VALUE-ADDED TAX PRACTICE AND ITS PROBLEMS (CASE

STUDY IN HAWASSA TOWN)

A SENIOR ESSAY PROPOSAL SUBMITTED TO THE DEPARTMENT OF

ACCOUNTING AND FINANCE AS PARTIAL FULFILMENT OF THE
REQUIREMENT FOR BACHELOR OF ARTS /BA/ DEGREE IN ACCOUNTING
AND FINANCES
INFOLINK UNIVERSITY COLLEGE

GROUP NAME ID NO
1 TEMESGEN KEBEDE..................85785-
14
2 TSION FIKRESELAM..................

3 HUSSEN ALI...............................49381-14

4 TSHAY ASHURO........................283768-14

ADVISOR: MR. ASMAMAW F.

(MBA)

FEBRUARY,

2025
 HAWASSA,

ETHIOPIA

5 | Page
 Table of Contents
LIST OF FIGURES iv
CHAPTER ONE 1
1. INTRODUCTION 1
1.1. Background of the Study 1
1.2. Statement of the problem 2
1.4.1. General objectives 3
1.4.2Specific objectives 3
1.5 4
Significance of the
1.6 Scope of the study 4
1.7 Organization of the study 4
CHAPTER TWO 6
2 LITERATURE REVIEW 6
2.1. Definition 6
2.2. Forms of VAT8
2.5 Arguments towards VAT adoption 8
2.6 Computation of VAT 9
2.7 VAT Administration in Ethiopia 10
2.7.1 VAT Refund 11
2.7.2 Registration for VAT 11
2.7.3 13
Registration
2.7.4 13
Time of Application and
2.5. 14
4. Cancellation of
2. 15
6. Advantage and Disadvantage of
2.6.1. Advantage of VAT 15
2.6.2. Disadvantage of VAT 16
CHAPTER THREE 18
3. Research Methodology 18
3.1. Description of Study Area 18
3.2. Source of Data 19
3.3. Sample Size 19
3.4. Sample Method 19

5 | Page
 3.5. Method of Data Collection 19
References 19

5 | Page
ACRONYMS AND ABBREVIATIONS

HZRA Hawassa Zone Revenue AuthorityVAT Value

Added TaxRST Retail Sales TaxGNP Gross National
ProductFIRA Federal Inland Revenue Authority

NNP Net notional product

5 | Page
LIST OF FIGURES
Figure 3.1 Geographical Map of study area

5 | Page
 CHAPTER ONE

1. INTRODUCTION

1.1. Background of the Study

Valued added tax is a tax Levied on consumption goods and service. It modified
sale tax base on the net value added at each stage rather than on gross receipts.
It was originated in France since 1954, (Bhatia, public finance 23th ed). The
development of this tax system was so fast that it has now seen employed by a
large number of Latin America, Asia, Africa and pacific countries.

Tax can be defined as a levy or other type of a financial charge or fee imposed by
the state or central governments on legal entities or individuals. It can be
categorized as direct or indirect taxes. For the purpose of this study, the researcher
takes one of the types of indirect tax which is VAT. If tax is levied directly on
personal or corporate income, then it is a not indirect tax. If tax is levied on the
price of a good or service, then it is named an indirect tax. Value added tax (VAT)
is a type of indirect taxes on goods and services. They are also referred to as
commodity or consumption taxes, since they are paid only when particular
transaction of goods or services is affected. The burden or incidence of such taxes
fails indirectly on the ultimate consumer rather than on the registered taxpayer
that is why this tax is indirect tax. Taxation has been the major source of revenue
for governments for thousands of years. It is the process of raising government
revenue to finance its expenditure through tax. According to Encyclopedia
management (2009) Value Added Tax (VAT) falls under the total category of a
consumption tax, meaning taxes are paid on what people buy rather than on their
earnings, savings or investments. Sales tax is imposed on the general sales. A
Value-Added Tax (VAT) is a fee assessed against businesses at each step of the
production and sells process, usually whenever a product is resold or value is
added to it. Tax is added to a product's price each time it changes hands until
delivery to the customer takes place, when the final tax is charged.

