CHAPTER – ONE

1. INTRODUCTION
1.1. BACK GROUND OF THE STUDY

VAT is a general tax on consumption levies on the value added to intermediate product by
business at each stage of production. Various forms of VAT are in use in more than 50 nations of
the world including Canada, Japan, several Latin American countries and all nations of the
European in 1967. The VAT which is common form of sells tax used by nations of the European
Union is collected from sellers irrespective of the distribution of consumption (HYMAN,2005).

Taxation is a system of raising money to finance government expenditure all governments

require payment of money tax from peoples, governments use tax revenue to pay soldiers and
police to build dams and roads to operate schools and hospitals to provide food to the poor and
medical care to the elderly and for hundreds of other purposes, without tax to fund its activities a
government would lease to exist. VAT is a tax on the value asses to goods and services by
enterprise of each stage of production and distribution process. It arises when ever “a taxable
person” makes “a supply of goods and services” in the course of his business. Thus in some
countries it is called “goods and services tax” or GST. VAT was invents by a French economist
in 1954 by Maurice laurel, director of the French tax authority. VAT was invented because very
high sells tax and tariffs encourage cheating and smuggling. VAT is assessed at each stage on
only the increment in value acquires by the product since the last taxable transaction (Gebrie,
2006).

1.2. STATEMENT OF THE PROBLEM

The values added at each stage of production are the difference between the firm sales and the
purchased materials input used in production. It is a percentage tax on value added applied at
each stage of production. VAT is an alternative method for collecting retail sales tax. It is a
popular in Europe, the European experience indicates that certain administrative section have
major impact on a VAT is ultimate economic effort. The first is how purchase of investment

1
assets by firms is treated in the computation of value added; second a collection procedure must
be devised. Finally, a rate structure needs(Rosen,2005).

The VAT replaced the current sales tax on manufacturing and imported goods and services in
Ethiopia, on January 1, 2003 the responsibility for the correct calculation and timely payment of
VAT rises on the tax payer himself. The VAT is a brand based tax on the consumption of goods
and services. It is collected at all stages in the production and distribution process beginning with
the importer and producer of raw material and ending with the retailer (Gebrie, 2006).

The major motives of the study will to address the problem that face both the authority and VAT
payers based on the following research questions.

1. What are the challenges the tax authority has faced in implementing the
VAT system in Aksum city Administration?
2. What are the problems the VAT registered traders has faced during their
business transaction?
3. What are the benefits that enable the tax authority to administer the VAT
properly and increase the amount of collection?

1.3. OBJECTIVES OF THE STUDY

1.3.1. General objectives

The overall objective of this study wasto assess the challenges and benefits of VAT
implementation in Aksum city administration.

1.3.2. Specific objectives

The specific objective of this study was

1) To examine the challenges faced by the tax authority in implementing value

added tax (VAT)
2) To identify the problem faced by VAT registered traders.

2
 3) To identify the benefit that enables the tax authority to administer the VAT
properly and increase rate of collection

1.4. Significance of the study

The study was important to the tax authority to improve its tax administration by overcoming its
challenges and by exploiting its benefits to increase the rate of collection. The recommendation
of this study has a paramount significance for further research has a reference.

1.5. Scope of the study

The study was focus on value added tax administration at Aksum city administration. This study
wasrestricting to Aksum city VAT registered traders, those who have annual sales turnover of
500,000 Birr and above.The aim of the study would generally to address the major challenges
related to VAT administration and VAT registered traders in Aksum city.

1.6. Limitation of the study

The limitation that the researcher may face in the research paper includes:

 Lack of relevance material

 Limitation of time
 Lack of finance
 Lack of experience because the research was new for this
researcher.

Any way unreserved effort was made by the authors to overcome these limitations and produce
good quality research report that full fill the objective of the study.

1.7. Research methodology

1.7.1. Method of data collection

The researcher was focus on the assessment, challenge and benefit of VAT implementation in
Aksum city administration in order to achieve the objective of the study the researcher was use

3
primary source. The primary source or data was collect from VAT collector and the employees
of ERCA in Aksum branch.

1.7.2. Method of data analysis

The data is analyzed by used both qualitative and quantitative techniques, specifically statistical
tools such as ratio and qualitative expression wereimproved to present and analyze the data by
using the table.

1.7.3. Methods of sampling techniques

The data was collected from different groups such as employees and tax payers that have long
term experience in engages in tax authority of revenue in Aksum town. In order to collect the
desire data from those group the researcher used non-probability sampling techniques,
particularly judgmental sampling technique. Aksum town revenue authority offices have 43
employees. From these 43 employees 10 employees are selected from revenue authority office
and from 400 VAT payers 30 Vat payers are selected as a sample.

