ADMINISTRATION PROBLEM OF VALUE ADDED TAX

(IN CASE OF ASSELA TOWN REVENUE AGENCY)

A RESEARCH PAPER SUBMITTED TO ACCOUNTING

DEPARTMENT IN PARTIAL FULFILLMENT OF THE
REQUIREMENT OF BACHELOR ARTS DEGREE IN
ACCOUNTING

SUBMITTED BY: DEREJE TEGENU

ADVISOR: DANIEL TOLESA

DEPARTMENT OF ACCOUNTING
COLLEGE OF BUSINESS AND ECONOMICS
JIMMA UNIVERSITY

MAY, 2012

JIMMA, ETHIOPIA
ACKNOWLEDGMENT
First, I would like express my gratitude to my Advisor Ato Daniel Tolesa. For
his valuable commitment and giving advises from the beginning to the end of
this research paper. Next, my thanks goes to my secretary W/ro Eleni Moges
who has carefully typed, designed and edit this research paper. My last not
least thanks were for Jimma University Business and Economics College for
designing such project through which students develop their knowledge.

ABSTRACT
This research titled Administration Problem of Value Added Tax (in case of
Assela Town Revenue Agency). Its main objective was to identify administration
problem of value added tax. For the purpose of this study primary data were
used to collect data through questionnaire and interview with manager. After
the data were analyzed, the major findings were: lack of awareness, absence of
administration control and un sufficient training. To this study the researcher
was recommended that the concerned body should have to give training,
motivate the taxpayers and create awareness the taxpayers.

II

TABLE OF CONTENT
 CO
NTENTS PAGE

Acknowledgment ....................................................................................I

Abstract .................................................................................................II

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

CHAPTER ONE

1. Introduction ......................................................................................1
1.1. Background of the study .............................................................1
1.2. Statement of problem ..................................................................4
1.3. Objective of the study ..................................................................5
1.4. Significance of the study ..............................................................5
1.5. Scope of the study .......................................................................6
1.6. Organization of the study ............................................................6
1.7. Limitation of the study ................................................................6

CHAPTER TWO

2. Literature Review ...............................................................................7

2.1. Definition of tax ...........................................................................7
2.2. Classification of the tax ...............................................................7
2.3. Definition and meaning of VAT ....................................................8
2.4. Generis and Development of VAT .................................................8
2.5. Forms of value added tax .............................................................9
2.5.1. Consumption type of VAT...........................................................10
2.5.2. Production type of VAT...............................................................10
2.5.3. Income type of VAT ...................................................................10
2.5.4. Wage type of VAT ......................................................................11
2.6. Component of value added tax......................................................11
2.6.1. In put value added tax ..............................................................11
2.6.2. In put value added tax .............................................................11
2.6.3. Net value added tax ...................................................................11
III
2.7. Imposition of value added tax ......................................................12
2.8. Merits and Demerits of VAT .........................................................13
2.8.1. Merits of VAT.............................................................................13
2.8.2. Demerits of VAT.........................................................................14
2.9. Registration of VAT.......................................................................15

CHAPTER THREE

3. Research Methodology .......................................................................16

3.1. Source of data .............................................................................16
3.2. Sample size .................................................................................16
3.3. Sample method ............................................................................16
3.4. Method data collection .................................................................16
3.5. Method of data analyzing and interpreting ...................................16

CHAPTER FOUR

4. Data Analysis and Interpretation ......................................................17

4.1. Source of Data and procedure of the study .................................17

CHAPTER FIVE

5. Summary, conclusion and Recommendation .....................................28

5.1. Summary and Conclusion ...........................................................28
5.2. Recommendation .........................................................................29
Reference
Appendix

CHAPTER ONE

1 .INTRODUCTION
 1.1 BACKGROUND OF THE STUDY
Tax is the most important source of government revenue. Governments may
secure a command over resources by borrowing and spending the proceeds or
by creating money. Government way also secure resources by profit from
enterprises such as publicly owned electric power facilities or the sale of
Timber from public lands, occasionally government may secure funds from
reparation or from gifts, But the major sources of government revenue consists
of taxes compulsory payments by person or organization to the state. Taxes
become the major means for financing the government activity. Taxes are
themselves burdensome since they reduce the economic power that would
otherwise be possessed by individuals or organization. But the activities that
are financed from the tax proceeds will presumably bring benefits to individual
and organization. The net burden to taxes then must take the nature of
government expenditure in to account (Encyclopedia American vol. 26. 2006 p.
316).

