UNITY UNIVERSITY

COLEGE OF BUSINESS, ECONOMICS AND SOCIAL SCIENCE

DEPARTMENT OF ACCOUNTING AND FINANCE

ASSESMENT OF VAT (VALUE ADDED TAX) ADMINISTRATION

IN CASE OF LEMI KURA SUBCIT

BY
MATHEWOS NEBYOU

A SENIOR ESSAY SUBMITTED TO UNITY UNIVESITY

DEPARTMENT OF ACCOUNTING AND FINANCE IN THE
PARTIAL FULLFILLMENT OF REQUIEMENT FOR BA DEGREE
IN ACCOUNTING AND FINANCE

ADVISOR: -
HABTAMU GASHAEYE (MSC)

JULY, 2024
ADDIS ABABA, ETHIOPIA
 DECLARATION
I Mathewos declared that this senior essay is my original work and that it has not been
submitted partially; or in full, by any other person for an award of a degree in any other
university/institution. Furthermore, information that is taken from different publishes and
unpublished sources are acknowledged/cited in the text and listed in the reference at the end of
this research paper.

Name: ___MATHEWOS NEBYOU_____________________ ___

Signature Date 04/07/2024

ADVISORS DECLARATION

The senior essay has been submitted for examination with my approval as a University
supervisor

Name of Advisor: ___HABTAMU GASHAYE____________

Signature____________________________

Date: ___04/07/2024_____________________________
COLLEGE DECLARATION
This project has been submitted for examination with my approval as a university advisor

UNITY UNIVERSITY: ________________________ DATE ____________ SIGN_______

EXAMINERS DECLARATION
A senior essay conducted Mathewos Nebyou with the title “Assessment of VAT (value added
tax) administration in the case of lemi kura ” submitted in partial fulfillment of the requirement
for Bachelor of art (BA) Degree in Accounting and Finance comply with the regulations of the
university and meets the accepted standards with respect to originality and quality in the study.

External Examiner: __________________ Signature: __________ date _________

ACKNOWLEDGMENT

I express my deepest gratitude and appreciation to God for His guidance and unwavering
support throughout my journey. His blessings have been the foundation of my wisdom and
success .I am sincerely thankful to my academic advisor, HABTAMU GASHAYE, for his warm
welcome, constant encouragement, and invaluable assistance that played a pivotal role in the
successful completion of this research paper .I extend my heartfelt appreciation to the
participants of my research, who generously dedicated their precious time to complete the
questionnaires. Their willingness to contribute greatly contributed to the successful culmination
of this study .I would like to acknowledge and express my profound gratitude to my family,
particularly my remarkable mother, Mrs. Ribka Amare. Her unwavering support and motivation
have been instrumental in my academic pursuits and life as a whole. Lastly, I am grateful to all
my friends who have been a tremendous help throughout my studies. Their support and
assistance have been invaluable on this journey of learning and growth.

i
Contents
DECLARATION.............................................................................................................................ii
ACKNOWLEDGMENT..................................................................................................................i
LIST OF TABLES..........................................................................................................................iv
LIST OF ACRONYMS / ABBREVIATIONS................................................................................v
Abstract...........................................................................................................................................vi
CHAPTER ONE..............................................................................................................................1
INTRODUCTION...........................................................................................................................1
1.1 Background of the study...................................................................................................................1
1.2 Background of the organization.......................................................................................................3
1.3 Statement of the problem................................................................................................................4
1.4 Research questions...........................................................................................................................5
1.5 Objectives of the study.....................................................................................................................5
1.5.1. General objective.....................................................................................................................5
1.5.2. Specific objective......................................................................................................................5
1.6 Delimitation of the study..................................................................................................................5
1.7. Significance of the study..................................................................................................................5
1.8. Research methodology....................................................................................................................6
1.8.1 Research design.........................................................................................................................6
1.8.2 Research approaches.................................................................................................................6
1.8.3 Research population..................................................................................................................6
1.8.4 Sampling Technique and Simple Size.........................................................................................7
1.8.5 Data collection methods............................................................................................................8
1.8.6 Data analysis and interpretation...............................................................................................8
1.9 Organization of the paper.................................................................................................................8
CHAPTER TWO.............................................................................................................................9
REVIEW OF RELATED LITERATURE.......................................................................................9
2.1 Theoretical Literature Review........................................................................................................9
2.1.1 Concept and Definition of Value Added Tax (VAT)..............................................................9
2.1.2 VAT in Ethiopia...........................................................................................................................9
.1.3 VAT Administration....................................................................................................................11

ii
 2.1.4 Registration procedure............................................................................................................12
2.1.5 Filling of tax return and payment of VAT................................................................................12
2.1.6 VAT assessment procedures....................................................................................................13
2.1.7 Efficient VAT Administration System.......................................................................................13
2.1.8 Principles of a Good Tax System..............................................................................................15
2.2 Empirical Review.............................................................................................................................17
2.3 Summary and Knowledge Gap........................................................................................................20
CHAPTER THREE.......................................................................................................................22
3. DATA PRESENTATION, ANALYSIS AND INTERPRETATION.......................................22
3.1. INTRODUCTION..............................................................................................................................22
3.2. Questionnaires Distribution and Response Rate..........................................................................22
3.3. General Information of the Respondents......................................................................................22
3.3.1 Gender of the Respondents.....................................................................................................23
3.3.2 Age Group of Respondents......................................................................................................23
3.3.3 Academic Qualification of Respondents..................................................................................24
Source: from own questionnaire 2024...................................................................................................24
3.4 Answers to Research Questions.....................................................................................................24
3.4.1 Efficiency and Effectiveness of VAT Assessment and Collection Procedures..........................24
CHAPTER FOUR.........................................................................................................................36
SUMMARY FINDING, CONCLUSION AND RECOMMENDATIONS..................................36
4.1 Summary of Research Findings.......................................................................................................36
4.2 CONCLUSION...................................................................................................................................37
4.3 Recommendations..........................................................................................................................38
REFERENCES..............................................................................................................................40
APPENDIX A...................................................................................................................................i
Questionnaire for VAT Administration Study in Lemi Kura Sub-city.......................................................i
APPENDIX B................................................................................................................................vii

iii
 LIST OF TABLES
Table 3:1 Gender of sample respondnts....................................................................................... 26
Table 3:2 Age Group of Sample Respondents............................................................................. 26
Table 3:3 Education qualifications of Respondents...................................................................... 26
Table 3:4 how effective and efficient are tax assessment and collection procedures.................. 27
Table 3:5 Questions Related to Major causes of tax collection problems................................... 30
Table 3:6 Questions related to Tax payers Knowledge / Awareness/ about taxation.................. 32