1.8. Organization of the paper

The senior essay consists of fourchapters. The first chapter is the introduction which includes
back ground statement of the problem, objective of the study, and significance of the study,
scope, limitation of the study and research methodology. The second chapter contains review of
literature. Chapter three contains data presentation and analysis. Finally this has chapter four
contain the summary and recommendation.

4
 CHAPTER – TWO
2. LITERATURE REVIEW
2.1 Overview of value Added tax
VAT first introduced in France in 1954 – 55 accepted by E.E.C.C countries in 1963 and
fully implemented by 1971 and now used by most over European as well as south
American countries. This is the form now most widely proposed for a federal sales tax in
the united states and incorporated in bill introduced into congress in 1979 (Due and
Friedlaender/. 2006, P – 419).
There ore, VAT invented by French economist in 1954 by Maurice landed director of the
French tax authority. The VAT is a general tax on consumption levies on the VAT
intermediate products by business at each stage of production. Various forms of the VAT
are in use in more than 50 nations of the world including Canada, Japan, Latin American
countries and all nations of the European Union (EU). The French national government
first adopted the tax in 1954, Ehen a nation is admitted to the European Union. It is
requires to introduce the VAT as a condition of member ship. In the United States a type
of VAT was used by the state of Michigan between in 1952 and 1967 was readopted in
1955 as a “single business tax”. (Hyman (2005) P – 629). However, VAT was
administered by HM customs and excise unity. The manager of the Inland Revenue and
HM customs and excise in April 2005 the tax is now administered by HM revenue and
customs (HMRC). (Melville, 2006, P – 477)

2.2 Meaning of value added tax

The value asses tax is simply a multistage sales tax that exempts the purchases of
intermediate goods and services from the tax base; value asses is the difference between
sales proceeds and purchases of intermediate goods and service over a certain period total
transaction less intermediate transaction (that is purchases made from firms by other
firms is equal to the sum of wages, interest rent and other input payment in the nation
summing up to GDP. This may be expresses as the following identify
5
 Value added = Total Transaction – Intermediate Transaction

= Final sale = GDP

= Wages + Interest + Profit + Rent + Depreciation were intermediate
transaction represent purchases by firs of goods and services to be further
proceeds in production. (Hyman, (2005) P – 632).
VAT is a tax paid by the customer who represents the increased value of a
product at each stage of its manufacture and distribution. In developing countries,
it is a tax up on a business firm’s contribution to the market value of the good or
service it produces. Since the tax only applies to value asses rather than total
receipts, the cascading effect (cumulative burden) of many forms of sales tax can
be avoids (Mukherjee, Ghose and Nag, 2008, P- 142).

2.3Evaluation of value added tax

The value added tax offer several potential advantage

1. For many countries the possibility of avoiding the adverse consequence of the turn over tax
without concentrating the impact of the tax at any one stage in production and distribution. The
value added tax produces no economic distortion or loss of efficiency if properly designed.

2. Under the other forms of sales tax, exclusion of sales for business use requires check up on
both the seller and customer, with the value added tax; all sales among the business firms are
taxable; the purchases takes credit for the tax paid on purchases. Therefore, that audit must be
made only up on the purchaser net up on the seller.

3. The cross audit check, tax reported as paid by one firm to its suppliers. For which it takes
credit against its own tax liability; should appear as tax paid to the government by the supplier.
This cross check is not automatic but is can be made by auditor or ultimately, by computer. (Due
and Friedlander, 2006, P- 420 – 421)

6
2.4Types of value added tax

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

A.GNP type: - gross national products were subject to general stages tax. The tax would be paid
by the seller when the product was sold to its last purchaser. Whether a consumer, a firm which
asses to its inventory, gross receipts minus the cost of purchasing intermediate goods from prior
producer in production line. The tax base at each stage world thus equal depreciation wage,
interest, profit, and rent. It would be the most comprehensive form of VAT and may be refereed
as VAT of the GNP type.

B.Income type: - this value assess approach as previous notes may also be used to implement a
sales tax on net product, suppose that the intent is to tax net national product equal to GNP,
minus consumption allowances or depreciation such a tax may be imposed in multiple stage form
by taxing the net value asses by each firm, with net value added defined as gross receipts minus
purchases of intermediate goods and depreciation the same result may also be accomplished by
general income tax. Since the bases of new product and an income tax are impact the same.

C.Consumption type: - the last method is referred to as the consumption type of VAT. The base
of the VAT is now defined as the firms gross receipts minus the value of at its purchase of
intermediate product (material and goods on process) as well as its capital expenditure we are
left with value of consumer goods output only. Such a tax is therefore equivalent to a general
retail sales tax consumption goods the two differing in administrating procedure only. (Musgrave
and Musgrave, 2004, P – 400 – 401).

