WOLAITA SODO UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACOUNTING AND FINANCE

VAT ASSESSMENT AND COLLECTION PROBLEM (A CASE STUDY IN KAMBATA

ZONE REVENUE AUTHORITY

A RESEARCH PROPOSAL SUBMITTED TO THE DEPARTMENT OF ACCOUNTING

AND FINANACE IN PARTIAL REQUIREMENT FULFILLMENT OF BACHELOR OF
ARTS DEGREE IN ACCOUNTING AND FINANACE.

BY

NAME; ISRAEL GIYA

ID; - ACC/WE/186/12

ADVISOR; - BISRAT T.

APRIL, 2024

WOLAITA SODO, ETHIOPIA

 ABSTRACT
Even though value added tax is a recent phenomena in our country which was introduced on the
beginning of January 2003 E.C., it has the collection problems in case of Ethiopian revenue and
customs north Branch in Addis Ababa.
The aim of the study is to give summarized back information about the newly introduced tax
(VAT) and to screen out the collection problems in Ethiopian revenue and customs authority
north branch in Addis Ababa.
The researcher use primary and secondary data collection technique in order to reach the aim of
the study and finally, to reach on some conclusion and recommendation by haring the result.

Keywords;- VAT collection problem , revenue authority Kambata zone .

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Table of Contents Page
ABSTRACT.................................................................................................................................................i

CHAPTER ONE..............................................................................................................................................1

1. INTRODUCTION.......................................................................................................................................1

1.1 Back ground of the study...................................................................................................................1

1.2 Problem of the study.........................................................................................................................2

1.3 Objectives of the study......................................................................................................................2

1.3.1 General objective........................................................................................................................2

1.3.2 Specific objectives.......................................................................................................................2

1.4 Hypothesis of the study.....................................................................................................................2

1.5 Significance of the study....................................................................................................................3

1.6 Scope of the study.............................................................................................................................3

1.7 Limitation Of the study......................................................................................................................3

CHAPTER TWO.............................................................................................................................................4

2. REVIEW OF LITERATURE..........................................................................................................................4

2.1. Value added tax (VAT)......................................................................................................................4

2.2 Computation of vat............................................................................................................................4

2.3 VAT Administration in Ethiopia.........................................................................................................5

2.4 VAT Refund........................................................................................................................................6

2.5 Registration.......................................................................................................................................6

2.5.1 A Obligatory registration............................................................................................................6

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 2.5.2 B Voluntary Registration.............................................................................................................7

2.6 Benefits of voluntary registered........................................................................................................7

2.7 Registration procedure......................................................................................................................8

2.8 Time of application............................................................................................................................8

2.9.Time of registration...........................................................................................................................9

2.10 Cancellation of registration.............................................................................................................9

2.11. Advantage and Disadvantage of VAT............................................................................................10

2.11.2 Disadvantage of VAT...............................................................................................................11

CHAPTER – THREE......................................................................................................................................13

3. RESEARCH METHODOLOGY...................................................................................................................13

3.1.Description of study area.................................................................................................................13

3.2. Research design..............................................................................................................................13

3.3. Sample size and sampling techniques.............................................................................................13

3.4. Method of data collection..............................................................................................................14

3.5. Method of data analysis.................................................................................................................14

REFERENCE................................................................................................................................................15

