The Effect of Value Added Tax Administration on Revenue Performance: the Case of Gamo Gofa Zone, Southern, Ethiopia

THE EFFECT OF VALUE ADDED TAX ADMINISTRATION ON REVENUE PERFORMANCE: THE CASE OF GAMO GOFA ZONE, SOUTHERN, ETHIOPIA

ARBAMINCH UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

A THESIS SUBMITTED TO THE DEPARTMET OF ACCOUNTING AND FINANCE, SCHOOL OF POST GRADUATE STUDIES IN PARTIAL FULFILLMENT IN THE REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE IN ACCOUNTING AND FINANCE

By AMARECH BEYENE BEZABIH

ID NO RMA/003/07

PRINCIPAL ADVISOR: SHAIK ABDUL MUJEEB (PROFESSOR)

CO-ADVISOR: MR NEGALIGN MAMO (MSc)

JUNE, 2017

ARBAMINCH, ETHIOPIA

THE EFFECT OF VALUE ADDED TAX (VAT) ADMINISTRATION ON REVENUE PERFORMANCE: THE CASE OF GAMO GOFA ZONE, SOUTHERN, ETHIOIPA

AMARECH BEYENE

A THESIS SUBMITTED TO THE DEPARTMET OF ACCOUNTING AND FINANCE, SCHOOL OF POST GRADUATE STUDIES IN PARTIAL FULFILLMENT IN REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE IN ACCOUNTING AND FINANCE

DECLARATION

I hereby declare that this MSc thesis is my original work and has not been presented for a degree in any other university, and all sources of material used for this thesis have been duly acknowledged.

Amarech Beyene

Signature ------

Date------

Examiners ‘Thesis Approval sheet

School of Postgraduate Studies

Arbaminch University

We, the undersigned, member of the Board of Examiners of the final open defence by Amarech Beyene have read and evaluated her study entitled “The Effect of Value Added Tax (VAT) Administration on Revenue Performance: The Case of Gamo Gofa zone, Southern, Ethiopia” and examined the candidate’s oral presentation. This is, therefore, to certify that the study has been accepted in partial fulfilment of the requirements for the degree of Master of Accounting and Finance (MSc).

Name of Chairperson Signature Date

Mr Taye Tadese (MSc) ------

Name of External examiner Signature Date

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Name of Internal examiner Signature Date

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Shaik Abdul Mujeeb (Prof) Signature Date

(Principal Advisor) ------

Mr Negalign Mamo (MSc) Signature Date

(Co-Advisor) ------

SGS Approval Signature Date

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ACKNOWLEDGEMENTS

I would like to express all the glory and honour to the God Almighty whose grace enabled me to succeed in my study despite the challenges I was confronted with.

I also would like to extend my deepest and heartfelt gratitude to my major advisor Shaik Abdul Mujeeb (prof.) and co-advisor Negalign Mamo (MSc) for their unreserved and valuable support and guidance during my study and thesis work.

My appreciation also goes to Geze Gofa Woreda administration offices, finance and economic development office, and Trade and industry development offices for their full sponsorship of my study, moral, material and financial support for last three years.

I am glad to my husband Mr Delelegn Degela and my son Albert Delelegn & daughter Kalikidan Delelegn for their devotion to share more responsibilities that when I carried during my study.

My heartfelt thanks also goes to D/r Yechale Kebede, Mr Taye Tadesse, Mr Afework Birhanu, Dr Melekamu Mada and Dr Anto Arkato for their particular support while I was faced painful events during my study.

TABLE OF CONTENTS

DECLARATION ...... 8

ACKNOWLEDGEMENTS ...... 10

TABLE OF CONTENTS ...... 11

LISTS OF TABLE ...... 14

LIST OF FIGURES ...... 15

ACRONYM AND ABBREVIATION ...... 16

ABSTERACT ...... 17

INTRODUCTION ...... 18

1.1. BACK GROUND OF THE STUDY ...... 18 1.2. STATEMENT OF THE PROBLEM ...... 20 1.3 OBJECTIVE OF THE STUDY ...... 22 1.3.1. GENERAL OBJECTIVE OF THE STUDY ...... 22 1.3.2 SPECIFIC OBJECTIVES OF THE STUDY ...... 1.4. RESEARCH QUESTIONS ...... 23 1.5. SIGNIFICANCE OF THE STUDY ...... 23 1.6. SCOPE OF THE STUDY ...... 23 1.7. LIMITATION OF THE STUDY ...... 23 1.8. ORGANIZATION OF THE STUDY ...... 24 CHAPTER TWO: ...... 25

LITERATURE REVIEW ...... 25

2. 1 THEORETICAL EVIDENCE OF VAT ADMINISTRATION ...... 25 2.1.1 DEFINITION OF VAT...... 25 2.1.2. DEVELOPMENT OF VAT ...... 27 2.1.3 CONTRIBUTION OF VAT TO ECONOMIC DEVELOPMENT ...... 28 2.1.4 OBJECTIVES OF VAT ...... 30 2.1.4. TYPES OF VAT ...... 30

2.5, WHO HAS TO BE REGISTERED FOR VAT: ...... 32 2.5.1. OBLIGATORY REGISTRATION ...... 32

2.5.2 VOLUNTARY REGISTRATION: ...... 33

2.6 VAT IN ETHIOPIA ...... 33

2.2. EMPIRICAL EVIDENCE OF VAT ADMINISTRATION ...... 34 2.2.1. VAT ADMINISTRATION ...... 34

2.2.2 WHO ADMINISTERED VAT? ...... 35

2.2.2.1 IDENTIFICATION AND REGISTRATION OF VAT ...... 19

2.2.2.3 VAT COLLECTION PROCESS ...... 19

2.2.2.4 VAT REFUND ...... 20

2.2.5. VAT FILING AND PAYMENT ...... 22

2.2.6. CONTROL OF FILING AND PAYMENT ...... 22

2.2.7. VAT INVOICE ...... 23

2.2.9. VAT PENALTY ...... 26 2.2.10. ELECTRONICS CASH REGISTER MACHINE ...... 26

CHAPTER THREE ...... 32

3. RESEARCH METHDOROLOGY ...... 32

3.1.1. GEOGRAPHICAL LOCATION AND CLIMATE ...... 32 3.1.2Economic Features ...... 32

3.2 RESEARCH METHOD ...... 33

3.4. SAMPLING TECHNIQUE ...... 34

3.5 SAMPLE SIZE DETERMINATION...... 34

3.6 .DATA COLLECTION TECHNIQUES ...... 36

3.7. VALIDITY AND RELIABILITY TEST OF DATA ...... 36

3.8. DATA SOURCES ...... 36

3.9 QUESTIONERS ...... 37

3.10 SEMI STRUCTURED INTERVIEW ...... 37

CHAPTER FOUR ...... 39

4.1. INTRODUCTION ...... 39

4.1.1 NUMBER OF RESPONDENTS ...... 39

4.1.2. EDUCATIONAL BACK GROUND OF RESPONDENTS ...... 40

4.1.3 RESPONDENTS AGE PROFILE...... 42

4.2 DESCRIPTIVE STATISTICS/ANALYSIS ...... 42

4.2 .1 BUSINESS CATEGORY OF RESPONDENTS ...... 42

4.2.2 RESPONDENTS LEVEL OF AWARENESS ON VAT RULES AND REGULATIONS 43

4.2.3 ISSUES RELATED WITH VAT REGISTRATION ...... 44

4.2.4 TOOLS FOR COLLECTING VALUE ADDED TAX ...... 45

4.2.5 PROBLEM RELATED WITH VAT ADMINISTRATION ...... 46

4.3.1 DOCUMENT ANALYSIS ...... 49

4.3.2 VAT CONTRIBUTION ON TOTAL REVENUE ...... 50

4.3.3 TAX PAYER PROGRESS IN VAT REGISTRATION...... 50

CHAPTER FIVE ...... 53

5.1. INTRODUCTION ...... 53

5.2 CONCLUSIONS ...... 53

5.3 RECOMMENDATIONS ...... 56

REFERENCES ...... 59

1 APPENDIX: Interview question to Tax officials ...... 66

2. APPENDIX questionnaire to be answered by Tax expert/employees/ ...... 67

3. APPENDIX V ...... 72

LISTS of TABLE

CONTENTS PAGES

Table 2.1. world country with VATTable2...... 30 Table 2.2: Invoice or Credit System method of Computing VAT ...... 33 Table 3.1 Used sampling Method for respondent ...... 35 Table 4.1. Demographic profile of the Study Area ...... 39 Table 4.2. Sex of respondents ...... 40 Table 4.3. Age profile ...... 42 Table 4.4. Business Category of respondents ...... 42 Table 4.5. Level of Awareness on VAT rules and regulations ...... 43 Table4.6. Responses related with VAT registrations...... 44 Table 4.7. Settlement in Collection time ...... 45 Table 4.8. VAT Administrate problems ...... 46 Table 4.9. Respondents with Audit Value ...... 47 Table 4.10. Audit Performance from Secondary Data ...... 48 Table 4.3.1. VAT progress from 2004- 2008 budget years ...... 49 Table 4.3.2. VAT Contribution on total revenue ...... 50 Table 4.3.3. Tax payers registration progresss 2004-2008 ...... 50 Table 4.3.4. Sectors Category of tax payer targeted registers ...... 51

LIST OF FIGURES

Contents Page

Figure 3.1. Location map of study area ------45

Figure 4.2. Progress of VAT collection profermance ------47

Figure 4.3 Tax payer progress in VAT------48 Figure 4.4. Number of tax registrant pr ------51

ACRONYM AND ABBREVIATION

ETRM Electronic Tax Registration Machine

VAT Value Added Tax

EU European Union

IMF International Money Fund

EFIRA Ethiopian Federal Inland Revenue Authority

GDP Gross Domestic Product

SIGTAS Standard Integrated Government Tax Authority System

CRM Cash Register Machine

FDRE Federal Democratic Republic of Ethiopia

GTP Growth &Transformational Plan

ERCA Ethiopia Revenues & Customs Authority

ASCDM Authority System for Customs Data Management

SNNP Southern Nations Nationalities, and Peoples Region

FEDO Finance & Economic Development Office

GGZRAMBO Gamo Gofa Zone Revenue Authority Main Branch Office

ABSTERACT

The purpose of this study was to assess the effect of Value Added Tax (VAT) administration on revenue performance in Gamo Gofa Zone. The total population of the target group of the study area 686 VAT registered tax payers from sample woredas. Out of 686 to achieve this objective, the study has applied purposive sampling technique to select 253 representative respondents. Mixed research designs both quantitative and qualitative methods were adopted. The secondary data were examined from annual reports of the authority from the year 2004-008E.C.The Quantitative data were collected through questionnaire and entered into statistical package for social science (SPSS) software version 20 and analysed using tools of descriptive statistics such as: mean, frequency& percentage. The qualitative data collected informer interview through prepared checklists and semi-structured questions respectively were interpreted and analysed to triangulate the data which were collected and analysed by using quantitative method. Generally, the cumulative findings shown that lack of awareness among tax payers; limitation of payer identification & registration; lack of effective audit practices; lack of supply and usage of ETR machine are the effects for VAT administration in the study area. Established and in depth creation of awareness, institutional capacity building, strong follow- up and implication of the declared laws, rules and regulations, design to use modernized monitoring mechanism, follow networking system that, SGTA (Standard Government Tax Administration) & push tax payers to use cash registration machine are major recommendations by the researcher according to its findings.

Key words: VAT Revenue, VAT Administration, VAT Registrants

CHAPTER ONE

INTRODUCTION

1.1. BACK GROUND OF THE STUDY

VAT first introduced in 1954 by a French economist Maurice Laurie who was joint director of the French tax authority.

Emergence and rapid development of VAT is among the most important tax development of the later 20th c (Owens, A. C.2010).

VAT is an indirect tax charged on domestic consumption of goods and services as well as on imported goods. It can be considered as the most important tax innovation of the second half of the twentieth century. The system of VAT is so designed that the final levy and burden of the tax on the goods is borne by the final consumer . It is primarily collected by business firms or individuals at all stages of production and distribution beginning with importers and producers of raw materials and ending with retailers. In line with this perception, VAT is implemented in many developed as well as developing countries (Haile Mariam, 2011).

The theory is that the end consumer carries the burden of VAT, not the business, which is merely collecting the VAT on behalf of tax authority it is now a major part of the tax structure of most Western European nations as well as the rest countries of the continents throughout the world. Although the reasons for adopting the VAT differ from one country to another, the main argument is that a properly designed VAT raises more revenue with less administrative and economic costs than other broadly based taxes (Sijbern et.al, 1998).

Most country of the world wants to generate large amount of revenue to boost their level of Economic growth and national development. This is because of the fact that, both the government and revenue were hand and glove and they are the two sides of one coin as there is no government without collecting and improving collection from different sources. (Bird, . M.,2010).

The global trend to introduce VAT is more continuing EU (European Union) countries. Most of them are Germany, Denmark, Finland, Greece, Hungary, Ire land, Italy, and so on. Nowadays, 160 countries have made Value Added Tax part of their tax system, and from 53 member of countries of African union 44(83%) of them are introduced VAT,

53 EU (Europe union) 11 from South Africa union counters, 19 Caribbean, central And North America 7 from Oceania countries and 26 from Asean countries introduced VAT(IMF Report,2014). Cote d‟Iviore is the first country in Africa to introduce VAT (James ,2015)

However, weak tax administration, particularly in developing and transitional economies is the principal problem to the successful implementation of Value Added Tax (Bird,2004).

According to (Cho.S.M.W.2003), one of the focuses of the tax policy reforms is reforming indirect taxation, the reform to indirect taxation was the introduction of Value Added Tax.

The main objective of most governments in developed and developing countries are to encourage and guide their economic and social development. These governments continue to reach out for the goal of government stimulated and directed development (Wawire, 2011).

Ethiopia's tax reform program has one of the focuses of the tax policy reforms is reforming indirect taxation introduced VAT since January, 2003. As a replacement of seals tax, VAT is the principal source of revenue for the Ethiopian government. The rate of VAT is 15% of the value for every taxable transaction by a registered person, all imported goods other than an exempt import and an import of services Value Added Tax. For instance, in the 2006–07 fiscal years, Federal Value Added Tax Revenue (on domestic transactions) accounted for about 41 percent of total federal revenues from (Shimeles, A. G,2005).

According to (Bird,2003) these responsibilities include a range of related activities such as taxpayer identification and registration, invoicing, filing and payment requirements, control of filing and payments, refunds, audits and penalties. VAT administration is also concerned with issues of who should administer the tax, what organisational setup to use and what resources are available.

Improving tax administration has long been a matter of concerned with developing countries. Since all countries need revenues, all countries have revenue administrations. Money alone is not enough; but it is necessary for any state to function, and the most reliable way to get it is with an effective tax administration. In addition, however, the tax system constitutes one of the major interfaces between citizens and state in any country. So, how taxes are administered and it may affect not only the political future of the government of the day but also, more fundamentally, public trust in Government. Tax

19 administration may thus play a critical role not only in shaping economic development but in developing an effective state (Bird, 2004) Again, as Bird and Gendron (2005) stated, even if all or some of the proceeds of the tax are to be the states, either on the basis of estimated consumption or on some formula basis, a single central VAT has substantial advantages and avoids many problems.