2.5 The nature of value added tax

Value added tax is a common method of indirect taxation in the European Union and subject to
variation of treatment amongst the member states, is made obligatory by a directing of the
council of the European Union. In the UK it takes the form of a charge on the invoices value of
applicable goods and services, made by traders who are not exempted. The amount so charged to

7
customers may be set against the VAT suffered by the trader on his/her purchases; in some cases.
This calculation may be lead to a repayment of tax to the trader the tax suffered by a business on
its purchase is called ‘input tax” and that which is charges its customers is called the “output
tax”. The value added by business firm is the difference between the receipts from the sales of
the firms product and the some of the among paid by the firm for goods and services purchases
during the period from business firms it is equal to the sum of the factor payment made by firm
(including the profit of the owners) the Vat extending through the retail level is identical.
Basically, to a retail sales tax, except that the tax is collects in increments through the production
and distribution channel, instead of entirely from the retailers, with q given tax rate and
coverage, the revenue yield would be the same as that of a retail sales tax. Most of levies are
extended through the retail level, but others do not apply beyond the last whole sale transaction.
A tax using the value asses principle but on time confined to the manufacture sector is usually
refereed to us a type of manufacturer’s sales tax. (Due and Friedleander, (2006) P 419 – 420).

2.6 Principle of VAT

The basic principle of VAT is that tax should be changed at each stage of the production and
distribution process, but that the total tax due should be borne by the final customers of the
product. This is achieved as follows:

 Traders who are registered for VAT is require to charge on their sales and must account
for this output tax to revenue and custom but.
 Such traders are allowed to from revenue and customs the input tax which they pay, to
their own suppliers, so that.
 In effect register traders suffer not VAT and the total VAT is borne by the customer at
the end of the distribution chain (Melville, 2005, P 477).

2.7 VAT administration in Ethiopia

The VAT replaces the current sales tax on manufactured and imported goods and services on
January 1, 2003. The responsibility for the correct calculation and timely payment of VAT rests
on the tax payer himself;because the tax payers can easily know there sales amount based on this
sale they should calculate correctly and pay timely to the government. The VAT is a broad based
8
tax on the consumption of goods and services. It is collected at all stage in the production and
distribution process beginning with the importer and producer of raw material 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 at the preceding level unlike the sales tax system, where by relief is granted only the raw
material used directly in the production of goods, under a VAT, reelect is granted for tax paid on
capital goods, distribution and administration input sales of export goods are not subject to the
VAT. Removing the tax content (on inputs) from exported goods makes the goods more
competitive in international market VAT is a tax on consumer expenditure. It is collected on
business transaction and imports. Most business transaction involves supplies of goods or
services and VAT is payable if they are:-

 Supplies made in Ethiopia

 Made by a taxable person
 Made in the course or further once of 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

Not made in the course or further once of business (Gebrie (2006) P 174 – 175)

2.8 VAT Registration and De-registration in Ethiopia

2.8.1 VAT Registration

In Ethiopia, registration for VAT is categorized into obligatory registration and voluntary
registration/ a person is obligated by law to register if the business is likely to have taxable turn
over in twelve month exceeds 500,000Birr.

The turnover is calculated on going bases two periods need to be considered the past 12 calendar
month and the next 12 calendar month on a month – by – month basis. There is the need to
estimate at the end of each trading calendar month, the total value of taxable goods and services
supplies by all the business for the past 12 month, where the total exceeds Birr 500,000. Then
there is the requirement to register for VAT.
9
A person may voluntary apply for registration even if his turn over is below 500,000, supplies or
business activities if the person regularly render at least 75% of his goods and services to register
person (Gebrie, (2006) P 185 – 186)

2.8.2 Benefits of voluntary registration

Input VAT can be recovered if a person is registered. It willtherefore be beneficial to voluntary

register where the person makes mainly zero rated supplies. In such case, input VAT will be
recovered, a no Vat will be charged on zero – rated output (Gebrie, 2006, P.186).

2.8.3 Registration procedure

Application for compulsory as well as voluntary registration must be made on from application
could “application for Vat registration” and the authority required to register the person in the
VAT and issue certificate with in thirteen days of the registration constraining detail of:

 Full name and other relevant details of the register

 The date of issuance of the certificate
 The date from which the registration take effect
 The registered person identification number

If registration is disallowed FIRA have to notify the applicant and the reason for the refusal, the
tax authority denies the applicant for voluntary registration is a person:-

o Has no fixed place of residence of business

o Does not keep proper accounting record
o Has no bank account
o Has previously been registered for VAT purpose but failed to perform its duties
the VAT law (Gebrie, (2006) P 187).

2.8.4 De – registration of VAT

Aperson’s registration for VAT may be cancelled through application to the tax authority under
the following two conditions:-

10
 a) If a VAT registered person has ceased to make taxable transactions (goods
and services subject to VAT).
b) After three years of the date of a registered person’s most recent
registration for VAT if the registered person’s total taxable
transactions( sales revenue) in the next 12 months are reasonable expected
to be not more than Birr 500,000 (Misrak , 2008 P – 327).