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 CHAPTER ONE

1. INTRODUCTION

1.1 Back ground of the study

One of the mechanism in which countries raise revenues to finance government spending on the
good and services that most of us demand is taxation.
As compared to the developing countries, the developed countries have been able to generate
substantial revenue through imposing of taxes one of reasons for this has been the efficient tax
system operating in the developing economies which are characterized by weak monetary and
low development of the formal sectors.
Value added tax (VAT) is a new system introduced in Ethiopia. This tax system is not new to
other countries.
Beginning with the adoption of tax sur, lavaliere adopted by France in 1954, it was gradually
been adoption by other countries (purhot, 2000). The development this tax system is so fast it has
now bee employed by a large number of Latin American, Asian, African and pacific countries
value Added tax (VAT) has become a major tax instrument worldwide. The global trend to
introduced VAT in more countries is continuing (Goode, 1993). Ethiopians tax reform program
has introduced VAT since January 2003.
The Ethiopian government has introduce, VAT as part of the overall tax reform program. The tax
reform program is preceded by establishment of a new ministry of revenue as a first step to
improve tax collections and to combat fiscal fraud.
The need for value Added tax (VAT) emanates from the very weakness of the sales tax that it is
intended to replace (purhot, 2000).
VAT is an indirect tax that is changed whenever at a taxable person make a taxable supply of
goods and services in the course of his business although it is finaly borne by consumer
(Hancock, 1998).
Service while other submit their VAT their VAT returns without payments. There is also
deliberate submission of nil returns non-issuance of VAT invoice and entertainment provides and
loaf operators refuse to use the VAT coupons.

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1.2 Problem of the study
It is known that most of the nations in the world have applied value added tax so as to develop
their economy. Even if VAT is being observed since it is a newly introduced type of tax, official
and tax experts, VAT collectors and VAT payers gave their own suggestions related to the
implementation problems of VAT. Therefore this study tries to answer the following principal
questions.
1. What are the possible reasons that may encourage business enter prize and individual
business persons to evading VAT?
2. Is there any measures taken by Ethiopian revenue and customs authority to control VAT
evasion or avoidance?
3. What are the major problems of Vat collection?

1.3 Objectives of the study

1.3.1 General objective

The general objective of the study is to identify the major problems of VAT collection faced by
Ethiopian revenue and customer authority (KRCA).

1.3.2 Specific objectives

The specific objective of this study are:-
1. Identify the factors affecting collection of VAT.
2. Identify measure taken by KRCA to control VAT evasion or avoidance.
3. Assess whether the collection of VAT has met is objective in generating the expected level of
government revenue and
1.4 Hypothesis of the study
Ho: There is possible reason that may encourage business enterprise and
individual to par VAT.
Ha: There is no possible reason that may encourage business enterprise and
individual to pay VAT.
Ho: There are problems in VAT collection.
Ha: there are no problems faced in VAT collection.

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Ho: There are measures taken by government for VAT evasion or avoidance.
Ha: There are no measures taken by government for VAT evasion or avoidance.

1.5 Significance of the study

Government organizations like Ethiopian revenue and customer authority (KRCA) business enter
price, school and some VAT registered enterprises are expected to be beneficiary from this
study. Accordingly the research has the following benefits.
1. The recommendations to be provided maybe useful in directing decisions to ward controlling
the problem of Ethiopian revenue and customs authority.
2. The issues discussed contribute to filling the literature gap on VAT.
3. It adds to poll of data available on VAT thus serves as a secondary source document.
4. It might initiate further studies to grate with and depth.
5. It will help to create responsible citizen.
6. It helps merchants and other parties to have abutter knowledge about VAT.

1.6 Scope of the study

This study will be focused on VAT collection problem of Kambata revenue and customer
authority. In the investigating the VAT system of KRCA (Kambata revenue and customer
authority) the study will compromise along with book, magazine, proclamation news paper, are
the basic points or source.

1.7 Limitation Of the study

In conducting this study the researcher will be faced several problems which have negative
impact on this study. One of the problems that hinder the researcher objective will be UN
availability of compiled documents in the office.
 Lock of sufficient time to collect data.
 Absence materials equipment and supplies that have to be provided by the universities.
 Lack of sufficient data in the office.

