VAT COLLECTION PROBLEMS IN CASE OF

REVENUE AUTHORITY OF DILLA TOWN

A RESEARCH PAPER SUBMITTED FOR THE PARTIAL

FULFILLMENT OF B.A DEGREE IN ACCOUNTING AND
FINANCE

BY: JEMAL NIGUSU

ADVISOR: DANIEL, H (MSC)

DILLA UNIVERSITY
COLLEGE OF BUSINESS AND ECONOMICS
DEPARTMENT OF ACCOUNTING AND FINANCE

JUNE, 2011
DILLA, ETHIOPIA
 APPROVAL SHEET

__________________ ___________________ ________

Student name Signature Date

____________________ __________________ ____________

Advisor Name Signature Date

____________________ __________________ __________

Examiner Name Signature Date

 ACKNOWLEDGMENT
Above all thanks to the Almighty Allah, helped me to go through all the period and accomplish
my academic success.
I would like to extend my gratefulness to my advisor instructor DANIEL, H who was
consistently checking up on my research guiding me in every aspect. He had made several
corrections to give strength to the paper.
Next my sincere thanks go to the employees of Dilla town revenue authority.
My family deserves my appreciation for their love and care. They coverlet me down in the
hardship I had come through during my studies. Especially I am also thankful to my sister
HALIMET NIGUSU who had provided the financial and material which is needed to accomplish
this paper.
Finally I would like thank all my friends those who support me in any aspects in the way of
preparing this paper.

i
Abstract
Even though value added tax is a recent phenomena in our country which was introduced on the
beginning of January 2003 E.C., it has the collection problems in case of REVENUE
AUTHORITY of Dilla town.
The aim of the study is to give summarized back information about the newly introduced tax
(VAT) and to screen out the collection problems in Dilla town revenue authority.
The researcher had used primary and secondary data collection technique in order to reach the
aim of the study and finally, to reach on some conclusion and recommendation by having the
result.
List of table
Table 3.1 Characteristics of the respondents.

Table 3.2 Factors which may affect VAT collection.

Table 3.3 Factors which may affect VAT collection.

Table 3.6 Preference of VAT to sales tax.

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

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

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

 Table of content
Content page

Acknowledgement...............................................................................................

Abstract...............................................................................................................

Table of content...................................................................................................

CHAPTER ONE

Introduction............................................................................................
1.1 Background of the study.....................................................................................

1.2 statement of the problem.............................................................................

1.3 objectives of the study....................................................................................

1.3.1General objectives......................................................................................

1.3.2 Specific objectives.....................................................................................

1.4 Research methodology....................................................................................

1.4.1 Types and sources of data.........................................................................

1.4.2 Sample size and sampling techniques......................................................

1.4.3Methods of data collection........................................................................

1.4.4 Method of data analysis..........................................................................

1.5 Significance of the study................................................................................

1.6 Scope of the study............................................................................................

1.7 Limitation of the study...................................................................................................

CHAPTER TWO
Review of related literature
2.1 Value added tax (VAT).............................................................................................
2.2 Computation (FORM) of VAT.....................................................................................

2.3 VAT Administration in Ethiopia..................................................................................

2.4 VAT Refund.....................................................................................................................
2.5 Registration and its types............................................................................................

2.5.1Obligatory registration.............................................................................................

2.5.2 Voluntary Registration ............................................................................................

2.6Benefits of voluntary registered...........................................................................................
2.7 Registration procedure....................................................................................................

2.8Application time of VAT registration........................................................................................

2.9 Time of VAT registration.....................................................................................................

2.10 Cancellation of registration................................................................................................
2.11. Consequence of cancellation...............................................................................................
2.12Advantage and Disadvantage of VAT..................................................................................
2.12.1 Advantage of VAT...........................................................................................................
2.12.2 Disadvantage of VAT ..............................................................................
CHAPTER THREE

3. DATA ANALYSIS, PRESENTATION AND INTERPRETATION

3.1 Demographic detail of respondents...................................................................................

3.2.............................................................................................................................................

3.3 contribution of VAT..........................................................................................................

3.4 VAT collection.............................................................................................................

3.5 VAT collection problem.................................................................................................

3.6 Administration and cooperativeness of officials.................................................................

3.7 Registration and cancellation..................................................................................................

3.8 Measures taken by the authority................................................................................................

CHAPTER FOUR

4. CONCLUSSION AND RECOMMENDATION

4.1 CONCLUSSION..........................................................................................

4.2 RECOMMENDATION........................................................................................................

REFERENCE

APPENDEX
 CHAPTER ONE

Introduction

1.1 Background of the study

One of the mechanism in which government raise its revenue to finance government spending on
the goods and services that most of us demand is taxation.

As compared to the developing countries, the developed countries have been able to generate
substantial revenue through imposing of taxes. One of the reasons for this has been the efficient
tax system operating in the developing economies which is characterized by weak monetary and
low development of the formal sector (HOWELL ZEE and VITO TANZI)

Value added tax (VAT) is a new system introduced in Ethiopia .This tax system is not new for
other countries. Beginning with the adoption of VAT by French in 1945, it was gradually been
adopted by other countries. The development of this tax system is so fast and it is now been
employed by a large number of Latin American, African and Pacific countries. VAT has become
a major tax instrument worldwide. The global trend to introduce VAT in more countries is
continuing (Fantahun Melese, 2005).

