to accommodate the growing needs of tax collection schemes FIRA’s hired
additional personnel and increased its operational efficiency. The organization includes:
 The establishment of an investigations department
 The establishment of FIRA regional office
 Performance of tax audit
 Establishment of tax review committee
 Confidentiality of taxpayers information

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2.11.6 Computation of value added tax
The following examples illustrate how value added tax is charged as goods move from one
vender to the next tannery, shoe maker, whole seller and retailer. Until they reach the final
consumer. For example, tannery sold a leather product for Birr 50 to shoe manufacturer and the
shoe manufacturer sold it at Birr 60 for a whole seller and the whole seller sold it for a retailer at
Birr 77 and the retailer sold it for the ultimate consumer at Birr 100. Thus, the computation of
VAT is illustrated as follows:

Tannery value added tax =15%X 50 = 7.50

Shoe maker value added tax =15% X60 =9-7.50 = 1.50

Whole seller value added tax =15%x70 =10.50-1.50-7.50=1.50

Retailer value added tax =15%100 =15-1.50-1.50-7.50 =4.50

Consumer total value added tax paid is 15.00 (i.e.7.50+1.50+1.50+4.50)

2.11.7 Persons to be registered for value added tax

 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 that is gross income for 12 calendar months exceeds or is likely to exceed Birr
500000 the person conducting the enterprise must register for value added tax with FIRA
(value added tax department).
 A person is obliged by law to register if one is doing any business which on 1st January:
2003 or their after is likely to have table turnover in 12 months exceeding Birr 500000.
 Turnover related to exempt supplies at least in the law is not to be included in the total
for deciding if value added tax registration is compulsory.

2.11.8 VAT REFEUND

 Grandcolas (2005) and Jantscher(1990) noted that managing VAT refunds is one of the
challenges of VAT administration is developing countries, In managing refunds and
competing refund frauds. Different countries use schemes including denial of refund
claims (except to exporters, caring forward of refund claims, demanding a third party
certification of the claim. Demanding guarantee, required tax payers to have separate

16
VAT bank accounts .Zero rating of supply to exports and remission of input VAT on
certain goods (mainly capital goods) some of those schemes are not only to combat
refund frauds, but are also intended to reduce the strain or business cash-flows.
Looking closely at the practices concerning VAT refunds to exporters and some require
other VAT taxpayers to carry forward their excess credits indefinitely(Jantcher 1990).In
Ethiopia as shown previously for the purpose of refund the vat legislation categories tax
payers in to two groups; zero rated business(mainly exporters)and other(non
exporting)business. As the outcomes of the interviews with tax officials revealed the tax
authority makes refunds mainly to exporters in addition to employing voucher system
for coffee exporters. According to interview with tax officials the first cash refund to
non-exporting business category are mainly importers that claim have excess. Vat credit
which is not being used by carrying forward to the next five accounting periods
(months).This was believed to be because at the time of import tax payers claims they
sell their product.

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CHAPTER THREE
3 Research method and methodology

3.1 Data source

Both primary source and secondary source of data was used for the successful completion of the
study; primary source is collect through personal observation and questionnaire. Whereas,
secondary source is collect through books, Manuals and other available information the
organization.

3.2 Data gathering method

To collect necessary information, the research will used both primary data and secondary data.
The primary data would be collected through questioners and personal observation where as
secondary data will collected by reviewing books, manuals, publication and other available from
the organization.

3.3 Sample size

From 175 of VAT registered questionnaire will be distributed to 40 of them by giving equal
chance to the total population, then select as sample. And also interview a senior office member
(10) who belongs to tax assessment department.

3.4 Sampling technique

To obtain the required information for the accomplishment of this study, it’s better to use simple
random sampling technique. Because it distribute the questioner to the total population. The
study will need huge amount of money and consume more time from the list tax payer’s category
such as sole proprietorship, Enterprise and partnership of those who registered for VAT.

3.5. Data Analysis

After all the require data are collect and process data were analyzed and interpreted according to
their nature. Data analysis implies that further assessment of the process of data to look for
patterns and relations among the data groups. Data was analyzed using descriptive data analysis
methods. It refers to understand and interpret. This method helps to describe, summarize and
present quantitative and qualitative data that will be presented in graph, table and etc.

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CHAPTER FUOR
4 Data analysis and Findings
This paper tries to interpreter and analysis by the way of clear, concise and understanding to
users. The data collected from respondents is summarized. The respondents include taxpayers of
hawassa city administration meneharia sub-city revenue authority sub branch office.and senior
staff. The total group of respondents is 40 that of taxpayers and 10 senior staff.