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 CHAPTER TWO

2. REVIEW OF LITERATURE

2.1. Value added tax (VAT)

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

Unlike the turn over tax which is applied to the full value of a product every time the item
changes hands in the process of production and distribution the VAT is assessed at each stage on
only the increment in value acquired by the product since the last taxable transaction. At the end
of the chain the total amount of tax paid on a given commodity is determined only by the tax rate
and the final price of the commodity, required less of the number of stages through which is has
passed what has been collected in fractional payments is equivalent to a single stage tax on the
value of the final product. The theory is that the end consumer carves the burden of VAT not the
business, which is merely collecting the VAT on behalf of tax all Hority. But the reality is not
quite so simple (Gebrie, 2008).
For fully taxable businesses VAT is not a cast but is merely an accounting headache whatever
you collect in output tax must be handed over to tax authority whatever you collect in output tax
must be handed over to tax authority whatever you pay in put tax can be recovered from tax
authority (apart from the input VAT on personal passenger vehicle and entertainment but on has
taken care full on purchase and sales of taxable supplies otherwise VAT will affect his/her cash
flow (Gebrie, 2008).

2.2 Computation of vat

In modern taxation there are four types of value added taxation system there are:
a. Gross product value added tax.
b. Income type value added tax.

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 c. Capital exemption type value added tax.
d. Consumption type value added tax. (Gebrie, 2008).

2.3 VAT Administration in Ethiopia

The VAT replaced the current sales tax on manufactured and imported good and service on
January 1, 2003. The responsibility for the correct calculation and timely payment of VAT rests
on the tax payer himself. The VAT is a broad based tax on the consumption of goods and
services it is collected at all stage in the production and distribution process beginning with the
importers and producers of raw materials and ending with the retailers cascading of the tax (i.e
tax on tax) is avoided by providing for a credit for the tax paid only to raw materials used
directly in the production of good under a VAT. Relief is a granted for goods are not subject to
the VAT. Removing that tax content (on in puts) from exported goods makes the goods more
competitive in international markets.
VAT is at ax consumer expenditure it is collected on business transaction and important most
business transactions involve supplies of good or services and VAT is payable if they are:
 Supplies made in Ethiopa
 Made by a taxable person
 Made in the course of furtherance of a business
 Are not specifically exempted or zero-rated-
Supplies are outside the scope of the tax if they are
 Made by someone who is not a taxable person or
 Not made in the course or furtherance of business
Curse or furtherance the way a taxable person has to carry out its activity to develop advance and
progress the taxable activity it refers to the normal and expected events or processes to develop
the taxable activity. Anything done in connection with the commencement or termination of a
taxable activity is treated as carried out in the course or furtherance of that taxable activity
(Gebrie, 2008).

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2.4 VAT Refund
VAT registered person shall got refund
If at least 25% of the value of a registered persons taxable transactions for the accounting period
other registered person in a single transaction of substantially all of the asset of a taxable activity
provide a notice in writing singnet by the transferred is finished with 21 days arter the supply
taken place is taxed at a zero rate the authority shall refund the amount of VAT applied as a
credit in excess of the amount of VAT charged for the accounting period with in a period of two
months after the registered person files an application for refund accompanied by documentary
proof of payment of the excess amounts.
In the case of other registered persons the amount of VAT charged for the accounting period is to
be carried for word the next five accounting period is to be carried for word to the next five
accounting periods and credited against payment for these period and any unused excess
remaining after the end of this five month period shall be refunded by the authority with a period
of two month after the registered person files an application for refund accompanied by
documentary proof of payment of the excess amounts. Where the tax authority satisfied for
refund application in over paid tax the tax authority shall.
 First apply the amount of the excess in reduction of any tax levy interest of penalty
payable by the person under the customs proclamation the income tell proclamation and
excise tax proclamation.
 The repay any amount remaining to the person if the amount to be refunded is move than
50 by.
When registered person is entitled to refund and the tax authority is satisfied but does not pay the
refund with in specified date the authority shall pay the person the refund plus interest set at 25%
over and above the highest cam mercies lending interest rate that prevailed during the preceding
quarter (Gebrie, 2008).