In modern economics, taxes are the most important source of government

revenue taxes from other sources of revenue that are compulsory devise and
are unrequited, that is they are not paid in exchange for some specific things or
benefits. Taxes are levied in almost every country of the world primary to raise
revenue for government expenditures (Encyclopedia Britannica vol. 28, 2007,
p.11).

Taxes are most commonly classified as either direct or indirect direct taxes are
primarily taxed on persons they are aimed at the individual ability to pay as
measured by his income or his net wealth. The main types of direct taxes are:
individual income tax, tax on agricultural income, land revenues, tax on
stamps and registration etc.

Indirect taxes are levied on objects and services or transaction. They include
general and selective taxes on sales of consumer goods. Examples of indirect
tax are: turn over tax, value added tax, excise tax and custom duty tax.
(Encyclopedia Britannia vol. 28, 2007. p. 397).
In relation to the above indirect taxes, the researcher major emphasis is relied
on value added tax. Value added tax is a tax based on the difference between
the cost of materials and other expense involved in the manufacture of a
product and the ultimate value of the finished article. The tax is imposed at
various stages in the production process and thus tends to spread the tax
burden among seller firms (Encyclopedia America, vol. 26, 2006, p. 867).

Value added tax is supported based on the following arguments:-

Easy to administer since the impact of value added tax system is like the single
point sales tax system.

It helps to economy in adopting the form of production that are economically

more suitable.

In the case of value added tax, the tax is divided in to several parts depending
up on the number of stages of production and sale.

Value added tax falls on the wages, interest, and profits as such the burden of
tax are shared by all factors of production.

However value added tax is also have arguments against it.

The proper implementation of value added tax system requires advanced

financial and economic structure and the firm should be in the habit of
keeping proper accounts.
 This system involves high cost of administration assessment, verification,
collection etc. hence it’s highly uneconomical.
The value added tax system largely depends up on the co-operation of the
tax-payers because cross-checking is not possible always.
(Parameswaran, 2005, pp. 108-109).
Finally, the study will go to understand the administration problem of value
added tax.

1.2 Statement of Problem

Value added tax is indirect tax levied on the value added of manufacture,
whole seller, Retailer and on consumption of goods and services. However
Administration is a set of activities aimed at creating a desirable out comes to
problem, challenges or difficulty that provide solution.
Now a days as technology and development become advanced and spread
throughout the world in order to improve efficiency and tax system
administration. But value added tax collection system faces administration
problem in Ethiopia in general and selected town in particular from both tax
payer and tax authority (Tahir 2003).

So the main target of the research deals with the identifying of Administration
problem of value added tax raised from both tax authority and tax payers, In
Assela Town Revenue Agency by finding solution for the following question.

What are the cause of Administration problem of value added tax?

Does value added tax system applied in accordance with value added
tax proclamation No 285/2002 and value added tax regulation.
79/2002?
Does the society know why they pay value added tax?
Does the Administration provide proper service to the tax payers?

1.3 Objective of the study

The main objective of the study is to identify Administration problem of value

added tax at Assela town Revenue Agency and it’s specific objectives are:-

To assess the various Administration problems relating to implementation of

value added tax in town and find out causes for them.
 To identify whether the value added tax system applied in accordance with
value added proclamation number 285/2002 and value added tax regulation
79/2002.

To evaluate convenience of value added tax to tax payers.

To evaluate the proper service Administration provide to tax payers.

1.4 Significance of the study

The reason why the researcher selected this title is that to identify the cause of
administration problem of value added tax in Assela Town Revenue agency.
The researcher has some practical knowledge of the theories of subject matter
when he/she applies in real situation so that the study was assessed
Administrative problem of value added tax and it has the following significance.

It creates general awareness among the concern people about major

problem encounter in the Administration system of value added tax.

It helps merchant (taxpayer) and other parties to have good knowledge

about value added tax.

It helps as a reference material to who had interest to study on this

1.5 Scope of the study

Major and particular emphasis was given to Assela Town Revenue agency,
which located in the east of Addis Ababa in Xiyo woreda, Arsi-zone of Oromia
regional state. Since value added implementations generally too vast and
difficult to cover all of the area. The scope of the study is on the Administration
problem of value added tax.

1.6 Organization of the study

The organization of the study were cover five chapters, chapter one consists:-
The background of the study, statement of the problem, objective of the study,
significance of the study, scope of the study, organization of the study and
limitation of the study. The chapter two focused on literature review and
chapter three focused on methodology, chapter four focused on empirical
analysis and interpretation. Finally chapter five focused on summary,
conclusion and recommendation.

1.7 Limitation of the study

Lack of getting un sufficient written materials regarding to the study.

Absence of manager from office due to meeting during data collection period.