iv
LIST OF ACRONYMS / ABBREVIATIONS

ERCA: Ethiopian Revenue and Customs Authority

FDRE: Federal Democratic Republic of Ethiopia

GDP: Gross domestic Product

MOR: Ministry of Revenue

v
 Abstract
The primary objective of this study was to assess the effectiveness and efficiency of VAT
administration in Lemi Kura Sub-city, focusing on the challenges faced, the knowledge and
awareness of taxpayers, and the systems used by the branch office. The findings reveal
significant challenges in VAT administration, including limited taxpayer awareness and issues
with the current tax administration system. Additionally, while the computerized system used by
the tax office is beneficial, it still requires improvements to enhance its reliability and user-
friendliness. The conclusions highlight the need for targeted educational programs to improve
taxpayer knowledge and comprehensive system upgrades to address technical issues and
streamline VAT administration. These steps were essential for enhancing the overall efficiency
and effectiveness of VAT administration in Lemi Kura Sub-city. The study was based on
descriptive analysis. The researcher used only primary in conducting the research. In this
regard, a total of 97 taxpayers have participated in the study as a source of information. The
primary data was collected through mixed type (i.e. both close and open ended) questionnaires.
The researcher has distributed questionnaires to selected tax payers. In addition the researcher
use structured and unstructured interview with management bodies. The secondary source was
collected from other relevant material, including former research papers done, proclamations,
manuals and guidelines, declarations and policies, books, encyclopedia, and the internet as well.
The assessment highlights the need for improved taxpayer education and awareness programs to
enhance compliance. Upgrading the existing computerized VAT administration system to a more
integrated and reliable online platform is recommended to address the technical challenges.
Strengthening the administrative capacity of the branch office through training and resource
allocation is essential for improving the overall effectiveness and efficiency of VAT
administration in Lemi Kura Sub-City.

Key Word:-VAT administration, Taxpayer awareness, Tax administration system Efficiency and
effectiveness

vi
 CHAPTER ONE
INTRODUCTION
1.1 Background of the study
According to Kaldor (1980) in prior’s time study, “A tax is a compulsory contribution from the
person to government to defray the expenses incurred in the common interest of all without
reference to special benefit conferred.” Quickly he added that “A tax is a compulsory
contribution of the wealth of a person or body of persons for the service of the public powers”

Taxation is defined as government revenue to fulfill public necessities. That is for social,
economic and political aspect of the society. Generally, tax revenue is an important for the
improvement of the living standard of the general public for a country growth and for
implementing policies and strategies. As Asamnew G/silassie (2008) described one of the
mechanisms in which governments finance their spending is through taxation: Tax is that the
main part of government revenue that accustomed to finance all the government expenditures to
stabilize the economy. Taxation is one of the best instruments to boost the potential for public
sector performance, to Finance the social insurance program and for the repayment of public
debt (Parameswaran, 2005). Taxation, even if often ignored, is a central component in the
development of both low and middle income nations (Russell, 2010).

The introduction of the value added tax (VAT) represents one of the most significant innovations
in tax policy and administration in developing countries, if not the most significant one (Moore
et al., 2018). While at the beginning of the 1980s only about 30 countries had adopted the VAT,
this number increased to almost 140 by 2009, an increase mostly driven by low- and middle-
income countries (IMF, 2011). The VAT has become the single largest source of revenue in
many countries, rising on average about a quarter of total tax collected and almost 40 percent in
African countries (Ebrill et al., 2001; Keen, 2012; ATAF, 2019).

According to the International Monetary Fund (IMF), VAT implementation and collection pose
significant challenges, particularly in developing countries. Tax authorities in such countries
often lack proper institutional frameworks, adequate controls, and sufficient resources to ensure
effective VAT administration (IMF, 2018)

1
Ethiopian government has introduced Value Added Tax as part of the overall tax reform
program. The tax reform program is preceded by establishment of a new Ministry of Revenue as
a first step to improve tax collections and to combat fiscal fraud. Various reforms have been
conducted subsequent to this the increase in the sales tax and the removal of import duty
surcharge in 2000; a new legislation on presumptive taxation and a 5 percent withholding tax on
imports became effective in February 2001; legislation was approved in March 2001 to introduce
the TIN system to reinforce the collection powers of revenue agencies, and a tax reform
implementation task force was established; a large taxpayer was made operational in July 2001;a
draft Value Added Tax legislation was submitted to parliament inOctober2001 (Habtamu,
Reddy, Debela, 2015).

According to Yesegat (2008), in Ethiopia revenues raised by VAT are usually gathered at the
expense of loss in its significant features. This may be caused by factors including poor VAT
administration, i.e., the in capacity of tax authorities to implement the attributes of the tax in
practice. A good tax administration is essential in fully implementing the design features of VAT
and achieving government’s policy objectives at large,

Numerous studies on tax compliance and administration have been conducted. While our country
also faces challenges with tax collection, few studies have examined the taxpayer's perspective in
Lemi Kura subcity. Previous studies by Teklu (2011),Zenebe (2018)and Heran(2018) and
focused on problems with the revenue authority but did not consider taxpayers' opinions and no
study was conducted in Lemi Kura subcity. Therefore, this paper will examine Value Added Tax
Administration in Lemi Kura subcity involving major stake holders i.e., tax collection officers
and taxpayers.

2
 1.2 Background of the organization

Sub city Lemi Kura, located around Ayat and has witnessed a significant growth and
development over the years. Established as part of Addis Ababa’s urban expansion
initiatives, Lemi Kura has evolved into a bustling hub of economic activity, housing a
diverse population engaged in various sectors, including commerce, manufacturing, and
services.

The Lemi Kura sub city’s history is inherited with Addis Ababa’s broader narrative,
reflecting the city’s transformation from a modest settlement to a vibrant metropolis.
Lemi kura’s strategic location and proximity to key transportation routes have
contributed to its economic vitality, attracting businesses and investment opportunities.

However, alongside its growth and progress, Lemi Kura grapples with various challenges,
including infrastructure deficits, service delivery gaps, and governance issues. Within the realm
of taxation, VAT administration emerges as critical area of concern, with implications for
revenue generation, business operations and economic development within the subcity.

Understanding the historical context of Addis Ababa subcity Lemi Kura is essential for
comprehending its present day dynamics and challenges, particularly in the realm of VAT
administration. Historical factors, such as urbanization trends, demographic shifts, and policy
decisions, have shaped the subcity’s socio-economic landscape and influenced its tax
administration practices.

3
 1.3 Statement of the problem
Ethiopia is currently experiencing a significant development process that will effectively solve
multiple societal issues through a variety of activities and infrastructure improvements. In order
to achieve this socio-economic development, the government relies heavily on the collection of
VAT from the public. Taxation is a crucial aspect of the country's economic development and
VAT, in particular, serves as a necessary source of income for the government, with a 15% tax
levied at every level from producers, retailers, and consumers to service providers (MRE, 2018).