5 | Page
According to Cnossen(1998) as cited in James (2011,p.15) suggested that the nearly
universal introduction of the Value Added Tax should be considered the most
important event in the evolution of the tax structure in the last half of the twentieth
century. The idea of VAT traces

back to the writing by Von Siemens, a German business man, in the 1920s.
However, Value Added Tax was first applied in France in 1948. VAT came into
effect for the first time on 10th April, 1954 in France (Tuan Minh Le, 2003). In
order to increase the revenue of the government many countries in the world are
implementing the Value Added Tax. Value added Tax (VAT) is a special types of
indirect tax in which a sum of money is levied at a particular stage in the sale of a
product or service.

.Ethiopian government has introduced VAT as part the overall tax reform program
the tax reform program was preceded by establishment of new ministry of
Revenue as first step to improve tax collection and combat fiscal fraud. Most
straight forward way of taxing only expenditure is through an indirect tax such as
VAT. The newly introduced VAT one of the components designed by foreign and
local experts to improve the tax collection and administration. The VAT was
projected to be applicable on the tax payers that meets the minimum there should
of 500000 birr and above annual return over. The standard VAT rate in Ethiopia is
15% and individuals whose annual sales were less than the in threshold can also
register for VAT, if here 75% transaction was with registered companies (Negarit
Gazeta, 2002).

1.2. Statement of the problem

The VAT proclamation No.285/2002 was introduced on 4th July 2002 and become in
to application as of 1st January 2003. The proclamation has 13 sections and 66
articles. According to this proclamation, tax payers are those persons registered or
required to be registered persons carrying out taxable import of goods to Ethiopia.
Most business transactions involve supplies of goods and services. VAT is payable if
they are supplies which are made in Ethiopia, by a taxable person, furtherance’s of
a business and are not specifically exempted or zero rated. According to Article 22
of the VAT Proclamation, all persons registered for VAT are required to issue a VAT
invoice to the person who

5 | Page
receives the goods or services. There are cases where a receipt or simplified
form of VAT invoices may be used depending on the value of transactions
involved. Those unregistered do not have the right to issue a tax invoices. VAT is
a tax on the final consumption of certain goods and services, but it is collected
at every stage of production and distribution. It is gathered by all entities
providing taxable goods and services and imposes on sales to all a purchases. A
business firm calculates its VAT liability by the VAT rate.

The major activity in VAT administrations are identifying tax payer, processing
returns, controlling collections, making refunds, auditing taxpayers and levying
penalties. The other part of VAT administration is assessment on VAT execution.

Value added tax was a new tax that levied on consumption Good and service.
Value added tax is based on the difference between the cost of material and other
expense involved in manufacturing of product and ultimate value of finished
product. The tax was imposed at various stage in the product process and this
tend to speared tax burden. Currently the tax payers claim on the tax administer
and the tax administer also claims against them, (Hussein, 2003). Business people
assume that VAT increase the selling price of the product for that reason they
perform activity without register to VAT. The problem arise from point of view of
tax administer on one side and tax payer on the other side.

1.3 Research Question

. The proposal study will attempt to seek answer for the following question.

1. Why business people perform activity without being registration to VAT?

2. Does all tax payers have awareness regarding to VAT?

3. What are the major weakness of tax administration?

4. What are the major factor that affect business people not registered VAT?

1.4 Objective of the study

5 | Page
1.4.1. General objectives

The general objective of the proposed research is to identify the major problems
related to the value added tax and its practice in Hawassa town.

1.4.2Specific objectives
The specific objectives of the proposed study are
to:

● Assess attitude of the tax payers towards the tax policy

● Assess the awareness of tax administration toward tax policy

● Identify the major factors that affect business people to unregister to VAT

● Assess effect of VAT on accounting and record

1.5 Significance of the study

The output of the study would useful for private and Government organization. The
purpose of the study this research would significant because it was the major
problems and solution of VAT practice. By clearly understanding the main
problems of VAT practice and to strength the relation with tax payers and tax
administer and to avoid the compliance. By doing this it initiates the VAT payers to
pay the VAT timely and properly. Value added tax will enhances saving and
investment, as it is a consumption.

1.6 Scope of the study

Since the value added tax implication is too vast and difficult to cover in a regional
or national level, the proposed study will majorly focus and give emphasis to a
single public agency, which will be Hawassa town revenue agency that is located
south of in Sidama Region. Therefore, the scope of the study will be on the practice
and problem on the value Added tax focusing on Hawassa town revenue agency.