CHAPTER TWO

2. LITERATURE REVIEW

2.1 Definition of Tax

Taxes are compulsory payment by every citizen to the government to enable the
government to fulfill its commitment to society. It is a transfer of resources
from person’s economic unit to government and is legally enforceable. There is
no necessary direct link between the resources transferred to government and
goods and services it supplies (Bhatia, 2002, p. 145).

Tax is a compulsory payment of contribution by the people to the government

for which there is no direct return to the taxpayers. Tax imposes a personal
obligation on the people to pay the tax. If they are liable to pays. The general
public should be taxed, according to their ability to pay and people in the same
financial position should be taxed in the same way without any discrimination.
Thus tax can be defined as “an involuntary fee or more precisely unrequited
payment” paid by individuals or business to government (Parameswaran, 2005,
p.55).

2.2 Classification of Taxes

Taxes are most commonly classified as direct or indirect taxes. Direct taxes; are
primarily taxes on persons they are aimed at the individual ability to pay as
measured by his income or his net wealth. The main types of direct tax are
personal income tax, property tax, agricultural income tax, etc. Indirect taxes
are levied on objects and services or transaction. They include general and
selective taxes on sale of consumer goods. Indirect taxes shift the burden of tax
to the consumers by raising the selling price.

Tax may also be classified in accordance with the relationship between the
base and rate. If the rate of tax increase at the base increases the tax is said to
be progressive, If the rate remains the same as the base increase the tax is
proportional. A tax is regressive if as the base increase the rate is reduced. In
description of specific taxes or of tax systems the term progressive,
proportional or regressive are usually applied in relation to family income,
which is treated as the implicit base out of which taxes are paid (Encyclopedia
Americana vol. 26, 2006. p. 319).
 2.3 Definition and meaning of value Added Tax

Value added tax belongs to the family of sales tax. VAT defined as “tax to be
paid by manufacturers or traders of goods and services on the basis of value
added by them. ‘It is not a tax as on the total value of the commodity being
sold’, but on the value added to it by the manufacture or trader”. They are not
liable to pay tax on the entire value added by them in the process of production
or distribution. Thus the VAT by them is the difference between the receipts
(from sales) and payment made to various factors of production (land, labor,
capital and organization) in the form of rent, wages, interest and profits
(parameswaran, 2005. p. 105).

VAT is a tax levied on consumption goods, It is a modified sales tax based on

the net value added at each stage rather than on gross receipts. It is a principal
means of indirect taxation (Encyclopedia Britannica vol. 28, 2007, p. 416).

2.4 Genesis and Development of VAT

Emergence and rapid spread of VAT is one among the most dynamic and most
import tax development of the later 20 th century and skill continues, value
added tax was invented in 1954 by a French Economists Maurice laurice who
was jointly director of French tax authority. Although, German industrialist Dr
Wilhelm Von-Siemens proposed the concept in 1918. France was the first
country to introduce value added tax effective from April 10, 1954. By 1969
only eight nations had adopted VAT. Out of this, cote-Devior was the first
country in Africa in 1960, Brazil from South America and Japan from Asia
were also among the first group of countries that introduced VAT in their
respective continent.

Since 1979, VAT has been adopted as the main form of an indirect tax by
many countries in different parts of the world. According to IMF report (2004)
more than four billion (70%) of the world population now live in countries with
value added tax and value added raised about 18 trillion dollar in the tax
revenue, roughly one quarter of all government revenue. Furthermore among
more than 190 countries of the world, over 136(72%) of them have made value
added part of their tax system. Now a days from 53 countries of Africa Union
34(64%) of them have already introduced value added tax (Misrak, 2011, p.
314).

The concept of value added tax also introduced to Ethiopia very recently.
Proclamation Number 285/2002 introduced the concept by replacing the
formerly known sales and excise tax proclamation on January 2003.

2.5 Forms of Value Added Tax

Under value added system a government charges and collects value added tax
from each taxable supplier based on the value added by supplier based on the
value added by supplier at each stage of the production and distribution
process. The value added by supplier which is considered as tax base for value
added tax and used by the supplier to determine its VAT liability. can be
determined in different forms. The form of tax base may also different
depending on the items to included in the tax base. In today’s taxation theory
there are four types of value added tax base on the determination of the
ingredients of the value added by supplier. They typically discussed below
(Misrak, 2011, p. 313).

2.5.1Consumption Type value Added Tax

The firm is allowed to deduct from the gross value of its production not only
the non-capital in puts purchased from other firms. But also the capital assets
purchased. Thus, the tax base in consumption type value added tax is
difference between gross value of products and total value of inputs purchased.
A consumption type value added tax, In neutral between methods of
production as substituting capital for labor.