2.8.5Consequences of De – registration

The following are the legal consequences of the cancellation of VAT registration:

a) From the date the registered is cancelled, the person (supplier) cannot charge (collect)
VAT and cannot issue tax invoices for any supplies made. In other word, the person
cannot make taxable transaction.
b) After the VAT registration is cancelled, the person cannot claim a retuned of VAT
paid on any goods or services purchases.
c) The VAT treatment of business stock and asset would depend on why the registration
was cancelled.
i) If the reason of cancellation by the person is to close the business, he must
account for Vat an all stock and assets and hand at the close of business on
the day his registration is cancelled.
ii) If the reason of cancellation by the person is to continue to trade below the
registration limits, the person should value goods on which tax is due at a
fair current market price in their present condition and account for the
VAT on his final return which will be issued by the Vat office. (Misrak,
2008 P – 3278 – 328).

2.9 Principal components of VAT

There are two principal components of VAT. These are:

A. Input VAT and

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 B. Output VAT

A.Input VAT: - is Vat payable by the taxable person on goods and services supplied to him and
on goods which he imports for the purpose of a business carried on by him and for which
registered for VAT. Viewing the concept form the other angle, it is the VAT payable on purchase
of taxable supply including capital goods and operating and administrative expenditures. For a
VAT registered person (taxable person) input VAT is not a component of the cost of purchase
(import rather the registered person is entitled to take input VAT reduction against the VAT
charge on sales or is recoverable from the tax authority. Hence, input VAT is a receivable for a
registered person.

B.Output VAT:- is the Vat collectible by a taxable person at the time of sales of taxable goods
and services (supply). It is the VAT chargeable on sales of goods and services whenever, a
taxable person supplies taxable goods or services to other person. Vat must be included in the
price charged for those taxable goods or services. This is the output VAT for the supplier. Output
Vat is not a component of the sales price rather it is a liability to the taxable person which is
collected on behalf of the tax authority.

If the output VAT exceeds input VAT the VAT registered person has collected more tax from its
sales, and thus, the excess Vat collected (net VAT) must be paid to the tax authority. Say FIRA,
at the end of the VAT accounting period. If the input VAT exceeds the output Vat, the difference
results in Vat refundable or VAT credit. A VAT credit may be allowed to be carried forward and
offset against periods output VAT (Misrak, (2008) P -314 – 315).

2.10 Rates of VAT

The VAT rate applicable to taxable goods and services differ from country to country. Some
countries have adopted VAT with a single rate and others with a multiple rate (more than one
rate). Some countries also use VAT inclusive price and some other countries adopt VAT
exclusive rate. In general there are two types of VAT rates to charge taxable supplies. (Misrak ,
(2008) P -315).

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 2.10.1 Standard (positive) Rate

Standard rate is a positive VAT rate (>0%) set by a country’s tax laws to charge VAT on taxable
goods and services. For instance, the standard VAT rate in Egypt is 10% in Colombia is 45%, in
cote-Devoir is 20%, in UK is 17.5%, in Algeria is 21%, in Argentina is 27%, in Kenya is 16%, in
Canada is 7% etc. Ethiopia also uses a single VAT rate of 15% (fifteen percent) (Misrak, (2008)
P 315 – 316).

2.10.2 Zero Rate

Zero ratesare a VAT rate of zero (null). This means, a taxable person charges VAT at 0% on its
sales. Hence the taxable supplier does not have a tax liability on its sales but is allowed the credit
(refund) for tax paid on its purchase to provide the supply. (Misrak, (2008) P 316).

2.11 VAT Invoice

VAT invoice is prepared by the ministry of revenue and shall contain the following information.

a) Full name of the registered person and the purchaser

b) Tax payer identification number of the registered person
c) Number and date of the VAT registration certificate
d) Name of the goods snigger or service rendered
e) Amount of the taxable transaction
f) Amount of the excise an excisable goods
g) Sum of the Vat due on the given taxable transaction
h) The issue date and serial number of VAT invoice (Gebrie, (2006) P – 190).
2.12 Taxable supplies

A taxable supply is any supply of goods or services other than a supply which is specifically
exempted from VAT. VAT is charged on a taxable supply at the standard rate unless the supply
attracts VAT at the lower rate or the zero rates. The lower (reduced) rate applies to:

13
 a. Fuel and power supplied for domestic or charity use
b. The domestic installation of certain energy saving equipment and
materials.
c. The grant – funded installation, repair or maintenance of certain
heating or security equipment in the home of qualifying pensioners or
the less well – off.
d. Women’s sanitary products
e. Children’s car seats
f. Certain urban regeneration building works and residential conversion
and grant funded maintenance to place of workshop that is listed
buildings. (Melville, 2005, P – 479).
2.13 The value of a supply