2.5 Registration
In Ethiopia, registration for VAT is categorized in two

2.5.1 A Obligatory registration

Any person conducting a commercial enterprise or intending to conduct a commercial enterprise
may apply to be registered for VAT.
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However if the taxable turnover of the enterprise which is gross income for 12 calendar months
exceeds or is likely to exceed birr 500.000 the person conducting the enterprise must register for
VAT with FIRA. Turn registration is compulsory (Gebrie, 2008).
The term any person for proposes of VAT registration includes
 Sole profiteer
 Company
 Partner ship
 Exmate of the decease
 Trust
 Incorporated body or unincorporated body
 Club or association
A commercial enterprise refers to any business of whatever nature and include
 Ordinary business e.g shop contractors manufacture whole salers etc.
 Trades and professions e.g Builders, Engineers, Accouters laurersete
 Activities of non-profit moving bodies e.g societies, Associations, sporting club, etc.
The turn is calculated on an ongoing basis two periods need to be considered the past 12 calendar
months and the next 12 calendar mother-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 months where the total exceeds birr 500.000 the then there is the real
utrement to register for VAT.

2.5.2 B Voluntary Registration

A person, who carried on taxable activity and is not required to be registered for VAT max
voluntarily apply to the authority for such registration if he/ she regularly is supplying or
rendering least 75% of his goods and services to registered persons.

2.6 Benefits of voluntary registered

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

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

 The full name and other relevant details of the registered person.
 The date of issuance of the certificate.
 The data from which the registration takes effect and
 The registered person’s tax payer identification number.
If registration is disallowed FTRA will have to notify the applicator and the reasons for the
refusal. The tax authority many deny the application for voluntary registration if the person.

 Has no fixed place of residence or business

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

2.8 Time of application

A person who carries on taxable activity and is not registered is required to file an application for
VAT registration it shall fill an application for registration on later than the last day of the month
after the end of the period if.
1. At the end of any period of 12 calendar month the person made during that period, taxable
transactions with a total value exceeding 500.000 birr or the last day of the month of the
period if
2. At the beginning of any period of 12 calendar moths when there is reasonable around to
expect that the total value of taxable transactions to be made by the person during that period
will exceed 500.000 birr (Gebrie, 2008).

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2.9.Time of registration
Registration takes place on one of the following dates depending on which date comes first.
 In case of obligatory registration on the first day of the accounting period following the
month in which the obligation to apply for registration arose.
 In the case of voluntary registration on the first day of the accounting period following the
month in which the person applied for registration or.
 On the date selected by the registered person on his application for a registration person
who conducts taxable activity in a branch or division shall be registered only in the name of
the registered person to register one or more of its branches or divisions as separate
registered person. The tax authority allow when its satisfied on such case that divisions or
branches maintains and independent accounting system and can be identified by the nature
of its activities or location (Gebria, 2008).

2.10 Cancellation of registration

VAT registered person can apply for cancelation of registration
 If tax payer ceased to make taxable transactions.
 At any time after a period of 3 years of the date of his most recent registration for VAT
if the registration persons total taxable transactions in the period of 12 months then
beginning reasonable are expected to be not more than 500.000 birr.
The cancellation of VAT registration takes effect
 At the time the registration person ceased to male taxable translation for example, if one
close down or sell his business. How over if one has more than one business and is not
closing down or selling them all he max not be able to cancel it will depend on the level
of taxable turn of remaining businesses.
 If the registered person has not ceased to do so at the end of the accounting period during
which the person applies to the authority for cancellation of VAT registration.
When registered for VAT is canceled the authority is required to remove the person’s name and
all other details from the VAT register and the person is required to return back the issued
certificate of registration. VAT registered person con not charge VAT or issue tax invoices for
any supplies made and cannot claim are fund of VAT incurred on any goods or services
purchased from the date of the registration is canceled (Gebrie, 2008).