VAT Base: Sales-Total value of inputs (Capital and non-capital) purchases

(Misrak, 2011, p. 313).
 2.5.2 Production type value Added Tax

The value of the inputs purchased by the firm form other firm is not deducted
further more. No depreciation is permitted on the purchase of capital goods
even in subsequent years. Thus the tax base in production type value added is
equal to gross value less value of materials other than non-capital goods
purchased.

VAT Base= Sale’s value-Total value of non-capital inputs

purchased( Misrak,2011,p.313).

2.5.3 Income type value Added Tax

The firm is deducted the depreciation on the capital goods a part from the full
value of its non-capital purchases. Here firms cannot deduct the entire value of
the capital goods purchase during the year but they can deduct the respective
amount of depreciation attributable to that year.

VAT BASE= sale valve- Total valve of non-capital pureness + Depreciation on

capital goods (Misrak, 2011, p.313).

2.5.4 Wage types of Value added Tax

A firm is able to deduct the net earnings from it’s capital in order to arrive at
the tax base, it un likely to be used for taxation by any government.

VAT Base= Capital –Net earnings (Misrak. 2011, 313).

2.6 Component of Value Added Tax

Value added tax have three components that are discussed below.

2.6.1 Input value added tax

In put VAT is the VAT payable by a taxable person on goods and services
supplied to him by value added tax registered supplier and on goods which he
imports for the purpose of a business on by him and for which registered for
value added tax. For a VAT registered person (taxable person) in put vat is not
a component of the cost of purchases importer rather than the registered is
entitled to take in put value added tax. Deduction against the VAT changes on
his sales or is recoverable from tax authority. Hence, input VAT is created as a
receivable for a VAT registered person (Misrak, 2011, p. 317).

2.6.2 Output Value Added Tax

Output VAT is the VAT collection by a person at the time of sales of taxable
goods and series (taxable supply). It is the VAT chargeable on sales of taxable
goods and services whenever a taxable person supplies taxable goods or
services to another person output VAT is not a component of which is collected
by him on behalf of the tax authority (Misrak, 2011 , p. 317).

2.6.3 Net Value Added Tax

The logic of value added tax is that during a value added tax accounting period.
A value added registered person pays, value added tax on its purchases and
imports which is called in put VAT and the same person also charges VAT on
its taxable sales which is called out put Vat Hence. The Net VAT is the
difference between input VAT and output VAT (Misrak, 2011, p. 317).

2.7 Imposition of Value Added Tax

If a business unit whether a person or body or association of a person is

engaging in the business and sells goods (supply of goods) or if it is doing
something for someone else and is paid for doing it (making a supply of
services) it is likely that it is making taxable supplies. When a business unit
is registered. VAT is changeable on all the taxable supplies it makes. There are
two rates of tax. The standard rate which is 15% and the zero rate which is 0%
the standard rate is levied on the following things.
 Every taxable transaction by a registered person

Every import of goods other than exempted import and an import of

services.

The following taxable transaction shall be charged with tax rate of zero (0%)

The export of goods or services to the extent, providing in regulation

The rendering of transportation or other service directly connected with

international transport of goods or passengers as well as supply of lubricant
and other consumable technical supplying taken on board of or
consumption during international flights and

The supply of gold to the national bank of Ethiopia (Parameswaran, 2005,

pp. 241-242).

2.8 Merits and Demerits of value Added Tax

2.8.1 Merits of VAT

Merits of value added tax: value added tax have its own merits such as:-

The popularity of value added tax with authority is mainly due to its
administrative advantages. It is much easier to assess tax liability of a firm by
using the credit method. There is also a greater scope for crosschecking of
returns submitted by firms. A general VAT is supposed to be neutral to the
resource allocation forms of production and business organization. In
contrast, a turn over tax encourages vertical integration of production. So as
to avoid the intermediary sales and taxes and to acquire a competitive
advantage over others.

Value added tax also neutral between factor costs because it taxes all value
added. As against this, the existing corporation taxation discourages the use
of equity capital and punishes profit earning. VAT does not hinder adoption of
advanced technology which may be capital intensive.

It is argue that value added tax avoids cost-cascading effect. A conventional

sales tax leads to compounding of tax liability, while VAT does not.

An implied advantage of value added tax is its neutrality which regard to

resource allocation.

A very important advantage of value added tax is that of lesser tax evasion.

The use of value added tax helps a country in encouraging its export in order
to get a competitive advantage over others a country may refund the taxes
paid on the exportable goods. It is easier to separate the tax from the cost of
production in the case of value added tax.