The value of a taxable supply is the amount on which the VAT charge is based and this is normal
equal to the price (before VAT) charged by the suppler. The value of a supply:

a) If a supply consists of a gift of business assets, the value of the supply is the
price (excluding VAT) which the person receives the gift would have to pay
to purchase goods identical in every respect to the goods concerned.
b) If the owner or an employee temporarily makes provide use of business assets,
the value of supply is the cost of providing the service. This cost is based on
the amount by which the assets have depreciated whilst being used for private
purpose.
c) It provide use is made of service which have been supplies to the business, the
value of the resulting supply of services is equal to an appropriate proportion
of the value of supply which was made to the business.
d) If the consideration for a supply is paid in kind, the value of supply is taken to
be the market value of the goods or services supplies. (Millville, 2005, P.
483).

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 2.14 Business splitting

“Business splitting” or “disaggregation” occurs when a business with a taxable turn over
exceeding the registration.

Threshold is divided in to two or smaller businesses, each operated by a different person and
each with a taxable turn over not exceeding the registration threshold, in the hope of avoiding
registration. If this type of man oeuvre were successful, supplies could be made to customers
without charging VAT and the administrative costs associated with avoided. The only
disadvantage would be that input tax could not be regained but in the case of a business with
mainly slight. However, if a business has been split artificially, HM revenue and customs may
direct that the persons conducting the split businesses should be treated as a single taxable person
for VAT purposes. This direction may be made even if the split businesses have never been
operated as a single mitt, so long as HMRC is satisfied that only one business really exists.
(Melville, 2005, P 487).

2.15 VAT Refund

VAT refund is the net VAT that a VAT registered persons expects from the tax authority, FIRA,
when input VAT exceed output. A VAT registered persons in Ethiopia is entitles to VAT refund
based on the following legal provision.

If at least 25% of the value of a registered person’s taxable transaction for the
VAT accounting period. Other than transfer of business from one registered
person to another registered person as a going concern, is taxed at a zero rate, the
tax authority shall refund the amount of VAT applied as a credit in excess of the
amount of VAT charges for the VAT period within two months after the
registered person tiles an application for refund, accompanied by documentary
proof of payment of the excess amount including VAT return.
In case of other registered person (other than those whose zero rater supplies are
25% or more during among), the amount of VAT credit (input VAT) in excess of
the amount of VAT charges (output VAT) for the VAT accounting period is to be
15
 carried forward to the next five accounting period and credited against payments
for these period. If there is any un used excess remaining after the end of this five
month period, the tax authority shall returned if within two months after the
registered person ties an application for refund, accompanies by documentary
proof of payment of the excess amounts, including VAT return (Misrak , 2008,
P .358 -359).
2.16 Penalties

The following penalties are imposed for violation in respect of value added tax.

 Where any person engage in taxable transaction without VAT registration where
VAT registration is required 100% of the amount of the tax payable for the entire
period of operation without VAT registration.
 Where nay person issued incorrect tax invoice resulting in a decrease in the
amount of tax or increase in credit or in the event of the failure to issue a tax
invoice 100% of the amount of tax for the invoice or in the transaction.
 Where a person who is not registered for VAT issues a tax invoice a penalty of
100% of the tax which is indicated in the tax invoice and is due for transfer to the
budget but has not been transferred and
 Where a person fails to maintain records 2000birr for each month or portion
thereof that the failure continues. (Gebrie, (2006) P- 198).

16
 CHAPTER-THREE
3. DATA PRESENTATION AND ANALYSIS

This section focuses on interpretation and analysis of data collected from primary and secondary
source. The primary data were collected through the use of questionnaires for 30 respondents
who are VAT resisters and 10 respondents who are employees of tax authority including with the
manager and also interview top level management of VAT administer.

3.1 General profile of the respondents

Table 1:- Profile of VAT registered traders

Item Demographic No of respondents Percentage

1 Sex

Male 20 66.67

Female 10 33.33

Total 30 100

2 Age

20-30 10 33.33

31-40 9 30

41-50 7 23.34

Above 50 4 13.33

Total 30 100

3 Education

Below 10th grade 0 0

10th-12th grade 8 26.67

Certificate 4 13.33

Diploma 12 40

First degree /above/ 6 20

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 Total 30 100

Source: questionnaire 2015

From the above table1, item number 1, the researcher can observe that business person who
participate in the economy are men (66.67%) a great number of respondents are male, while
10(33.33%) of the respondents are females. The researcher understood from the table the
majorities or VAT registered traders are male.

On the above table item number 2, the majority age group from the respondents are 20-30 years
old, which is 33.33%., the VAT registered traders which age ranges 31-40,41-50,and above 50
are 30%,23.34%,and 13.33% respectively .the age group which lies between 20-30 have large in
number that is33.33%.the researcher understood from the table the age group 20-30 and 31-40
are more vat registered traders.