Developing countries struggle with low tax collection rates, which can be attributed to
ineffective tax administration caused by factors such as limited resources and designing taxes
without considering their practical implementation. Bird and Gendron (2007) pointed out that
developing and transitional countries have specific challenges, including fragmented economies,
large informal sectors, low tax morale, rampant evasion, and lack of trust between tax
administrators and taxpayers. Furthermore, a lack of proper management in the VAT selling
process results in unfair competition and revenue loss due to the failure to issue receipts as proof
of payment to the government. This is a significant issue as receipts are necessary for the
government to collect revenue from any business activity, leading to a decrease in government
revenue

In Addis Ababa level, Kassu (2011), Rosen (2011) and Fiyori (2017) studied the challenges of
tax administration in Arada Sub City, while Gebreselassie (2011) and Asamenew (2012)
investigated the tax assessment and collection problems of category “A” taxpayers in Yeka Sub
City. Henok, (2014) also assessed the VAT administration impact on revenue performance in
Yeka Sub City

As evident from the studies presented, different researchers studied the VAT administration
through different point of view in several study areas. However, most of the studies examined
the topic from the tax administer side without including the taxpayers view in a narrow scope
and and also no study has been made in Lemi Kura subcity. Accordingly, the purpose of this
study is to investigated the Value Added Tax administration in In Lemi Kura subcity and also to
include the taxpayer view to make an all-round assessment

4
 1.4 Research questions
The study attempted to answer the following questions:

1. What are effective and efficient tax administrations in Lemi Kura subcity?
2. What are taxpayers’ knowledge and awareness about taxation?
3. What kind of system does the sub city implement to VAT collection?
4. What other constraints are within Sub city and VAT payers that hinder the smooth
administration of VAT

1.5 Objectives of the study

1.5.1. General objective

The general objective of the study would be to investigate the Value Added Tax
administration in Lemi Kura sub city.

1.5.2. Specific objective

Specifically, this research paper tries to address the following issues:

1. To examine the effectiveness and efficiency of tax administration in Lemi Kura sub city
2. To analyze the knowledge and awareness of taxpayers related with VAT administration.
3. To examine the challenges of VAT administration in in Lemi Kura sub city
4. To assess the type of system the branch office use to administer VAT

1.6 Delimitation of the study

It is difficult to address the entire group of taxpayers in all sub-cities and branches. The study's
focus is confined to the issue of VAT administration under the Ministry of revenue Lemi Kura sub
city taxpayer's branch. It's crucial to keep the scope of the investigation moderate in order to fully
analyze the problem. For the purpose of conducting a thorough analysis and trustworthy research
on issues related to tax administration, the researcher is therefore restricted to the taxpayer's
branch of Ministry of revenue Lemi Kura sub city.

5
 1.7. Significance of the study
The findings of this study were expected to contribute to the existing body of knowledge on
VAT administration in Ethiopia, particularly at the subnational level. By identifying challenges
and proposing recommendations for improvement, the study aims to inform policy and practice,
ultimately enhancing revenue collection and supporting economic development efforts in Addis
Ababa Lemi Kura subcity.

1.8. Research methodology

1.8.1 Research design
Four different sorts of study designs exist. Descriptive, analytical, and predictive are these. The
descriptive style can be used to name and categorize the elements or traits of the subject.
Analytical frequently extends the Descriptive technique to make suggestions or provide
explanations for why or how something is happening. Predictive to speculate intelligently on
future possibilities based on close analysis of available evidence of cause and effect. With the
understanding that a descriptive research design would be utilized to describe the facts and
characteristics of the subject of the study, the researcher uses a descriptive survey research
design. It was also used in fact-finding research, aids in the formulation of guiding principles,
and provides solutions to challenges pertaining to regional or broader national concerns. In
addition, it aims to provide those answers. For the who, what, when, where, and how questions.
According to Adams, Khan, Raeside and White (2007) research design is the blueprint for
fulfilling research objectives and answering research questions. In other words, it is a master plan
specifying the methods and procedures for collecting and analyzing the needed information.

1.8.2 Research approaches

This study finds appropriate to apply the quantitative research approach. The reason for selection
is that the quantitative research approach provides a comprehensive assessment of VAT
administration in Ministry of Revenues Lemi Kura sub-city. This helps to identify areas that
need improvement and make recommendations for effective VAT administration.

1.8.3 Research population

Based on available data, there were approximately 3,000 VAT-registered taxpayers in Lemi Kura
sub city in Addis Ababa.

6
 1.8.4 Sampling Technique and Simple Size
The study applied simple random sampling technique. Guiding principle behind this
technique was that each element must have an equal chance of being selected . There are
three reasons for choosing simple random sampling technique:

• To increase statically efficiency,

• To provide adequate data for analyzing population and

• To minimize bias.

To determine the sample size, the study will use Yamane’s (1967) formula that provides a
simplified method to calculate the sample size.
N
n= 2
1+ N (e)
Where:
• n is the sample size.
• N is the population size.
• e is the margin of error (expressed as a decimal, e.g., 0.1 for 10%).
If you want to calculate the sample size using Yamane's formula with a population of
3000 and a margin of error of 10% (0.1), you can use the same formula:
N
n= 2
1+ N (e)

Where:
N= Population size = 3000
e = Margin of error = 0.1
3000
n= 2
1+ 3000(0.1)

3000
n=
1+ 3000∗0.01

3000
n=
1+ 30

3000
n=
31

n= 96.77

7
 Therefore, the sample size ( n ) is approximately 97.
1.8.5 Data collection methods

In an effort to gather data from taxpayers and the tax office, the research was utilized structured
questionnaires which was primary data. These instruments offer two primary advantages. First,
they can be efficiently distributed to a large number of respondents, making the process both
time-efficient and economical. Second, they often provide respondents with anonymity, allowing
them to provide honest answers to sensitive questions.

1.8.6 Data analysis and interpretation

To analyze and interpret the results of the primary data that has been obtained from the
respondent’s experiences and observations, which are used to evaluate the VAT administration

in Lemi kura Sub-city, descriptive statistics, percentages, graphs and tables would be used.

1.9 Organization of the paper

The paper was organized into four chapters addressing specific aspects of research topic.
Chapter one provides an introduction to the study, including the statement of the
problem, research questions, objectives, scope, significance, methodology and
limitations. Chapter two outlines detailing research design, approach, population,
sampling technique, data collection methods and data anal ysis while the third chapter
contains brief description of the research methodology. The fourth chapter presents the empirical
findings from the assessment.

8
 CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.1 Theoretical Literature Review
2.1.1 Concept and Definition of Value Added Tax (VAT)

Taxes are mandatory contributions to support the government, which are levied on various things
such as property, income, and transactions. They differ from fees and fines in that they are
imposed on the entire community and are not tied to receiving any specific services, privileges,
or violations of the law. Taxpayers are legally obliged to pay taxes and may not always receive
direct benefits in return. The primary means for governments to generate revenue is taxation,
which is essential for financing operations and providing public goods and services (Jemal,
2020)

VAT is an indirect tax levied on the consumption of goods and services, but definitions of the
term vary across different authors. Lejeune (2011) identifies it as a prevalent form of
consumption tax and a major source of revenue for governments. For James (2011), VAT is
advantageous as it allows for the recovery of taxes on business inputs and prevents the cascading
effects of turnover tax. Meanwhile, Parameswaran (2005) views VAT as a type of sales tax that
must be paid by manufacturers or providers based on the value added by them. Producers only
owe tax on the added value, meaning they can receive a refund for VAT paid on purchases or
inputs. Ultimately, VAT is meant to be paid on the difference between the value of sales and
purchases throughout the production and distribution chain.