It also claimed that value added tax is conductive to efficiently since a firm is
not exempted from its tax liability even if it runs in to a loss. It pays a tax not
on its profits but on the value produced so it tries to improve its performance.

It argued that for varies reasons some goods should enjoy a tax exemption
(Zero tax rate) while the remaining ones need not be subject to uniform taxes
rate. It has been found possible to incorporate these features in to value added
tax, multiple (including Zero) rate are how commonly found in value added
system (Bhatia 1976, pp. 149-150).

2.8.2 Demerits of value Added Tax

Value added tax is a complicated system and needs an honest and efficient
government machinery to do the cross checking and link up various
production, activities and the resulting tax liability of each firm. It is there
necessary that the country adopting it should also be sufficiently advanced in
its financial and economic structure and the firms should be in the habit of
keeping proper accounts.

Even if the tax payers are fully honest. This system of taxation forces them to
maintain elaborate and costly accounts. This becomes uneconomical
especially for the smaller firms.

The difficulties of maintaining accounts, cross, checking and preventing tax

evasion increases if the system contains some exemption (such as for food
items) and differential rates of taxation (luxuries are like by to be taxed at
higher rates than necessities). It would be naïve to assume that a modern
government would like to have tax system, which is claimed to be neutral in it
is a locative and distributive effect.

Critics of value added tax doubt that it induces efficiently. They claim that in
a shortages economy like ours speculative hoarding. Non-competitive price
rise and similar practices are guided common. In a seller’s market, producers
and sellers have no incentive to increase their efficiently and reduces costs
since goods will sell irrespective of their interior quality and high price
(Bhatia,1976, p. 151).

2.9 Registration of VAT

A persons registered for VAT is registered in two ways that is obligatory

registration and voluntary registration. Obligatory Registration is apply to
every person who carrier on taxable activity has to register himself with the
VAT authority. In other words, Any person conducting a commercial enterprise
or intending to conduct a commercial enterprise may apply to be registered for
VAT, if at the of any period of 12 calendar months the person made taxable
transaction the total value of which exceeded 500,000 birr or at the beginning
of any period of 12 calendar months there are reasonable grounds to expect
that the total value of taxable transaction to be made by the person during
that period will exceed 500,000 birr.

Voluntary registration also applied to a person who carried taxable activity

and it not required to registered for VAT, may voluntarily apply to the
authority for such registration. He is entitled to apply for registration if he
regular supply or render at least 75% of his/her goods and services to
registered person. Federal Inland Revenue Agency /Value Added Tax can
refuse to register any person who:- has no fixed place of a bode or business,
does not keep proper accounting records, has no bank account and has
previously been registered for VAT purpose but failed to perform his duties
under (VAT proclamation No 285/2002, Article 16 & 17)

CHAPTER THREE

3. RESEARCH METHODOLOGY

3.1. Source of data

The researcher was used primary data, the primary data for this study is the
response of employees, tax payers and managers that the researcher was
obtain on his research study using its data collection tools.

3.2. Sample Size

The number of the questionnaires for the organization were depend up on the
number of the employees and VAT registered merchant of the Assela Town,
from the total number of employee in the organization 58 and total number of
VAT registered merchants 212, The sample size were 6 and 21 respectively.

3.3. Sampling Method

The researcher collected sample from tax administration authority and
different merchants of Assela town by using random sampling.

3.4. Method of data collection

The researcher was used the primary data collection methods. The primary
data was collected by interview with manager of the Revenue Agency and
questionnaires distributed to organization employees and merchants of the
town.

3.5. Method of Data Analyzing and Interpretation

The data which were collected through different method were analyzed and
interpreted through percentage, table and chart.

CHAPTER FOUR

4 . DATA ANALYSIS AND INTERPRETATION

The researcher focused on the Administration problem of value Added Tax in

Assela Town Revenue Agency and comprise respondents who are generally
expected to provide relevant data and information that helps the researcher to
achieve the objective mentioned.

4.1. Source of Data and procedures of the study

This section mainly deals with the analysis and interpretation of finding. The
necessary data and information were obtained from primary data collected
through questionnaires and interview. The primary data were gathered from
employees, tax payers and managers of Assela Town Revenue Agency.

The questionnaires were distributed to 6 employees and 21 tax payers. All of

the employees return the questionnaires distributed and 19 tax payen return
the questionnaires. Accordingly, the analysis and findings of this paper are
based on the response of employees, tax payers and interview with managers of
the Revenue Agency.