1.7 Organization of the study

5 | Page
The organizational of the study will cover five chapter:

1. Chapter One: Chapter one will contain background of the study, statement of
the
problem, objective of the study, significance of the study, scope of the study,
organization of the study and limitation of the study.

2. Chapter Two: Chapter two will be literature review.

3. Chapter Three: Chapter three will be methodology, which will include study
design and data collection tools.

4. Chapter Four: Chapter four will include data analysis and discussion.

5. Chapter Five: Chapter five will focus on research summary, conclusion and
recommendation.

1.8 Limitation

The major limitation were:-

● Lack of awareness among the respondent about the tax system.

● Lack of sufficient secondary data.

● Most of the tax payers luck willingness to fill the questionnaires.

5 | Page
 CHAPTER TWO

1 LITERATURE REVIEW
2.1. Definition
The introduction of value added tax (VAT) is probability the most important tax
development in the world VAT had been introducing for the first time almost 50
years ago, and Its application remained confined to a wand full countries will the
lake 1900’s, (Bhatian, 1996; P 145)

Value added tax (VAT) is a tax which is imposed on value which traders add to their
purchase of raw materials, good and service. It is perhaps best described as the
taxation of value added purchase of raw material, good service that are made by
trader for the purpose of the his business are known as “input,” with the ultimate
sales to the third

5 | Page
party customer made by the trader described As output VAT liability is calculated
on the difference between a traders input tax (VAT that it pays on the acquisition
of the raw material, goods and service required for the purpose of its business).
And the output tax that it charges on making supplies of good and service to its
own customer, (Jona than Ivansion, 2002, P . 180).

VAT is imposed by the government at each stage in the production in goods and
services. The tax is paid by every company that handles a product during its
transformation from raw materials to finished goods. The amount of the tax is
determined by the amount of the value that a company adds to the materials and
services its buys from other firms, (world Book, 2001, P ., 267). In 1954, France
become the first notion of adopt the value added tax today, this tax is growing in
popularity, Canada and about 40 Nations use it is not used by united states on the
federal level. But most of the other large industrial nations use it, (World book, 2001,
P ., 257).

Value added tax belongs to the family sales tax there for. It be helpful distinguish
between different forms sale tax and Note the place of VAT in them. A general
sales tax is a tax on sales transaction but it is applied at only one stage of business
activity right from the manufacture to retail usually it’s collected either at the
whole sale level or a retail level. The trader are allotted sale tax numbers and a
traders possessing such a number can be purchase the goods without paying the
sales tax the similarity sales goods to the next buyer net if sales is the next buyer
also happens to possess a sales tax number with the authorities (Bhatian, 2002,
P ., 146).

Depending on the tax base on which the value added tax is computed, value
added tax can be classified in three consumption type VAT, gross domestic
product VAT and income Style VAT under the consumption, while the tax base of a
gross domestic product VAT is a goods and service included in gross domestic
product, which includes personal consumption capital goods, government
purchases and net export under the income style VAT, the tax bases is determined
as the net national income. Despite of their type of VAT, consumption type VAT is
used in most nations, (Hyman, 2002, P ., 2002).
5 | Page
VAT is a tax not on total value of the good being sold, But only on the value added
to it by the last seller. The seller, therefore, is liable to pay a tax not on its gross
value, but net value that is the gross value minus the value of inputs,
(Bhatia,2002,146).

To determine the VAT liability of a tax payer one of the three alternative methods
can be used under addition method, a tax payer calculates the value added by
summing the value of the factors of production that uses in the production of
taxable goods and services. Under the credit method (and also called invoice
method however, the tax payers computers his/her tax liability from the VAT show
in the invoice he/she receives on his/her issues on his/her taxable sale. invoice keep
track of which credit firms are allowed. Firms subtract the VAT paid on the
purchases (the credit) since it represents the tax liability in the previous stage of the
production. The tax are therefore collected only on value added at each stages of
production (Hyman, 2002, P ., 702).