Ethiopian tax reform program has introduced VAT since January 2003. The Ethiopian
government has introduced VAT as part of the overall tax reform program. The tax reform
program is preceded by establishment of a new ministry of revenue as a first step to improve tax
collection and to combat fiscal fraud (Misrak Tesfaye, 2006). The need for VAT emanates from
the very weakness of sales tax that is intended to be replace by VAT an indirect tax that is
charged whenever a taxable transaction /supply of goods and services in the course of his or her
business. It also born on consumers’ service supplied like grant of goods for use under rental
agreement, credit agreement, or any other agreement under which such a use is granted while
other submits their VAT return without payment or deliberately submission of nil return (non
issuance of VAT invoice) like goods and services purchased for the purpose of personal
passenger vehicles and entertainments unless the person made in the course of his businesses
even if he or she is registered for VAT (http//[email protected]).

1.2 statement of the problem

Value added tax (VAT) is a form of taxation adopted by French in 1954 and become more
popular in western European countries towards the end of 1960s and today it is a possible tool
that government official have to raise tax revenue and plays instrumental role in funding money
of the social program of them. PEDDY BEHAN, parents of the vants accounting firm and is
VAT specialist said ‘VAT is hugely efficient tax, it is great tax from revenue exercise’ taxed on
all exchanges used in the community (http//www.investor guid.com). Much like that of
European and other countries, Ethiopian government adopts VAT since 2003 and implements
for the purpose of collecting revenue through taxing each steps in chain of production ,
calculating the increase value of commodity or services as it moves towards distribution for tax
registered person as well as from customers indirectly (Gebrie, 2006).

Many studies were conducted and have been conducted concerning the implementation and
collection of VAT in Ethiopia and asses several problems on its implementation and collection
which faces on VAT payers and collectors, official and experts in Ethiopia. Therefore, this study
ware conducted to asses problems associated with the implementation and collection of VAT in
dilla town revenue authority by answering the following principal questions.

1. Does the collected VAT generate the expected revenue for government?
2. What are the major problems of VAT collection?
3. What are the possible reason that may encourage business enterprises and individual
business person to evade VAT?
4. Doo executive bodies properly execute their duties in relation to evasion of VAT?
5. Is there any measure taken by dilla town revenue authority to control VAT evasion?

1.3 objectives of the study

1.3.1General objectives
The overall objectives of the study are to identify the major problems of VAT collection faced by
Dilla town revenue authority.

1.3.2 Specific objectives

The specific objectives of the study are:

1. Asses whether the collection of VAT had meet its objectives in generating the expected
level of government revenue or not
2. Identify factors that affect collection of VAT
3. Identify the possible reasons that encourage business enterprises and individual business
person to evade VAT.

4. Identify the performance of executive bodies in relation to evasion of VAT by VAT

payers.

5. Asses the performance of the office to take corrective measure in relation to VAT evasion.

1.4 Research methodology

1.4.1 Types and sources of data

This study ware conducted in dilla town revenue authority in order to identify and determine the
VAT collection problem. The data those are appropriate to achieve the objective of the study
ware both primary and secondary data. Primary data were collected from dilla town revenue
authority through questionnaire and secondary data were collected from related documents of
dilla town revenue authority and reference books which are essential for gathering information
quickly and cheaply as well as from internet and other sources.

1.4.2 Sample size and sampling techniques

The total population in the study area was total employee of dilla town revenue authority which
ware 39. As a result of rarely Enough time and money to gather information from everyone in
the population, the researcher had take 15 employee as a representative of a total population
through probability type of simple random sampling method. Because it avoid bias and each
employee have equal chance of being selected. Questionnaire was distributed for each
representative to obtain the required information for the study.

1.4.3Methods of data collection

The researcher used different type of data collection techniques on the study. Those method used
to collect data vary according to the source which data was collected. In order to collect primary
data, questionnaire was used which had two formats those are opened and close end questions
which were carefully analyzed and discussed to achieve the conclusion. Questionnaire was in
such a way that the objective of the study had easily accessed and investigated in detail. The
secondary data was collected from certain proclamation about VAT and internet.

1.4.4 Method of data analysis

The method of data analysis that was used in this study was percentage completion, tabulation
and detail analysis of qualitative expression.

1.5 Significance of the study

Government organization like revenue authority, business enterprises school and some other
VAT registered enterprises are expected to be beneficiary from this study accordingly, the
research is expected to have the following benefit.

- The recommendation provided may be use full in directing decision towards controlling
the problem of dilla town revenue authority.
- The issue discussed contributed to fill the literature gap on VAT.
- It added to poll of data available to VAT. Thus serves as a secondary source document.
- It may initiate father studies to great width and depth.

1.6 Scope of the study

It would be better if the study was conducted in wider area like at national level, regional and
including all taxes. But due to some constraints, the researcher had obliged to limit the study
on the area of dilla town revenue authority focusing on VAT collection problem by using a
great effort to made the research as much as perfect. From those constraints;

- Time; as we know a research is a big task, it requires much time. But the time for the
researcher was so limited.
- Money and adequate skill are also the most important for conducting good research. Also
there were a shortage of money and adequate knowhow for conducting the research in
wider scope.