Questionnaire Analysis and Interpretation Data of the Respondents

Table 4.1. Personal Information of the Employee

S.No Item Respondent frequency Percentage %

1 Sex
Male 4 66.67%
Female 2 33.33%
Total 6 100%
2 Age
20-25 yrs 2 33.33%
26-30 yrs 2 33.33%
31-35 yrs 0 0%
36-40 yrs 1 16.67%
Above 41 1 16.67%
Total 6 100%
3 Educational level
10 completed 0 0%
12 completed 1 16.67%
Diploma 3 50%
Degree 2 33.33%
Master Degree 0 0%
Total 6 100%
4 Position of Employee
Human resource 1 16.67%
management Finance 4 66.67%
Dept. 1 16.67%
Operational worker
Total 6 100%
Source: Survey Result, 2012

As shown on the above table 4.1, 66.67% of the employees are male and
33.33% of the employees are females, with regard to Age 33.33% of the
employees are found in the age between 20 up to 25 years and also 33.33% of
them are found between 26-30 years, 16.67% are between 36-40% years, and
16.67% of the them are above 41 years. Finally there is no the employees
between 31-35 years from the sample, from this survey it’s visible that most to
the employees are young. Concerning with educational status 16.67% are
grade 12 completed 50% are diploma, 33.33% are first degree. There is no
master degree and grade 10 completed employees from the sample take from
this survey most of the workers are in Diploma level followed by Degree. The
manager confirmed that most of the employees are diploma level. They have
not such much experience with the issue of tax because most of them are
graduated by different professions. However the organizations give training to
them to improve or to aware them with the concept of tax and related issues.
Regarding the position of the workers 66.67% of the employees are working in
finance department, 16.67% are Human resource management and 16.67% are
operating worker.

Table 4.2. Do you think that, VAT is a better tax system than former sales tax.

S.No Item Respondents Frequency Percentage

1 Yes 4 66.67%
2 No 2 33.33%
3 Total 6 100%
Source: Survey Result, 2012

As shown in the above table 4.2., 66.67% of the employees response that VAT
is a better tax system than sales tax and 33.33% of respondent are responded
that VAT is not a better tax system than former sales tax. This tables informed
that the respondents who says VAT is not a better tax system than former sales
tax cited the following factors: hindering competition between merchants, The
fraud of invoice when collected and Low acceptance from tax payers.

S.No Item Respondents Frequency Percentage

1 Yes 0 0%
2 No 6 100%
3 Total 6 100%
Table 4.3. Are all expected VAT eligible companies registered.
Source: Survey Result 2012

As shown in above table 4.3, none of the employees responded that all expected
VAT eligible companies are registered and 100% employees responded all
expected VAT eligible companies are not registered. The manager of the
Revenue Agency is also confirmed that all of the expected VAT eligible
companies are not registered they mentioned those factors; lack of awareness
about VAT, Absence of Administration control and fear of competition in the
market.

Table 4.4, Do you think that all the registered organization pay tax one

S.No Item Respondents Frequency Percentage

1 Yes 0 0%
2 No 6 100%
3 Total 6 100%
Source: Survey Result, 2012

As the above table 4.4, none of the employee responded that the VAT payers
have willingness to pay VAT on time and 100% of the employees responded
that the VAT payers have no willingness to pay VAT on time, As we observe
from the above survey all of the employees said no by expressing the following
reason, they expect refund from government when they face Loss, lack of
awareness and absence of Administration control.
Chart 4.1. Do you think that the societies know why they pay VAT

16.67% Key

No

Yes
83.33%

Source: Survey result, 2012

As above chart 4.1, 16.67% of the employee responded that the society knows
why they pay VAT and 83.33% of the employees responded the societies doesn’t
know why they pay VAT, From these we conclude that most of employees
respond that the society doesn’t know why they pay VAT by expressing the
following reason, lack of information about VAT, Administration problem (no
training about VAT) and weak relationship between Administration and VAT
payers.
Table 4.5. Does the VAT system applied in accordance with VAT proclamation
No 285/2002 and VAT Regulation 79/2002

S.No Item Respondents Frequency Percentage (%)

1 Yes 0 0%
2 No 6 100%
3 Total 6 100%
Source: survey Result, 2012

Based on the above table 4.5, none of the employees responded that VAT
system is applied in accordance with rule and regulation of VAT. While 100% of
the employees agree on that VAT system is not applied in accordance with rule
and regulation of VAT. According to the respondents those said no they
mentioned this factors:- Implementation problem of rule and regulation,
difficulty in application of VAT collection procedures, double selling of Sales
invoice and lack of awareness from tax payers on VAT.