Theoretically the tax liability in the case of VAT and in the case of sales tax at the
retail level should turn out to be the same. This is because the total initial price is
nothing but the value added to be the raw material at different stages of production
and trade. In case of VAT, the same value of created value is taxed in stages. The
usual practice is to estimate the tax liability of the last seller on the bases of gross
value of the produce and give him credit for the tax paid by the earlier seller. It must
be noted that were the assumption is that final sale value at a retail level represents
the actual value added at different stages and that market fraction and other
imperfection are not distorting the whole picture (Bhatian, 2002, P ., 147).

2.2. Forms of VAT

Like a sales tax, VAT can also be clesipncd to have deferent forms, exemption and
rates.
In these connection, there are two important varieties of VAT, Viz-the consumption
variety. The difference between these two varieties emerges from the treatment of
capital depreciation. If firms allowed to deduct the entire credit as the equipment is
purchase, the system is termed as a consumption VAT. If the firms is allowed to
deduct the credit as the equipment is depreciates over the time the system is
termed as an income VAT, (Bhatian, 2002, P ., 148).
5 | Page
The second variety of consumption VAT in these case the firm in question is
allowed to deduct from the gross value of the product not only the non-capital
purchased from other firms, but also the capital requirement so purchased. In the
absence of foreign trade the aggregate base of this tax for the economy as whole
becomes wage (w) plu profit (p) plus depreciation minus investment (I) there for,
the aggregate tax base becomes GNP- I that is consumption in the economy
(Bhatian, 2002, P ., 149).

The third variety the one where the firm is able to deduct the net earnings from
its capital in order to arrive at tax base since earnings from its capital in order to
tax base earnings from capital amount to profit plus interest. Their balance left to
be taxed equivalent to wages.

The fourth variety is where the firms is allowed to deduct the full valve of its non-
capital purchase from other firms and depreciation on the capital purchase from
other firm for the country as the whole the aggregate tax base net notional
product (NNP). This is called the income type value added tax, (Bhatia, 2002, P .,
149).

1.5 Arguments towards VAT adoption

There are several argument for or against the adoption of VAT in Ethiopia base on
its strong and weak points (Hussein, 2003) some arguments are advanced for the
adoption of VAT first, VAT has broad based, so it would provide with Higher and
constant source of revenue for the government second, VAT promotes saving and
investment. In consumption type VAT, the investment and saving are excluded for
the tax base capital formation is promoted. Third, VAT would reduce tax evasion.
The tax (VAT) system requires that tax invoice must be issued in transaction and
that tax payers would keep invoice in order to benefit from tax deduction. Fourth
VAT promotes or enhances export, because the input tax is allowed or refundable.
Currently the tax payers claim on the tax administer and the tax administer also
claims against them finally, it all odds cascading unlike excise or sale tax under the
VAT system, each input is only taxed only (HYMAN, 2002, P160).

In contrast some arrangements are also for warded a gains the adoption of value
added tax. The first and main argument is that VAT is a regressive taxation. A
reason should be
5 | Page
taxed only according to his/her ability to pay, but it is in congruent with this principle
because poor person pay higher percentage of their income for the level of
consumption they have (Hussein, 2003).

A Number of country has however exempted basic necessities particularly food

items from VAT in order to compensate for its regressive effect. In addition, the
system of record keeping was not ready to operate the VAT system. Therefore, the
business and trader need time to develop the record keeping capacity at the
applicable VAT rate on the difference between sales and allowable purchases
according to proclamation no 285/2002 Art 21 Ethiopia uses the invoice method in
practice, few countries such as brazil and Bolivia use tax inclusive while most
countries such as Kenya, Senegal, adopt tax exclusive rate the Ethiopia VAT rate
15% also single rated 15% and tax exclusive, (proc No 285/2002).

VAT minimizes the damage that may be caused by attempts to avoid and evade
the tax and Helps to ascertain the profit obtained by the tax payers. (Federal
Negarot Gazeta, 2002). The law with regard to VAT requires the person to pay
value added tax on a registered person who is registered or required to be
registered a person who is
registered is taxable as soon as registration for VAT takes place but a person who
fail to adhere to registration requirement is considered to be taxable beginning
from the start to the accounting period following the period the obligation for the
registration arose, (Proc, No 285/2002).

1.6 Computation of VAT

In modern taxation there are four types of value added taxation system
there are:

a. Gross product value added tax.

b. Income type value added tax.

c. Capital exemption type value added tax

d. Consumption type value added tax.