The value added tax (VAT) is a fairly recent form of taxation that was first introduced in France
around 50 years ago. While it was initially only used in a few countries, by the late 1980s most
countries had adopted it and it now accounts for around 25 percent of tax revenue worldwide.
VAT is now the main form of indirect taxation in many different countries at varying levels of
development (Thorony, 1960 and Ebrill et al, 2001).

2.1.2 VAT in Ethiopia

In Ethiopia, VAT was introduced on January 1st, 2003, as a replacement for sales tax. It is
believed that VAT plays a major role in generating revenue for the government in the countries

9
that implement it (FDRE, 2002). The introduction of VAT in Ethiopia aimed to address the
limitations of the sales tax system, which did not allow for the collection of taxes on added value
created during sales transactions. VAT, on the other hand, enables the collection of taxes at
multiple stages and allows for the refund of taxes paid on inputs, thus reducing the likelihood of
tax evasion. VAT is also viewed as a consumption tax, which raises awareness among consumers
and encourages them to reduce consumption, leading to increased savings and investments.
Outdated sales tax was insufficient in generating revenue for the government to cover necessary
expenditures (Yohannes & Sisay, 2009).

Jaleta (2014) outlines four primary reasons for the implementation of VAT in Ethiopia. These
objectives include generating significant amounts of revenue to drive and support national
development, distributing income and wealth among individuals living within the state, fulfilling
obligations under the WTO agreement, and following the IMF's directives.

The Ethiopian revenue and customs authority has implemented a new amendment to the Tax
Administration Proclamation no.983/2008. This categorizes taxpayers into three groups. Firstly,
the Category "A" taxpayers is considered large size taxpayers, who includes business income
taxpayers or rental income taxpayers that have separate legal personality regardless of their
annual revenue. Secondly, any other business income or rental income taxpayers with an annual
gross turnover of birr 1,000,000 or more fall under this category. The Category "B" taxpayers are
medium size taxpayers that fall under this category if their annual gross turnover is more than
birr 500,000 but less than birr 1,000,000. Lastly, the Category "C" taxpayers are small and micro
size taxpayers that are any other business income or rental income taxpayer with no legal
personality whose annual gross turnover is estimated to be up to birr 500,000.

In Ethiopia, small and medium businesses must operate formally, with proper licensing, and pay
taxes according to the Income Tax Proclamation No. 979/2008. Those who earn income from
trading must register for tax, keep records, conduct tax assessments, pay taxes, and have other
tax-related duties. Businesses also need to use cash register machines, and most small-to-medium
taxpayers must comply with indirect taxes, including VAT and TOT. Small and medium
businesses with an annual taxable transaction below birr 1,000,000 must pay TOT to ensure
fairness in commercial relationships and increase government revenue from taxation (MRE,
2016).

10
.1.3 VAT Administration
In the study by (Yesegat, 2008) VAT administration pertains to how tax authorities discharge the
responsibilities entrusted to them with respect to taxpayers’ identification and registration, VAT
filing and payment, control of VAT filing and payment, VAT invoicing,
VAT auditing, penalties, and VAT refund. In Nwanyanwu (2015) on his behalf stated that, Value
Added Tax (VAT) Administration refers to the process adopted in registering, assessing,
collecting, and accounting for VAT revenue. It encompasses penalties and cases of appeal
associated with the making of returns arising from failure to register in line with the VAT Act.
Therefore, a good VAT administration means fully implementing the design attribute of tax and
reducing gap between effective taxation and what it is implied to be in legislation (Abay, 2013).

Tax administration refers to the identification of tax liability based on the existing tax law, the
assessment of this liability, and the collection, prosecution and penalties imposed on recalcitrant
taxpayers. Tax administration, therefore, covers a wide area of study, encompassing aspects such
as registration of taxpayers, assessments, and collection (Kangave, 2005). Ethiopia’s tax reform
program has introduced VAT at the rate of 15% on
January 1, 2003, to replace the sales tax proclamation that provides exemption for necessities and
domestic transportation and zero rating to encourage exports and capital investments. After the
introduction of VAT, additional exemptions were extended to basic foods, agricultural fertilizers
and to other products. Unlike the sales tax, VAT provides relief of tax on all business inputs,
including capital goods and business expenditures and will provide further business incentives by
zero rating exports and the international transport of goods and passengers. Since domestically
produced goods relieved of VAT, they will be more competitive within international markets and
may mean a shift from Ethiopia's dependence on foreign to domestic trade, but it is too early to
evaluate its impact. It is not, however, difficult to see that its implementation is a challenge,
owing to the predominance of small and informal operators in the country, its history of tax
evasion and corruption, lack of standard recordkeeping systems as well as the lack of knowledge
about VAT and a tax-base for its computation.

Tax assessment refers to the initial review by the tax authority of the tax declaration and attached
supplementary documents submitted by a taxpayer and verification of the arithmetical and
technical accuracy of the declared tax liability and tax payable shortly after the submission of the

11
declaration once an income declaration is checked and verified by the concerned tax authority
through a process called income tax assessment, hence, tax assessment is the end result of the
process of ascertaining a tax payer’s taxable income and the tax payable on that income. Tax
collection is a collection of money from taxpayers based on the tax assessment declaration or
notification (Tesfaye et al, 2014). Jantscher (1990) noted that the basic tasks of tax
administration consists of three distinct (though connected) activities i.e., identification,
assessment, and collection.

2.1.4 Registration procedure

Under the VAT proclamation, registration for VAT is categorized in to three. These are
obligatory, voluntary and special business categories. Any person who carries on a taxable
activity and at the end of any period of 12 calendar months has made, during that period, taxable
transactions the total value of which exceeds 1,000,000 birr or at the beginning of any period of
12 calendar months there are reasonable grounds to expect that the total value of taxable
transactions to be made by the person during the period will exceed 1.000,000 birr, has the
obligation to register for VAT. (article 16(1) (a) and (b)) according to article 17, a person who
carries on taxable activity and is not required to be registered for VAT may voluntarily apply to
the tax authority for such registration, if he regularly is supply ignore rendering at least 75% of
his goods and services to registered persons. The third category of registration, special business
categories that also have the following features: those who are involved in export are advised to
be registered voluntarily in order to get refund. This is practical through zero rate purchases that
enable the person to ask credit on input tax. Such forced special business category registrants are
gold, electronics, importers, shoe factories, level ten and above constructors, computers and their
accessories, leather and leather products, plastic and plastic products (Proclamation no.
978/2008).