In the above table, number 3, the majority educational group level is diploma which is 40%. The
other educational level between 10th -12th grade, certificate and first degree/above are 8(26.67%),
4(13.33%) and 6(20%) respectively and from the respondents no one in below 10 th grade group.
As the data shows large number of respondents educational level is diploma.

3.2 Analysis and discussion of VAT registered traders

Table 2, registration of VAT by traders of the study area

Question Answer No of Percentage

respondents

Did you register for VAT on the Yes 21 70%

time schedule of ERCA?
No 9 30%

Total 30 100

If your answer for the above A,I am waiting until theresponsible 5 55.56%
question is no, Why?
body will tell me

B,Because I don’t know if I have to 2 22.22%

register to VAT

C,I think the amount income tax that I 2 22.22%

will pay increase

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 D,because I don’t get receipt when I bout goods 0 0%
from whole sealers

Total 9 100%

If your answer is yes, what benefit A,the income tax will pay on the bases of 7 33.33%
do you get from ERCA at Aksum accurate information
city administration?
B, the VAT I collect from customer will be used 11 52.38%
to contract public services which also benefit
me

C, I will carry out my business with confidence 3 14.29%

D,not selected 0 0%

Total 21 100%

Source: questionnaire 2015

As indicated in the above table number 2, 21(70%) of respondents replied that they registered in
accordance with ERCA registration schedule. Only 9(30%) respondent did not register according to
ERCA schedule.

According to table 2, respondents replied N0 to the above question out of the 9 respondents who said
number 5(56.56%) of the respondents waited until the responsible body tells them, 2(22.22%) of them
have no knowledge as VAT is mandatory, 2(22.22%) of them thought the income tax would have been
increased. Therefore traders who were not register on time are less among respondents.Among
respondents who replied yes for the question in table 2, 7(33.33%) of respondents stated that we
registered on time to pay income tax on the basis of accurate information, 11(52.38%) of them understood
the role of VAT for their country`s development, 3(14.29%) of them though that VAT have kept their
business enable to continue.

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Table 3, service delivered to VAT registered by Aksum city tax administration authority.

Question Description No of respondents percentage

Did you get proper A. In terms of saving your time 7 23.33%

service from Aksum and money
city administration of B. In terms of getting sufficient 16 53.33%
tax authority when you information on how to pay
submit the collects when to pay and to whom you
amount? pay
C. In terms of having accessible 3 10%
and convenient location
offices to submit the collected
amount
D. Others specify 4 13.34%

Total 30 100%

Source: questionnaire 2015

Table 3, revealed that Aksum tax Authority gave various service to VAT registered traders
including information on how to pay, when to pay and to whom they pay. 16(53.33%), they built
accessible offices to submit collected VAT, 3(10%) and these service enable them to save their
money and time, 7(23.33%) and also others specify that the tax authority provide efficient and
flexible service.

Table 4, Habits of customers to request VAT receipt

Question Description No of respondents percentage

How do you evaluate A. Most customers usually ask 11 36.67%

your customer`s habit of VAT receipt
requesting VAT receipt? B. About half of customers ask 3 10%
VAT receipt
C. Few customers ask VAT 6 20%
receipt
D. Some customers have no habit 10 33.33%
of requesting VAT receipt
Total 30 100%

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Source: questionnaire 2015

As indicated from the above table, 11(36.67%) of them responded that most customers ask VAT
receipt. 3(10%) responded half of customers ask VAT receipt. 6(20% of them said few
customers ask VAT receipt, 10(33.33%) of the respondents have no habit of requesting VAT
receipt. It is imperative to note that large number of customers have limited habit of demanding
receipt after transaction. Thus, it is very important to improve such practice among customers.

Table 5, problems related being VAT registered teasers

Question description No of respondents Percentage

Are you encountering A. Yes 22 73.33%

problems because of being
VAT registered? B. No 8 26.67%

Total 30 100%

If your answer is yes what A,my customers are decreasing 8 36.36%

are the existing problems

B,whole sellers are not willing to 9 40.91%

give me receipt

C,because of being VAT 5 22.73%

registered that I am forced to pay

D,I faced no problem 0 0%

Total

Source; questionnaire 2015

As shown in table, 22(73.33%) of respondents have been encountering problems because of being VAT
registered. But 8(26.67%) of them are not facing problems.

VAT registered traders who replied yes to the question in table 5 were asked to state their problems.
Accordingly 8(36.36%) of respondents though that their customers number were decreasing due to price
increase 9(40.91%) could not get VAT receipt from whole sellers, 5(22.73%) of them replied that they are
being exposed far different expenses.

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Table 6, perception of VAT registered about implementation of VAT law

Question Description No of respondents Percentage

Do you think that the A. Yes 7 23.33%

VAT regulation is
properly implemented? B. No 23 76.67%

Total 30 100

Source; questionnaire 2015

Among the respondents only 7(23.33%) agreed that VAT is being implemented properly,
23(76.67%) of them replied to the contrary.