1.7 VAT Administration in Ethiopia

5 | Page
The VAT replaced the current sales tax on manufactured and imported good and
service on January 1, 2003. The responsibility for the correct calculation and timely
payment of VAT rests on the tax payer himself. The VAT is a broad based tax on the
consumption of goods and services it is collected at all stage in the production and
distribution process beginning with the importers and producers of raw materials
and ending with the retailers cascading of the tax (i.e. tax on tax) is avoided by
providing for a credit for the tax paid only to raw materials used directly in the
production of good under a VAT. Relief is a granted for goods are not subject to the
VAT. Removing that tax content (on in puts) from exported goods makes the goods
makes the goods makes the goods more competitive in international markets.

VAT is a customer expenditure it is collected on business transaction and

important most business transactions involve of goods and services and VAT is
payable if they are:

● Supplies made in Ethiopia

● Made by a taxable person

● Made in the course of furtherance of a business

● Are not specifically exempted or zero-rated supplies are outside the

scope of the tax if they are

● Made by someone who is not a taxable person or

●Not made in the course or furtherance of business

Curse or furtherance the way a taxable person has to carry out its activity to
develop advance and progress the taxable activity. It refers to the normal and
expected events or processes to develop the taxable activity. Anything done in
connection with the
commencement or termination of a taxable activity is treated as carried out in the
course or furtherance of that taxable activity (Gebrie, 2008, p.191).

1.7.1VAT Refund
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
5 | Page
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 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.

● 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.

When 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 cam mercies
lending interest rate that prevailed during the preceding quarter (Gebrie, 2008, p.
119).

1.7.2Registration for VAT

In Ethiopia, registration for VAT is categorized into two. It discussed as
follow:

An Obligatory registration

Any person conducting a commercial enterprise or intending to conduct a

commercial enterprise may apply to be registered for VAT. However if the taxable
turnover of the enterprise which is gross income for 12 calendar months exceeds or
is likely to exceed birr 500.000 the person conducting the enterprise must register
for VAT. Turn registration

5 | Page
is compulsory (Gebrie, 2008, p. 201).

The term any person for purposes of VAT registration includes

● Sole profiteer

● Company

● Partnership

● Emote of decease

● Trust

● Incorporated body or unincorporated body

● Club or association

A commercial enterprise refers to any business of whatever nature and includes:

● Ordinary business e.g. shop contractors manufacture wholesalers etc.

● Trades and professions e.g. Builders, Engineers, Accountants
● Activities of non-profit moving bodies e.g. societies, associations, sporting
club, etc.

The turn is calculated on an ongoing basis two periods need to be considered the
past 12 calendar months and the next 12 calendar mother-by month basis. There
is the need to estimate at the end each trading calendar month the total value of
taxable goods and services supplies by all the business for the past 12 months
where the total exceeds birr 500.000 then there is the real nutriment to register for
VAT.

Voluntary Registration

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

Benefits of voluntary registered

Input VAT can be recovered if a person registered it will therefore be beneficial to

voluntarily register where the person makes mainly zero rated supplies. In such a
case
5 | Page
input VAT will be recovered and on VAT will be charged on zero rated out puts (Gebrie,
2008, p.203).

1.7.3Registration Procedure
Application for compulsory as well as voluntary registration must be made on
application form called “application for VAT registration” on application for sale and the
authority is required to register the person in the VAT register and issue a certificate of
registration within 30 days of the registration containing details of.

● The full name and other relevant details of the registered person

● The date of issuance of the certificate

● The data from which the registration takes effect and

● The registered person’s tax payer identification number

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

● Has no fixed place of residence or business

● Does not keep proper accenting records

● Has no bank account

● Has previously been registered for VAT purposes but failed to perform his duties
under the VAT law (Gebrie, 2008, p.203).

1.7.4Time of Application and Registration

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

1. At the end of any period of 12 calendar months the person made during that
period, taxable transactions with a total value exceeding 500,000.00 birr or the
last day of the month of the period if taxable transactions with a total value
exceeding 500,000.00 birr.

2. At the beginning of any period of 12 calendar months when there is reasonable

5 | Page
 around to

expect that the total value of taxable transactions to be made by the person
during that period will exceed 500.000 birr (Gebrie, 2008, p. 203).

Registration takes place on one of the following dates depending up on which

date comes first.