As compared to sales tax VAT is more complex in spite of its complexities, the global trend to introduce VAT in more countries is continuing. Until recent years, VAT was collected by the Ethiopian Customs Authority and Along with its branch offices and however, very recently the administration of VAT revenue has been delegated to regional governments (Liam Ebrill, M.-P. b. 2001).

As (Yesegat. A, 2008) stated that, since September 2004, the ERCA has delegated to regional governments the administration of VAT for sole traders exist in their respective authorities clarifying the trend in decentralizing the VAT administration. Changes in tax policy and tax structure in any country usually reflect changes in administrative realities as much or more than they do change in policy objectives. Therefore, the study focused on Gamo Gofa zone purposively because of the fact that VAT administration launched in SNNPRS in general and Gamo Gofa zone in particular is not short period of time but the registrant’s number is not as such satisfactory compared with its potentiality. Hence, this study is made to examine the effect of Value Added Tax administration on revenue performance and collection activities.

1.2. STATEMENT OF THE PROBLEM

Most developing countries are currently dependent more on external financial resources to fund their development activities. Ethiopia is one of among developing counters more than half of their budget is financed from external sources, these is not satisfy social interest Therefor mobilizing internal revenue is the main opportunity rather than depending on external sources. These internal revenues are collected from tax and non-tax revenues. The tax revenue paid by citizens to the state in order to carried out the planned objectives of the government to address the public demand (Yesegat, 2004).

Therefore, " taxable income shall mean the amount of income subject to tax after deduction of all expenses and other deductible items allowed under this proclamation and regulations

20 issued there under" proclamation No 286/2002 Section one Article (11). Value added tax (VAT) is indirect tax revenue which is collected from multi stage of production, distribution, and consumption chain of goods and services from the registrants. It is the principal source of revenue for the Ethiopian government. To this end, since January 1/2003 Ethiopia has launched VAT as one of the tax component by proclamation No 285/2002 and replacing the prior sales tax due to: VAT enhance saving and investment: However, as (Yesegat, A.2004) suggested that, in revenue collection there are a gap which includes tax payers’ identification and registration, VAT filing and payment, VAT refunds, VAT audits, penalties and VAT invoicing. In addition to these, the author further discussed as lack of tax awareness among the society and strong education programs as well as lack of trust between taxpayers and administrators as major gaps to the VAT system in the country. As (Simon, Yibrach & Abiy,2013) reported in their study ‘‘problem and prospects of value added tax implementation’’ in the case of Tigrai region they suggested that on their finding ,numbers of VAT registered businesses fail to offer VAT receipts up on payment, providing used VAT receipts as a means to evade from the system.

The level of enforcing business firms to provide bill during payments is low as majority of the consumers fail to ask for receipt during payments, similarly many consumers fail to tear down the receipt as it gives the chance to use illegal businesses for tax evasion. Even though, the revenue collecting process encountered with many challenges, VAT plays an energetic role for the national development of Ethiopia and it enables to succeed the current growth and transformations plan (GTP) of the country(Jalata,2014). Therefore Ethiopian government should make a full-fledged effort to efficiently collect and effectively utilize such tax revenue through closing the door towards the issues of corruptions which can be possible through making the VAT administrations more fashionable than ever before (Dasalegn, 2014).

According to (Habtamu, et al, 2015), the ‘‘challenges in administration of Value Added Tax’ which includes Resistance against Value Added Tax registration, Low level of tax awareness, weak audit and enforcement capacity of the tax authority, sell goods and service without tax invoice by Value Added Tax collectors, Tax laws enforcement problems, are the challenges which affect collecting sufficient revenue in terms of Tax collected from VAT.

Nowadays, encouraging results are observed as far as collecting revenue is concerned. Since VAT was introduced within 13 years in G.C. showing dramatic changes in generating government revenue. Data shows that still there is gap to the effective VAT taxation and the legislation (Haile Mariam, 2011).

Therefore Gamo Gofa is one of the study areas that have been addressed mainly in terms of VAT administration on revenue performance. Since different researchers tried to identify the major challenges in the VAT administration which reduced the collection of revenue from VAT in deferent area. Moreover, as research knowledge and interface there is no studies conducted in the effect of VAT administer on revenue performance in Gamo Gofa Zone tax and revenue authority office and other studies conducted in the study area in other sides of taxation is also limited. Based on the above research gap to the knowledge of the researcher motivate to do the revenue generation in the Gamo gofa zone particularly in Arab Minch and sawula towns, and Geze gofa woreda. Due to there are challenges which hinder the VAT administration as not expected and on-going challenges are awareness, problems in terms of tax payer identification, usage of cash registration machine and auditing practice still going on in SNNPRS in general and in the study area in particular. Therefore, the researcher believes that, these the gap of administrative activity may affect the effectiveness of the collection of VAT in the Gamo Gofa Zone as well.

1.3 OBJECTIVE OF THE STUDY

1.3.1. GENERAL OBJECTIVE OF THE STUDY The main objective of this study is to investigate the effect of VAT administration on revenue performance in Gamo Gofa Zone. Based on this broad objective the researcher developed the following specific objectives:

1.3.2 SPECIFIC OBJECTIVES OF THE STUDY

 To investigate major VAT administration processes and activities are being undertaken in the study area.  To assess actual VAT administration practice comply with the existing tax laws and standards.  To investigate the contribution of VAT on Revenue Generation in study area.  To assess the major challenges of VAT administration in study area.

1.4 .RESEARCH QUESTIONS

Major questions:

What is the effect of VAT administration for Revenue Generation in Gamo Gofa Zone?

1.4.1. Specific question:

 What major VAT administration processes and Activities are being undertaken in the study area?  Does the actual VAT administration practice comply with the existing tax laws and standards?  To what extents VAT contributes to the Revenue Generation in the study area?  What are the major challenges of VAT administration in study area? 1.5. SIGNIFICANCE of the Study

 For the authority providing a deeper understanding of the critical effect of VAT administration on revenue performances.

 For the governmental and policy makers use as the source of input for policy decision making and reforms in VAT

 For another researchers and academician it use as reference material

1.6 SCOPE OF THE STUDY

The scope of the study is limited to VAT only; it did not consider other types of taxes. In addition, it is going to be conducted in ERCA Gamo Gofa Zone Main Branch Office. Hence, the Study doesn’t include the revenues collected through the other tax part of the authority. The scope of the study is also limited to only five years’ time interval from 2004- 2008E.C and doesn’t investigate the VAT administration since its establishment.

1.7. LIMITATION OF THE STUDY

Adequate and reliable information is important to undertake any kind of survey. And hence protection exists in cleared the questionnaires to avoid biases. Moreover, briefing is given about the purpose of the study, and explanation is given on some questions.

However, unwillingness and carelessness from some tax officials while giving documents is the shortcomings. The absence of enough reference materials regarding the VAT implementation and related problems in the authority. In addition to this Lack of experience of the researcher were other limitations of conducting these study

1.8. Organization of the study

The study organized in five chapters. In Chapter one presents the introduction parts. Chapter two presents literature review. Chapter three presents research design and methodology. Chapter four presents results and analysis. Finally, chapter five presents conclusions and recommendations.

CHAPTER TWO:

LITERATURE REVIEW

This chapter consists of concepts and definitions, theoretical related literature reviews, the conceptual framework and empirical aspects of the VAT administration under this study. It looks the detail challenges that hamper VAT administration process regarding: registration, collection process, transferring and refund mechanism, the service deliverable, the VAT auditing, the law enforcement process, the habit of taxpayers and ethical problems of both the taxpayer and execution bodies. These are main sub topic of this chapter.

2. 1 THEORETICAL EVIDENCE OF VAT ADMINISTRATION

2.1.1 DEFINITION OF VAT Different authors who wrote about defined VAT, which is also known as goods and services tax (GST) or consumption tax, in different ways. Value added tax or VAT is an indirect tax, which is imposed on goods and services at each stage of production, starting from raw materials to final product. VAT is levied on the value additions at different stages of production. VAT is widely applied in the European countries. However, now a number of countries across the globe have adopted this tax system (Economy Watch, 2010).

VAT is an indirect tax levied on domestic consumption of goods and services imported. It is designed to be paid on the value added which is the difference between the value of sales and value of purchase at the point of transaction throughout the production and distribution chain. Any producer owes tax only in the value added; in practice this means that the producer will have refund for VAT paid on all the purchases or inputs. Value added tax (VAT) is an indirect tax that is changed whenever a tax payable person makes taxable supply of goods and services in the course of the business and imports, although it is a tax on consumer expenditure. VAT is a tax not on the total value of goods being sold, but only on the value added to it by the last seller who is liable to pay a tax not on its gross value, but on the value that is the Gross value minus the value of inputs (Liam Ebrill, M.-P. b.2001).

The Ethiopian tax system involves different types of direct and indirect taxes, including various income taxes such as employment, profit, corporate and rental, interest income taxes and so on. Moreover, a value added tax (VAT) was introduced since 2003 instead of

25 a sales tax. Various tariffs are also levied, mainly on import items (proclamation No 285/2002).

According to this proclamation, VAT in Ethiopia, is payable if they are supplies make in Ethiopia, made by a taxable person, made in the course of furtherance of a business, are not specifically exempted or zero rated. Supplies, which are made in Ethiopian, not exempt Known as taxable supplies. Tax is a contribution from individuals out of their private property for the maintenance and defence of government, so that it may perform its functions and the ends of the state are realized. Tax is a financial charge or other levy imposed on an individual or a legal entity by government'' (Yohannes, et, al, 2009).

A direct taxis one for which the formal and economic incidence are essentially the same, i.e. the taxpayer is not able to pass the burden to someone else. Direct taxes are paid entirely by those persons on whom they are imposed’’ (Yohannes and Sisay, 2009). ''Indirect tax is the tax is not directly falling for payment on the taxpayer, but is indirectly paid as a part of the price of goods the consumers consume. It consists of value added tax, custom duties, stamp duties, excise tax and turn over taxes'' (Yohannes et, al, (2009).

VAT is one kind of indirect tax that imposed on multiply steps on consumption and production of goods and services in uniform rate and exempting some items of goods and services due to economic, social and administrative reasons which are associated with welfare benefits. As a result, VATs are considered to be very efficient devices for increasing government revenue as well as its popularity (Kloeden, 2011).

VAT is one of the most popular taxes around the world, the main reason for this popularity is that VAT provides a buoyant revenue base that usually yields significantly more revenue than other taxes on consumption and the VAT is neutral and efficient as it does not tax investment or cascade tax liabilities (Santos, 2002).

The VAT administration directly deals with businesses in order to execute the tax policy. The features of VATs are self-assessment and self-enforcement way of the tax collection methods, the registrants have an encouragement to ask their providers for accurate receipts in order to subtract input costs on their VAT bills and other features of VAT is refundable because the registrants must be collect the declared amount from the customers

26 and pay to the concerned government bodies in the meantime collect their overpayments from concerned governments bodies (Pomeranzy, 2010). Therefore, its benefit is that broaden tax base by increasing tax payers and decreasing tax load from small number of the taxpayers that maintain fair distribution of tax burden and maintain good governance and stability in the country.

Good tax administration system comprise: identification and assessment of compliance risks, providing strategies for that risks, accessible, dependable and timely information service as well as the accurate and timely treatment of requests and appeals, in addition to these, VAT administrations are identifying taxpayers, registration of identified potential tax payers, processing returns, controlling transaction flows and collections, making refunds, auditing taxpayers, assessment of VAT evaders, prosecution and proposals for legislative change (OECD, 2001 ) and (Adjei, et al).

Different types of VAT evasion observed in the world which needs many efforts in order to eradicate it from the world in general and from Ethiopia in particular. Based on this fact, the frauds which are challenge full for VAT administration are: shadow economy fraud, suppression fraud, insolvency fraud, carousel fraud, bogus traders (Cnossen, 2010).

2.1.2. DEVELOPMENT OF VAT Emergence and rapid spread of VAT is among the most important tax development of the later 20th c VAT invented in 1954 by a French economist Maurice Laurie who was joint director of the French tax authority. The theory is that the end consumer carries the burden of VAT, not the business, which is merely collecting the VAT on behalf of tax authority.

According to international monetary fund report 2014, more than 4 billion, 70% of the world population new live in countries with VAT, raise about 18 trillion in tax revenue, roughly one quarterly of all government revenue over (72%) of them have made VAT part of their tax system, and from 53 member of countries of African union 44(83%) of them are introduced VAT, 53 EU(Europe union ) 11 from south Africa union counters, 19 Caribbean, ,central And North America 26 Asean counters,7 Oceania countries and currently 160 countries introduce VAT in the world(IMF,2014). in Ethiopia January 1/2003 and in SNNPR State the same time which given in proclamation No 285/2002.

2.1.3 CONTRIBUTION OF VAT TO ECONOMIC DEVELOPMENT

Value added tax (VAT) contribution to economic development of any nation is not minimum, with this realities its contribution to GDP different from continent to continent in continent different from country to country.

According to (James, 2011) it has been introduced in more than 140 countries in world. The annual revenue increases up to US$18 trillion, and is paid by more than 4 billion people. The main reason for this recognition is that VAT provides a buoyant (positive) revenue base that usually yields significantly more revenue than other taxes on consumption. VAT revenue in Barbados and Jamaica, for example, is equivalent to 9% of their GDP (dos Santos, 2002) and in Ethiopia VAT revenue accounted 41% for 2006-2007 fiscal years (EFIRA, 2007).

In across country analysis an IMF study in 2001 noted a number of empirical regularities with respect to trade country size and government size. Countries that have implemented a VAT have relatively higher per capita GDP levels and rely less on international trade (Bird and Gendron, 2006).

However, to perform this suit product there are some challenges such as the relatively high compliance cost for small firms and the exposure of the refund system to fraud have always been inherent in the structure and operation of VAT. These problems have been exacerbated in recent years by the increased fiscal weight being placed on VAT in many countries, particularly in emerging economies seeking fiscal revenues to respond to new pressures arising from the need to reduce tariffs to accord with the requirements of the WTO and regional trade arrangements. Experience in a variety of countries suggests that several conditions are needed for success in such major tax reforms as adopting and implementing VAT.

Among the factors commonly mentioned are political commitment which was vital factors to carry out the tax tasks, thorough advance preparation, adequate investment in tax administration, an extensive public education program, consideration of local conditions, "no one size fit for all"(NOSFA) principle’ and the need for visible offsets to perceived distributional downsides, support from the business community, and by no means least, good timing. On the technical level, thorough advance preparation, adequate investment in

28 tax administration, and extensive public education have all proved critical to success in some countries for VAT administration (Bird and Gendron, 2007).