Respondents who replied NO to the question in table 6 were asked to state their reasons.
Accordingly 16(53.33%) of them said that not all traders who have annual taxable transaction
above 500,000 birr are not obliged to be VAT registered and 7(23.33%) of them claimed Aksum
city administration tax office had weak control mechanism.

Table 7, VAT withhold repayment to VAT registered traders

Question Description No of respondents percentage

If you have withhold A. Yes 10 33.33%

repayment from Aksum
tax authority are they B. No 20 66.67%
ready to pay back within
reasonable time?

Total 30 100

Source; questionnaire 2015

Table 7, discloses that 10(33.33%) of the respondent are getting their withhold VAT repayment
from the tax authority within the specified time, however 20(66.67%) of them reported that VAT
withhold repayment is not paid within the specified time.

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Table 8, Treatment of errors at the time of transaction

Question Description No of respondents percentage

If some errors are A. Yes 16 53.33%

committed on VAT
collection during the B. No 14 46.67%
transaction. Let say due
to VAT machine
damage, is the faults
corrected on time b
Aksum city tax
administration
authority?

Total 30 100

Source; questionnaire 2015

Table 8, shows that 16(53.33%) of the respondents agrees that when an unintentional error is
committed that the tax authority correct the errors, whereas 14(46.67%) of them replied that the
tax authority did not make correction of the errors occurred through transaction on time.

Table 9, VAT registered participation in training and workshop

Question Description No of respondents percentage

Did you get sufficient A. Yes 16 53.33%

and proper training on
the VAT system from B. No 14 46.67%
Aksum city
administration tax
authority?

Total 30 100

Source; questionnaire 2015

Table 9 above reveals that out of the total respondents 14(46.67%) of them participated in
training and workshop facilitated by Aksum city administration tax authority, 16(53.33%) of
them did not participate in the training and workshop.

Those VAT registered traders who participated in training and workshops facilitated by Aksum
city administration tax office were asked about the frequency of their participation (16 traders).
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Accordingly 10(33.33%) of them engaged in training two times and 3(10%) of respondents
involved four times in the training.

3.3 General profile of respondents

Table 10: Profile of employees of the authority

Item Demographic No of respondents Percentage

1 Sex

Male 5 50%

Female 5 50%

Total 10 100%

2 Age

20-30 5 50%

31-40 3 30%

41-50 1 10%

Above 50 1 10%

Total 10 100%

3 Educational level

Certificate 0 0

First degree 8 80%

College Diploma 0 0

above First degree 2 20%

Total 10 100%

4 Service year

One year 2 20%

2-5 years 4 40%

5-10 years 3 30%

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 Above 10 years 1 10%

Total 10 100%

5 Marital status

Married 6 60%

Single 4 40%

Divorced 0 0

Windowed 0 0

Total 10 100%

Source: questionnaire 2015

As observed from the above table 10 item number 1. The researcher has been taken male and
female employees which has equal proportion 5(50%) are male and 5(50%) are female. As
observed from the above table 10 item number 2 majority of respondents are under the age of 20-
30 years old. Which is about 50% employees who are 31-40 years old 30%, 41-50 age group is
10% and also age group above 50 is 10%. In the above table 10 item number 3 the researches
tried to take respondents under different educational level. The majority educational group level
is first degree, which is 80%. The number of respondents who have first degree is 20%. The
researcher understood from the table majority of employees educational level is first degree.

As observed from the above table 10 item number 4 majority of respondents has 2-5 service
year, which is about 40% employees who has 1 service year are 20%,5-10 service year are 30%
and service year above 10 years is 10%.

In the above table 10 item number 5, the researcher tried to take respondents under majority
status. The majority of respondents are married which is 60%. The number of respondents who
are single is 40%. The numbers of respondents who are divorced and windowed are 0%.

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3.4 Analysis and discussion of employees of tax authority

Table 11; complaints management in the organization

Item Demographic No of respondents No of Percentage

respondents

1 How do you manage Explain the controversial 3 30%

complaints arising from case
customer of time of
collection? Manage properly before 7 70%
case is raised

Punishing for those who 0 0%

raised a question

Other please specify 0 0%

Total 10 100%

Source; questionnaire 2015

Based on table 11 above indicates 30% of the respondents respond that if complaints is raised at
time of collection the employees discus with the customers to the controversial cause that case
inconvenience .But 70% of the respondents focus on managing properly before
cases are revised. The employees are taking care of managing case.