1.7 Limitation of the study

In conducting this study the researcher faced several problems which had a negative impact on
the study. From those problem;

- Absence of material and equipment supply that had provided by the university.
- Lack of sufficient time to collect data and
- Shortage of finance was some.
 CHAPTER TWO
2. REVIEW OF LITERATURE

2.1. Value added tax (VAT)

VAT is a tax on the value added TAX to good and services by enterprises at each stage of the
production and distribution processes. It arises whenever a “taxable person” makes a “supply of
goods or services” in the course of his business. Thus in some countries it is called “good and
services tax” or GST VAT was invented by French economist in 1954 by Maurice lour director
of the French tax authority VAT was invented because very high sales taxes and tariffs
encourage cheating and smuggling. (Gebrie, 2008).

Unlike the turn over tax which is applied to the full value of a product every time the item
changes hands in the process of production and distribution the VAT is assessed at each stage on
only the increment in value acquired by the product since the last taxable transaction. At the end
of the chain the total amount of tax paid on a given commodity is determined only by the tax rate
and the final price of the commodity, required less of the number of stages through which is has
passed what has been collected in fractional payments is equivalent to a single stage tax on the
value of the final product. The theory is that the end consumer carves the burden of VAT not the
business, which is merely collecting the VAT on behalf of tax, all authority. But the reality is not
quite so simple (Gebrie, 2008). For fully taxable businesses VAT is not a cast but is merely an
accounting headache whatever you collect in output tax must be handed over to tax authority
whatever you collect in output tax must be handed over to tax authority whatever you pay in put
tax can be recovered from tax authority (apart from the input VAT on personal passenger vehicle
and entertainment.(Gebrie, 2008).
2.2 Computation (FORM) of VAT
VAT is design to have different exemptions and rates. In this case there are four forms of VAT
system which are discussed below.
Gross product VAT; In these categories, the tax base for any firm will be just sales minus
material other than capital goods. (Bahita, 2003)
Consumption type VAT:- Here, the tax base for the firm is sales proceed minus capital
material minus material and so the firm in question is allowed to deduct from the gross value of
its product not only the non capital input purchased from other firms, but also the capital
equipment so purchased(H.l bahita,2003).

Income type VAT:- In these cases the tax base for any firm is sales minus material
purchased minus depreciation. So the firm is allowed to deduct the full value of its non capital
purchased from other firm and depreciation on the capital purchase from other firm (h.l Bhatia,
2003).
Capital exempted VAT:- When a firm is able to deduct the net earning, from its capital in
order to arrive a tax base and since earnings from the capital amount to profit plus interest.
Therefore, when the balance left to be taxed is equivalent to wages, therefore is not allowed to
VAT (Bhatia 2003).
2.3 VAT Administration in Ethiopia
The VAT replaced the current sales tax on manufactured and imported good and service on
January 1, 2003. The responsibility for the correct calculation and timely payment of VAT rests
on the tax payer himself. The VAT is a broad based tax on the consumption of goods and
services it is collected at all stage in the production and distribution process beginning with the
importers and producers of raw materials and ending with the retailers cascading of the tax (i.e.
tax on tax) is avoided by providing for a credit for the tax paid only to raw materials used
directly in the production of good under a VAT. Relief is a granted for goods are not subject to
the VAT. Removing that tax content (on in puts) from exported goods makes the goods more
competitive in international markets.
VAT is at ax consumer expenditure it is collected on business transaction and important most
business transactions involve supplies of goods or services and VAT is payable if they are:
 Supplies made in Ethiopia
 Made by a taxable person
 Made in the course of furtherance of a business
 Are not specifically exempted or zero-rated-
Supplies are outside the scope of the tax if they are
 Made by someone who is not a taxable person or
 Not made in the course or furtherance of business

Curse or furtherance the way a taxable person has to carry out its activity to develop advance and
progress the taxable activity it refers to the normal and expected events or processes to develop
the taxable activity. Anything done in connection with the commencement or termination of a
taxable activity is treated as carried out in the course or furtherance of that taxable activity
(Gebrie, 2008).
2.4 VAT Refund
A VAT refund is the net VAT that a taxable person expects to be given back from the concerned
tax authority thus, taxable person shall got refund
If at least 25% of the value of a registered persons taxable transactions for the accounting period
of VAT(month) other than transfer of a business from one registered person to other as going
concern, was taxed at a zero VAT rate the authority shall refund the amount of VAT applied as a
credit in excess of the amount of VAT charged for the accounting period with in a period of two
months after the registered person files an application for refund accompanied by documentary
proof of payment of the excess amounts.(misrak ,2003)

In the case of other registered persons the amount of VAT charged for the accounting period is to
be carried forward the next five accounting period is to be carried for word to the next five
accounting periods and credited against payment for these period and any unused excess
remaining after the end of this five month period shall be refunded by the authority with a period
of two month after the registered person files an application for refund accompanied by
documentary proof of payment of the excess amounts. Where the tax authority satisfied for
refund application in over paid tax the tax authority shall.
  First apply the amount of the excess in reduction of any tax levy interest of penalty
payable by the person under the customs proclamation the income tell proclamation and
excise tax proclamation.
 The repay any amount remaining to the person if the amount to be refunded is more than
50 by.