There are other factors which are distorting the VAT registrants. First, several countries override the VAT threshold for compulsory registration for certain sectors not considering of their sales turnover. Secondly, voluntary registration mandate was given for the small potential taxpayers accordingly their annual sales turnover which made them to understate their annual sales turn over as they like. For example, Kenya, Mauritius, and Uganda have high percentages of taxpayers below the registration threshold from overriding it, while Zambia on the other hand has the least voluntary registration was currently reintroduced. Ghana also has a high proportion of small VAT taxpayers given a very low threshold and compulsory registration of all retailers (Kloeden, 2011).

Ethiopia gives more attention to the domestic revenue mobilization from these tax revenue administration reforms were the basic measure had been taken. According to the pillars of gross and transformation plan (GTP), of federal democratic republic of Ethiopia ministry of finance draft explains "on the revenue side, implementation of the on-going tax reform program is going to be further enhanced through strengthening tax administration and collection'' (MoFED, 2010). During the period of GTP, efforts will be geared towards promoting compliance and equipping tax collection institutions with adequate enforcement power which will further boost revenue mobilization at federal and regional levels.

The Government will accelerate the pace of implementation of the tax reform program through further enhancing the capacity of tax collection institutions, implementation of the TIN system throughout the country, improvement of the presumptive tax system, development and implementation of an audit program to cover all taxes and expansion and improvement of the administration of the Value Added Tax (VAT)". Based on these fundamental pillars the traders whose annual sales turnover is 500,000 birr and exceeds that amount had been as a threshold set for VAT registrants on proclamation No 285/2002. Even if the threshold and the legal procedure were set, there are challenges when performing VAT revenue collection.

Those 160 countries in the world that have implement VAT Number of country based on region are as follows:-

Table 2.1. World country with VAT S.no Region No. of Country 1 Asean 26 2 Asia 19 3 Europe 53 4 Oceania 7 5 Africa 44 6 South America 11 7 Caribbean, 19 Central & North America Total 160 Source: IMF, 2014 REPORT.

2.1.4 OBJECTIVES OF VAT According to (Sijbern, Cnossen, 1998)as cited by (Haile M.M,2011) Taxes are a compulsory levy, imposed by government and those who are taxed have to pay the sums of irrespective of any corresponding return of service or good by the government.

Taxes are important sources of public revenue. The existence of collective consumption of goods and services necessitates putting some of our income into government hands. Such public goods such as roads, power, municipality services, and other infrastructures have favourable results on many families, business enterprises, industries and the general public’s. Although the specific reasons for adopting the VAT differ from one country to another, the main argument is that a properly designed VAT raises more revenue with less administrative and economic costs than other broadly based taxes.

Furthermore, a VAT does not influence the methods of doing business. The tax bill is the same for a product made in the corporate or non-corporate sector with capital-intensive or labour-intensive technology or for one made by integrated or specialized firms. The VAT also ensures neutrality in international trade by freeing exports of tax and by treating imports and domestic goods the same; this is an important attribute in an interdependent, high-tax world. As a transactions tax, which must be shown on invoices, the VAT is harder to evade than an income tax (Bird and Gendron, 2007).

2.1.4. TYPES OF VAT In the modern world there are four types of VAT namely, consumption, production and income VAT.

2.1.4.1. Consumption VAT

In this type of VAT, the firm is allowed to deduct from the gross value of its product not only the non-capital input purchased from other firms but also the capital equipment purchased. Thus, in consumption type VAT, tax base is the difference between gross value and total value of inputs purchased (capital and non-capital).

2.1.4.2. Production VAT In the production type VAT, the value of the inputs purchased by the firm from other firms is not deducted in full. Only the value of non-capital purchase is deducted. Furthermore, no Depreciation is permitted on the purchase of capital goods even in subsequent years. Thus, the tax base in production type VAT is equal to gross value less value of non-capital goods Purchased.

2.1.4.3 Income VAT According to income type VAT, the firm is allowed to deduct the depreciation on the capital goods (during the year) apart from the full value of its non-capital purchases. Here, firms cannot deduct the entire value of the capital goods purchased during the year but they can deduct the respective amount of depreciation attributable to that year country or countries in which the item is produced rather than consumed (ITD, 2005).

Tax evasion: A person, who evades the declaration or payment of tax, commits an offence and in addition to any penalty may be prosecuted and be subject to a term of imprisonment of not less than five (5) years (Main, 2005, p. 12).

Output tax:- is the VAT that a business pays over taxable supplies made and can be recovered only on so far as your business in VAT registered and make taxable output. Output VAT is the VAT collectible by a taxable person at the time of sale of taxable goods and services (supply). It is the VAT chargeable on sales of taxable 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. The logic of VAT is that during a VAT accounting period, a VAT registered person pays VAT on its purchases, which is called input VAT; and the person charges VAT on its sales, which is called output VAT. At the end of the VAT accounting period, the difference between the amount of output tax and

31 input tax represents either VAT payable to the Tax Authority or VAT Refundable from the Tax Authority. Input tax: - the VAT that a business collects over on taxable supplies (VAT paid on sales). Input VAT is the VAT payable by a taxable person on goods and services supplied to him and on goods which he imports for the purposes of a business carried on by him and for which registered for VAT. Viewing the concept from 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 deduction against the VAT charge on sales or is recoverable from the Tax Authority. Hence input VAT is a receivable for a registered person.

VAT payable: - this is the VAT to be paid to the authority /ERCA/ by the taxable person. It is computed as: VAT payable = Output tax – input tax Zero rating: - the supply is charged with VAT at 0% but credit can be taken for VAT paid on purchase used to make supplies.

2.5, WHO HAS TO BE REGISTERED FOR VAT:

In Ethiopia, registration for VAT is categorized in to three:-

1. Obligatory registration 2. Voluntary registrant 3. Based on Business type

2.5.1. OBLIGATORY REGISTRATION

Any person conducting a commercial enterprise or instancing to conduct commercial enterprises or intending to conduct a commercial enterprise may apply to be registered for VAT. However if the taxable turnover of the enterprise, which is gross income for 12 calendar monthly exceeds or is likely to exceeds birr 500,000, the person conducting the enterprise must be register for VAT with FIRA( The Federal Inland Revenue). In VAT proclamination285/2002 If the turnover is below birr 500,000 of business activity one may apply for voluntary registration

2.5.2 VOLUNTARY REGISTRATION:

A person, who carried on taxable activity and is not required to be register for VAT, may voluntarily apply to the authority for such registration. If he/she regularly is supplying or rendering at least 75% of his good and services to registered persons (Misker, 2008)

Benefit of voluntary registration: Input VAT can be recovered if a person is registered. It will therefore be beneficial to voluntarily register where the person makes mainly zero - rated supplies

2.6 VAT IN ETHIOPIA

Since the major shift in economic policy from the command economy to market oriented economic system in 1992/93, the Government of Ethiopia has taken a series of tariff and tax reform measures with the objective of doing away out dated tariff and tax laws, to strengthen customs and tax administration, to improve the balance of trade to attract domestic and foreign direct investment, to facilitate trade and liberalize trade, and to generate adequate revenue to cover current and capital expenditures hence to finance poverty reducing project send development in general.

During the period of 1993/94 to 2002/03 the federal revenue to GDP ratio has increased from 8.9% in 1993 /94 to 11.87% in 2002/03 while national tax revenue to GDP ratio has increased to 15% in 2003/04 from 10. 9% in, 1993/94 to 102. 9% in 2002 /03 As in the case internationally, the value added tax (VAT) was introduced since January 1/2003 with the objectives of reducing distortions by other indirect taxes, to compensate for import tariff revenues lost as a consequence of trade liberalization and due to governments need to increase its revenue during the fifteen months of the implementation of VAT, there is an indication that the tax will bolster revenue as the C- efficiency ratio rises. Coupled with many unregistered liable businesses, it seems that the tax base has been eroded.

Though, collection of VAT at customs entry point doesn't have any problem the taxes of the federal Inland Revenue authority in the identification. Hence, coupled by a series of reduction in the import tariff, excise tax and income tax and widening of the budgetary deficit, introducing a neutral and efficient tax, i.e. the VAT with broad tax base was considered. Value Added Tax (VAT) has become a major tax instrument worldwide. The global trend to introduce VAT in more countries is continuing. VAT has also become an indispensable component of tax reforms in developing countries.

Ethiopia's tax reform program has introduced VAT since January, 2003. VAT revenue performance and its neutrality and efficiency are also the reasons for superiority of this tax in contrast to other common tax instruments such as the turnover tax. The emerging conventional wisdom, based largely on practice and numerous country case studies, suggests that a single rate VAT (with the rate between 10 and 20%), with very few exemptions and, therefore, a broad base is superior to a VAT with multiple rates and many exemptions which reduce its base and complicate administrations. Ethiopia's standard VAT rate of 15% and 10% equalization for services and 2% for goods have to be studied in the medium term whether or not they could broaden the tax base and register high revenue performance (Munoz and Cho, 2003).

2.2. EMPIRICAL EVIDENCE OF VAT ADMINISTRATION

2.2.1. VAT ADMINISTRATION

As Bird (2004) noted that the basic tasks of tax administration consist of three distinct though connected activities, i.e. identification, assessment and collection.

Further, Bird and Grand colas (2008) noted tax administration consists of several related but separable processes registration, filing, payment, audit, and enforcement. In accordance with Tait, (1988) the introduction of VAT is usually the greatest change in tax system of a country and there is also a possibility to perform the reform of tax administration. It would be better for countries in transition to adopt simple taxes - with a broad base and low rates - to give the tax administration the chance to adjust to the new system. Although the needs of organizational and technical aid can be easily obtained from foreign experts, a successful reform of tax administration is necessary "critical mass" of domestic experts that can be better aquatinted with the domestic conditions and situation (Tanzi and Zee, 2001).

As Grand colas (2008) noted VAT performance in Africa may depend on significant variations to the conventional view of VAT practice, and that the main objective of a tax administration should be to improve voluntary compliance. The level of VAT compliance is particularly influenced by the design of the VAT and the quality of the tax administration; and discusses that the lack of skilled tax administrators poses a struggle for developing countries, including those in Africa.

Grand (2008), suggest that the overall performance of the VAT systems in Africa depends on three main factors: “The capacity of policymakers to take into consideration the structural weaknesses of the tax administration commitment to apply the designed penalty

34 system; and development of a client-oriented tax administration and an effective audit Program. In general detail strategies to modernize the tax administration, such as simplifying filing and payment processes and streamlining refund process.

According to Santos (2002) an argument often used against the introduction of VAT is the weakness of the tax administration. VAT performance would be poor under a weak administration. However, if a tax administration is weak, its strengthening is a priority regardless of what taxes the country has in place. During the process of deciding whether to introduce a VAT, the tax administration’s weakness should be a concern, but not an overriding factor. If such weaknesses are a real problem, they will have to be tackled under any scenario. In fact, some countries have used the VAT introduction to set up a new, more modern tax administration. With the correct perspective and commitment, this process can naturally lead to a strengthening of the tax administration.

The VAT is administered by the domestic tax administration in the majority of the surveyed countries (29 out of 36), reflecting the uncontroversial decision of the authorities to administer the VAT in the same domestic tax department as the previous sales or turn over taxes. In these cases, discussions focused on the respective merits of establishing separate VAT offices or administering the VAT, with the income tax, in function based offices (Ebrill, 2001:126).

2.2.2 WHO ADMINISTERED VAT?

VAT is administered by the ERCA, the Regional Government’s &Finance Bureaus. The ECA administers VAT on imports into the country. With its VAT department, large taxpayers’ office and branch administers federal and joint VAT on domestic transactions, while regional governments’ finance bureaus administer their own VAT revenues (VAT proclamation, 285/2002).

With this overview of the design and administration of VAT in Ethiopia the following sections present how the tax authorities perform their responsibilities with respect to the major VAT administration tasks, including taxpayer identification and registration, VAT filing and payment, control of VAT filing and payment, VAT invoicing, VAT auditing, penalties and VAT refunds.

2.2.2.1 IDENTIFICATION AND REGISTRATION OF VAT

Before turning to the discussion of the tax administration tasks, it is sensible to briefly review the major design features and administrative organs of VAT in Ethiopia. Items of design VAT is imposed on the supply of goods and services other than exempted supplies (such as bread and milk). VAT is based on the invoice credit method in which taxpayers are given credit for the VAT paid on inputs when it is supported by the relevant documents. The tax is also based on the destination principle in that imports are taxed but not exports. VAT is chargeable at a standard rate of 15 per cent on all taxable supplies of goods and services other than those zero rated (mainly exports). VAT registration is required by businesses that have annual turnover of Ethiopian Birr (ETB) 500,000 and more (Yesegat, 2008).

However, other fears were created in the meantime such might be evasion and biasness were exist in the process of identification and registration. In Ethiopia, where the awareness level of taxpayers, the practice of taxpaying traditions and the capacity of tax administrators appear to be more or less low, in such situation the complex fraudsters mechanism could not be managed. Moreover, it needs technological solutions in order to overcome such missing trader intra-community (MTIC) fraud is technology intensive. So it will require technological responses. (Ainsworth, 2011).

2.2.2.2 VAT COLLECTION PROCESS

The former sales tax was imposed on imports, domestically produced goods and a few specified services at a top rate of 15% whereas, many items of agricultural products, consumption goods, pharmaceutical products, printed books, financial services and work contracts were taxed at 5%, and Water, electricity, medical and educational services were completely exempt. At that time the imposition of sales tax is not on a regular basis and the base is not regularly revised due to this reason its economic contribution is low with compared to the current VAT tax imposition (Muñoz and Cho1, 2003). The VAT collection process has been carried out through both the government body, legal entities and all the VAT registered taxpayers under the provision of proclamation No 285/2002 of (Article 33). Generally consumer pays VAT, knowingly or unknowingly. According to the VAT legislation in Ethiopian as in many other countries, the responsibility of paying VAT to the government on a VAT-able/taxable transaction rests on the supplier of goods or the provider of a service. VAT registered business has to know all the details 19

associated with the collection of taxes. With that provision each and every entity should collect and transfer the collected amount to the provided account (Salehen, 2013).

2.2.2.3 VAT Assessment

After review by the Authority, it appears that a person has understood his tax obligation. The Authority issues an additional assessment within 5 years after the end of the accounting period concerned; and in the case of fraud or wilful negligence, notwithstanding any limitation in any other law, assessment make at any time. If the Authority makes an additional assessment within 30 days of the notice and demand, the person assessed does not pay the additional assessment or appeal the assessment as provided in VAT proclamation, the person is in default, (Proclamation No.285/2002, Art.29).

2.2.2.4 VAT REFUND

Grand colas (2005) and Jantscher (1990) noted that sited by (Yesegat, 2008) VAT refunds are one of the challenges of VAT administrations in developing countries. In managing refunds and combating refund frauds, different countries use schemes including denial of refund claims (except to exporters), carrying forward of refund claims, demanding a third party certification36 of the claim, demanding guarantee, requiring taxpayers to have separate VAT bank accounts, zero rating of supplies to exporters and remission of input VAT on certain goods (mainly capital goods).Some of these schemes are not only to combat refund frauds, but are also intended to reduce the strain on business Cash flows.

VAT registered person shall got refund if at least 25% of the value of a registered person in a single transaction of substantially all of the asset of a taxable activity provide a notice in writing signet by the transferred is finished with 21 days after 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 within 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 20

excess remaining after the end of this five month period shall be refunded by the authority with a period of two months 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.