Table 4.6. Personal Information of Tax payers

S.No Item Respondent Percentage %

frequency
1 Sex
Male 12 63.18%
Female 7 36.82%
Total 19 100%
2 Age
20-25 years 3 15.79%
26-30 years 6 31.58%
31-35 years 3 15.79%
36-40 years 3 15.79%
Above 41years 4 21.05%
Total 19 100%
3 Type of Business
Manufacturing 0 0%
Trade 6 31.58%
Service 13 68.42%
Total 19 100%
4 Experience on their business
0-5 years 0 0%
6-10 years 8 41.1%
11-15 years 3 15.79%
16-20 years 8 42.1%
Above 21 years 0 0%
Total 19 100%
Source: Survey Result, 2012

As shown of the above table, 4.6, 36.82% of the tax payer are female and the
remaining 63.18% of the tax payers are male, with regard to age 15.79% of the
tax payers are between 20-25 years, 31.58% of them between 26-30 years,
15.79% of them are between 31-35 years and also 15.79% are between 36-40
and 21.05% of the tax payers are above 41 years. Concerning with the types of
business they involved 31.58% of tax payers are participated on trade activities
and 68.42% of them are in the service center. There is no respondent
participate in manufacturing business types. When we see experience they
have on their business 42.1% of tax payers have experience of 6-10 years and
also 42.1% of tax payers have experience of 16-20 years and 15.79% of the
respondents have experience of 11-16 years there is no respondent which have
experience of below 5 years and above 21 years from the sample I take. So we
examine that most of the tax payers have more than 10 years experience.

Chart 4.2., Do you think registration for VAT is beneficiary?

 Key

No
52.63% 47.37%
Yes

Source: Survey Result, 2012

Based on the above chart 4.2, 52.63% of the taxpayers are response that
registration for VAT is beneficiary and 47.37% of the taxpayer’s response that
registration for VAT is not beneficiary. As we have seen from the above survey,
almost some of them replied that the VAT has positive effect on their business
and those said VAT is not beneficiary expressing those reason. High tax rate,
disagreement between their income and tax obligation, fear of decreasing of
their customer and expectation of reduction of their income.

Chart 4.3. Does the administration provide supports of VAT related activities is
enough.
 42.1%
Key
57.9% Yes

No

Source: survey Result, 2012

According to the above Chart 4.3, 42.1% of tax payers response that
administration provide supports on VAT related activities is enough while the
remaining 57.9% of the tax payers said the Administration give provide on VAT
related activity is not enough, The tax payers who said Administration supports
on VAT related activities is not enough express some reason. In sufficient
employees on VAT department, unskilled manpower and administration
internal problem. The manager of the revenue Agency also confirmed the above
problem and they said before a year we have not any plan to give any supports
because we have no budget and professional skills human power, which have
experience on the above problem but know they try to give training and give
some information to the taxpayers.

Chart 4.4 Do you think that VAT has burden on your business.
 31.58% Key
68.42%
Yes

No

Source: Survey Result, 2012

Based on the above chart 4.4, 68.42% of the taxpayers response that VAT has
burden on their business and the remaining 31.58% of the taxpayers
response that VAT has no burden on their business. From the above survey we
observe that the majority of the respondent response that VAT has burden on
their business those who believe in this express some reason:- Hinder
competition, decreasing of the customer and fear of penalties by
Administration.

Table 4.7, Does the VAT system Applied in accordance with VAT proclamation
No 285/2002 and VAT regulation 79/2002.

S.No Item Respondents Frequency Percentage (%)

1 Yes 0 0%
2 No 19 100%
3 Total 19 100%

As the above table 4.7, none of the tax payers response that VAT
administration apply in accordance with rule and regulation 100% of the tax
payers response that VAT system is not applied in accordance with the rule
and regulation of the VAT because of the following reasons:- Administration
control on collection, Rule and Regulation implementation problem by
employee of the organization.

CHAPTER FIVE

5. SUMMARY, CONCLUSION AND RECOMMENDATION

5.1. Summary and Conclusion

 Most of VAT registered respondents understand the benefit of VAT to be

competent in the market and to the prosperity of their business.
 As per the opinion of VAT registered bushiness VAT is advantageous than
the sales tax to them to government and the society.
 Assela Town Revenue Agency does not collect the VAT as per procedures
set by the tax authority.
 The VAT payers and potential business do not get sufficient and timely
trainings related to the VAT: such as its benefit, their duty & responsibility,
etc.
 With regard to registration of potential VAT payers all the eligible
companies were not registered because of lack of awareness about VAT and
absence of administration control.