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

2.5 Registration and its types

Under the Ethiopian VAT law registration is one of the integral parts of the VAT system. So, any
person conducting a commercial activity or intended to conduct a commercial activity shall
apply to be registered for VAT if the supply is in the scope of VAT and are identified as tax
payers. Even though they are identified as tax payers they are not required to pay tax, rather they
are only required to collect tax from other customers. There are three types of registrations
depending up on some criteria they meet in accordance with to Ethiopia VAT legislations
(misrak 2003).
2.5.1 Obligatory registration

Any person conducting a commercial enterprise or intending to conduct a commercial enterprise

may apply to be registered for VAT. However if the taxable turnover of the enterprise which is
gross income for 12 calendar months exceeds or is likely to exceed birr 500.000 the person
conducting the enterprise must register for VAT with FIRA. Turn registration is compulsory
(Gebrie, 2008). The term any person for proposes of VAT registration includes;

 Sole profiteer
 Company
 Partner ship
 Trust
 Incorporated body or unincorporated body
 Club or association
A commercial enterprise refers to any business of whatever nature and include
 Ordinary business e.g. shop contractors manufacture whole sellers etc.
 Trades and professions e.g. Builders, Engineers and Accountants.
2.5.2 Voluntary Registration
Even if the annual gross turnover of a person is below the limit, there is a room for his or her to
register for VAT voluntarily. There for a person who carried on taxable activity but not required
to be registered for VAT may voluntarily apply to the authority for such registration if he/ she
regularly is supplying or rendering least 75% of his goods and services to registered persons.

2.6 Benefits of voluntary registered

In put VAT can be recovered if a person registered it will therefore be beneficial to voluntarily
resister where the person makes mainly zero rated supplies in such a case input VAT will be
recovered and on VAT will be charged on zero rated out puts (Gebrie, 2008).

2.7 Registration procedure

Application for compulsory as well as voluntary registration must be made on application form
called “application for VAT registration” and the authority is required to register the person in
the VAT register and issue a certificate of registration within 30 days of the registration
containing details of:-

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

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

 Has no fixed place of residence or business

 Does not keep proper accenting records
 Has no bank account
  Has previously been registered for VAT purposes but failed to perform his duties under
the VAT law (Gebrie, 2008)

2.8 Application time of VAT registration

A person who is carried on a taxable activity and is not registered is required to file an
application for VAT registration it shall fill an application for registration on later than the last
day of the month after the end of the period if.

1. At the end of any period of 12 calendar month the person made during that period, taxable
transactions with a total value exceeding 500.000 birr or the last day of the month of the
period if
2. At the beginning of any period of 12 calendar moths when there is reasonable around to
expect that the total value of taxable transactions to be made by the person during that period
will exceed 500.000 birr (Gebrie, 2008).
2.9. Time of VAT registration
After application for VAT registration is accepted and approved by concerned party/tax
authority/, registration takes place on one of the following dates depending on which date comes
first.
 In case of obligatory registration, on the first day of the VAT accounting period following
the month in which the obligation to apply for registration arose.
 In the case of voluntary registration, on the first day of the VAT accounting period
following the month in which the person voluntarily applied for registration.
 On the date selected by the registering person on his application for a registration.
However, the authority, in his discretion, may change the selected date to the beginning of
an accounting period (Gebria, 2008).
2.10 Cancellation of registration
A person who is registered for VAT may apply for cancelation of registration;

 If tax payer ceased to make taxable transactions.