According to proclamation No 285/2002 the transfer of the collected VAT input credit to the concerned tax authority on the prescribed period of time. VAT is based on the invoice credit method in which taxpayers are given credit for the VAT paid on inputs when it is supported by the relevant documents. VAT is chargeable at a standard rate of 15 % on all taxable supplies of goods and services in Ethiopia other than those zero rated (mainly exports).

1. Every registered person is required: a) To file VAT return with the Authority for each accounting period, whether or not tax is payable in respect of that period; b) To pay the tax for every accounting period by the deadline for filing the VAT return.

2. The VAT return for every accounting period shall be filed no later than the last day of the calendar month following the accounting period.

3. In case where a registration takes place with retroactive effect under (Article 18, (4) (c)), the registered person is required to pay VAT for taxable transactions taking

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 amount to be refunded is more than 50 % by registered person is entitled to refund and the tax authority is satisfied but does not pay the refund within specified date the authority shall pay the person the refund plus interest set at 25%over and above the highest commerce’s lending interest rate that prevailed during the preceding quarter (proclamation No.285/2002, Art. 27).

Like other countries in Ethiopia, as shown previously, for the purpose of refunds, the VAT legislation categorizes taxpayers into two groups: zero rated businesses (mainly exporters) and other (non-exporting) businesses (Yesegat, 2008). A successful refund management mechanism is essential to safeguard the VAT as a tax on consumption and to avoid 21

misrepresentation of the resources allocation, maintain fair competition among traders and reduce serious cash flow problems for businesses.

2.2.5. VAT FILING AND PAYMENT

All payments, including those on estimated assessments, should be accompanied by returns. VAT is a transaction-based tax, and consequently should be reported and controlled as often as possible. Many countries require monthly filing and payment. However, this could result in a large number of returns and payments, which the administration could be unable to administer. Thus, some administrations have decided in favour of monthly returns and payment for the largest taxpayers and quarterly returns and payment for other taxpayers.

Longer filing and payment periods, while reducing the number of returns and payments to process, make administration more complicated. Control of compliance with filing and payment requirements and information crosschecking are more difficult to implement where longer filing and payment periods are in place. Longer filing and payment periods also affect revenue (Santos 2002).

As Bird and Gendron,(2005) noted that Registrants are normally required to file returns on a monthly basis if their annual taxable sales exceed some specified limit, with smaller taxpayers filing bi-monthly, quarterly, or even annually. There seems to be little empirical study of the relative costs and benefits of such different filing periods, but the practice is almost universal. Returns generally have to be filed within a month (or less) of the end of the relevant taxable period. Some countries have different types of returns for different taxpayers, especially when some file on a ‘simplified’ or ‘quick’ basis and some are subject to special high-rate excise (VAT) rates.

2.2.6. CONTROL OF FILING AND PAYMENT

In administering VAT in Ethiopia tax authorities use computer programs, namely: Standard Integrated Government Tax Administration System (SIGTAS) and Automated System for Customs Data Management (ASCDM). The computer programs are used to maintain taxpayer register and process VAT returns. Detection of non-filers seems to be carried out mainly manually. As the outcomes of the in-depth interviews with tax officials showed, the tax authority tries to identify non-filers in collaboration with the Ministry of Trade and Industry. In Ethiopia every trader is required to renew business license annually with the 22

pertinent offices under the Ministry of Trade and Industry or regional governments. To renew business licenses, traders are required to produce evidence from tax authorities that all taxes have been paid. The tax authorities on their part, before providing the evidence to taxpayers, check if there are delinquent taxes (including VAT).

In addition, tax authorities end eavor to follow-up non-filers identified by the computer programs. However, because of shortage of manpower, such follow-ups are usually carried out once in a 3 to 6 month period.

The above practice affecting to controlling VAT filing and payment delay the collection of the tax and risks the governments Revenue. It is, hence, suggested that to ameliorate the potential impact of non-filers on the revenue performance of the tax, strengthening the administration capacity of the tax authorities, and effectively using the computer programs coupled with timely follow-up of non-filing taxpayers are worthwhile to consider(Yesegat,2008).

2.2.7. VAT Invoice

According to Santos (2002) invoices are a critical component of VAT. The correct use of invoices must be enforced by tax administrations. Tax practitioners often say that an invoice is like a check issued against the Treasury. So, all precautions should be taken to ensure that they are adequately used. Tax administrations have to decide on the contents of the VAT invoice.

Usually, invoice information should include: the taxpayer identification number of both the seller and the purchaser; the name and address of the seller; the name of the purchaser; the date the invoice is issued; the invoice number, a description of the goods, indicating a unit and total selling price; the amount of VAT resulting from that transaction; the total amount of the invoice, including the VAT payable, the date the invoice was printed, and the serial number of invoices printed in that batch. Special provisions should be made for taxpayers who use computer systems to print their own invoices. Decision also has to be made on whether invoices or tickets issued to final consumers will show VAT paid. Most countries prefer not to show the VAT paid by final consumers, as these invoices, as opposed to invoices between VAT payers, should not grant VAT credit.

Compliance with invoicing requirements is another important issue. Countries have to decide how to control printing, issuing and the use of invoices. False or altered invoices are 23

one of the concerns in VAT administration. Several countries have dealt with it through the introduction of strict invoicing regulations.

Many of them require the taxpayers to obtain tax administration authorization before printing invoices. Some countries have introduced systems to register the print shops that print invoices and require them to inform tax authorities the taxpayer Identification number and range of the invoice numbers printed. Some countries have available Web-based systems that allow print shops to get authorization for printing invoices and informing the range of invoice numbers printed. When the taxpayers use computerized invoicing systems and print their own invoices, they should get authorization from the tax administration before printing. The invoices Tax administrations, which have adopted these systems, have all the necessary information on valid invoice numbers available to them.

2.2.8 Auditing and Law Enforcement Process

As Bird and Gendron (2005) noted perhaps the safest statement that can be made about VAT administration in any developing and transitional economies (DTE) is that auditing procedures should be modernized and strengthened. Audit is the core of any tax system, especially of essentially self-assessed taxes like VAT. In most countries, the data exist to begin to design sound audit design policies for those already in the tax net. In principle, such audits should be done both randomly and on a more selective basis taking into account the ‘risk profile’ of different types of taxpayers. For example, since VAT is applied in effect to the difference between sales and purchases (or the ‘gross margin’ as it is often called with respect to retailers), a critical factor is the reported mark-up coefficient supplies as a ratio of inputs. When this ratio is equal to or less than 1, a taxpayer is in effect reporting that his sales are less than his purchases, thus claiming that his ‘gross profit margin’ (value- added, under another name) on such sales is negative.

As (Yesegat, 2008) the quality of auditors (VAT administrators at large) that appears to be poor coupled with their relatively small number is affecting the effectiveness of the audit program. This is, in turn, likely to impact on the revenue that could be generated through effective audit programs and on the use of effective audits as tools of deterring noncompliance. It is, thus, worthwhile for the government to consider the possibility of recruiting and retaining a sufficient number of qualified VAT administrators, auditors in particular.

As (Nethanet.B, 2014) in the title of ‘‘Assessment of tax audit practice’’ the cause of Hawassa city administration recommended that to achieve the objectives of government revenue objective a well-structured tax audit program is vital to ensure the fiscal health of the country, and sustain the health of the tax system by reducing tax gap through voluntary compliance improvement and additional tax collections. Further, it might provide valuable support in identifying areas of the tax law that require clarification or addressing deficiencies in the law, and to influence compliance across the broader taxpayer community at all levels. Generally the effective VAT audit increases the performance of revenue generation.

In order to talk the above bottlenecks the following auditing procedure are attempted to be performed based on its identified risk criteria.

 Registration checks: mainly for new businesses, particularly small and medium-size ones. These are unannounced visits to the premises of a business to ensure that it has registered with the tax administration and to confirm that: the taxpayer has a clear understanding of its obligations; appropriate records are being kept; proper invoices are being prepared and issued. This type of audit should not require more than a half day.  Desk audits: these are made annually (usually after the filing of the income tax return) and are intended to detect mathematical errors as well as other anomalies in the returns which would result in the assessment of additional tax liabilities.  VAT refund audits: a pre-refund audit should be undertaken for all first refund claims; audits of further claims should be carried out selectively (based on risk criteria). Refund audits should focus on verifying the refund for the period covered by the claim.  Single issue audits: are directed at verifying items for which errors have been detected in returns (such as an unusual credit claim). An issue-based audit should focus on no more than one or two tax returns, and should not last more than two-three days.  Comprehensive audits: all cases where serious under reporting or evasion have been detected during a registration check, desk verification, or an issue-oriented audit, should be subject to a comprehensive audit. It entails a full examination of all tax liabilities over a period of several years, up to the limit provided for in the law. It takes from 30–90 and 5– 10 days for medium and large enterprises and for small enterprises respectively.  Tax fraud investigations: these involve the most serious cases of non-compliance which may have criminal implications. Fraud investigations require searching of premises, seizure 25

of evidence, testimony from witnesses, etc. And are normally carried out by specialized investigators in accordance with criminal law. Fraud investigators may be assigned to the audit department or a separate department within the tax administration for criminal tax offences (Okello, 2008).

2.2.9. VAT PENALTY

As Bird and Gendron (2005) noted if someone is caught cheating on VAT, the tax administration must first act quickly to stop the practice, then impose civil penalties (including e.g. intercepting income flows to delinquent taxpayers, grabbing assets, and perhaps temporary business closures of the sort that have proved effective in some Latin American countries) as appropriate, and, finally, and only in especially serious cases proceed to the lengthy and difficult level of criminal prosecution. A simpler way to build credibility for a penalty system without going to the extreme of launching a criminal case may sometimes simply be to publicize the administration of penalties, including the names of the people or organizations penalized, through the media. considering that VAT is still young (introduced for the first time in the year 2003) in Ethiopia, focusing on the implementation of strict penalty provisions (like imprisonment of taxpayers) instead of taxpayers’ education may have negative impact on the attitude of taxpayers beyond its deterrence effect. Further, the lack of consistency and transparency in administratively imposing the penalty may open a room for corruption. It is, thus, advisable to try to implement what is legislated in the law regarding penalties (on the financial penalty aspect).in these regard the transparency and consistence are employed to improve the performance of revenue.

2.2.10. ELECTRONICS CASH REGISTER MACHINE It is a machine that uses a firm ware that is installed in an electronics programmable chip and only store readable memory and record the sale of gods or services instead of the regular sales receipt. The introduction of ETRM (Electronics Tax Registration Machine) has assisted in cutting costs that the business and government used to incur in processing VAT; ETRMs helped to decreases tax evasions, and lastly the introduction of ETR need to create enough awareness and strong regular audit follow up to get those fruit full benefit of ETRs. Electronic tax Registers reduce the operating cost of the government that were incurred to collect VAT and also business income. ETRs while improving the efficiency and effectiveness of government operations, provides timely and accurate tax information 26

to businesses and increases the availability of electronic tax filing. It was found that ETRs have enhanced the revenue collection resulting from sound sales and stock audits (Yalemtesfa, 2011).

In Ethiopia, ETRs machines use has become mandatory, following the reforms made on VAT administration. Use of ETRs machines among VAT registered taxpayers is correlated with high levels of tax compliance attitude in the target population (Dr Abdu. Tesafa, 2015).

2.2.11. VAT REVENUE PERFORMANCES Traditionally, the effectiveness of VAT in raising revenue is measured by the ratio of VAT revenue to GDP. Countries with similar standard of VAT rate can have significant different ratio of VAT revenue to GDP. More generally, the efficiency ratio as defined by (Ebrill and Keen, 2001) as the ratio of VAT revenues to GDP divided by the standard VAT rate. It has been mostly used as a general indicator of the performance of VAT (Ebrill and Keen, 2001).

Another method of measuring the effectiveness of VAT is C-efficiency ratio. C-efficiency ratio as defined by (Ebrill and Keen 2001) is the ratio of the share of VAT revenue in private consumption (rather than GDP) to the standard VAT rate. A uniform tax on all consumption has a C-efficiency ratio of 100 per cent. Thus, it shows that all goods and services are covered by the tax and also there is high literacy or awareness from the taxpayer side. Any deviation from a single tax rate on private consumption will be depicted by a higher or lower value of C-efficiency ratio. The C-efficiency is more informative than the efficiency ratio as it is based on private consumption.

According to Tait (1988) VAT is designed to raise large amounts of revenue (typically 5 to 10% of gross domestic product) without creating economic distortions. In practice, many countries, because of political pressures to use the tax system to correct social inequities and because of their inability to tax certain sectors use exemptions and multiple rates that erode the neutrality of the VAT. As Bird and Zolt (2003) stated tax systems exist primarily to raise revenue to fund government operations.

Lack of sufficient revenue often results in large budget deficits. Except when short-term fiscal stimulus may be considered appropriate for macroeconomic reasons, deficits generally have undesirable macroeconomic consequences such as crowding out private investment and increasing inflation. Preventing deficits requires good control over both the 27

expenditure and revenue sides of government. The legislated budget must be structured each year to operate strictly within estimates of likely revenue receipts. While this may seem obvious, even these initial conditions for good tax and budgetary policy are not satisfied in a number of countries.

Kefela, (2009) noted the average taxation ratio of developed countries as a proportion of GDP lay between 29 and 32%, whereas the corresponding range for developing countries in the medium-income category was from 17 to 22%. The average taxation ratio in the poorest countries lies between 13 and 16%. The problem is a vast gap exists between the tax payments required by law and those actually surrendered to the state. The taxation authorities – often inadequately staffed, institutionally weak and lacking in political support are not in a position to collect the amounts outstanding.

In developing and transitional economies in which revenue constraints generally bite, fulfilling this laundry list is usually too much to expect. Unsurprisingly, few countries have managed to do it all. One result is that many problems have been encountered in implementing VAT in most DTE—ranging from flaws in tax design (e.g. inappropriate thresholds) to failures in implementation (weak registration procedures, poorly functioning refund systems, insufficient audit(.Bird and Gendron , 2005).

According to Tanzi and Zee (2001) the ideal level of tax revenue; determining the optimal tax level is conceptually equivalent to determining the optimal level of government spending. Unfortunately, the vast literature on optimal tax theory provides little practical guidance on how to integrate the optimal level of tax revenue with the optimal level of government expenditure.

Nevertheless, an alternative, statistically based approach to assessing whether the overall tax level in a developing country is appropriate consists of comparing the tax level in a specific country to the average tax burden of a representative group of both developing and industrial VAT is one of the main sources of government revenue in all EU member states. Across the EU as a whole, VAT brought in €783.7 billion of revenue in 2009, 6.6% of the EUs GDP and 17.3% of all taxes raised.

In the current fiscal context, a key attraction of the VAT’ is its ability to generate significant amounts of revenue. Among non-U.S. OECD members in 2006, While the primary motivation at the moment for considering a VAT is its revenue-raising potential, in the past 28

supporters have promoted the VAT as a possible substitute for the federal income tax, either abolishing the income tax altogether and substituting a VAT, or lowering income tax rates and substituting VAT revenues in a revenue-neutral tax reform. Along these lines it is interesting to examine the effect of introducing the VAT into the EU, because most member nations said that they were going to adopt a VAT to redesign their tax structures to comply with the EU regulations, but were going to undertake their reforms in a revenue-neutral manner.

