Research proposal

Research proposal in bank

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 ACKNOWLEDGMENTS
Above all, I would like to express my deepest heartfelt
thanks to God whose hand support me all in my life time,
and for this research proposal he gives me the potential in
all aspects.
And also,I would like to express my heart felt gratitude to
my Advisor Mr. Sintayehu G. (MSc.) for his guidance and
valuable support for the preparation of this research
proposal.
In addition, I would like to thank my classmate because of
the availability from all of them while discussing the topics,
and ideas of this Research proposal session.
 ABSTRACT
• This study will be assess the existing VAT audit practice in the case
of Ethiopia Revenue and Customs Authority,
• Hawassa Branch and find out the extent to which the VAT audit
contributed to enhancing government revenue in the context.
This study will be conducted based on data obtained from ERCA,
Hawassa Branch, specifically focusing on VAT audit. The unit of
analysis is VAT audit and the concerned section is the audit unit
(wing) in the organization.
•
• Additionally the study will be conducted to investigate the tax
audit practice, and to identify the main problems of the tax audit
program performed that affects tax revenue collection and
taxpayers‟ voluntary compliance in the Ethiopian tax system. The
study will be adopted both quantitative and qualitative
 CHAPTER ONE
1 INTRODUCTION
.1 Background of the Study
• Government has played an important role in the socio
economic development of society. Social development
may be in the form of raising the level of living and social
welfare in the form of providing social amenities to the
people. Social amenities are in the form of education,
health and sanitation, utilities like electric supply, water
supply etc, and recreation facilities. The process of socio-
economic development requiring huge expenditure
cannot be carried unless the government has the
perennial source of income. Every government has two
important sources of revenue
 Introduction
• is one of the most important sources of revenue to every
government. In the earlier days, payment of taxes was optional
(Mekelle University, Public Finance and Taxation Module, n.d.). A
choice was given to the people to pay the tax and to avail the
benefit of social amenities in the form of education, health and
sanitation, utilities and recreation facilities. Naturally, everyone
interested in availing social amenities used to evaluate the benefit
derived by him in exchange for the tax to be paid by him. But the
option in the payment of tax created lot of problems for the
government in fulfilling their obligations to society. Hence, in
modern times, the option was withdrawn and tax became a
compulsory contribution by every citizen to the government to
enable the government to fulfill its commitments towards society
(Mekelle University, Public Finance and Taxation Module, n.
 Introduction
• and economic services. Setting up an efficient and fair tax
system is, therefore, essential for every nation in the
globe, and especially in developing countries like Ethiopia
where there has been deep-rooted socio-economic
problems and increased demand for government services,
infrastructures, and social welfare. The ideal tax systems in
these countries should raise sufficient revenue and reduce
government borrowing, and should do so without
discouraging economic activity.
 Introduction
• In order to minimize the complexity of tax administration, enhance
taxpayer compliance, and encourage investment, the Federal
Government of Ethiopia (FGE) has launched a tax reform program. The
government conducted a tax reform program to improve the tax
system as a whole. The reform program had two components,
overhauling of the tax legislation and improving the tax administration,
both of which aimed at establishing a sustainable domestic revenue
base through modernizing the tax system, encouraging saving, trade
and investment. The tax reform included issues like changing policies to
address the problem of insufficient revenue, correct distortions that
reduce economic welfare and growth, and take measures to reduce
inequalities. On the part of the government, establishing new tax
laws and proclamations had made its intention as to collect “new”
and “additional” revenue there by widening and deepening its tax base
for which it needs to cover its fiscal and budgetary needs (Income tax
proclamation,286/2002)
 Introduction
. In doing this, a number of reform measures were taken
including policy and legal issues, institutional arrangements,
as well as updating the tax system existed for years. The
enactment of the income tax proclamation No. 227/2001,
which was decreed on the 4th of January, 2001 by the House
of People’s Representatives (the parliament) was an
important move and indicator of governments’ commitment
to pursue the reform program to facilitate compliance and
improve efficiency of the tax administration.
• Following the income tax proclamation, the FGE continued
to issue other tax laws, and two such proclamations
include Proclamation No. 285/2002, called the
introduction of VAT (Value Added Tax) system that