  At any time after a period of 3 years of the date of his most recent registration for VAT,
if the registered persons total taxable transactions in the next 12 months are reasonably
expected to be not more than 500,000.
After application requested for cancellation is accepted and approved, cancellation of VAT
registration takes effect;
 At the time the registered person ceased to male taxable translation. However, if the
authority is satisfied that the registered person did not make taxable transaction from date
of registration takes place, the authority cancel to that date.
 At the end of VAT accounting period during which a person applies for cancellation if
the registered person has not ceased but below the statutory registration there hold
When registered for VAT is canceled, the authority is required to remove the person’s name and
all other details from the VAT register and the person is required to return back the issued
certificate of registration.(Gebrie, 2008).
2.11. Consequence of cancellation
Cancellations of registration have the following legal consequences.
 From the date the registration is cancelled, the person cannot issue tax
invoice for any supplies made by him. However, he/she cannot make any
taxable transaction.
 After the registration is cancelled, the person cannot claim a refund of VAT
paid on any goods or services purchased after cancellation takes effect
(misrak 2003).
2.12Advantage and Disadvantage of VAT
2.12.1 Advantage of VAT
If VAT is properly designed, implemented and administered, it is an efficient and fair source of
revenue to government and has the following advantages.
A. It avoids cascading effect of tax (tax on tax):-VAT works on the principle of that
when raw material passes through various manufacturing stages and manufactured products
passes through various distribution stage, tax should be levied on the incremental value at each
stage and not on the gross sale price. This insures that some commodity does not get taxed againt
and again and this, there is no cascading effect. Putting the concept in simple terms, in vat
system, each input is taxed only once.
B. It is more comprehensive and equitable tax system:-Even though the ultimate
burden of VAT full on the final customer, VAT is collected by the government from all sectors.
that is, from import, manufacturing, whole sale and retail sectors. Therefore, it is a more
compressive and equitable taxes system on the contrary; sales tax is normally levied at one stage
of the whole marketing (Misrak Tesfaye (msc))
C. It reduces the possibility of tax erosion:-In case of VAT, The taxes are divided in to
several parts depending on the number of stage of production and sales. In each stage every
transaction is made using VAT invoice approved by tax authority. In addition each VAT
registered person (supplier) has to maintain appropriate records on their sale and purchase
transaction. Those obligations make tax evasion difficult
D. It has less Tax burden: - Under VAT system, the tax is collected in small fragments at
different stage of production and sale. Hence, the vat payers feel the burden of the tax less
(Misrak Tesfaye (2008)).
E. It us neutral:- Regardless of the number of stage of production and distribution, VAT is
collected in each stage, therefore; VAT is expected to be perfectly neutral in the location of
resources in the form of production and commercialization. (misrak Tesfaye, (msc)).
F. It Improves Productivity:-In VAT system, a firm has to par tax even though it van in
to loss. The firm cannot claim any exception for loss because it pats taxes on the value produced
and not on profits. So, firms will always try to improve their performance and reduce the cost of
production. As a result, the overall productivity of the country will be improved (Misrak
Tesfaye, (2008).
G. It promotes capital investment and saving:-VAT is a consumption tax since one
pays VAT on its expenditure and has the option to sure so as not to be taxed. Furthermore, relief
from tax on capital goods may encourage investment. Potential investors also consider tax
legislation as one of the factors in making investment decision (Misrak Tesfaye(msc)).
H. It enhances exports:-Exports of goods and services in most countries that implement
VAT are liable to VAT. At zero rates this may make exports internationally competitive and,
thus encourage exports (Misrak Tesfaye, (2008).
2.12.2 Disadvantage of VAT:-It is not a bundle of advantages. It is also criticized seriously
due to the following drawbacks.
A. It is regressive in nature:-A Straight forward single rate VAT with few exemptions
would tax lower income groups (the poor) more heavily than the higher income groups (the rich).
This is because the poor pay more, as a percentage of their income than the rich. Hence, it is
regressive in nature and in effect. It is, thus incongruent with the basic Principles of taxation
which states that reason should be taxed according to his ability to par. In order to compensate
for its regressive effect a number of countries have exempted basic goods particularly food
items, education and transport from VAT. (Misrak tesfaye,(msc)).
B. It requires advanced economic structure:-The proper implementation of VAT
system required organization and advanced financial and economic structure as it complicated
system. VAT system also requires proper record keeping of invoice at each stage of production
and sale by both the seller and buyer. Hence, it becomes, difficult to implement the system in all
types of economy (Misrak Tesfaye, (2008).
C. It put additional burden to tax authority:-In VAT system, the manufactures, whole
sealers and retailers have to fulfill various legal formalities in the form of manufactures various
records, accounts, books, etc. the verification of those formalities put additional burden to the tax
enforcing authorities. (Misrak Tesfaye (msc)).
D .It is un economical VAT system involves high of administration, assessment,
verification collection, etc, hence, it is highly un economical (Misrak Tesfaye (msc)).
E. It has reams loopholes for tax evasion Although VAT system requires proper record
keeping of invoices at each stage of production and distribution by both the buyer and seller; it
has ream loopholes for tax evasion. This may include the following.
 Tax payers could over report sales of zero rated goods
 Tax payers could use invoices they received for personal purchase to claim Tax credits.
 It enables buyers and sellers to strike secret deals with regards the Issuance of receipts.
 It could lead to the formulation of forged ponies’ receipts to claim
Tax credit on input VAT, etc (Misrak Tesfaye (msc)).
 CHAPTER THREE

3. DATA ANALYSIS, PRESENTATION AND INTERPRETATION

In this chapter the data are collected using questionnaires offered to respondents
(employees of revenue authority in Dilla town). Concerning problem of VAT collection
are presented, analyzed and interpreted.

The total sample questionnaire were 15 that were distributed the selected sample
respondent so; the analysis is based on the questionnaire data from 15 respondents as all
employees have filled the questionnaire and properly returned.

The main aim of this study is to find out VAT collection problems that are interpreted by
the information obtained from the sample employee and to point out some solution from
the obtained information

3.1 DEMOGRAPHIC DETAIL OF RESPONDANT

The first part of the questionnaire begins with the detail information of respondent and the
following table illustrates the response for each questions.
TABLE 3.1 DEMOGRAPHIC INFORMATION OF RESPONDANT

NO- ITEM RESPONSE NO OFRESPONDANT %(PERCENTAGE%

1 SEX Male 11 73%
Female 4 27%

total 15 100%

2 age 20 -30 yrs 8 53.3%

31 -40 4 26.7%
41 -50 2 13.3%
>50 1 6.7%

total 15 100%
3 Marital status Married 12 80%
Unmarried 2 13.3%
Divorced 1 6.7%

total 15 100%
4 Educational Certificate 4 27%
status Diploma 6 40%
BA degree 5 33.3%3
MA degree
and above 1 6.7%
total 15

total 15 100%
5 Work <1 yrs 1 6.7
experience 2 -5 9 60
6 -10 4 26.6
11 -15 1 6.7
>15