In fact, as ( Holcombe and Mills,1994) report, throughout the EU, tax revenues ratcheted up substantially when the VAT was introduced. The evidence is all the more clear because the VAT introduction was staggered, as EU countries introduced it from 1967 to 1973. Statistical analysis shows a clear racketing up in the level of revenue, followed by an increase in the growth rate of revenue, after the introduction of the VAT (.Holcombe, 2010).

The VAT is in theory a tax on consumption, but in practice, calculating the amount of VAT due is as complex as calculating the amount of income tax due, as Strachan (1981), a tax administrator in the UK, notes when describing the administration of the UK’s VAT. To see how administrative and compliance costs arise, one needs to understand some of the details regarding the way a VAT is administered (Gale and Harris, 2011).

Improved domestic resource mobilization is an essential feature of the strong policy framework developing that transitional country need to have in place in order to be able to benefit from the opportunities afforded by globalization rather than passively suffer from the fluctuations that may otherwise be inflicted on countries with weak governance and policy structures. Money alone is not enough for good government; but it is necessary.

Similarly, good tax administration is not sufficient in itself, but it is necessary for effective and efficient domestic resource mobilization (Bird, 2004).

However, as (Yesegat,2008) identified that, in revenue collection there are a gap which includes tax payers’ identification and registration, VAT filing and payment, VAT refunds, VAT audits, penalties and VAT invoicing. In addition to these, the author farther discussed as lack of tax awareness among the society and strong education programs as well as lack 29

of trust between taxpayers and administrators as major challenges to the VAT system in the country.

(Simon, yibrach & Abiy,2013) suggested that on their finding, Significant numbers of VAT registered businesses fail to offer VAT receipts up on payment, providing used VAT receipts as a means evade from the system. The level of enforcing business firms to provide bill during payments is low as majority of the consumers fail to ask for receipt during payments, similarly many consumers fail to tear down the receipt as it give the chance to use illegal businesses for tax evasion.

Even though, the revenue collecting process in countered with money challenges, VAT plays an energetic role for the national development of Ethiopia and it enables to succeed the current growth and transformations plan (GTP) of the country. Therefore Ethiopian government should make a full-fledged effort to efficiently collect and effectively utilize such tax revenue through closing the door towards the issues of corruptions which can be possible through making the VAT administrations more fashionable than ever before (Dasalegn, 2014).

(Haile Mariam’s,2011) work entitled, “Implementation of Value Added Tax and its Related Problems in Ethiopia (The Case of ERCA)” presents findings with respect contribution of VAT to development indicated that the revenue collected through VAT to the government is sufficient due to different reasons: society could not understand about the benefits of VAT to the country's development, weak tax administration and follow-up systems with respect to taxpayers, the higher level of the threshold that doesn't encompassing all potential taxpayers, Lack of skilled manpower and equipment’s, Less efforts of identifying and rewarding genuine registrants, existence of unethical employees and taxpayers in case of identification and registration. Therefore, the authority has to solve all of these problems so as to attract the taxpayers and achieve the desired objectives maximum collection of VAT revenue. In addition to the above recommendation this can be carried out by hiring more qualified and professional employees and reducing the threshold to the lower level as well as strengthen its enforcement and follow-up activities

According to (Habtamu et al, 2015) in their journal article they added that challenges in administration of Value Added Tax, which includes Resistance against Value Added Tax registration, Low level of tax awareness, weak audit and enforcement capacity of the tax 30

authority, sell goods and service without tax invoice Value Added Tax collectors, Tax laws enforcement problems, are the challenges which affect collecting sufficient revenue in terms of Tax collected from VAT. Nowadays, encouraging results are observed as far as collecting revenue is concerned. Since VAT was introduced showing dramatic changes in generating government revenue. But Data shows that still there is grate gap to the effective VAT taxation and the legislation.

(Dakito’s 2011) work entitled, “Empirical Analysis of the Contribution of VAT for Economic Development and Social Spending in Ethiopia” explicates the following results. Moreover, the problem with respect to VAT in the country is lack of awareness regarding to the nature of the tax from the tax payers. On the other hand, the problem from the administration point of view is that, the authority is considering VAT as “money machine” and its simplicity to collect tax rather than creating awareness regarding to what does mean by VAT and how and who is going to pay the tax. Generally, the problem of VAT in the context of Ethiopia is the same as to the problem of the former sales taxes, tax cascade. This is mainly because of misunderstanding of the concept of VAT by the business men and failure by the tax authority to create awareness regarding how and who is going to pay VAT tax after all to the government. Creating awareness is important for effective collection of VAT revenue and uses that amount for micro- economic purpose. Hence, this study aims to assess the challenges of VAT administration in Gamo Gofa Zone and to suggest possible solutions for the effective performance of VAT administration in the study area. There for researcher designed to strengthen the strong facts and then correct the weak points, there must be a soundly research which is systematically conducted and to know the tax administration of revenue performance in study area.

CHAPTER THREE

3. RESEARCH METHDOROLOGY This chapter describes specific procedures that the researcher anticipates adopting procedures for addressing the research problem and what intended to do to answer the research questions. The methodology chapter includes location of the study, research design, total and sample population, sampling procedure and sample size, data gathering instruments and data analysis ways are as follows.

3.1. DESCRIPTION OF STUDY AREA

3.1.1. GEOGRAPHICAL LOCATION AND CLIMATE

Gamo Gofa is one of the 14 Zones in the Southern Nations, Nationalities, and Peoples' Region (SNNPR) in Ethiopia. The zone is bordered on the south by the Dirashe special woreda, on the south west by Debub Omo Zone and Basketo special woreda, on the north west by Konta special woreda, on the north by Dawro and Wolayita Zone on the north east by lake Abaya is one of the border in Gamo Gofa Zone, and on the south east bordered by the Amaro special woreda.

The zone has a total area of 12,581.4 km2 and The Zone has 15 districts (woredas) and 2 town administrations. Namely, Arba Minch Zuria, Mirab-Abaya, Boreda, Chencha, Dita, Kucha, Daramlo, Bonke, Kemba, Zala, Ubadebretsehay, Oyida, Demba Gofa, Geze Gofa and Melokoza; and 2 reform towns are Arba Minch and Sawla. Arba Minch town is the administrative and business center of the zone, located at 505 km from Addis Ababa and 275 km south west of Hawassa. The general elevation of Gamo Gofa zone ranges from 600 to 3300 meters above sea level around Guge Mountain. The total population of the zone is estimated about 1597767 based on the 2007 Census with a population density of 80 inhabitants per kilometre square.157,446 or 9.88%urban in habitants a further 480 or 0.03% are pastoralists. A total of 337,199 households were counted in this Zone.

3.1.2 ECONOMIC FEATURES

Gamo Gofa Zone has, Huge natural resource, conducive climate, has international airport, which is visited by many tourists, It has Nechsar national and Maze national park. Which inhabits wailed animals, unique birds & Zebra which many tourists visit each year. The park is surrounded by Abaya & Chamo lakes, thick Forest and Reliable stability & free 32

mobility in these zone. The 85% of population livelihood in agricultural activities, the Zone is known for its banana, apple and fish production. The remaining 15 % are urban population and they habited by deferent business activity some of them are government employers.

According to the data from Zone Revenue Authority, there are 1070 VAT taxpayers in Gamo Gofa Zone revenue authority.

3.1. Location map of study area

Source: Author’s Computation on GIS from Ethno-GIS and CSA data 2014

3.2 RESEARCH METHOD

Mixed method was used in this research about VAT administration activity general and revenue performance as these two types of data complement each other. The numbers and the broader information available from the quantitative research methods are quite important for future decisions. In addition to statistical investigation conducting discussion with key informant and carrying out observations are crucial to understand the problem in 33

depth. Therefore both quantitative and qualitative research methods are mixed method in this research.

3.3. THE STUDY POPULATION

Participants of the study were registrant of Value added Tax payer in Gamo Gofa Zone, Tax officials and official employees of revenue in the study area. The total population of the target group of the study area 686 VAT registered tax payers from sample woredas. Six Tax employers were selected from three woredas (two from each) & three office heads (one from each) 9 respondents among government officials were selected purposively. Hence, the total population of the study is equal to the sum of Value Added Tax registered in the Zone, tax officials and Tax employees were totally 695 were selected as target population (Annual report of Gamo Gofa Zone revenue administrated Branch Office).

3.4. SAMPLING TECHNIQUE

For time and financial constraints reaching all woreda in the zone is practically impossible. Thus, attempt was made to take data from part of the population purposively from one woredas and two town administrations namely, Arbaminch; Sawla towns’ administration and Geze Gofa woreda were selected. This is because; Arba Minch and Sawla are reform towns in Gamo Gofa zone so, that reform towns have high potentials in VAT registration and tax administration compared to the other woreda towns. Geze Gofa woreda was selected due to, the researcher have evidence for its potential to raise more government revenue including VAT promising cash crop area, but there was a gap to rise by using the opportunity of its potentiality so that, to assess this gap the researcher selected purposively this woreda. Finally selected the respondents that filled the questionnaire were selected from VAT registration list as using simple random sampling techniques and Tax employs, office heads and Gov’t officials were select by using Judgmental sampling system.

3.5 SAMPLE SIZE DETERMINATION

To determine sampled subject from the total population of the target group simple random sampling techniques was employed. The reason of using this sampling technique is each element of the study population has equal chance and independence, generalized and known population. The total population of the target group of the study area were the 34

registrant list of Value added Tax payer in Zone, Tax officials, and employees of Revenue Authority branch office of selected woreda are target population.

So that to select Value Added Tax registrant’s taxpayers, simple random sampling techniques was appropriate. To determine the actual sample size of the study population for the purpose of this research Yamane (1968) sample size determination formula were applied as follow:

Therefore the sample frame form selected woreda for the sample determination by using the given formula identify the sample size for VAT registrants are:

푵ퟏ n. So n= ퟏ+푵(풆)ퟐ n = required simple size

N= target population

686 푒2=margin of error/5%/ so that n = Total sample to be drawn 253 1+686 (0.05)2

Base on the sample size the proportional allocation of the sample draw from each woreda by using the following formula find respondents for raw data collections.

풏(푵ퟏ) Pi = Pi = probability of individual respondents 푵 n =total sample size

N1=Targeted population

Table 3.1. Used sampling methods for respondent

S.no Tax payers according to their Number of VAT Sample size 풏(푵ퟏ) woreda registrants Pi = 푵

1 Sawla town 117 43 2 Geze Gofa woreda 51 19 3 Arbaminch town 518 191 Total 686 253 Source: researchers own survey

ퟓퟏퟖ Arbaminch = n = x 253 =191 ퟔퟗퟓ

ퟓퟏ Geze Gofa = n = x 253= 19 ퟔퟗퟓ 35

ퟏퟏퟕ Sawla town = n = x 253=43 ퟔퟗퟓ

Total sample size of respondents 253

Therefore the actual samples size from the three woreda plus nine in number of employees and office heads purposely selected from three woredas are the study population were data was collected.

3.6 .DATA COLLECTION TECHNIQUES

Two primary data collection methods used for this study were questionnaire and interviews. A face to face interview was conducted to collect survey data. This technique is preferred over other forms because it allows respondents to clarify questions and it enables to pick up nonverbal indications from the respondent. However, one of the drawbacks is that there are costs involved in the form of transport, time and energy.

So it is planned to interview purposively three branch higher officials. Surveying people is one of the most commonly used techniques to collect quantitative data. The main instrument used to collect empirical data was the questionnaire. It requires numerical data to be collected about how many people hold similar views on the subject matter.

To quantify these characteristics, a standardized questionnaires had been designed. The questionnaire design was based on the research objectives and the literature review. It was written in English but had to be translated for some respondents to Amharic language. Effort was made to make it simple and understandable.

3.7 DATA SOURCES

The study employed both secondary and primary data. The primary data were provided by open ended and close ended question were presented to VAT registrant taxpayers, the tax officials, and for the employee of selected woreda ERCAO. And more to explain the in dependent variable of revenue performance and dependant variable of VAT administration secondary data were explored through reviewing related literature, policy documents, and proclamations, annual reports, brochures and Websites from Internet were explored from the Zone.

3.8 VALIDITY AND RELIABILITY TEST OF DATA The validity of data was tested before processing and destructing all questioners. This were helps to establish the reliability of the tools that were used in data collection. This 36

was done by pre-testing the questionnaires using sample of 6 respondents from VAT payers, similarly verified by interviewing 6 respondents. Haw could tax payers understand about VAT rules and regulations and about general VAT administration activities in addition to these pre tested haw tax payers understand to the given Questions. Therefore this method is supported to correction of the mistakes and errors within the tools of data collections to verify how they are reliable to produce significant information from the field. Reliable data were acquired to reduced statistical errors.

3.9 QUESTIONERS

To collect relevant and reliable data from the selected sample respondents, both open and closed ended questionnaire were prepared and administered. To assess the effect of VAT administration on revenue performance each respondent was required to indicate his/her attitude freely the questioner was prepared in English language and translated into Amharic language in order to make the questions clear, avoid ambiguity as well as to be easily understood by the respondents. The questionnaire was edited by the English language teachers to check the equivalency of translation to the Amharic meaning.

The data collection process was managed by the researcher and also data was collected with the help of enumerators that were be selected from the area which had sufficient know how in VAT administration and the likes who were trained by the researcher on how to collect the data. Close supervision was undertaken by the researcher to avoid errors and mistakes and timely correction was given as much as possible.

3.10 SEMI STRUCTURED INTERVIEW

One of the methods used for collecting information were key informant interview. As explained by Creswell (2009), Interviews are important to gather information that may not be secured through other techniques, because they give an opportunity to listen respondents in person. Therefore, Semi structured interviews were prepared for purposively selected tax officials, the representatives of the trade communities in the zone key informants were interviewed at mutually agreed on their respective offices, tax officials provided place for consumer society representatives and answered to the questions only according to their perceptions and attitude about VAT related issue.

3.11 Data Analysis Methods After the data was collected, processed, organized manually, and used descriptive statistics to describe the major problems. Beside on this, the date was as presented by using percentages, chart, and table by the help of statistical package for social science (SPSS) software version 20 was employed. The qualitative part of the data which collected through interview and document was analysed and described qualitatively in detail to support the finding of this research.

CHAPTER FOUR

4. Result and Discussion

4.1. INTRODUCTION

The main purpose of this study was to investigate the effect of VAT administration on revenue performance in Gamo Gofa Zone. In consequence, the basic questions raised to understand how the VAT registrants become aware of the VAT revenue administration system in the study area, the challenges held by the VAT revenue administration system in terms of identification, awareness creation, settle in collection process and VAT auditing practice and its value to increase the amount of revenue from VAT are the major objective of these study. The study was delimited to assess the effect of VAT administration on revenue performance in Gamo Gofa zone. This focuses on VAT registrant’s tax payers in this zone.