4.1 Data analysis and presentation

This chapter deals with the analysis and presentation of data collected through questionnaires,
interview and secondary data, twenty questioners are distributed and were eighteen of them are
collected from the respondents.

3.1 Profile of respondents

No Respondent frequency (%)

Item Seiner staff Taxpayer Percentage
Sex
A. Male 4 38 84 %
B. Female 6 2 16 %

Total 10 40 100
Sources: own questioner result from senior staff and taxpayer

No Respondent frequency (%)

Item Seiner staff Taxpayer Percentage
Educational status
C. below high school 11 22 %
D. Diploma 2 7 13 %
E. Degree 8 18 40 %
F. Above Degree 4 25%
Total 10 40 100
From the total respondent 84% of them are males and the remain 16% are female
3.2. Personal profile

Sources: own questioner result from senior staff and taxpayer

In table 3.2 term educational status indicates that 40% of the taxpayer and senior staff degree
status, 22% of them are below grade 10, 13% of them are diploma and the remain 25% are above
degree and masters.

 The main tasks that might be performed by any department in charge of VAT are:-
 Identification and registration of taxpayers
 Processing returns
 Controlling collections
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  Securing of delinquent declaration and collection of taxpayers
 Making refunds
 Auditing taxpayers
 Investigation for tax fraud and evasion and levying penalties
 In order to administer those tasks, the department in charge has to be well organized and
conduct publicity and taxpayer’s education and information is necessary to permit careful
preparation of regulation, and processing of VAT returns and payments. The hawassa city
administration meneharia sub-city revenue authority sub branch office is evaluated in
connection to those dimension as flow:

3.3 responses on clear understanding about VAT concepts

No Item Respondent frequency (%)

Taxpayer % age

1 Do you have clear understanding

about VAT concepts, rules and
regulations?
55.5%
A. Yes 22
B. No 4 11.1%
C. Partial 13
33.4%

Total 40 100

Sources: own questioner result from taxpayer

Table 3.3 above indicates that 55.5% of the respondents have how known related to the VAT
concepts, rules and regulations. And the left 11.1% have not any understanding in how VAT
must be implemented can carrying in action and 33.4% are whether they have clear
understanding or not mean that they have partial understanding in related to how VAT should
must be followed. Generally most of the taxpayers have the concepts as well as the rules and
regulations in when and where the VAT is applied.

3. 4 responses on enough information that customers are buying the goods including VAT

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No Item Respondent frequency (%)

Taxpayer % age

1 Do you have enough information

that customers are buying the
goods including VAT?

A. Yes 83.3
33
B. No 7 16.7%

Total 40 100

Sources: own questioner result from taxpayer

Table 3.4 questions show that the 83.3% of respondents said that our customers have enough
information in which the goods they purchase. And the left 16.7% of respondents said our
customers haven’t enough information toward the goods they purchase. Finally, comparing the
two parts of respondents, their customers have enough (sufficient) information in type of product
they purchase and type of product they purchase and pay price for it. Due to this the respondents
of taxpayers says that the VAT department information gap, between the employees on rules and
regulations of the proclamation. In addition that most of senior staff said that efforts currently
under way within the minister of revenue and federal Inland Revenue authority to continue and
address the short come an encountered in strengthening its divisions.

4.2 Organizational structure staffing and training

One of the major decisions that should to be taken in preparation for the introduction of VAT is a
choice of organization and organizations changes to administer the VAT, staffing requirements
and staff training. In some countries, customs organizations are assigned to administer the VAT.
In others either they establish a separate organization due to their connection that the modern
nature of the tax would make it difficult to administer by their existing convectional and
somewhat antiquated methods, or integrate it with the income tax administration taking into
account better planning and coordination of enforcement efforts and use of current tax audit
expertise. In others, if function lines organize the tax administration and a general sale tax was
previously enforced, a VAT unit shall replace the sales tax unit.

In the case, Hawassa city administration meneharia sub-city revenue authority setting up a
special VAT department;

 At present the newly introduced value added tax is administered by a newly established
vat department in federal Inland Revenue authority in Addis Ababa some branches in the
country and by the Ethiopian customs authority. The new department in federal Inland

21
 Authority is answerable to the General Manager. The staffs are graduates of accounting,
economics and the management professions.
 Along this one, there where efforts to design the organization structure and to determine
the number of staff to be trained and developed. Some have been taken from the ex-sales
unit; some have gone from the tax reform program and the minister of revenue and have
been newly recruited.
 The VAT is computerized, considering the current and future challenges: the VAT
department’s needs additional personnel in all areas taxpayers’ education and
registration, tax collection and accounts consideration, tax collection enforcement and
audit.