● In case of obligatory registration on the first day of the accounting

period following the month in which the obligation to apply for
registration arose.

● In case of voluntary registration on the first day of the accounting

period following the month in which the person applied for
registration or

● On the date selected by the registered person on his application for a

registration person who conducts taxable activity in a branch or division
shall be registered only in the name of the registered person to register one
or more of its branches or divisions as separate registered person. The tax
authority allow when its satisfied on such case that divisions or branches
maintains and independent accounting system and can be identified by the
nature of its activities or location (Gebrie, 2008, p. 204).

2.5.4. Cancellation of Registration

VAT registered person can apply for cancellation of registration

● If tax payer ceased to make taxable transactions.

● At any time after a period of 3 years of the date of his most recent
registration for VAT if the registration persons total taxable transactions
in the period of 12 months then beginning reasonable are expected to be
not more than 500,000.00 birr.

The cancellation of VAT registration takes effect

● At the time the registration person ceased to make taxable translation

for example, if one close down or sell his business. However, if one has
more than one business and is not closing down or selling them all he may
not be able to
5 | Page
 cancel it will depend on the level of taxable turn of remaining businesses.

● If the registered person has not ceased to do so at the end of the

accounting period during which the person applies to the authority for
cancellation of VAT registration.

When registered of VAT is cancelled, the authority is required to remove the

person’s name and all other details from the VAT register and the person is
required to return back the issued certificate of registration. VAT registered person
cannot charge VAT or issue tax invoices for any supplies made and cannot claim
are fund of VAT incurred on any goods or services purchased from the date of the
registration is cancelled (Gebrie, 2008, p. 209).

2.6. Advantage and Disadvantage of VAT

2.6.1. Advantage of VAT

The following are some of the advantages of VAT
a. It avoids cascading effect of tax (tax on tax): VAT works on the principle of
that when the raw material passes through various manufacturing stages and
manufactured products through various distribution stages, tax should be
levied on the incremental value at each stage and not on the gross sale price.
This insures that some commodity does not get taxed again and again, and this
there is no cascading effect. Putting the concept in simple terms, in VAT system,
each input is taxed only once (Misrak, 2008, p. 310).

b. It is major comprehensive and equitable tax system: Even though the

ultimate burden of VAT full on the final customer, VAT is collected by the
government from all sectors that is from import manufacturing, whole sale and
retail sectors. Therefore, it is a more compressive and equitable taxes
system. On the contrary, sales tax is normally levied at one stage of whole
marketing (Misrak, 2008, p. 310).

c. It reduces the possibility of the tax erosion: In the case of VAT the taxes are

5 | Page
 divided into several parts depending on the number of stage of production and
sales. In each stage every transaction is made using VAT invoice approved
by tax authority. In addition each VAT registered person (supplier) has to
maintain appropriate records on their sale and purchase transaction. Those
obligations make tax evasion difficult (Misrak, 2008, p. 310).

d. It has less tax burden: Under VAT system, the tax is collected is small
fragments at different stage of production and sale. Hence, the VAT payers
feel the burden of the less (Misrak, 2008, p. 310).

e. It is neutral: Regardless of the number of stage of production and

distribution, VAT is collected in each stage, therefore; VAT is expected to
be perfectly neutral in the location of resources in the form of production and
commercialization (Misrak, 2008, p. 310).

f. It improves productivity: In VAT system, a firm has to par tax even though
it van in to loss. The firm cannot claim any exception for loss because it
pats taxes on the value produced and not on profits. So, firms will always
try to improve their performance and reduce the cost of production. As a
result, the overall
productivity of the country will be improved (Misrak, 2008, p. 310).

g. It promotes capital investment and saving: VAT is a consumption tax since

one pays VAT on its expenditure and has the option to sure so as not to be
taxed.
Furthermore, relief from tax on capital goods may encourage investment.
Potential investors also consider tax legislation as one of the factors in
making investment decision (Misrak, 2008, p. 311).

h. It enhances exports: Exports of goods and services in most countries

that implement VAT are liable to VAT. At zero rates this may make exports
internationally competitive and thus encourage exports (Misrak 2008, p.
311).