Hence, misconceptions were regarding its effect, its application, and its benefit to the national economy and its advantage to diversifying counters infrastructures. These misunderstandings cover the way for the researcher to think about the gap of the effect of Value Added Tax administration on revenue performance and the problems it encountering. Accordingly a survey was conducted to identify, asses and analyse the effect of VAT administration by distributing questionnaires for information gathered from VAT registered taxpayers and employees of ERCABO. Based on the results of the findings, VAT administration has faced different problems when it comes to the ground. Among these issues described as follows.

4.1. Demographic characteristics

4.1.1 NUMBER OF RESPONDENTS

Table 4.1. Demographic profile of study area

S.no Variables Frequency Percentage Cumulative % 1 Arba Minch 174 75.3 75.3 2 Sawla 39 16.9 92.2 3 Geze Gofa 18 7.8 100 Total 231 100 Source: the researcher Own Data Survey, 2016 39

As it showed on the (table 4.1) that 253 questionnaire were distributed to both employees and VAT registered taxpayer for the sampled towns and woreda administrations. Out of 253 questionnaires 231(91.3 %) were filled and returned properly. As the result shown on the above table the majority of 174 i.e. 75% of the study subjects were from Arbaminch town and 17% and 8% of the rest were from Sawla town and Geze Gofa woredas respectively. This reflects that majority of subjects that participated on the study were from Arbaminch town because of its, high potential on VAT registration. High potential trade exchanged, huge investment concentration and high opportunity on tourism attractions rather than Sawla, so that Arbaminch town are more powerful to increase the number of VAT payers.

4.1.2 SEX CATEGORY OF TAX PAYERS Table 4.2. Sex of respondent

Variables Frequency Percent Cumulative Percent Male 154 67 67 Female 77 33 33 Total 231 100.0 100.0 Source: the researcher Own Data Survey, 2016

Sex of tax payers has composed both male and female. As the survey results revealed on the above table, from the total of sampled tax payers, about 154(67%) were male and the remaining 77(33%of them were female. This indicates that numbers of female tax payers are low comparing with that of male clients, this is because females devote most of their time in homecare and informal businesses.

4.1.2. EDUCATIONAL BACK GROUND OF RESPONDENTS

Educational States of respondents. 120

98 100 82 80

60 42 35.1 40 29 24

20 10.4 13

0 First Degree Diploma G 1 to 12 Illitrate Frequency Percentage Linear (Frequency)

Source: the researcher Own Data Survey, 2016

From the figure 4.1 above, it has been revealed that from the total of respondents 24(10.4%) of subjects were first degree holders, 82(35.1%) of them had achieved college diploma, 97(42%) of them educated from grade 1-12 and the rest of 29(13%) were illiterate. This replies that majority of the respondents can read and write. As it is discussed on the above, the majority of the respondents have a good level of educational qualification which enables the respondents to have idea of the Value Added Tax administration. And also enables them to understand the implementation of VAT and It is safe to interpreted they were able to understand the objective of taxation and specifically VAT, since they were educated enough having certificate and above education rank.

4.1.3 Respondents Age profile of Tax payers Table 4.3. Age profiles

s.no Variables Frequency Percent Percent Age 1 20-30 35 15.2 15.2 2 31-40 59 25.5 40.7 3 40-50 65 28.1 68.8 4 above 50 72 31.2 100.0 Total 231 100.0 15.2 Source: the researcher Own Data Survey, 2016

As it showed on the table 4.3 above, from a total of 231 sampled subjects one three of them i.e. 31% were aged above 50 years old, 65 (28%) of subjects were aged between 41 to 50 years old, 59 (26%) of them were aged between 31 to 40 years old and the rest of 35 (15%) of subjects aged between 20 to 30 years old. This shows that the majority of respondents of the study subjects were aged above half of 50 years old. This means majority of the respondents were people with high tax paying experience. They can be considered as matured enough of having awareness about tax and taxation principles.

4.2 DESCRIPTIVE STATISTICS/ANALYSIS

4.2 .1 BUSINESS CATEGORY OF RESPONDENTS

Table 4.4. Business category of respondents

S. Variables Frequency Percent Cumulative no Percent 1 Manufacturing 9 4 4 2 construction type 26 11 15 3 agricultural product 43 19 34 4 Electronics 24 10 44 5 Commodity trading 64 27 72 6 Service 65 29 100 Total 231 100 100 Source: the researcher Own Data Survey, 2016.

As table above 4.4 shows that the majority of 64 (27%) of respondents engaged on commodity trading, 65 respondents or 28% of subjects involved on service sectors and the 42

rest of 19%, 11%, 4% and 11% of respondents responded that they were engaged on agricultural product, construction, electronics and manufacturing sectors respectively.

This implies that more than half of the respondents were engaged in trading and service sectors.In addition to this, officials and interview made experts indicated/disclosed that most of merchants who engage in the service and commodity trading involve to establish new type of business also. In manufacturing sector respondents are very less. This indicates that most of the people are willing to do trading instead of manufacturing, because it takes more time and make investment also more.

4.2.2 RESPONDENTS LEVEL OF AWARENESS ON VAT RULES AND REGULATIONS

S.no variables Frequency Percent Cumulative % 1 yes 88 38 38 2 partially 112 48.5 48.5 3 no 31 13.5 13.5 Total 231 100 100 Source; the researcher Own Data Survey, 2016

In this section the researcher interested to know how the VAT registered tax payers understand about VAT rules and regulation and how far are they aware. As the data shows above the table (4.2.2) from the total 231respondents, 88(38%) of the respondents answered that they aware of the tax administration rule and regulations to implement it properly, 112(48.5%) of respondents said that they were partially awareness about tax administration rules and regulation properly and the rest of 31(13.5%) of respondents replied that they don’t have any information about VAT administration activities.

From these finding the researcher can be conclude that, the majority of tax payer they have no sufficient concept VAT rules and regulations. There for revenue Authority needs tried to create tax awareness through electronic media, printed materials and other opportunity. Based on this result the researchers interviewed with revenue authority branch tax officials and tax experts asked them ‘’ how do you evaluate your customer and tax payer awareness level?’’ they forward that, VAT registered businesses are after selling goods and services they do not get invoice to customers and similarly customers also not ask to receive receipt but they notice ‘’ Do not pay if a receipt is not issued’’ practically transactions are sold without invoice.

The other issue is they increase or decreasing the figures that actual purchased goods and services. As an interview with the zone tax officials, they admit the existence of the problem and held that the office uses its own investigation system, most often sending investigators to the business revolving place , and trying to control transactions without VAT.

According to the officials, if the goods sold without VAT are discovered, and, administrative and criminal measures will be taken. Literature shown that, Customers` non-awareness of tax especially about VAT is clearly seen in their experience of not asking for receiving invoices after shopping and getting services. Their carelessness to read and act according to written notice like “Do not pay unless invoice issued!” and other information is exposed to VAT evasion. Smooth customers` cooperation has a great role in increasing government revenue (Jerene, W.2016).

4.2.3 ISSUES RELATED WITH VAT REGISTRATION Table 4.6. Why Tax payers unwilling to VAT registration

S.no Variables Frequency Percentage Cumulative % 1 poor VAT administration 21 9 9 system 2 fear for losing their 80 35 44 customer 3 fear of competition with 57 25 69 unregistered 4 no potentials for VAT 21 39 100 register Total 231 100 100 Source: researcher Own Data Survey, 2016

As it is revealed on the table above, 4.6 out of 231 subjects 21(9%) of respondents said that the tax payer in their area are not voluntary to registered VAT due to poor quality of VAT administration system, 80(35%) of them replied that due to fear for losing their customer is the main cause to reluctant to voluntarily VAT registration, 57(25%) of respondents said that they fear for abnormal market competition with unregistered sellers and 73(31%) of them replied that they fear for lack of list capitals to compute with the others in the market. Therefore, the result is indicated that majority of business societies are not willing to VAT registers volunteers due to fear of abnormal market competition with unregistered business sellers.

They said that fear of abnormal competition with unregistered similar firms is hinders voluntary VAT registration all over Gamo Gofa Zone level. This indicates that the dominance of VAT unregistered businesses, resulted in abnormal market competition and losses normal market share and profitability by registered businesses.

Similar research conducted by (Yesegat, 2008) implied that VAT registration encourages investment and export likewise it also affects the VAT registrants in different ways: primarily the market shifts towards to non VAT registrants. Secondly the existing highest threshold level exempts several potential taxpayers. Thirdly the current market prices maximize the annual sales turnover for non VAT registrants. Another study conducted by Dinqu (2015) pointed that, the existence of unfair competition among the traders and reduction of government revenue were not easy effect.Therefore, this situation can lead to losing large amount of tax revenue to the government.

4.2.4 TOOLS FOR COLLECTING VALUE ADDED TAX Table4.7 Settlement in collection time

S.no Variables Frequency percentage 1 Cash registration 87 38% machine 2 Invoice 144 62%

Total 231 100% Source: researcher Own Data Survey, 2016

In Addition to primary data, secondary data shows that users of cash registered machine as follows:

Table 4.8 cash registered machine users in Zone 2004-2008 E.C N Branch office Numbers Buyer of cash Users of Users% O of payers registered machine CRM 1 Arbamimch 518 304 258 49.80 town 2 Sawula town 117 71 52 44.4 3 Geze Gofa - - - Woreda Total 635 375 310 48.81 As it observed from the above table, 4.7 the majority of 144 (62.3%) respondents replied that they collect VAT by using hand writing /binding/ invoices, 87 (38%) of them replied that, they collect VAT by using electronics cash registration machine. This result reflects that majority of tax payers collect revenue from VAT by using hand writing /binding/ invoice. And also secondary data was evidence for this as we seen in table 4.8, has been the machine user among the total woreda only Arbaminch and sawula towns are cash registered machine users .Researcher interviewed tax payers briefly what they think of the reasons that make the traders not to collect the taxes by using electronic cash registration machine.

They argue that, in the side of authority lack of providing enough machine and shortage of supply and in other side tax payers have no interest to purchase electronics cash registration due to self-regard and they think that the machine is in convenient to tax evasion register on day to day turn over.

Additional evidence that using ETRs machines among VAT registered taxpayers does contribute to the improvement of VAT compliance among taxpayers (Mushammed, Tesfaye, 2015). So that, what we conclude from this, Cash registered machine was facilitate business activity in other side reduces tax evasion. Therefore having honour business society, effectively collected revenue and maximize revenue performance.

4.2.5 PROBLEM RELATED WITH VAT ADMINISTRATION

Table 4.8 VAT Administration problem

S.No Variables Frequency Percentage Cumulativ e% yes 165 71% 71 no 66 29% 100 total 231 100% 100 Source: the researcher Own Data Survey, 2016 46

As data shows on table above 4.8 out of 231 respondent’s 165 (71%) replies that VAT related tax administration have problem and the rest of 66 respondents i.e. (29%) of them said there is no problem with VAT related administration. This indicated that there is some challenge related with VAT related tax administration.

As interview was made with head officials and tax employees, in order to get definite information. They argue that lack of improved infrastructure like: high way, Electricity, Information and communication technology and other related services hinders to achieve good performance in VAT related tax administration. On the other hand beside of tax payers are reluctant to register VAT and, lack of taxpayer’s awareness are also mentioned as the part of the problem.

Similar research conducted by Habtamu, (2015) found that, Awareness gap of Taxpayers, resistance against registrations for Value Added Tax by some traders, weak culture of taxpayers, poor Value Added Tax administration system. All these problems hinder the Administration of Value Added Tax (Habtamu Dheresa,2015).

As (Wondwosen Jerene,2016) Administrative limitations in resource allocation, awareness creation, providing trainings and feedbacks, controlling and follow up to combat VAT evaders and employees’ corruption involvement is observed as some of the key internal factors among others hindering tax collection.

4.2.6. THE CONTRIBUTION OF VAT AUDIT ON REVENUE PERFORMANCE, REDUCING OF ILLEGAL TREAD AND TAX EVASION Table 4.9 Respondents of Audit Value

S.no Variables Frequency Percent Cumulative%

1 Excellent 35 15 15% 2 moderate 71 31 31%

3 weak 87 38 38% 4 Total 231 100

Source: researcher Own Data Survey, 2016

Data shows on Table 4.9 above, out of 231 sampled subjects the majority of 87 (38%) respondents said that the value of VAT audit on revenue performance is weak, 71 (15%) of them were said that value of VAT audit on revenue performance is moderate and 35 i.e. 47

15% of them said that the value of VAT audit on revenue performance is Excellent. Therefor it indicate that majority of firms are believe that the value of VAT audit on revenue performance is weak.

Based on this finding the researcher interviewed tax auditors ,the purpose of audits and the selection of tax payers to audit criteria, they respond that the authority followed above 75% are risk based audit and the rest of 25% are focused on service audit. Year S.no Audit Acquired birr Plan Audited Percent Target Achieved Percent

2004 1 70 88 125.71 10,000,000 8,084,031 80.84 2005 2 76 74 97.37 4,913,441 7,436,953 151.36 2006 3 250 96 38.40 27,400,000 15,077,395 55.03 2007 4 380 145 38.16 24,666,000 23,484,393 95.21

2008 5 422 131 31.04 14,846,974 11,850,478 79.82

Total 1198 534 330.68 7,286,415 65,933,250 904.8%

Source: Gamo Gofa zone Tax and Revenue Authority from 2004-2008 annual report

According to annual report of Revenue Authority from (2004-2008 E.C) they planned to audit and collect revenue from audit result are targeted to audit 1198 actual preformed 534 tax payer audited in number that are 44.6% and targeted to collect revenue from audit result, 7,286415 and actually achieved that, 65,933,250 million.

Therefore, from this it can be observed that low audit rate which might have negative impact on the revenue potential of VAT and the level of compliance. Similarly they achieve low audit rate and collect high rate of performance. The depth interview made with tax officials and they said that VAT audit in Gamo Gofa zone are selected by the criteria by the audit selection committee.

The selection criteria include: credit declaration, nil VAT declaration, non-filers, unusual VAT filing patterns, and information obtained from third parties. The reason is they cover the total tax payer transaction audit in a given budget year due to resource limitation, luck of practiced manpower in audit department.

Similarly literature suggested that the effectiveness and efficiency of Audit work was affected by staff qualification, experience and resources for audit (Nethanet.B, 2014).

So that, the skilled manpower, resource allocation and qualified staff is absolutely connect each other to effective audit work.

4.3 SECONDARY SOURCES

4.3.1 DOCUMENT ANALYSIS

In this section the researcher discusses results of data collected from secondary sources targeted and collected revenue reports. According to this report from Gamo Gofa Zone Revenue Authority, the total targeted revenues and performance for five years were as follows:

Table 4.3.1. VAT progress from 2004-2008 budget years

S.no Budget year E.C Target Collected Percent%

1 2004 35,000,000 34,108,506 97.45

2 2005 103,532,240 120,444,827 116.34

3 2006 50,000,000 90,100,000 180.2

4 2007 3,900,000 8,702,019.80 223.13

5 2008 11,704,292 26,790,147 228.84

Total 200,626,532 280,145,500 139.6%

Source: from Gamo Gofa Zone Revenue Authority 5 years report.