2.1.5 Filling of tax return and payment of VAT

Every registered person is required to file a VAT return with the authority for each accounting
period, whether or not tax is payable in respect of that period; and to pay the tax for every
accounting period by the deadline for filing the VAT return. The VAT return for every
accounting period is filed no later than the last day of the calendar month following the
accounting period. VAT on taxable imports is collected by the Ministry of Revenues of Ethiopia

12
accordance with VAT as per the customs legislation of Ethiopia under the procedure
contemplated for customs duty, (proclamation no.978/2008, and art.26).

2.1.6 VAT assessment procedures

The tax assessment for those, who are required to maintain financial records, is done based on
the records that taxpayers maintain; however, if they fail to maintain financial records, estimated
assessment will be done. For the rest of taxpayers, who are not required to maintain financial
records, it is based on the standard assessment method (Council of Ministers, 2008). The self-
assessment systems which are require taxpayers to do calculation, payment, and reporting their
own tax payable by themselves. However, VAT is essentially a self-assessed by taxpayer. In the
self-assessment taxation approach, taxpayers calculate their taxable income, file tax returns and
pay their taxes due. This taxation system basically presupposes taxpayer’s willingness to pay
taxes, continue accurate bookkeeping
behavior and calculate their taxable income based on objective data. Self-assessment is so
important helps to improve effectiveness by focusing resources on taxpayer services,
enforcement, reduce compliance costs and reduce corruption. But administrative assessment is
not compatible with modern tax administration (Bodin, 2008). The issue of self-assessment
reemerged in the early 1990s, as transition economies moved toward VAT implementation with
little experience of tax administration and little appreciation of what would be required to
administer an accounts-based tax (Ebrill, et al, 2002). Modern tax systems and their
administration are built on the principle of “voluntary compliance,” meaning that taxpayers are
expected to comply with their basic tax obligations with only limited intervention by revenue
officials. In practice, voluntary compliance is achieved through a system of “self - assessment”. In
most countries, the development of self-
assessment is closely linked to the rise of the VAT. Indeed, the real question is not how to
administer a VAT in a country without the capacity to administer self-assessment, but how to
implement the basic principles of self-assessment in a country willing to introduce a VAT (Keen,
2005).

2.1.7 Efficient VAT Administration System

Modern tax administrations attempt to collect adequate revenue while keeping tax administration
and compliance costs low and treating taxpayers fairly. The most costeffective systems are those

13
that convince most taxpayers to meet their tax obligations voluntarily, so that tax officials can
concentrate on the small number who does not comply.

Features of the tax administration that encourage compliance include a service- oriented attitude
that educates and assists taxpayers in meeting their obligations, effective audit programs and
consistent use of penalties as strong deterrents to non-compliance, and transparent administration
of the tax laws that is viewed as honest and fair (Okello, 2014).

Facilitating voluntary compliance: Modern tax administrations proactively facilitate compliance

by simplifying processes, providing information, education, and support to taxpayers, and
directing their limited compliance monitoring and enforcement resources to the areas of greatest
risk to revenues. They adopt a compliance risk management approach that recognizes a spectrum
of compliance behavior and an opportunity to foster a cooperative relationship with taxpayers.
This risk management approach is structured to systematically identify, assess, rank, and treat tax
compliance risks, as in the figure below, by segmenting taxpayers into compliance groups and
developing different responses to the factors that influence compliance in each group. This
approach recognizes that tax administrations must be thoughtful in how they deploy their limited
resources. Rather than focusing on enforcing compliance throughout the compliance risk
spectrum, tax administrations focus on enforcement in areas of greatest risk and facilitate
voluntary compliance in remaining areas (Munoz and Cho, 2003).

Tax administrations utilize information systems to monitor taxpayer accounts and an audit
strategy to detect non-compliance. A highly visible audit program is essential to ensuring that
taxpayers understand and are exposed to the consequences of non-compliance. An audit strategy
that focuses on the areas of greatest risk to revenues not only increases the return on the use of
limited audit and other compliance resources, but also facilitates voluntary compliance by
reducing the intrusion of the tax administration into the affairs of compliant taxpayers (OCED,
2004).

Traditionally, tax administrations have relied on recourse to legal remedies to enforce taxpayer
compliance, which has been described as a classic enforcement mentality, built upon the
fundamental assumption that a ruthless and efficient investigation and enforcement capability
will produce compliance through the mechanism of deterrence. Today, tax administrations focus

14
on facilitating and encouraging voluntary compliance. H owever, where appropriate, the full
rigor of the legal system is brought to bear on taxpayers who do not comply, thereby instituting
some level of uniformity in the application of the law and a perception of fairness among
taxpayers (Malcolm, 1994).

According to Tesfaye (2008), taxation has become a vital component of development effort of
every country without a tax system that functions well governments cannot provide even the
basic infrastructure and social services. Public infrastructures cannot be improved without an
equitable and efficient means of mobilizing revenue. Many countries are beginning to see that a
tax system has a role in providing a safety net for the poor. It is incentive measure to protect the
environment a good tax system is essential if governments are to pursue growth, equity and
environmental protection people will be more willing to pay. As stated by Uremadu, 2000;
Harvey, 1982; and Musgrave, 1987 cited in Uremadu and Ndulue (2011), a good tax system
must be based on principles as thus explained. Equity: treatment of similarly situated taxpayers
or that people should pay tax according to their abilities to pay. Certainty: it stipulates that the
time of payment, the manner of payment and the amount to be paid should be clear to the
taxpayer and to the taxing authorities. Convenience: this relates to mode of payment and the
timing. This principle stipulates that the time and manner of payments should be convenience to
the taxpayer. As a matter of fact, a tax system should be simple, easily assessed, and understood
and be collected at minimal costs. Economy: the total costs of collection should be small when
compared with the tax yield or amount realized from tax. Hence, the compliance costs to the
taxpayers and the administrative costs to the government negatively affect national output of
taxes collected. Simplicity: this is usually a good tax system should be very simple and not be
complex. It should be simple and well understood by both the taxpayers and tax administrators
alike. It should as well be easily administered.

2.1.8 Principles of a Good Tax System

A good tax system is an essential element of a well-functioning economy. Therefore, the
principles that guide its operation must be clearly defined and effectively implemented.
According to Bird and Zolt (2014), the following are the primary principles of a good tax
system: fairness, efficiency, simplicity, accountability, predictability, transparency, adequacy,
and enforceability.

15
Fairness implies that the tax system should ensure that each taxpayer contributes to the public
good according to their ability to pay. In other words, the tax burden should be distributed
equitably across income levels, to avoid any undue advantage to any individual or group (Bird
and Zolt, 2014). To achieve this, governments may use a progressive tax system where
individuals with higher incomes contribute more than those with lower incomes. Efficiency, on
the other hand, implies that the tax system should not impede economic growth or distort market
incentives. The tax system should allow businesses to operate efficiently and invest in productive
activities without any unnecessary burden. The tax code should be designed to minimize
compliance and administrative costs (Mankiw et al., 2010).