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2.11. Advantage and Disadvantage of VAT

2.11.1 Advantage of VAT

The following are some of the main Advantage of VAT.
A. It Avoids cascading effect of tax (tax on tax)
VAT works on the principle of that when raw material passes through various manufacturing
stages and manufactured products passes through various distribution stage, tax should be levied
on the incremental value at each stage and not on the gross sale price. This insures that some
commodity does not get taxed again and again and this, there is no cascading effect. Putting the
concept in simple terms, in vat system, each input is taxed only once.
B. It is major comprehensive and equitable tax system.
Even though the ultimate burden of VAT full on the final customer, VAT is collected by the
government from all sectors, that is from import manufacturing, whole sale and retail sectors.
Therefore, it is a more compressive and equitable taxes system on the contrary; sales tax is
normally levied at one stage of the whole marketing (Misrak Tesfaye (msc))
C. It reduces the possibility of tax erosion
In the case of VAT. The taxes are divided in to several parts depending on the number of stage of
production and sales. In each stage every transaction is made using VAT invoice approved by tax
authority. In addition each VAT registered person (supplier) has to maintain appropriate records
on their sale and purchase transaction. Those obligations make tax evasion difficult
It has less Tax burden
Under VAT system, the tax is collected is small fragments at different stage of production and
sale. Hence, the vat payers feel the burden of the tax less (Misrak Tesfaye (2008)).
D. It us neutral
Regardless of the number of stage of production and distribution, VAT is collected in each stage,
therefore; VAT is expected to be perfectly neutral in the location of resources in the form of
production and commercialization. (misrak Tesfaye, (msc)).
E. It Improves Productivity
In VAT system, a firm has to par tax even though it van in to loss. The firm cannot claim any
exception for loss because it pats taxes on the value produced and not on profits. So, firms will

10
always try to improve their performance and reduce the cost of production. As a result, the
overall productivity of the country will be improved (Misrak Tesfaye, (2008).
F. It promotes capital investment and saving
VAT is a consumption tax since one pays VAT on its expenditure and has the option to sure so
as not to be taxed. Furthermore, relief from tax on capital goods may encourage investment.
Potential investors also consider tax legislation as one of the factors in making investment
decision (Misrak Tesfaye(msc)).
G. It enhances exports
Exports of good and services in most countries that implement VAT are liable to VAT. At zero
rates this may make exports internationally competitive and, thus encourage exports (Misrak
Tesfaye, (2008).

2.11.2 Disadvantage of VAT

The following are some of the main disadvantage of VAT.
A. It is regressive in nature
A Straight forward single rate VAT with few exemptions would tax lower income groups (the
poor) more heavily than the higher income groups (the rich). It is, thus incongruent with the
basic.
Principles of taxation which states that reason should be taxed according to his ability to par.
This makes Vat regressive tax system. In order to compensate for its regressive effect a number
of countries have expected basic goods particularly food items from VAT. (Misrak tesfaye,
(msc)).
B. It require advanced economic structure
The proper implementation of VAT system required organization and advanced financial and
economic structure as it complicated system. VAT system also requires proper record keeping of
invoice at each stage of production and sale by both the seller and buyer. Hence, it becomes,
difficult to implement the system in all types of economy (Misrak Tesfaye, (2008).
C. It put additional burden to tax authority.
In VAT system, the manufactures, whole sealers and retailers have to fulfill various legal
formalities in the form of manufactures various records, accounts, books, etc. the verification of
those formalities put additional burden to the tax enforcing authorities. (Misrak Tesfaye (msc)).
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 D. It is un economical
VAT system involves high of administration, assessment, verification collection, etc, hence, it is
highly un economical (Misrak Tesfaye (msc)).
E. It has reams loopholes for tax evasion
Although VAT system requires proper record keeping of invoices at each stage of production
and distribution by both the buyer and sealer, it has ream loopholes for tax evasion. This may
include the following.
 Tax payers could over report sales of zero rated goods
 Tax payers could use invoices they received for personal purchase to claim
tax credits.
 It enables buyers and sellers to strike secret deals with regards the
issuance of receipts .
 It could lead to the formulation of forged ponies’ receipts to claim
tax credit on input VAT, etc (Misrak Tesfaye (msc)).