As stated in the objective, this study had an aim of studying the total revenue generated in the last five years from VAT in the last five years (2004-2008 E.C). As data shows that VAT revenue is increasing year to year. As interviewed with tax officials and employers showed, that this is because in the year after 2006 tax payer due to its transition of VAT registrants from manual recording to cash register machine as obliged by the regional government. 49

4.3.2 VAT CONTRIBUTION ON TOTAL REVENUE

As stated in the objective, this study has an aim of studying the total revenue generated in the last five years and then study the proportion contributed by VAT. (2004 - 2008E.C) a total of 757,876,829 birr was collected by the Gamo Gofa Main Branch of the Ethiopia Revenue and Customs Authority. Out of this total amount 280,145,500birr was collected from VAT and this accounts for 36.96%of the overall revenue generated. This clearly shows how significantly VAT is contributing to the economic development of the Zone. The detail is given table below.

Table 4.3.2.VAT contribution on total revenue

S.no Budget year Total revenue VAT revenue VAT Contribution On collected Total Revenue % 1 2004 163,694,182 34,108506 20.8 2 2005 254,685,343 120,,444,827 47.29 3 2006 297,827,163 90,100,000 30.25 4 2007 463,460,543 8,702,019.80 1.9 5 2008 578,209,598 26,790,147 4.6 Total 757,876,829 280,145,500 36.96%

Sources: Source: from GGZ RA from year 2004-2008 E.C

4.3.3 TAX PAYER PROGRESS IN VAT REGISTRATION From the above data, Table 4.3 shown that, VAT Target Registered tax payers increased year to year, and actual registration tax payers also increased number wise. By observing the above data, the government authorities failed to reach their target in increase actual registered tax payers during 2004-08(28.94%). In the above period only in the year 2005 actual registrants’ percentage is better than other years. There is big gap of reaching their targets in increasing the actual tax payers registered number. That is why, tax revenue generation will fall down. Hence, the government authorities should take necessary steps to improve the actual registrants for improvement of tax revenue data shown below

Table 4.3.3. Tax payer’s registration progress 2004-2008

S.no Budget Year Target Registered Percent %

1 2004 357 84 23.5 2 2005 455 156 34.28 3 2006 632 201 31.80 4 2007 1004 297 29.58 5 2008 1249 332 26.58 Total 3697 1070 28.94

Source: from Gamo Gofa Zone Revenue Authority 5 years report

4.3.4 TAX PAYERS IN BUSINESS CATEGORY

Figure 4.4. Number of tax registrant Progress

Source: from Gamo Gofa Zone Revenue Authority 5 years report.

From the above figure disclosed that the government total number of targeted registered during 2004-08 was 3697 whereas actual registered number was only 1070, which was equivalent to 28.94%. It means the government authorities fail to increase the actual number of registrants. However, researcher found that in commodity trade (50.81%), Service sector (39.76%) and wholesale business (34.03%) actual registrations are far better comparatively other sectors. Even though, from the observation of the above table, there 51

is big need to motivate by the government for actual registrations in various sectors particularly manufacturing (9.88%) and agriculture (8.67%). If the government is able to increase in future the actual registrations in manufacturing and agriculture sectors, it can able to generate more tax revenue.

CHAPTER FIVE

CONCLUSIONS AND RECOMMENDATIONS

5.1. INTRODUCTION

This chapter makes conclusions that are drawn from the findings of the study, which were presented, discussed and interpreted in chapter four. In addition, the chapter includes the recommendations that are forwarded to identify VAT administration limitations and their effects which influenced the Gamo Gofa Zone Ethiopia Revenue Custom authority Main Branch office on revenue performance. The main purpose of this study was to investigate the effect of VAT administration on revenue performance in Gamo Gofa Zone. In consequence, the basic questions raised to understand how the VAT registrants become aware of the VAT revenue administration system in the study area, the challenges held by the VAT revenue administration system in terms of identification, awareness creation, settle in collection process and VAT auditing practice and its value to increase the amount of revenue from VAT are the major objective of these study. This focuses on VAT registrant’s tax payers in this zone.

5.2 CONCLUSIONS

Government for the sake of smooth administration and improvement of tax revenues, ERCA delegated regions and city administrations to collect VAT from their registered taxpayers starting from September 2003 (ERCA, 2003). Gamo Gofa Zone, is one of delegated to VAT administration from South Nation Nationality People Region (SNNPR) it has more than five years’ experience in VAT administration to collect tax revenue to the government; researchers’ survey observed that most of VAT registrants were registered for VAT in the last two years comparatively. In terms of category of business, most of the registrants were from service providing sectors and trading commodity than other categories. As it indicated from major VAT administration processes and Activities of Gamo Gofa Zone Main Branch Office, day to day activity based on tax rules and regulation were Timely service delivery to create strong enforcement, make clear and accountable work environment must be created by the Tax administration, Creating awareness to tax payers for payment of tax timely, providing information timely through Radio in areas language, magazines, workshops, broachers, house to house supervision and openly discusses with 53

tax payers to reduce tax evasion and corruption, recognize model tax payers as well as tax officials, adjusting rules and regulation based on tax payers feedback/opinion, creating tax day celebration, bring awareness of tax procedures and payment of taxes to the tax registrants if they do not follow impose penalty on the tax payers, make a notice before taking any harsh measurement. By doing in this manner VAT administration authority people will increase their VAT tax revenue than other kinds of taxes.

In terms of awareness the majority of the study subjects have no sufficient awareness about tax administration rules and regulations. According to tax experts and officials who made interview, from both sides means from sellers and customers it lucks issuing and receiving invoice as modern market culture especially on ordinary market. They also maintained that even though it is not sufficient, awareness creation were made especially for sellers and business centres to issue receipt for their customers before market exchange. They added that it enabled that different notice and burners with the message of public awareness. However, practically transactions are sold without invoice.

In terms of advantage researcher raised some questions like being registering for VAT is important or not. However, they think that registering for VAT is good. But they fear that they might lose their customers due to unequal treatment for all firms to register VAT in their area. Direct interview was made with tax experts and head officials with similar questions. The reflection of the experts and head officials were not fare away from the study found answers from the study subjects. They said that fear of abnormal competition with unregistered similar firms is hinders voluntary VAT registration all over Gamo Gofa Zone level. This indicates that the dominance of VAT unregistered businesses, resulted in abnormal market competition and losses normal market share and profitability by registered businesses.

Majority of tax payers collect revenue from VAT by using hand write invoice. Researcher interviewed tax payers briefly what they think of the reasons that make the traders not to collect the taxes by using electronic cash registration machine. They argue that, in the side of authority lack of providing enough machine and shortage of supply and in other side tax payers have no interest to purchase electronics cash registration due to self-regard and they think that the machine is in convenient to tax evasion register on day to day turn over. 54

Some of challenge related with VAT related tax administration. Deepest interview was made with head officials and tax employees, in order to get deep information. They argue that lack of improved infrastructure like: high way, Electricity, Information and communication technology and other related services hinders to achieve good performance in VAT related tax administration. On the other hand beside of tax payers are reluctant to register VAT and, lack of taxpayer’s low awareness are also mentioned as the part of the problem.

Majority of firms believe that the value of VAT audit on revenue performance is high Based on this finding the researcher interviewed tax auditors ,the purpose of audits and the selection of tax payers to audit criteria, they respond that the authority followed above 75% are risk based audit and the rest of 25% are focused on service audit. Therefore, the authority of Gamo Gofa Zone tax collection main branch office needs emphasis on this issue. Tax audit is vital for reducing tax evasion and tax audit has positive effect on reducing tax fraud and tax evasion (Netsanet.B, 2014), in other side reduced tax evasion and fraud, increase the revenue collection performance.

Low audit performance which may have negative impact on the revenue potential of VAT and the level of compliance. Similarly they achieve low audit rate and collect high rate of performance. The depth interview was mad with tax officials and they said that VAT audit in Gamo Gofa zone are selects by the criteria by the audit selection committee. The selection criteria include: credit declaration, nil VAT declaration, non-filers, unusual VAT filing patterns, and information obtained from third parties. The reason is they cover the total tax payer transaction audit in a given budget year due to resource limitation, and luck of skilful manpower. So that, we conclude from the finding of view VAT audit is significantly reduce tax evasion and fraud as same time it have a great value to maximize revenue.

According to the responses of the respondents depend up on the given possibility the following are the challenges of the VAT Tax Authority. These are lack of human resources especially Value Added Tax auditors, lack of taxpayers awareness, lack of education for taxpayers, lack of good qualification of tax office at worda level, lack of qualified accountants to taxpayers, limitation of infrastructure in woreda town to implement VAT 55

effectively, selling of goods and services without tax invoice(without bill), weak culture of tax payers, fear of competition with unregistered tax payers, are the challenges which affect the collection of sufficient tax revenue. If these limitations are overcome by tax revenue authorities, definitely they will improve tax revenue collections to the government and they can improve their performance also.

5.3 RECOMMENDATIONS

The following are the major recommendations that come out from the research results towards both the Tax revenue authority and for business community.

Recommendations to the Tax Revenue authority are:

 To provide quality services the authority should increase the number of qualified employees, make arrangement of consistent training and development program for the staff. right administration point of view the revenue authorities should establish strong tax audit unit, appointing genuine leaders on department, hire skilled and ethically outstanding tax auditors are need to improve recovery of more tax revenue and performance.  Conduct a consistent awareness creation programs to update or upgrade the business community/registrants and non-registrants and should convey concepts, rules and regulations, advantages and uses of the Value Added Tax by using mass-medias or exchange mediums like television, radio, newspapers, creating accessible websites, distribution of broachers, preparations of different seminars and workshops on a regular basis to increase awareness. If they are doing timely, absolutely tax authority performance will increase and at the same time tax authority’s revenue tax collections will increase extremely.  It is suggested that there are many non-VAT taxpayers, there is need to conducting intensified awareness creations programs and enforcement them into tax stream. VAT authorities should prepare of Simple Value Added Tax registration procedure for non-tax payers or non-registrants. In identifying those qualified the registration threshold, it is better to arrange require to use cash register machines in order to know their annual turnover.  The authority branch office has to make collaborations with the nearby educational institutions such as Arba Minch University’s with department of accounting and finance or 56

Department of business management, they can conduct joint programs such as capacity building and researches or under community development programs, these departments faculty may provide knowledge or training to non-taxpayers or not-registrants in tax procedures, laws, proclamations of taxes, preparation and submission of tax returns that enable solve the problems of the society in general and branch office in particular.  As we seen in audit report, some VAT payers not declaring the collected tax payments at the given time due to their carelessness and they are running their business with government portion. So that there is a need to continuous follow up and actions have to be taken on such individuals, who are doing such kind of manipulative things.  The authority of Gamo Gofa Zone tax collection main branch office needs emphasis on this issue. Tax audit is vital for reducing tax evasion and tax audit has positive effect on reducing tax fraud and tax evasion Netsanet. B (2014) in other side reduced tax evasion and fraud, increase the revenue collection performance.  The tax revenue authority should enforce tax payer to purchase and use cash registration machine and timely follow- up is required. Further, Supporting and capacitating the lower level of tax administration structure in terms of material and technical knowledge is more feasible to enhance the implementation of VAT administration system and improve revenue performance.  Generally Established and in depth creation of awareness, institutional capacity building, strong follow- up and implication of the declared laws, rules and regulations, design to use modernized monitoring mechanism, follow networking systems that, SGTA (Standard Government Tax Administration) & push to tax payers should be use cash registration machine are major recommendations for this study.  Apart from the tasks performed by the tax authority, the business communities also should obey the current VAT rules and regulations, proclamations, develop or familiarise the culture of taxpaying as a sign of modern thinking, pay attentions towards the government’s effort to collect and funding to the government in the form promote payment of taxes.  Prompt payment should think as tax payment is one of social and economic development backbone in entering country rather than mandatory contribution, it means directly or indirectly putting every one’s tax contribution showing the impact on changing the life of each citizen.  VAT payers should take responsibility to assign educated and skilled man power in order to improve audit problems in their organizations as well as they should be ready to use 57

technological devices like IT electronic cash registration machines. Business organization should also need to be empower their experts by providing relevant train and information’s to avoid skills and knowledge gapes. Finally the researcher suggest for further research.to investigate in Business society view of tax compliance attitude.

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Appendix

QUESTIONNAIRE to be answered by VAT Registrant

Dear respondents,

This study is conduct in partial fulfilment of the requirements for the Accounting &Finance. I am carrying out a study on the effect of Value Added Tax administration in Gamo Gofa zone. The purpose of this questionnaire is to obtain your perceptions and views regarding the existing Value Added Tax (Value Added Tax) administrative activities of main branch office and its main constraints against effective tax administration. This study will help the branch office to identify its problems and improve its VAT administration system. There for the information you give me will facilitate and critically analyse the subject matter.

I hereby assure you that all information obtained through this questionnaire shall be used for academic purposes only and will be handled and stored with the highest order of confidentiality. Please do not write your name anywhere on the questionnaire.

Thank for your cooperation!

Prepared By Amarech Beyene

Part -I Demographic profile

Instruction: - Please, state your opinion for each given proposed items using the tick sing (√) under your suitable number.

1. Name of woredas/town

A) Sawla B) Arbaminch C) Geze Goffa Woreda

A) Sex category of respondent A. Female B) Male 2. Educational status

A) Alliterated B) Grade 1-12 C) certificate/diploma C) first degree and above

3. Age of respondent A) .20-30 B) .31-40 D) 41-50 E) above 50

Part II question regarding to VAT Administration

Instruction: - Please, state your opinion for each given proposed items using the tick sing (√) under your suitable number

1) Type of business 63

1. Manufacturing 4 .Agricultural product

2. Construction 5.Trade commodity

3 Electronics 6.Srevice sector

2) Is your organization VAT registered? 1. Yes 2 No

Other means (please specify) ------

A. Awareness about VAT rules and regulations?

1. Know 2.I don’t know 3.insuffeciant

B. Do you have information about VAT unregistered tax payer in your area?

1. Yes 2.No others means (please specify) ------

C. Why some business not registered for VAT?

1. Weak administration of authority forces them to registration

2. Lack of awareness for tax payer about VAT registration

3. Business enterprises want to monopolize the market with least price

4. Fear VAT for losing their customer

D. Have you believe that the threshold of VAT 500000 and above?

1. Yes 2.No 3.Noidea If any, please specify it? ------

E. Number of VAT unregistered business in your area?

1. High in number 2.midum in number 3 Few

F. Why they not willing to pay?

1. Poor VAT administration system 2. due to problems from their suppliers

3. Fear of competition with unregistered 4. No potentials for VAT register

If any, please specify it? ------

G. Do you believe being VAT registered has an advantage? 1. Yes 2.No

If any, please specify it? ------

H.If your answer for Q, 13 is yes what is the reason?

1. Low awareness and lack of information 2. Selfishness 64

3. Poor capacity of the government officers

I. How do you settle VAT during payment? 1. Cash register machine 2. Invoice 3.none If any, please specify it? ------J. Is cash registration machine facilitates the VAT collection process in your work?