3.5. Responses on buyer asking receipt from sellers for material bought

No Item Respondent’s frequency (%)

Taxpayers Percentage (%)

1 Is a buyer asking receipt from

sellers for material bought?
A. Yes 27 66.7%
B. No 13 33.3%

Total 40 100%

Sources: own questioner result from taxpayer

Here the researcher observes that the ultimate consumer is willing to buy goods including VAT.
A receipts is the most important document that identifies (insures) the price and owner ship of
property. So now a day’s those who purchase material from any legal traders he/she must ask
receipt for the material bought. This minimize using fraud (false) invoice by the legal trader.
Attitude of respondent toward buyer’s knowledge of buying goods or services included VAT.
Payers ask receipts after buying goods, VAT inclusive purchase is good for VAT registrant, and
also they need for source document to their organization. Since the range respondent say yes
with 66.7%.

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3.6 Responses on collection VAT increase government revenue

No Item Respondent’s frequency (%)

Taxpayers Percentage (%)

1 Do you believed that

collection VAT increase
government revenue?
A. Yes 40 100%
B. No - -

Total 40 100%

Sources: own questioner result from taxpayer

4.3 VAT collection increase government revenue

In order to speed up economical, social and political development of society, government should
collect tax from customers properly. VAT is one of the most important to increase governmental
revenue. Based on the above data, all respondent agreed that collection VAT increase
governmental revenue. This shows that most of the taxpayers believe collection of VAT increase
tax revenue.

3.7 Responses on organization report VAT on time

No Item Respondent’s frequency (%)

Taxpayers Percentage (%)

1 Does your organization report

VAT on time?
A. Yes 36 88.8%
B. No 4 11.2%

Total 40 100%

Sources: own questioner result from taxpayer

Table 3.6 shows that the 88.8% of respondents are said yes? I.e. the organization makes
appropriate report of collection VAT. According VAT proclamation No 285/94 paragraph 26
any VAT registrant even though the registrants doesn’t have to pay VAT at each accounting
period, it state that the registration should announce his/her sales to the Ehiopian Revenue
Customs Authority before the last date of the next month.

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3.8 Responses on Hawassa city administration meneharia sub-city revenue authority corporate
you to have awareness about VAT

No Item Respondent’s frequency (%)

Taxpayers Percentage (%)

1 Do ERCA corporate you to

have awareness about VAT?
A. Yes 36 88.8%
B. No 4 11.2%

Total 40 100%

Sources: own questioner result from taxpayer

Those who give as an answer yes, with 88.8% they believe that Hawassa city administration
meneharia sub-city revenue authority aware its taxpayers through media, written material and by
communicating information face to face. According to the researcher observation, Hawassa city
administration meneharia sub-city revenue authority should coordinate and give awareness
creation programmers to the taxpayer through TV, radio, seminar to avoid the information lag
between Hawassa city administration meneharia sub-city revenue authority and the taxpayers,
and also Hawassa city administration meneharia sub-city revenue authority office should open
even day to assist(create) awareness to the taxpayers.

3.9. Responses on skill regarding the accounting treatment of VAT

No Item Respondent’s frequency (%)

Taxpayers Percentage (%)

1 Do you have skill regarding

the accounting treatment of
VAT?
A. Yes 33 83.3%
B. No 7 16.7%

Total 40 100%

Sources: own questioner result from taxpayer

From the respondents who say yes with 83.3% they have full knowledge in accounting treatment
of VAT. And they remain taxpayers 16.7% have not any how known in how VAT is calculated.

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Generally, to summarize the above table almost taxpayers have clear understanding about
accounting treatment of VAT.

3.10Responses on Hawassa city administration meneharia sub-city revenue authority take the
taxpayer identification number

No Item Respondent’s frequency (%)

Taxpayers Percentage (%)

1 Do the ERCA take the

taxpayer identification
number?
A. Yes 40 100%
B. No - -

Total 40 100%

Sources: own questioner result from taxpayer

Table 3.9 indicates that many of the taxpayers responds, registration for VAT more good. But
still now some taxpayers whose annual sales turnover is greater than the historical background of
taxpayers in Hawassa city administration meneharia sub-city revenue authority to handle or
enforce those taxpayers for VAT some of the respondents, there is lack of human power
resources for registering.