Total 15 100%

Source: questionnaire survey 2013

As shown in the above table item 1, shows that 73% of respondents were male out of 15
respondents while the remaining 27% are female. This implies that the organization is
dominated by male and sex ratio is not fairly balanced.
Also item 2 and 3 show the age composition and marital status of the organization employee. So
that 53.3% of respondents were from 20 -30 yrs, 26.7% aged 30 -40, 13.3% were 41 -50 while
the remaining 6.7% were above age of 50year. As it implies the organization employees are
more productive age group and most of them are married. The age greater than 40 years are 20%
and therefore, the organization should sited and hire employee under productive age to enhance
effectiveness on this job to achieve the organization objectives.

Also item 4 and 5 shows most of the respondents are under lower profession. But, have had high
experience to the job they are assigned.

Table 3.2 compression between VAT and sales tax

Survey question response No of respondent Percentage (%)

6. Is VAT advantageous than yes 11 73.33%
sales tax? no 2 13.33%

Know nothing 2 13.33%

total 15 100%
Source: questionnaire survey 2013

With the survey, dilla town revenue authority employees were asked whether VAT is
advantageous or not. Among 15 respondents 11(73.33) % replied yes as VAT is more
advantageous than sales tax, 2(13.33) % replied no that is as VAT is not advantageous than sales
tax while the remaining 2 (13.33)% replied as they do not know anything about sales tax since
they are new for the organization . So they cannot compare VAT and sales tax .Respondent who
replied yes also put their reasons as VAT avoid double taxation , it is easy to control tax fraud
and the possibility of tax evasion , generate more revenue to government since it is collected
from all sector and avoid cascading effect of tax(tax on tax).

From the point mentioned by most respondents, we can say that VAT is more advantageous than
sales tax. This is because of VAT reduce cascading effect of tax, it is collected from all sector so
that it is a major source of revenue to government, improve productivity, promote capital
investment and saving, enhance export at zero rate, it is not paid by tax payers rather collected
from customer and it is easy system to c0ntrlfraudlen activity and to avoid evasion.
3.3 contribution of VAT

Although the specific reason for adopting VAT is to raise more revenue to government. So the
respondents were asked whether they belie that the current collection contribution of VAT to
government to achieve is sufficient or not as illustrated below.

Table 3.3 contribution of vat

Survey question No of respondent %(percentage)

7. Do you believe that the current contribution of to government
revenue is sufficient?
Yes 5 33.3%
No 10 66.7%

Total 15 100%
Source; survey questionnaire

As can be observed from table 3.3, out of 15 respondents, 5(33.3) % replied yes that they believe
the contribution is sufficient while most of the respondent 10(66.7) % responded as it is not
sufficient and as they asked reasons;

- Weak follow up system and collection by the authority against those disobedience tax
payers.
- Lack of sufficient man power as well as skilled.
- Less effort of identifying and rewarding the genuine tax payers
- Existence of some unethical employee and tax payers who refrain some interested
business from their intention of registration are listed as reason.

From this we can say that the authority have had weakness in its administration follow up and
enforcement of tax payers to pay tax , in creating efficient and award employee and tax payers
by training and , it has no strength.

3.4 VAT COLLECTION

VAT proclamation no-285/2002 stipulates that any person or enterprise registered for VAT is
required to issue VAT I invoice for his or her taxable transaction which used as a corner stone
for tax collection. But a person who is not registered for VAT do not have right to issue a tax
invoice. Nevertheless this proclamation has seen violated by some business enterprises as
obtained information showed by asking question as illustrated below.

Table 3.4 vat collection

Survey question No of respondent

8. How much of the willingness of vat registered entities to collect

and pay their vat liability on time and legally?
High 1 6.7
Low 4 26.7
Very low 10 66.6
total 15 100
Source questionnaire survey 2013
As can be seen on the above table, out of 15 respondent, 1(6.7) % replied high that is VAT registered
enterprise and person are highly willing to collect with legal invoice and to pay on time to
government, 4(26.7)% replied low willingness to collect with legal invoice and to pay on time and
the remaining most 10(66.6)% replied very low that is willingness of vat registered enterprise and
person is to collect with illegal invoice rather than legal and retain for themselves rather pay for
government. Also the researcher asked them the reason for collecting with illegal invoice and not
pays for government to respondents said and very low. They puts: absence of strong follow by the
authority, existence of large number of nonregistered enterprises, lack of awareness of the society
about benefits, rules and regulation of tax, of need grow with a little effort and short period by
retaining government tax for self benefit illegally, existence of employee that deals for self benefit
rather than governing for the rules, duties and responsibility and the absence of strong enforcement
and controlled mechanism by the authority.
As observed, it implies that most VAT registered enterprises do not comply with the rules and
regulation of vat and they committed illegal activities by preparing fake invoice and remitted the tax
income for themselves. As the side of the authority we can say it is incapable to identify and control
non compliance enterprise and persons with the rules and regulation of vat. This is because of
absence of sufficient well equipped manpower.
3.5.VATcollectionproblem
The survey also conducted by asking the respondent whether the collection of VAT in the town
is easy and smooth or not and for respond not easy and smooth ,factors which affect easy
collection and smooth relation as illustrated below.