5.2. Recommendation

Based on the research findings and conclusions drawn, the following

recommendations are forwarded to the concerned bodies:-

1. VAT administration should take major activity to improve the effectiveness

of VAT through training, publication of magazines and newspaper to
improve the collection procedure.
2. The Revenue office have to motivate the tax payer that have not willingness
to pay VAT on time, by giving some priorities such as giving reward and
supporting activities.
3. The revenue office should also create awareness the tax payer about rule
and regulation, when they pay, for whom to pay and benefit they get from
paying VAT.
4. The concerned body should control and monitor the registered person and
potential VAT payers to achieve its organizational goals (objectives).

REFERENCES

Encyclopedia American, 2006, volume 26, International ed, USA, Scholastic

library publishing, inc.

Encyclopedia Britannica, Jacob E. Safra, 2007, volume 28, 15 th ed, USA.

Newyork, Britannica, inc.

H.L Bhatia, 1976, public finance, 19 th ed, New Delhi. India. Vicas
publishing, inc.

Misrak Tesfaye, 2011, Public finance and Taxation, Theory and practice
2nded. Addis Ababa, Ethiopia.
 Parameswaran ,2005, public finance and taxation, 1 st edition, AAU, Ethiopia
VAT proclamation No 285/2002, Article 16th and 17th.

APPENDIX
JIMMA UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS COLLEGE

DEPARTMENT OF ACCOUNTING

Dear respondents

This questionnaire is designed to collect data on Administration problem of

value added tax. In Assela Town Revenue Agency the outcome of the study will
help to understand Administration problem in the area. Any information you
provide is helpful to the researcher. Therefore, please fill questionnaire
carefully marks “” a boxes and write on blank space when needed. .
For employee

1. Sex, Male  Female 

2. Age, 20-25 years  26-30 years  36-40 years  above 
3. Education status
10 completed  Degree 
12 completed-certificates Master Degree 
Diploma  Others __________________________
4. Position in the organization
Supervisor
Human resource management
Operating worker
Finance department
Others specify ________________________________________________________
5. Do you think VAT is a better tax system than former sales tax?
Yes No
If No, for what reason:-
Recording problem
Difficulty of collection 
Hinder competition 
High tax rate 
Others specify ___________________________________________________
6. Are all the expected VAT eligible companies registered?
Yes  No 
If No, what are the major reasons:-
High threshold
Absence of administration control 
Lack of awareness 
Fear of loss 
Others, specify______________________________________________________
7. Do you think all the registered organization pay on time?
Yes  No
 If No, what is a reason?

Less operating income 

Lack of awareness 

Expectation of refund from government when they face loss 

Absence of Administration control 

Other specify _____________________________________________________

8. Do you think that, the societies know why they pay VAT?
Yes No 

If No, why:-

Lack of information about VAT

Absence of training related to VAT

Absence of Administration control 

Others specify _______________________________________________________

9. Does the VAT system applied in accordance with VAT proclamation No

285/2002 and VAT regulation 79/2002?
Yes  No 

If No, what is a reason:-

Lack of awareness

Absence of administration control 

Implementation problem 

Other specify _______________________________________________________

For Tax Payer

1. Sex, Male  Female 

2. Age, 20-25years  26-30 years  31-35years 
36-40years  above 40 years 
3. Type of Business
 Manufacturing 
Service 

Trade

Others, specify_______________________________________

4. For how long-do you stay in this business?

0-5 years  16-20 years 
6-10 years  above 21 years 
11-15 years
5. Do you think registration for VAT is beneficiary?
Yes  No 
If No, what is a problem:-
High tax rate
High threshold 
Disagreement between income and business 
Expectation of reduction income 
Others specify ________________________________________________________
6. Does the administration provide supports of VAT related activity is enough?
Yes  No 
If No, what are major reasons:-
Unskilled manpower 
Absence of Administration control 
In sufficient employee in VAT department
Others, specify_______________________________________________________
7. Do you think that VAT has burden on your business?
Yes  No 
If yes, what burden-
Low demand 
Hinder completion 
Low income 
Others, specify ______________________________________________
8. Does the VAT system applied in accordance with VAT proclamation No
285/2002 and VAT regulation 79/2002?
Yes  No 

If what is a reason 

Insufficient employee

Implementation problem 

Absence of administration control

Others, specify_______________________________________________________

Thank you!

Interview Questionnaire

1. What procedures are undertaking in your organization concerning to

collection problem, legal tax collection such as the date of tax due and
payable follow up delinquent tax?
2. How the above procedure are implementing in your organization?
3. What are the challenges the organization is facing in collection and
administration of VAT?
4. What looks like the overall tax administration system related to skilled
man power, sufficient number of employees in VAT department and
material facility such as computers and others?
Thank you!