Simplicity means that the tax system should be easy to understand, comply with, and administer.
The complexity of the tax system is a significant compliance burden for taxpayers, especially for
small business owners. A simpler tax code can reduce the cost of compliance and free up time
for businesses to focus on other essential activities (Auerbach, 2010).

Accountability refers to the transparency of the tax system, both to taxpayers and to the
government. Transparency ensures that taxpayers understand how their tax dollars are being used
by the government, and that the government is accountable for its use of taxpayer funds. A
transparent tax system reduces the potential for corruption and improves governance (Zucman,
2019). Predictability means that the tax system should be stable, with long-term policies and
expectations that will not change suddenly. Taxpayers need to be able to make informed
decisions regarding their business finances, and sudden tax changes can deter investments and
undermine economic growth (Bird and Zolt, 2014).

Transparency requires that the tax system should be open and accessible to taxpayers. The
government must provide adequate information on tax mechanisms and administration, tax
policies, and revenue collections to enable taxpayers to make informed decisions (Brondolo &
Cervellino, 2018).Adequacy means that the tax system should generate enough revenue to fund
government programs and projects adequately. The tax system should be designed to reflect the
government's fiscal priorities, taking into account the country's social, economic, and political
contexts (Bird and Zolt, 2014).

16
Enforceability refers to the Government’s ability to collect taxes effectively. An enforceable tax
system means that the government must have the necessary resources and legal frameworks to
enforce tax laws and regulations without undue hardship to taxpayers. The tax system should
also operate in a manner that reduces the likelihood of tax evasion (Bird and Zolt, 2014).

A good tax system plays a critical role in the economic growth and stability of any country.

Governments must ensure that their tax system is guided by the principles of fairness, efficiency,
simplicity, accountability, predictability, transparency, adequacy, and enforceability. The
application of these principles can lead to a fairer, more efficient, and more manageable tax
system, which enhances economic growth and social equity.

2.2 Empirical Review

According to Dheressaet.al, (2015), the study was particularly focused on challenges of VAT
administration regarding the assessment, collection and implementation of VAT. Their survey
result showed that, most of the business entities have not comply with the laws and regulations
of VAT and they committed illegal activities by preparing fake invoices and they remitted the
tax income for themselves rather than to pay the government. Concerning the side of the
authority, it is incapable to identify and control business enterprises that are noncompliance with
the laws and regulations of VAT. They recommended in their study that the authority should
strengthen its follow-up, appraise the performance of existing, recruit qualified new employees,
strengthen its controlling mechanisms, improve its administrative systems and prepare programs
to provide intensive education to the society about the benefits, rules and regulations of taxes
specifically VAT.

Bizualem (2015), indicated that the major challenges delay Ministry of Revenues of Ethiopia
from generating what was initially planned are: lack of sufficient number of skilled personnel,
limited staff capacity, non-responsiveness by the management, limited awareness creation,
problems related with invoicing, unfair competition, and control centered management tendency.
And he recommended that the need to strengthen the administration capacity in general and the
VAT collection system as efficiently as possible. According to Jebessa (2005), many business
owners do not keep their books properly, which invited to general estimations, which are often
arbitrary. So training is necessary on the one hand and on the other hand, national standards for

17
bookkeeping, which would be respected in all taxation offices nationwide, need to be defined
and introduced.

According to Dekan (2003), the tax assessment sometimes can be un clear to the taxpayers.
Regarding to the complexity of tax assessment system (not simple and clear) may result in
unintentional non- compliance if taxpayers have problems with filling the tax form. Furthermore,
such noncompliance differs from other crimes. Because it can be concluded that the errors
occurred unintentionally due to the misinterpretation of the rules. Results from a survey shown
that only 55% of the taxpayers were certain, that they had neither overstated a deduction nor
understated taxable income on their return. Thus, by enhancing complexity, it is difficult to
distinguish honest from dishonest taxpayers. By this virtue, tax examiners in the tax
administration will have greater problems to identify a case of noncompliance and comparing
whether the violation was deliberate or unintentional. And this can be increased tax collection
costs. Besides, the Kwabena (2011), findings on the knowledge of tax systems revealed that most
self- employed are not knowledgeable of the tax system in Ghana. To affirm this internal revenue
service organizes educational programmers, for the self-employed category of the taxpayers and
find out the possible impact on revenue mobilization from the informal sector. The analyses on
education the research shown that, only 27 out of 189 respondents’ representing 14.3% have
received some tax education while the remaining 85.7% have never received any form of income
tax education.

Asamenew (2012), found that the major causes for the problem in VAT administration practices
are there exist inefficiency and insufficient number of tax assessment and collection officers,
most taxpayers lack sufficient knowledge of tax assessment and collection procedures. Thus,
most of taxpayers do not know why they are paying taxes; what types of taxes are expected from
them; and the applicable rules and regulations. Due to this he recommends that negligence, delay
in tax payment and evasion are taken by taxpayers as solution to escape from payment of taxes.

According to Hagos (2011) and Lemessa (2007), awareness creation by the authority on
taxpayers were rated about 87.8% and 74% of the respondents responded that below enough and
poor and this shows that the awareness creation activities of the tax authority were ineffective
and inefficient in according to awareness creation. Therefore, they established that the awareness
creation problem was a series and the root cause of all problems relating to the tax collection and

18
assessment. Due to this, the authority may not achieve the expected future voluntary compliance
in the absence of services along with the taxpayer’s lack of tax awareness. Without educating
taxpayers and creating tax awareness, making power visible to the community might detect the
deliberate evasions and frauds but not be a solution to create a compliant taxpayer those does not
comply unknowingly.

Markos (2010) found that different problems were observed, the main one is being attitudinal
problem of the taxpayers and implementation capacity of the government employees. As a result,
the data show that there are many businessmen and companies that should be registered for VAT
but are not. As a result, the branch office is losing millions of birr per year. And he
recommended changing the attitude of the taxpayers and building the implementation capacity of
the employees.

A study on Challenges of Value Added Tax Administration: The Case of East Wollega Zone by
Dheressa, Reddy, and Yadeta, 2015 investigated the challenges of VAT administration in
relation with assessment, collection and implementation and they also evaluate the main
problems related to VAT administration activities performance and service delivery of tax office
and voluntary compliance of taxpayers in the case of Eastern Wollega Zone specifically Nekemte
town. Their samples were composed of VAT registrants, Auditors, Tax Collectors, Audit and
Assessment and Process Owners/ Team leaders. The researchers noted that the authority is facing
the following problems that have an effect on collecting sufficient amount of revenue, resistance
against Value Added Tax registration, low level of tax awareness, weak audit and enforcement
capacity of the tax authority, selling goods and service without using value added tax invoices by
registrants, weak culture of taxpayers, lack of fairness, lack of experience of Value Added Tax
registrants, weak follow-ups and controlling mechanisms against those unregistered and
registered Value Added Taxpayers generally majority of the respondents stated that there is poor
Value Added Tax Administration in the East Wollega Zone.