Table 3.5 VAT collection problem

Survey question No-of respondent %(percent)

9. Do you say that the collection of vat in the
town is easy and smooth?
Yes 4 26.6%
no 11 73.3%
total 15 100%
Source; questionnaire survey 2013
According to above table, out of 15 respondent, 4(26.7) % replied yes as the collection is easy,
smooth and no problem while the remaining 10(66.6) % responded no, that the collection is not
easy and smooth. As they said this is due to presence of tax payers who did not declare the tax
they collect as per law, existence of tax collectors who collect with illegal invoices and retain for
him or herself, insignificant recognition given to benefit of tax and being not volunteer to pay,
being not volunteer to show own financial statement, inappropriate employee in the
organization and low awareness of the community due to less strength of the authority to create
awareness about tax for the community, enforcing noncompliance entities, auditing, follow up
and taking corrective action on who provide forgery invoice listed as a problem.

It implies that several problems exist at time of VAT collection from both the tax payers and the
authority due to several reasons ass mentioned by the respondent.

3.6 Administration and cooperativeness of officials

In order to have understanding about the administration capacity and cooperativeness of officials
and employees the survey was conducted by asking whether the administrative capacity and
cooperativeness of the officials is strong enough to control and alleviate tax evasion and illegal
action or not including the reason for response no.
Table 3.6 Administration and cooperativeness of official

Survey question No- of respondent Percentage (%)

1o.Is the administration capacity and
cooperativeness of official strong enough to alleviate
and control tax evasion and illegal activities?
Yes 6 40%
no 9 60%
total 15 100%
Source: questionnaire survey 2013
From this survey among 15 respondent, 6(40%) replied yes as the VAT administration capacity
is strong enough and officials are highly cooperated to alleviate and control tax evasion and
illegal activities while the remaining most respondents 9(60%) replied no as the administration
capacity is not strong enough and officials are not cooperated to control and alleviate tax evasion
and illegal activities. As a reason less motivation of some employees due to less remuneration,
absence of strong enforcement, weak control system against fraud and evasion and absence of
sufficient ethical employee are listed.

From this we can say that the administration system and cooperativeness of official is not enough
to alleviate evasion and illegal activity and to bring those illegal entities to be governed under the
rules and regulation of tax and collect VAT legally to increase government revenue.

3.7 Registration and cancellation

Registration for VAT is an action for which a person or enterprise who make a taxable
transaction being subjected for laws to collect vat on behalf of government to raise government
revenue. But cancelation is opposite of registration. Having this in mind the researcher tries to
assess whether there exist entities cancelled from vat registration or not in the town including the
reason for cancellation as illustrated below.

Table 3.7 registration and cancellation

Survey question No- of respondent %(percent)

11. Are there any person cancelled from
VAT and shifted to other tax?
Yes 10 66.7%
no 5 33.3%
total 15 100%
Source: questionnaire survey 2013
As indicated above , out of 15 respondent, 10(66.7%) responded yes as there are many person and
registered entities cancelled from VAT while the remaining 5(33.3%) responded no as there is no one
cancelled from VAT and shifted to other tax. Respondent who say no put the following as a reason.

 low awareness of the community towards advantage of VAT and its contribution to the
country’s economy and government revenue, preference of the community to purchase
goods and services from entity that exclude vat and hence sales of registered may lower
and they prefer to be out of registration.
 Due to weakness of the authority officials and employees to attract nonregistered to be
registered and stop their illegal activity.
 presence of unethical employees in the authority
 In a little manner due to cease of business with different reasons for cancellation.

It implies as there are many person and entities cancelled from VAT in the town and this is due
to less strengths of the authority in making the community aware and have understandings about
VAT, in taking corrective action, and expectation of tax payers of higher benefits by attracting
price oriented customers.

3.8 measures taken by the authority

The survey also conducted by asking the respondent whether the authority had taken some
measures to alleviate illegal activities or not.

Table 3.8 measure taken by the office

Survey question Non- 0f respondent Percent (%)

12. Are there any measure taken by the
authority to alleviate illegal activities?
Yes 8 53.3%
no 7 46.7%
total 15 100%
Source: questionnaire survey 2013
As the above table indicate out of 15 respondent, 8(53.3%) replied yes as there were several
measure taken by the authority to alleviate illegal activities of tax payers while 7(46.7%)
responded no as there are not any measure taken by taken by the authority to alleviate illegal
activities of tax payers. It implies that almost half of the respondent replied as no measure taken,
so the organization is weak in taking corrective action and measures for illegal activities of tax
payers as well as nonregistered enterprises to stop their illegal activity.

CHAPTER FOUR

4. CONCLUSION AND RECOMMENDATION

4.1 CONCLUSION

Value added tax (VAT) is a transaction tax collected on goods and services at all stages of
production and distribution. This tax is collected 0n the value added t each stages. Value added is
the difference between the sales price and the value of purchased at the stage.