2.6.2. Disadvantage of VAT

The following are some of the main disadvantages of VAT

5 | Page
a. It is regressive in nature: A straight forward single rate VAT with few
exemptions would tax lower income groups (the poor) more heavily than
the higher income groups (the rich). It is thus incongruent with the basic.
Principles of taxation which states that reason should be taxed according to
his ability to par. This makes VAT regressive tax system. In order to
compensate for its regressive effect a number of countries have expected
basic goods particularly food items from VAT (Misrak, 2008, p.311).

b. It require advanced economic structure: The proper implementation of VAT

system required organization and advanced financial and economic
structure as it complicated system. VAT system also requires proper
record keeping of invoice at each stage of production and sale by both the
seller and buyer. Hence, it becomes, difficult to implement the system in
all types of economy (Misrak, 2008, p. 312).

c. It put additional burden to tax authority: In VAT system, the manufactures

whole sellers and retailers have to fulfill various legal formalities in the
form of
manufactures various records, accounts, books, etc. the verification of those
formalities put additional burden to the enforcing authorities (Misrak, 2008,
p. 312).

d. It is uneconomical: VAT system involves high of administration, assessment,

verification collection, etc. hence; it is highly uneconomical (Misrak, 2008, p.
312).

e. It has reams loopholes for tax evasion: Although VAT system requires
proper record keeping of invoices at each stage of production and
distribution by both the buyer and seller, it has ream loopholes for tax
evasion. This may include the following:

● Tax payers could over report sales of zero rated goods.

● Tax payers could use invoices they received for personal purchase to
claim tax credits.

● It enables buyers and sellers to strike secret deals with regards the issuance
5 | Page
 of receipts.

● It could lead to the formulation of forged ponies’ recipients to claim tax

credit on input VAT, etc (Misrak, 2008, p. 312).

CHAPTER THREE

3. Research Methodology
3.1. Description of Study Area

5 | Page
The study area for this research will be Hawassa, Ethiopia. Hawassa is the capital
city of the sidama region with a total area of 157.2 (sq.kms). divided into 8 sub-cities
and 32 kebeles. It is 273 km south of addis ababa. Based on the 2007 census
conducted by the central statistical agency of Ethiopia, this zone had a total
population of 258,808, of whom 133 were male and 125,685 female. A total of
61,279 households were counted in this zone, which results in an average of 4.22
persons to a house hold, and 57469 housing units.

Figure 3.1. Geographical Map of Hawassa City

3.2. Source of Data

The researcher will use primary data and the primary data for this study will
be the response of employee and tax payers that the researcher will
interview or provide questionnaire to obtain data using data collection tools.

3.3. Sample Size

The number of the questionnaires for the organization will depend up on the
number of the employee and VAT registered merchant of the Hawassa town,
which will be determined during the research period. The total number of VAT
registered in Hawassa town is 2500. This figure of population is the most accurate
and up to date. From that the researchers will use a sample size of 345
participants of the tax payers who are

5 | Page
registered to VAT. We determined our sample size by using yemane formula
because our population number for the research is known.
2
n= )

N/(1+N*e 2
n = 2500/ (1+2500 * 0.05 )

n = 2500 / (1+6.25)

n = 344.83 ~ 345

n = 345

3.4. Sample Method

The researcher collared sample from tax administration authority and tax
payers of Hawassa town by using random sampling.

3.5. Method of Data Collection

Primary data collection will be used to collect the data. These can be done
through questionnaires distribution to both tax administration authority and tax
payers of the town.

3.6 Method of Data Analysis and Interpretation

After data is collected the process of analysis will start to make the raw data suitable
for further analysis. Editing, coding and classification will be made using the
descriptive analysis methods of data analyzing technique for both tabulation and
percentage will be sued. Finally the responsible explanation of the relation will be
identified and the final tax of interpretation will be accomplished after considering all
the relevant factor.

References
Abdule Hamid Badir, (2002), VAT draft proclamation. .

Negarit Gazetta edition, 2002

5 | Page
Gebrie work, 2006, Tax accounting in Ethiopia In context, 1 st edition, AAU, Ethiopia.

Hyman, (2002), VAT practice, 8 th edition.

Jonathan, (2002), VAT and Technology, 8 th edition.

Misrak Tesfaye, (2008), Ethiopia tax accounting theory and practice, Ethiopia.

Negarit Gazzeta, proclamination No 285/2002 Addis Ababa: BPP .

World Book, (2001).

5 | Page