In 2008, Yesegat’s study about Value Added Tax Administration in Ethiopia: A reflection of
problems had the objective of how VAT administrators in Ethiopia perform their duties and how
the effective taxation requirements differ from the legislation (focusing on the key administration
tasks) and identify key problem areas that deserve the government’s due attention. The outcome
of the study shows lack of tax awareness among the society and strong education programs as

19
well as lack of trust between taxpayers and administrators as major challenges to the VAT
system in the country. The gaps and problems identified in the study were partly because of
under staffing of the tax authority which confirms the existence of limited tax administration
resources. The researcher therefore suggested that enhancing tax education and follow up
programs are valuable and designing a strategy that can encourage consumers to ask for VAT
invoices could be helpful although this is likely to increase the administrative costs of the tax. It
is also advisable for the authority to consider the possibility of recruiting and retaining sufficient
number of qualified VAT administrators, auditors in particular.

Research about by Aruwa (2008), mainly examines the relevance and problems hindering
efficiency of VAT. Most of the staff perceives that they are not adequately equipped technically
and administratively to handle VAT operations. Taxpayer organizations have in appropriate
knowledge of VAT operations because as per the in-depth interviews with a few of the
organizations indicate that input VAT is wrongly treated as production costs. The responding
organizations declaim that input VAT caused their working capital requirements to increase.
Therefore, the argument that the system is not properly understood by the organizations remains.
Even if the governments have raised substantial revenue from VAT, it is presently perceived as
been underutilized due to high rate of tax evasion, lack of record keeping by business enterprises.

2.3 Summary and Knowledge Gap

The use of VAT as a means of raising government revenue is on the rise globally, with African
countries also adopting it due to its lower administrative and economic costs as compared to
other broadly-based taxes. Despite even relatively poor administration, VAT is considered an
effective tool for generating government revenue. The literature review includes discussion of
the concept and definition of VAT, as well as various administration activities such as VAT
collection, voluntary compliance, audit, refund, and enforcement.

According to studies, numerous challenges have been encountered in the Ethiopian tax system
since the introduction of VAT. The primary areas of concern are taxpayers' identification and
registration, VAT filing and payment, VAT refunds, VAT audits, penalties, and VAT invoicing
related to tax administration. Moreover, society lacks tax awareness, and trust between taxpayers
and administrators is weak. Resistance to registering for Value Added Tax, low tax awareness,
weak audit and enforcement capacity of the tax authority, unregulated sale of goods and services

20
without tax invoices by Value Added Tax collectors, and challenges enforcing tax laws all
impact the collection of sufficient revenue through Value Added Tax.

Tax authorities encounter various challenges in dealing with taxation, especially VAT, and
require enough time to comprehend and address these intricate matters. One of their greatest
challenges is convincing taxpayers to pay their taxes consistently and honestly. Once effective
systems are established, the administration and execution become seamless and user-friendly.
However, Ethiopia, similar to other developing nations, has only recently implemented VAT and
continues to experience obstacles in its VAT administration.

Overall, the researcher has identified a gap in the existing studies on VAT administration in
Ethiopia. While previous research has been conducted on this topic in various towns and by
different researchers, there has been a lack of comprehensive studies on VAT administration
practices at the federal medium level taxpayers’ branch office in Addis Ababa. Furthermore,
even the existing studies have not fully examined the taxpayers’ aspects of VAT administration.
This particular study aims a comprehensive study on VAT administration practices by focusing
on the federal medium level taxpayers’ branch office in Addis Ababa.

21
 CHAPTER THREE
3. DATA PRESENTATION, ANALYSIS AND INTERPRETATION
3.1. INTRODUCTION
This chapter presents the study's analysis, results, and discussions based on the study's objectives
and methodology. The main objective was to assessment and collection problems of VAT for
taxpayers in the MOR Lemi Kura taxpayer’s branch office. The findings were discussed using
data gathered from respondents. Quantitative analysis was employed to handle data obtained
from 97 respondents regarding VAT assessment and collection issues, using statistical tools such
as frequency counts and percentages to examine questions in the questionnaires from 97
distributed questionnaire 3 were not return back or unreturnable. The qualitative aspect relies on
data derived from interviews and open-ended questionnaire questions, systematically integrated.
Qualitative data analysis techniques were justified as the research aims to evaluate the problem
of VAT assessment and collection. The MOR office taxpayers' responses to a questionnaire were
quantitatively analyzed, while responses from interviews were qualitatively analyzed, identifying
key themes related to the research questions. Individual interviews and group discussions were
transcribed to create the collected data. The topics are then categorized and subjected to thematic
analysis.

3.2. Questionnaires Distribution and Response Rate

Response rate refers to the number of subjects sampled in a study who respond to the research
instruments. 31 A response rate of 50% was deemed adequate for analysis and reporting,
response rate of 60% was good and a response rate of 70% and over was considered very good
(Mugenda & Mugenda, 2003). A total of 97 questionnaire copies were distributed, with 94
completely filled out, reflecting a response rate of 96.91%. Despite repeated attempts to contact
them, 3.1% did not reply.

22
3.3. General Information of the Respondents
The table below shows the respondents' characteristics, such as their sex, age, and qualification.

3.3.1 Gender of the Respondents

Table 3:1 Gender of respondents

Sex Number of Respondents Percent (%)

Female 40 42.26
Male 54 57.74
Total 94 100
Source: from own questionnaire 2024

The data reveals a higher percentage of male respondents compared to female respondents in the
survey conducted by the VAT Company. This difference in gender distribution could reflect
broader trends in the company’s workforce composition, industry characteristics, or engagement
levels. Understanding these patterns can help the company develop more targeted and effective
strategies for workforce management, diversity, and inclusion initiatives.

3.3.2 Age Group of Respondents

Table 3:2: Age group of respondents

Age Frequency Percent (%) Cumulative

percent
21-30 24 25.4 25.4
31-40 33 35.3 60.7
41-50 21 22.6 83.3
Above 50 16 16.7 100
Total 94 100

23
Source: from own questionnaire 2024

The survey also revealed gender distribution: 57.74% male and 42.26% female. This suggests a
higher representation of male respondents. The gender distribution might reflect broader trends
in the company's workforce, industry-specific dynamics, or different levels of engagement.
Understanding these patterns is important for VAT Company to develop targeted strategies for
workforce management, diversity, and inclusion initiatives.

3.3.3 Academic Qualification of Respondents

Table 3:3 Educational levels of the respondents:

Education Level Frequency Percent (%)

Certificate 19 19.72
Diploma 42 45.1
Degree 29 31
Master’s degree and above 4 4.18
Total 94 100

Source: from own questionnaire 2024

The updated education level distribution data reveals a workforce with diverse educational
qualifications. By understanding this distribution, the company can better tailor its training,
development, and recruitment strategies to meet the needs of its employees and ensure that all
educational levels are adequately supported and represented.