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 CHAPTER – THREE

3. RESEARCH METHODOLOGY

3.1. Description of study area

The study will conduct Kembata is a zone in the Central Ethiopia Regional State of Ethiopia. It
was formerly known as Kembata, Alaba and Tembaro, until Alaba and Tembaro became
a special woreda in 2002 and 2023 respectively.[1] This zone is named after the Kambaata people
which gained zonal posture following the establishment of Central Ethiopian region in 2023.

The zone is bordered on the south by Wolayita, on the southwest by Dawro, on west by Tembaro
special woreda, on the northwest by Hadiya, on the north by Gurage, on the east by the Alaba
special woreda, and on the southeast by an exclave of the Hadiya Zone. The administrative
center is Durame; other important towns include Shinshicho. Other local landmarks include the
three mountains of Ambaricho, Kataa, and Datoo, and the hot springs at Motokoma. The longest
river in the area is the Lagabora which in Kambaata means the "river of Bora".

Kembata has 217 kilometers of all-weather roads and 140 kilometers of dry-weather roads, for
an average road density of 249 kilometers per 1000 square kilometers. The Central Statistical
Agency (CSA) reported that 8,364 tons of coffee were produced in Gurage, Hadiya and Kembata
in the year ending in 2005, based on inspection records from the Ethiopian Coffee and Tea
authority.
3.2. Research design
The research design that will be used in this study is descriptive survey. Descriptive research can
collect detail information about a given subject and uses it in order to address the research vat
assessment and collection problem (a case study in kambata zone revenue authority both
quantitative and qualitative approach can be used to address the objective of the research.

3.3. Sample size and sampling techniques

The total sample size is employees of the KRCA selected. The No of questionnaire for each
employee are depends up on engage on VAT. The judgmental, sampling method were used for
the selection of the respondent to the questionnaire b/c all employees of the KRCA employees.
Do not know above VAT and its problems. The judgmental sampling method will be used on the
nature of the KRCA.
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3.4. Method of data collection
The researcher will be used different type of data collection on the study. The data will be used
collection methods vary accordingly to the source data collection. The researcher will be used
questionnaire to collect primary data in the questionnaire method of data collection questions
were prepared and asked the respondent which take as a sample from the total employee under
the study. The question will be used has two format that were opened and close end questions,.
Both questions were carefully analyzed, discussed and achieved the conclusion. The question
was in such a way that the objectives of study will be easily accessed and investigated of in
detail. The secondary data will be conducted from certain proclamation about the VAT.

3.5. Method of data analysis

The method of data analysis that used, will percentage compellation and qualitative expressions
moreover, will be used tables.

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REFERENCE
Bahita H.L --- 1998, Public finance, Vikas publishing 19th ed, 1998.
CSA 2005 National Statistics Archived 2006-11-23 at the Wayback Machine, Table D.2
"Detailed statistics on roads" Archived 2011-07-20 at the Wayback Machine, SNNPR Bureau of
Finance and Economic Development website (accessed 3 September 2009)
Gills Malcolm et al., 1990, value added tax in developing counties, A world bank
Hancock Dore, 1998, Taxation policy and practice. Hapman and Hall, 3 rd, 1998. Misrak Tesfaye
(msc), 2008 first edition.
IMF, www. Imf . org.
Joswig, Andreas (2020). "Language Standardization Dilemmas in the Ethiopian Context". In Van
der Waal, Jenneke; Smits, Heleen; Petrollino, Sara; Nyst, Victoria; Kossmann, Maarten
(eds.). Essays on African Languages and Linguistics in Honour of Maarten Mous. Leiden:
Leiden University: African Studies Center. p. 89. ISBN 978-90-5448-186-7.
Names and codes for January 2000, Ethiopia (WHO website). The information in the WHO
spreadsheet is built on information received 18 September 2002 from the Ethiopian Ministry of
Federal Affairs.
Purhot, Mahesh 2000, value added tax: the need of the new millennium
symposium. The WORD BANK sune 1990.
Tanzi Vito and Howell zee, 200l tax policy for developing countries
Treis, Yvonne (2012). A Grammar of Kambaata, Part 1. Cologne: Rüdiger Köppe Verlag.
www.strat.com.

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