Table 12 Awareness rising program on the evasion and avoidance

Respondent No of respondent Percentage

Does your Yes 3 30%

organization
arrange awareness Partially 6 60%
raising program for
No 1 10%
its customer on the
subject of tax
Total 10 100%
evasion and
avoidance

Source questioners 2015

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According to table 12 above indicates 60% of total respondent respond partially
of they have awareness about raising program on tax evasion and avoidance
30% of the respondents have on awareness about raising program on tax
evasion and avoidance, where as 10% of respondents does not have any
awareness about raising program on tax evasion and avoidance. From this the
researcher understand that the organization have partially arranging
awareness raising program on tax evasion and avoidance

3.5 Analysis and discussion of interview question to

Top level management of VAT administration

According to the information obtained from Aksum city tax administration authority the
awareness of Aksum city population on the VAT system is not satisfactory .the tax authority
manager supplements that the authority have been working on the awareness creation and this
duty will continue as well.

In order to increase the number of VAT register traders the Aksum city tax administration tax
authority office made awareness creation campaign for traders’ who have above 5000,000 Birr
taxable transaction in Aksum city administration.

As mangers of tax authority expressed the office primary interest is not to enforce task rather to
create awareness for all concerned bodies including the tax authority employees themselves. In
order to develop the awareness of trader’s workshops and training sessions were carried out at
different times.

The tax authority is providing efficient and flexible services to his office clients and this enables
the authority to generate high revenue from the limited number of VAT registered traders .In
order to serve VAT registered traders adequately, the authority office has been triad to expand its
branch office in the vicinity of the trader however, the tax authority office couldn’t serve all the
clients as per the demand of its clients.

In order to increase tax collection, the tax authority is exercising different control mechanism.
Such as door to door follow up VAT machine repair and making VAT registered traders to offer
receipts to their clients for every transaction.

The manager of Aksum city administration tax authority conceived that there are some
limitations in his office to handle VAT registers changed their address to default before same
years. But know the tax office is working hard to enforce the tax low on all eligible traders.

Aksum city administration tax authority manager states that the office employee’s performance
to collect VAT is being improved new. Therefore, increasing number of

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 VAT registers traders are giving receipts for their clients .those traders who are no working to
give receipts to their clients are brought to courts.

CHAPTER FOUR

4. SUMMARY AND RECOMMENDATION

4.1 SUMMARY

In the previous chapter attempts were made to describe and evaluate the major problem and
Benefits related to the implementation of value added tax(VAT) this chapter summarized and
forward recommendation on the presented and analyzed data in the previous chapter.

Based on the objectives and research questions at this research the following major findings are
abstained.

The problem faced by VAT registers traders

Low tax performance in the study area is also associated with the problems faced by VAT
registered traders (73.33%) feel that being VAT registered itself is a problem. Some of them
scared that the number of their customer will decline due to price increase associated to VAT and
other thought that they are not getting VAT receipt from whole sellers.

The majority of the respondents reported that VAT is not properly implemented by tax authority
(76.67%) some of them stated that not all traders who have annual taxable transaction above
500.000 Birr are not obliged to be VAT registered, contrary to this VAT registration is based on
the discretion of the tax authority even though their annual taxable transaction is below the
threshold , and same claimed that the tax office had weak control mechanism .still others suspect
that VAT may increase their income tax payment to the authority .

IT is also reported that the majority of VAT registered trader (66.67%) are not getting their
withhold VAT repayment from the tax authority within the specified time.

The challenges faced by the tax authority

This study disclosed that the performance of tax collection in Aksum city is low.This is partly due
challenges faced by tax authority which includes the following.

The habit of customers to demand VAT receipts is low, At the same time in the absence of strict
follow up and control of VAT authority ,most VAT registered traders are also reluctant to after
VAT receipts to their clients.

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 It is also found that most of the respondents of VAT registered traders stated that the operation of
VAT in the tax authority is not favorable to VAT registered traders .this is partly because at
shortage of qualified and skilled manpower. Scarcity of resources such as office unstable location
of ERCA office and unfavorable attitude of same traders on VAT system.

The Benefit that enables the tax authority to administer the VAT properly

The questionnaire result reveal that the majority of the traders are made VAT registration in
accordance with the time schedule of the tax authority

Some VAT registered traders revealed that the VAT system enable them to have accurate
information about the cash how of their business income tax they will pay is based on such
accurate information and the system also increased government revenge which in turn benefits all
tax payers including the VAT registered trader himself.

4.2 RECOMMENDAION

The following suggestions are forwarded as recommendation based on the finding of the study.

The VAT registered should

 . be willing to participate in training and workshop when the authority traced such
program to raise their awareness
 Give receipt for their customer
 Not involved in the practice of VAT fraud
 Use VAT machine except during power failure or damage of the machine
 Put their VAT certificate on visible place.

The tax authority of Aksum branch should

 Improve channels of communication with business sector

 Reduce pay beak period when government offices purchased products or services,
amounting Birr 500.000 or more from VAT registered traders, so the tax authority needs to
create an efficient and flexible system.
 Strive to register traders with similar capital in other wars the registration system should be
transparent and open.

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