3.11 Responses on ERCA train about the VAT to taxpayers

No Item Respondent’s frequency (%)

Taxpayers Percentage (%)

1 Do Meneharia sub-city
revenue authority train about
the VAT to taxpayers? 40 100%
A. Yes - -
B. No

Total 40 100%

Sources: own questioner result from taxpayer

Train is the relationship between trainer and trainee to gate clear understanding about the specific
facts, Hawassa city administration meneharia sub-city revenue authority branch begin giving

25
training in implementation of BPR. Now a day the taxpayers how amount of money is imposed
VAT in every goods they sale to customers.

4.4 Interview result

4.4.1 Interview to VAT department

4.4.2 Awareness of tax payers and tax administrator

ERCA as whole create awareness through mass media like ETV, “Gebilelimat” program
providing brusher it etc. Meneharia branch sometimes aware taxpayers through training and also
by preparing special education program but, the taxpayer are not willing to attain the program. In
general Meneharia sub-city revenue authority branch needs some more effort in creating
taxpayers awareness.

4.5 Tax officers (administrators)

For the officers awareness will be given with the help of capacity building program.

4.5.1 Attitude of taxpayers towards tax policy

Through the policy and program is good but, while implementation as a result of the background
and very low awareness most taxpayers have low knowledge of the tax policy.

According to the researcher observation, due to lack of attention, tax payers does know little
knowledge about VAT while the government prepares programs so that the taxpayers will
develop their knowledge through mass media like TV, “Gabi lelimate program” local radio
station “Hawassa FM” and other workshops etc. and also the researcher observes the habit of
taxpayers is not well developed and not rational.

4.5.2 The tax payers who have not registered encourage to be registered?
VAT is one source of revenue for government. So due to this reason Hawassa city administration
meneharia sub-city revenue authority encourage those who are not VAT registered to inter in to
the VAT contract. And now a day Hawassa city administration meneharia sub-city revenue
authority gives the following way encouragement:

 By giving brusher
 Provide advice the advantages of VAT to the economies of country
 It give training twice per a week

4.6 Control of fraud illegal invoice, and improper accounting

To control of fraud invoice, non insurance of legal invoice and improper accounting records
sometimes assessment will be arranged. But, majoring of control is made when taxpayers come
to auditing for different cases such as for closing their business and others.

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4.7 Observations to asses’ current practices

In Hawassa city administration meneharia sub-city revenue authority branch the researcher
observed the following information (data). While the organization collects from taxpayers, first
taxpayers declare monthly reports. This declaration form is filled by the taxpayer. Based on self
asses according to article 26 of VAT proclamation and submit a monthly declaration, that is
payment nil and credit declaration.

Correctly on the day of a remittance of the month and credit carried forward from previous
month. To check up the taxpayer last month report, the official search in the computer system of
SIGTAS (Slandered Integrated Governmental Tax Administration system), if the taxpayer does
not pay they were penalized. As the taxpayers documents are checked, a document No is given.
If it is payment, the taxpayer having his document number will be assigned to the casher. Finally,
the casher feed document.

4.7.1 There is failure of issue invoice how do you check?

To protect the failure of invoice by the taxpayer of hawassa city administration meneharia sub-
city revenue authority use a bill checked the already failed (fraud) invoice. This is made at the
time of reporting, the VAT collection from the taxpayers.

4.8 ERCA practiced the VAT refund

From the respondent the VAT departments have not any clear understanding in how VAT is
refunds. According to the VAT proclamation 285/2003, if at least 25 of the angle of a registered
persons taxable transaction for the accounting period is taxed the amount of VAT applied as a
credit in excess of the amount of VAT changed for the accounting period within low amount of
VAT charged for the accounting application for refund accompanied by documentary proof of
payment of the excess amount.

4.8.1 What will be the action for those who fulfill the necessary requirements but, not yet
registered?

From the respondents, the way of persuade to those who are fulfill the rules and regulations in
VAT registration but not yet registered are listed below:

 Send latter to register

 They are obligated to pay 15% it their capital greater than 500

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4.9 From documentation
4.9.1 Rate of month reports

In order to collect the amount from taxpayers the nil and return filers reason should be studied
deeply. As the organization find out the reason based on the result gradual minimize their
number and should be change into payment. The non filer also should be enforced based on the
collection enforcement power VAT proclamation No 285/2002.

4.10 Challenges faced in VAT administration and implementation

1. Resistance against registration for VAT

It is obvious that in our VAT law taxpayers are preferentially treated based on their annual
turnover, i.e. only taxpayers with annual turnover of more than half a million Birr are liable to
registration to come into the VAT network.

A. Preference to pay taxes without maintaining books of account

Despite the fact that the VAT proclamation provides financial penalty for failure to keep box of
account, most traders does not maintain records of their business operation: such a category of
tax payers include all traders who are legally capable for VAT registration. Those taxpayers
mostly prefer to pay taxes by means of estimated tax amount lasts for several years without
having any review on significant and frequency change in the business turn over. This situation
has not enabled to widely identify those who should register for VAT timely. However, ERCA
has taken various actions to avoid such challenges by the time come into effect.