replaced what was known as sales tax is, therefore, one
of the most important outcomes of the reform measures
taken regarding taxation in Ethiopia. VAT is a transaction
tax collected on all goods and services at all stages of
production and distribution. It is an indirect tax and is
collected on the value added at each stage. Value Added
is the difference between the sales and the value of
purchases at that stage (Mekelle University, Public
Finance and Taxation Module, n.d.). The collection of
VAT begins with importers or producers and ends with
the retailers. The amount of VAT collected from a
transaction at different stages of distribution will be equal
to the total amount of sales tax collected from one stage
of the distribution on that taxpayer against tax payable by
him on sales (Mekelle University, Public Finance and
Taxation Module, n.d.).
 Introduction
VAT is the most prevalent form of consumption tax in the
world. Globally, the advance of the VAT is the most
significant development in the field of the taxation in the
past 50 years. VAT started in the 1960’s in Europe and
America; while in Ethiopia it started in the 21st century under
the above mentioned proclamation. The VAT proclamation in
Ethiopia puts forth so many requirements and procedures as
to who will pay VAT and how. Implementation of the system
is one thing; and monitoring the system, continuous follow
up, and ensuring compliance is another thing. The proper
administration and operation of these components in turn
depend on the accepted working norms and guidelines to
frame its contribution to tax management.
 Introduction
• Although tax revenue of the Ethiopian government seems
to be increasing from time to time, little is known as to how
much the tax payers complied with the rules and the
degree to which tax evasion has been minimized and/or
completely avoided. An important monitoring system to
ensure tax payers compliance with the existing VAT
proclamation and in turn increase government tax revenue
is, therefore, to place an audit system, in particular VAT
audit. The purpose of this study is, therefore, to assess the
existing VAT audit practice in the case of Ethiopia Revenue
and Customs Authority, Hawassa Branch and find out the
extent to which the VAT audit contributed to
 1.2 Statement of the Problem
• The VAT system has emerged as a consumption tax of choice. A
well designed VAT does not disrupt trade and investment and is
highly successful in applying appropriate tax administration
system. These neutrality features are important for the proper
functioning of common markets, such as the Euro and free trade
areas, which does not permit discriminatory tax on imports or
subsidies on exports. Beyond that the VAT is productive, stable,
and flexible source of government revenue. Since VAT is collected
on current basis, say, monthly, its revenue generating capacity is
not affected by inflation and the effect of rate changes on revenue
is immediately visible. While VAT scores high on neutrality to pay
basis, but this should not be acceptable if adjustment to income
tax social benefit schemes can be made. In sum, the timing of tax
collections under the VAT is as under a retail sales tax
 Count........
• Although a 15 percent VAT is charged on consumption of goods in
Ethiopia, the level of compliance among tax payers and/or organizations
registered for VAT needs close monitoring. It seems that there are a
number of deficiencies in the implementation and management of the
VAT system from the perspective of the tax payers, registered
businesses, as well as the tax authority itself. Violations of VAT
provisions jointly by the tax payers and businesses registered for VAT
through collaborating and not disclosing all taxable transactions seems
to be a deep-rooted challenge in the existing system, which is likely to
degrade revenue generation capacity of the government and hence
impair public investment programs in the nation at large. If there is any
failure from the side of the concerned tax authority to regularly check
(monitor) the system and ensure compliance from businesses, the
problem would become very much serious and the tax collected from
consumers might end up in the hands of businesses.
 Count............
• An audit, therefore, plays a central role in VAT administration
especially considering historical and cultural norms and practices
as well as people’s attitude towards paying tax in the context. As
audit plays a central role, preparation and use to VAT audit
manual is of the highest priority in facilitating audit and
assessment functions. Here, an audit is a selected verification of
tax payers declared tax liability which always involves a review of
taxpayer’s book of accounts, related records, 3rd party
information, general tax payers, and etc. When analysis of the tax
payers compliance pattern justifies for audit and investigation of
the tax payers files, the tax office either applies spot or
compressive audit to test the reliability of the tax affairs dealt with
the choice and preference of the one to another is dependent on
the magnitude of the tax risk associated with the 0case and the
 Count ........

This study aims at investigating the VAT audit practice,