VAT was introduced in Ethiopia in2002 under proclamation no-285/2002 in replacement of sales
tax and administrated on person who are VAT registered and carried on a taxable activity with a
total transaction value of birr 500,000 and above.

VAT is levied and paid at a rate of 15% of the value of every taxable transaction by a registered
person and import of goods other than exempted goods and services. Analysis is made in the
preceding section of this paper. On the basis of the analysis therefore, I have conclude the
following.

 To discharge responsibility of VAT collection in the town there are several problem that
influence the performance of the office. Even if the man power in the office is sufficient, the
performance of VAT collection is weak in the town and therefore, revenue generation for
government is not sufficient to achieve its objective with lower contribution of collected
VAT. This is due to;
 Ineffective implementation of rules and regulation of VAT in the town.
 Less coordination and cooperativeness’ of officials and employees to collect VAT.
 Existence of large no- of registered enterprises needs to grow with a little effort and short
time by retaining government revenue illegally for them by collecting with illegal invoices.
 Low awareness of the community about the benefits, rules and regulation of tax.
 Cancellation from registration of VAT.
 Weakness of the office administration to train the community and create awareness for them,
increase motivation of employee by sufficiency of remuneration, attract nonregistered
enterprise to be registered, follow up and auditing.
 Enforcement and taking corrective measure on illegal person, entity and employee to stop
their illegal activity and to be subjected for rules and regulation.

4.2 Recommendation

As the study was conducted, there are certain problems related to collection of VAT. Therefore,
to minimize this problem, I have forwarded the following recommendation.

 The authority should recruit sufficient and capable employee, devote time consistently on
strengthen in areas of auditing and follow up for illegal entities and persons.
 The authority should work strongly to alleviate the existing bottle necks and achieve the
described objectives by improving the service quality it is rendering , solving the problems
associated with fraud and evasion and recognizing the activities of genuine traders.
 Also the authority should increase number of registrant entering to a market by solving
problems to attract them and collect huge amount of money to achieve the desired objective.
 Constantly examine and take action over those unethical workers.
 The community also should be obeying the VAT rules and regulation and so they should
register for VAT according to the registration process of VAT without any enforcement
action taken over them.

The public have to work in harmony with the authority to bring the non compliance
enterprise to the court front and the society should also accept and obey the existing VAT
rules and regulation.
 REFERENCE

 Gebrie Worku, Tax accounting in Ethiopian context, 1st edition, A.A, 2008.
 Fantahun Melese, Taxation in Ethiopia, ECC, 2005.
 H.Zee and V.Tanzi, “Tax policy for emerging market”, IMF publication service.
 H.L Bhatia, Public finance, 24th edition, Vikas publishing plc, 2003.
 Misrak Tesfaye, public finance and taxation in Ethiopia, 2011.
 Misrak Tesfaye, public finance and taxation in Ethiopia, 2006.
 http//[email protected].
 WWW.google.investorguide.com,
 WWW.mofed.gov.et,
 APPENDIX

DILLA UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

Questionnaire

Dear respondents: I am graduating class student conducting a research study on vat collection problem in
case of Dilla town revenue authority for the purpose of partial fulfillment of bachelor degree [BA] in
Accounting and finance. So, you are kindly requested to give accurate and relevant information, which is
the most valuable input for the success of any study. Please be aware that there is no any political, social
or psychological harm on you due to responding these questions .The researcher hopes that you will be
answer all questions confidentially.

REMARK: Don’t your name and address

INSTRUCTION: Answer the following questions by making tick mark inside the box and with
necessary explanation in the space.

PART ONE: Personal information of respondents in HATF

1 .sex Male female

2. age group 20-30 31-45 45 and above

3. Educational level

A. above 1st degree

B .first degree

C. diploma

D. certificate

E. grade 12 and below

F. Technical and vacation

4. Marital status

A. married C. divorce

B. single D. widowed

5. Service in the commission

Less than one year 6-10 year

2-5 year 10-15 year

6. is vat advantageous than the replaced sales tax? Why?

7. Do you believe that the current contribution of vat to government revenue is sufficient?

Yes no

8. if your answer for question no 7 is ”no” why?

......................................................................…………………………………………………………………
……………………………………………………………………………

9. How much is the willingness of vat registered entities to collect and pay their liability on time and
legally?

High low very low

10. If your answer for question no 9 is low and very low what do you say the reason to be
illegal?………………………………………………………………………………………………………
………………………………………………………………………………………………………………
…………………………………………………………………………………

11. Do you say that the collection of vat in the town is easy and smooth?

Yes no

12. If your answer for question 11 is “no” what are the problem that hinder the collection?

………………………………………………………………………………………………………………
………………………….……………………………………………………………………………………
……………………………………………………............................................
13. Is the tax administration capacity and cooperativeness of tax official strong enough to control and
alleviate tax evasion and illegal action?

Yes no

14. if your answer for question 13 is ”no” what is the reason?

………………………………………………………………………………………………………………
………………………………………………………………………………………

15. Is there any vat registered person and entity canceled from vat and shifted to other tax?

Yes no

16. Is there any measure taken by the authority to alleviate illegal activity?

Yes no

17. If your answer for question no 16 is “yes” list some

………………………………………………………………………………………………………………
……………………………