 A visit paid to taxpayer’s establishment to determine the turn over level for registration.
 Collecting various economic information using different schemes third party
 Conducting study or capital requirement and its minimum return and accepted annual
turnover to differentiate sectors, which must automatically register, are few of tasks
carried out to stabilize the new tax system.
B. Understated financial statement

Mostly traders who maintain books of account usually declare turnover much less than the
registration threshold level. This, of course, requires an intensive work in order to adjust the
actual income for registration. This is one the areas where registrant traders use as a means
against registration for not to come into the VAT network.

2. Failure to issue invoices during transaction

VAT is a tax system in which invoice serves as a corner stone for the tax collection process that
is a way VAT is considered as a credit invoice method. A failure to issues invoices causes a

28
check in the tax system as whole. It is knowledge that several number of VAT registrant do not
issue VAT invoices properly during transaction. VAT registrant is legally obliged to issue a
VAT sales invoice but, several number of traders issue invoice. But, which is not prescribed by
low and at the same time avoid the tax collect for personal use.

CHAPTER FIVE
5 Conclusion and recommendation

This chapter deals with summery, conclusion and recommendation based on primary and
secondary findings and finally, to recommend the meneharia sub-city revenue authority
concerned VAT implementation.

5.1 Summery

The main purpose of this research was to investigate the implementation problem of VAT in
Hawassa city administration meneharia sub-city revenue authority. Effort was made together
relevant data regarding the taxpayers and senior staff of the Hawassa city administration
meneharia sub-city revenue authority.

5.2 Conclusion

The benefit of VAT has already been explained so far. VAT encourages export through avoiding
the tax content on inputs. It also applies the relief of capital goods from VAT which contributes
more to an accelerated encouragement in investment and production domestically produced
goods will also have greater chance to compute with the imported.

It has been stated that control implementation of VAT is extremely importance; since VAT is
one of the indirect tax it contributes sustainable development in the country. As the researcher
observed to some of the taxpayers in Hawassa city administration meneharia sub-city revenue
authority branch sales is decreasing overtime as compared with those who are registered and
those who are not registered. This creates market distortion. This market distortion is the result
of some taxpayers’ sale product including VAT and others without VAT.

From the findings the researcher can summarize the following point.

 It enhances tax administration skills of the tax collector through capacity building and
application of information communication technique.

29
  To maintain the VAT system the authority provide the taxpayer extensive education
program through different media
 The tax authority introduces modern tax system through computerized VAT
administration system.
 Non-strengthened tax administration in track those non registered and delinquent
taxpayers
 It could be observed that the non taxpayers are very large most registrant of VAT payer
claim credit

Recently, as developing as well as developed countries in the world have increasingly focused
their attention towards amending the tax system by standardizing and improving the poorly
designed tax structure in order to mobilize high volume of resources for the development
purposes and make the economy healthy, efficient and self sufficient to larger extent. In this
regard VAT has become a point of attraction for about 130 countries in the world including
Ethiopia. Exited sales taxes were replaced by VAT since January 2002/2003 in Ethiopia.

5.3 Recommendation

To attain the objective of the organization, effective collection of VAT should exit even though
the implantation of VAT is introduced recently, the organization functioning properly. Therefore,
the following point with regard implementation of VAT is recommended.

From the findings the researcher forwards the following recommendation:

 The organization needs extensive effort on creating awareness in the business

communities
 In order to overcome fair market competition among the traders those who are above the
threshold must be registered and those registrants must use legal invoices recognized by
the tax office.
 In force, the taxpayers to use modern accounting records properly.
 The tax authority should able to conduct a supervise visit or observation consistently on
selected groups of tax payers.
 In order to control right amount of VAT collection the tax authority should undertake an
expected checking of account of business, hiring competent auditors.
 Each register business should display their certificate of VAT in clear and visible place.
If there is done, it is easily to control implementation of VAT without registration and
other illegal activities of Hawassa city administration meneharia sub-city revenue
authority should force them to do so.
 Employee in Hawassa city administration meneharia sub-city revenue authority should be
well training to make to implementation of VAT in a good manner.
 All taxpayers participated on increasing government revenue strongly and collection
VAT properly.

30
 Generally, the government must create awareness over the final consumer to have the
habit of purchase to all manufactured materials by invoice and as it is know that VAT is
easily exposed to fraud and evasion the government attempts extensive effort.

31
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