1. Yes 2.No 3. I didn’t

K. How you evaluate the level of customer when using cash register machine? 1. Increased 2. Decreased 3.No change 4.I didn’t evaluate L. Have the branch office made trainings to improve awareness on VAT activity?

1, Yes 2.No 3.Insufficent

M. If yes explain that has been for?

1. Always 2.sometimes 3.monthly 4.qurterly

N. Are there problems in the VAT administration that needs to be improved? 1. Yes 2.No If any, please specify it? ------O. Do you get advice and others services regarding the procedures of tax payment book, recordkeeping &filing? 1. Yes 2.No 3.Insufficient P. Do you think that your organization has audited before? 1. Yes 2.No

If any, please specify it? ------

Q. How do you evaluate the value of VAT audit on revenue performance?

1. Excellent 2.midume 3.Weak 4.I can’t evaluate

R. How do you evaluate frequency of VAT audit in your organization?

1. Audit one year 2. Every quarter 3.monthly

S. How do you evaluate the performance of tax audit in reducing illegal tread and tax evasion? 1. High 2.midum 3.weak 4fair

2 APPENDIX: INTERVIEW QUESTION TO TAX OFFICIALS

PART I

Back Ground Information of officials

Please provide your response in detail from you work experience

1. Sex A. Male B. Female

2. Age______

3. Occupation ______

PART II

Interview questions

1. As the officials what promotion measures taken by your office to progress Value Added Tax (VAT) revenue performance?

------

2. What challenges you faced to achieve a good performance in Value Added Tax (VAT) collection and administration?------3. Dose the awareness level of the society’s raise up well Value Added Tax (VAT) paid for improvement of socio economic development? 4. How do you evaluate your customer and tax payer awareness level?------5. What measures taken by gov’t bodies for raising public awareness about Value Added Tax (VAT) benefit to contribute social interest? 6. How auditing process contribute for a good achievement of Value Added Tax (VAT) revenue performance? ------7. Can you mention that the schedule of auditors the clients file to audit file to audit within a year?

------8. Do you have suggestion convenient feature of VAT administration in Gamo Goffa zone?

APPENDIX-2

3. APPENDIX QUESTIONNAIRE TO BE ANSWERED BY TAX EXPERT/EMPLOYEES/

Dear respondents,

This study is conduct in partial fulfilment of the requirements for the Accounting &Finance. I am carrying out a study on the effect of Value Added Tax administration in Gamo Gofa zone. The purpose of this questionnaire is to obtain your perceptions and views regarding the existing Value Added Tax (Value Added Tax) administrative activities of the branch office and its main constraints against effective tax administration. This study will help the branch office to identify its problems and improve its VAT administration system.

The information you give me will facilitate and critically analyse the subject matter. There is no right or wrong answer. But the correct response is what you done and observed. Therefore, please answer all questions accordingly.

Thank for your cooperation!

Part I Background information

Dear respondent put () in the box of your correct choice

Back Ground Information of officials

Please provide your response in detail from you work experience

1. Sex A. Male B. Female

2. Age------

. Service year: ------

1. What is your level of educational qualification?

Certificate Diploma Degree Above degree

2. What is your status or position in the organization?

A) Auditor B) Assessor C) Collector D) Follow-up and reporter E) Other, specify ______

3. How long have you been working in the institute?

A) Less than five years C) Five to ten years

B) Ten to fifteen years D) More than fifteen years

4. Field of study

A) Accounting C) Economics

B) Finance D) Management

E) Others please specify ------

I Question Related With VAT Registration

1. In registering unregistered taxpayers for VAT, what system do you follow?

A) Door to door inspection B) Checking purchase invoices of registered taxpayers If any other, mention it here,------

2. Are there tax payers that are voluntarily required to register VAT?

A) Yes B) No If No, please explain why this is happening? ------

3. What do you consider in taxpayers identification and registration process for VAT?

------

4. What are the problems that hinder smooth administration of VAT?

A) VAT tax payers are less competitive in the market

B) Consumers are not willing to buy with VAT

C) Poor tax enforcement capacity of the authority

D) Use of fraudulent invoices and non-issuance of invoices

Other, please specify------

5. What are the alternative solutions to aggravate the identified problems?

______6. What are the reasons for some traders not to maintain records of their business operations in accordance with the laws and regulations of VAT?

______

Question Related With Audit Practice To Tax Auditor.

1. Is there any Audit manual to perform tax audit Activities?

A), Yes B), No C), sum amount but not sufficient

2. Did you have any audit experience before you joined the revenue branch office?

A), Yes B), No

3. If your answer in question 2 is yes, how long did you work as an auditor?

A) Less than 2 ages C) 4-6 years B) 2-4years D), 6-10years

What is the primary purpose of tax audit performed in the (multiple answers are possible)?

A) To check the evasion of tax

B) To ensure compliance in accordance with tax law

C) For assessment and collection of additional tax revenue

D) To educate taxpayers E)Others, pleasespecify______

6. What are the criteria used by the authority for selection of tax payers for audit and audit procedure? ------

6. What types of Audit are usually performed?

A) Desk Audit D) Comprehensive audit

B) Issue audit E) Registration Audit

C) Refund Audit F) Fraud investigation

7. How often tax audit is supported by intelligence input?

A) Always B) Sometimes

C) Rarely D) Never

8. How tax auditors and investigators can get the required information?

A. By reviewing the previous case histories of taxpayers

B. Using information from third parties such as financial institutions

C. Using business sector profile Others, please specify------

I. Question Related With Cash Registration Machine

1. The use of cash register machine reduces tax evasion or fraud.

A) Yes B) No C) I didn’t evaluate

2. Using cash register machine facilitates the VAT collection process.

A) Yes B), No C, I don’t know

3. VAT registered organizations VAT payment increases after they started uses cash register machine.

A) Yes B) No C) I don’t know

4. Tax Evasion and avoidance is as a result of poor administration in the state? A)Yes B),No C),No Idea 70

5. Do you think that tax Administration in is very effective and efficiently managed?

A) Yes B) No C) No Idea

6. Do you believe using VAT registration machine increases revenue?

A) Yes B. No C) If any III Question Related With Awareness

1. What are the approaches that the branch office follows to increasing the awareness of tax payers about the VAT registration process? List at list your ideas that need action;

______

2. Have the branch office made trainings to improve awareness of the taxpayers?

A) Yes B) No C) I don’t know

3. If your answer for question 26, yes Explain that has been for:- A, Weekly B, monthly C, quarterly D, some times

4. Haw to evaluate awareness of taxpayers towards VAT: A) High C) Low

B) Average D) Very low

5. In your evaluation awareness of tax payer efficient in ______Branch?

A) Very good D) Poor

B) Good E) Very Poor

C) Average

If you have other specification Explain: ______

6. Is that required to improve VAT administration and maximize revenue of the branch?

List at list your ideas that need action; ------

Thank you for your cooperation! 71

4. APPENDIX V

አርባምንጭዩንቨርስቲየብዝነስናኢኮኖሚክስኮለጅድህረ- ምርቃበአካዉንትናፋይናንስይህንመጠይቅበመሙላትለምታደርጉልኝትብብርበቅድሚያአመሰግናለሁ! የዚህመጠይቅዋናዓላማበቫትአስተዳደርጉድለትምክንያትበገቢአፈፃፀሙላይየምያሳድሩተግዳሮቶችንበተመለከተበጋሞ ጎፋዞንዉስጥባሉከተማአስተዳደሮችናወረዳዎችበሚገኙየገቢዎችቅርንጫፍጽ/ቤቶችላይጥናታዊጽሁፍለማድረግእናየ መፍትሄሃሳብለማቅረብበመሆኑግልፅአሳማኝእናከምንምተፅዕኖነፃሆናችዉምላሽእንዲትሰጡእየገለፅኩምላሹንበማረም // እንዲትመልሱከአክብሮትጋርእጠይቃለሁ፡፡

ስለምላሹአመሰግናለዉ!!!!!

በግብርከፋዩ የምመለስ መጠይቅ፡- አማረችበየነ

ክፍል 1. ጥሬሀቆች

1. ወረዳሀ)አርባምንጭከተማ ለ) ሳዎላከተማ ሐ)ገዜጎፋወረዳ

2.ፃታ ሀ)ወንድ ለ) ሴት

3.የትምህርትደረጃ ሀ) መፃፍናማንበብአልችልም ለ)ማንብቢናመፃፍ 1-10/12 ሐ) ሰረተፍኬትናድፕሎማ መ) የመጀመሪያድግርናበላይ 4.ዕድሜሀ) ከ20-30ዓ/ም ለ) ከ31-40ዓ/ም ሐ)ከ41-50በላይዓ/ም መ)ከ50 በላይ 5.የሥራዘርፎምንድንነዉ?

ሀ)አምራች ለ) ግንባታዘርፍ ሐ) የእርሻዉጤቶችአቅራብ

መ)ኤለክትሮንክስ ሠ)ሸቀጣሸቀጥንግድ ረ)አገልግሎትዘርፍ

ክፍል 2 ቫትምዝገባንበተመለከተ፤

1.ድርግቶቫትተመዝጋብነዉ? ሀ)አዎ ለ)አይደለም

2.የቫትመመሪያዎችናደንቦችንጠንቅቀዉያዉቃሉ?

ሀ)አዉቃልዉ ለ)አላዉቂም ሐ)በቂአይደለም

3. መልሶለተ.ቁ 3 አላዊቂምከሆነምክንያት? ብያብራሩ------

4. እርሶበምሰሩበትዘርፍካፒታልያላቸዉግንቫትያልተመዘገቡአሉ? ሀ)አዎ ለ)አላዉቂም

5. ነጋዴዎቸበፍቃዳቸዉቫትየማይመዘገቡበትምክንያትምንድነዉ?

ሀ)የአስተዳደርሰርዓትልልነትናበአግባቡያለማስተማር

ለ)በግብርከፋዩበኩልየግንዛንቤዕጥረት

ሐ)ግብርከፋዩከመንግስትቁጥጥርዉጪገቢያዉንለመቆጣጠር

መ)ደንበኛይሸሻልብሎመፍራት ሌላምካለብያብራሩ------

6. ቫትለመመዝገብመነሻካፒታሉ 500,000ናከዛበላይመሆኑምዛናዊነዉ?

ሀ)አዎ ለ)አይደለም ሐ)ሀሳብየለኝም

7.ለተ.ቁ.6 መላሶ አይደለም ከሆነ እንዴት ብሆን ይሻላል ብለህያስባልህ? ------

7.በአከባብዉላይቫትያልተመዘገቡምንያህልይሆናሉ?

ሀ)ብዙ ለ)አነስተኛ ሐ)ጥቅት መ)የለም

8. ለጥያቄ 7 መልሶብዙ፤ከሆነለምንድነዉታክስከፋዩፍቃድኛየማይሆነዉ?

ሀ) የአስተዳድረስርዓቱደካማስለሆነነዉ ለ) ደንበኛይሸሻልብሎመፍራት

ሐ) ቫትካልተመዘገቡትጋርገብያዉድድርፍራት መመ) ቫትለመመዝገብአቅምያለዉነጋዴበአከባብዉያለመኖር

9. ቫትመመዝገብጥቅምአለዉብሎያስባሉ?

ሀ)ጥቅምአለዉ ለ)ጥቀምየለዉም ሐ) ጥቅምየለምጉዳቱይበዛል

10. ለጥያቄተራቁ.9 ጥቅምአለዉከሆነነጋዴዉለመመዝገብፍቃደኛየማይነዉምንድነዉምክንያቱብገለጽ?

ሀ) የግንዛቤጉድለትናየመርጃእጥረት ለ) ግላዊነት

ሐ) ስለቫትግንዛቤለመስጠትየተቐሙአቅምዉስንነት

ሌላምካለብገልጹ------

2.ከገንዘብመመዝገብያማሽንጋርየተያያዘመጠይቅ፤

1. ድርጅቶገንዘብበምንይሰበስባል?

ሀ) በሽያጭመመዝገብያመሣሪያ

ለ) በደረሰኝ ሐ) በእጅ 73

2. ድርጅቶሽያጭመመዝገብያመሣሪያመጠቀምመቼጀመሩ ------ዓ/ም?

3. ሽያጭመመዝገብያመሣሪያመጠቀምስራዎንያቀጣፋልብሎያስባሉ?

ሀ) አዎ ለ) አያቀላጥፍም ሐ)ጊዜይጨርሳል

4. ታክስቅ/ፍጽ/ቤትስለሽያጭመመዝገብያመሣሪያተከታታይስልጠናሰተዉያዉቃሉ?

ሀ) ዘወተር ለ) አንዳዴ ሐ) በአጋጣሚዎች መ) ብዙጊዜ

5. ድርጅቶሽያጭመመዝገብመሣሪያመጠቀምያከጀመሩደንበኞቹንእንዴትያያሉ ?

ሀ) ጨምሯል ለ) ቀንሳል ሐ) መካከለገኛ

3. ግንዛቤንበተመለከተየቀረበመጠይቅ፤

1. ቅርንጫፍጽ/ቤትየግንዛቤክፍተትለመሙላትሥልጠናይሰጣል?

ሀ)አዎ ለ) አይ ሐ) አላዉቂም

2. ለጥያቄተ.ቁ 1 መልስአዎከሆነለምንያህልጊዜ?

ሀ) በየሳምንቱ ለ) በየወሩ ሐ) በየሩብዓመቱ መ)አንዳድጊዜ

3. በቫትአስተዳደርዙሪያመሻሻልያለበትነገርአለብለዉያስባሉ?

ሀ)አለ ለ) የለም ሐ) አላዉቂም

4. ለጥያቄቁ.3 መልሶአለከሆነእንደግለሰብየእርሶአስታዬትምንድነዉ?------

5. ስለክፍያስርዓት፤መዝገብአያያዝ፤ስለምዝገባስርዓት፤ስለሰራዎምክርአግኝቶያዉቃሉ? ሀ)አዎ ለ) አግኝቸአላዉቅም

3.ከኦድትጋርየተያያዘመጠይቅ፤

1. ድርጅቶከዝህበፍትኦዲትተደርጎያዉቃልዎይ?

ሀ)ያዉቃል ለ)አያዉቅም

2.የዞኑገብዎችዋናቅርጫፍጽ/ቤትየኦዲትስራትምንይመስላል?

ሀ)በጣምጥሩነዉ ለ) መካከለኛ ሐ)ደካማ መ)አላዉቅም

3.በምንያህልጊዜድረጅቶኦድትተድረጎያዉቃል?

ሀ) በዓመትአንድጊዜ ለ) በየሩብዓመቱ ሐ)በየወሩ 74

4.የቫትአስተዳደርስርዓቱላይበኦድትዙሪያእንዲሻሻልየማትሰጠዉአስታዬትይኖሮታል? ------5.የታክስኦዲትምንገቢስወራንይከላከላልብለህታስባለህ?

ሀ) ከፍተኛ ለ) መካከለኝ ሐ) ዝቅተኛ መ)አጥጋብ

አመሰግናለዉ!!!!!