3.4 Answers to Research Questions

Using the collected data, this part answers the research questions set out by the study.

3.4.1 Efficiency and Effectiveness of VAT Assessment and

Collection Procedures
question 1 & 2 Response Frequency Percent (%)
How would you rate Yes 29 30.8
the overall
effectiveness and No 51 54.2

efficiency of the tax

24
 administration in Neutral 14 14.8
Lemi kura sub-city
Total 94 100

Source: from own questionnaire 2024

The data reveals a significant dissatisfaction with the effectiveness and efficiency of the tax
administration in Lemi Kura sub-city, with 47.8% of respondents rating it negatively. However,
the 54.2% positive responses suggest that there are some areas of strength that can be leveraged.
Addressing the concerns of the majority while engaging the neutral respondents and building on
the positive aspects will be crucial for improving the overall perception and performance of the
VAT administration.

question 3 Response Frequency Percent (%)

How timely are the Yes 51 54.2
tax administration
services in No 45 47.8

addressing your
concerns and Neutral 6 6.3
queries?
Total 94 100

Source: from own questionnaire 2024

The table presents data on the timeliness of tax administration services in addressing concerns
and queries. According to the responses, 54.2% of respondents find the services timely, while
47.8% do not, and 6.3% remain neutral. This indicates a significant dissatisfaction with the
timeliness of tax administration services, as 47.8% of respondents rate it negatively. However,
the 54.2% of positive responses suggest that there are aspects of the service functioning well. By
improving response times, leveraging positive practices, and engaging with neutral respondents,
the tax administration can enhance overall taxpayer satisfaction and efficiency in service
delivery.

Moreover, the data on the perceived fairness of the VAT rate reveals that 28.2% believe it is
appropriate, while a majority of 64.9% feel it is excessive, and 6.9% are neutral. This
underscores a general perception that the current VAT rate is unreasonable, adding to the

25
challenges faced by taxpayers. Addressing these issues collectively will require a comprehensive
approach to both rate adjustments and service improvements.

4. How would you rate the professionalism of the tax administration staff?

Response Frequency Percent(%)

Very effective 20 21.3
Effective 28 29.8
Neutral 10 10.6
Ineffective 20 21.3
Very ineffective 16 17.7
TOTAL 94 100
Source: from own questionnaire 2024

Given these findings, there is a clear indication that while nearly half of the respondents are
satisfied with the professionalism of the tax administration staff, there is a significant portion that
perceives room for improvement. This highlights the potential benefits of further staff training
and development initiatives to enhance professionalism and address the concerns of those who
rated it negatively.

5. How accessible are the tax administration services in your area?

Response Frequency Percent (%)
Very effective 16 17.0

Effective 29 30.9

Neutral 11 11.7

Ineffective 26 27.7

Very ineffective 12 12.8

TOTAL 94 100

Source: from own questionnaire 2024

26
The data reveals that while nearly half of the respondents are satisfied with the accessibility of
the tax administration services, there is a significant portion that perceives room for
improvement. Addressing the concerns of those who rated the services negatively could involve
measures to enhance accessibility, such as improving service locations, hours of operation, or the
availability of online services.

6. What improvements do you suggest for enhancing the effectiveness and efficiency of tax
administration?

Common Suggestions:
 Simplifying tax procedures and documentation.
 Increasing the number of trained staff to handle queries more effectively.
 Improving the digital infrastructure to facilitate online services

Section 3: Challenges of VAT Administration

1. What are the main challenges you face regarding VAT administration?

Response Frequency Percent (%)

Complex procedures 29 30.8

Lack of clear information 24 25.5

High compliance costs 17 18.0

Inadequate support from tax officials 13 13.8

Other (please specify) 11 11.9

TOTAL 94 100

Source: from own questionnaire 2024

The main challenges in VAT administration include complex procedures (30.8%), lack of clear
information (25.5%), high compliance costs (18.0%), and inadequate support from tax officials
(13.8%). Additionally, 11.7% of respondents mentioned other various challenges. These issues

27
underscore the need for simplified processes, clearer information, cost reduction, and better
support from tax officials.

2. How often do you encounter errors in VAT administration processes?

Response Frequency Percent (%)
Very often 9 9.6
Often 15 16.0
Occasionally 23 24.5
Rarely 27 28.7
Never 20 21.3
TOTAL 94 100
Source: from own questionnaire 2024
The data reveals that while a substantial number of respondents do encounter errors in VAT
administration processes, the frequency varies. Addressing these errors could involve improving
process accuracy, enhancing staff training, and implementing more robust error-checking
mechanisms to reduce the occurrence of errors and improve overall satisfaction with VAT
administration.

3. Are you satisfied with the current level of support provided by the tax office regarding VAT
administration?

Response Frequency Percent (%)

Yes 32 44.0

No 62 66.0

Total 94 100

Source: from own questionnaire 2024

The data reveals that while a smaller portion of respondents are satisfied with the support
provided by the tax office, the majority perceive it as inadequate. This indicates a need for the
tax office to enhance its support services, potentially through better communication, more
responsive customer service, and increased resources dedicated to assisting taxpayers with VAT

28
administration issues. Addressing these concerns could improve overall satisfaction and
efficiency in VAT administration.

Section 4: Knowledge and Awareness of VAT Administration

1. How would you rate your knowledge of VAT laws and regulations?
Response Frequency Percent (%)
A) Very knowledgeable 12 12.8

B) Knowledgeable 28 29.8

C) Neutral 15 16.0

D) Unknowledgeable 23 24.5

E) Very unknowledgeable 16 17.0

TOTAL 94 100
Source: from own questionnaire 2024

The data indicates that while a substantial number of respondents feel confident in their
knowledge of VAT laws and regulations, there is nearly an equal portion that perceives a lack of
understanding. This highlights the potential need for increased educational initiatives and
resources to improve the overall knowledge and compliance with VAT regulations.

2. How often do you receive information or updates about VAT regulations from the tax
office?

29
Response Frequency Percent (%)
A) Very often 15 15.9
B) Often 33 35.1
C) Occasionally 27 28.7
D) Rarely 15 15.9
E) Never 4 4.2
TOTAL 94 100

Source: from own questionnaire 2024

The table displays how frequently respondents receive updates about VAT regulations from the
tax office, highlighting a need for more regular communication from tax authorities.

3. Do you feel that the tax office provides adequate training and resources on VAT
administration?
Response Frequency Percent (%)
A) Strongly agree 8 8.5
B) Agree 24 25.5
C) Neutral 20 21.3
D) Disagree 27 28.7
E) Strongly disagree 15 16.0
TOTAL 94 100

Source: from own questionnaire 2024

This data suggests that while some respondents find the training and resources adequate, a larger
group feels there is room for improvement, highlighting the need for enhanced training and
resource allocation.

4. How would you rate the effectiveness of the communication channels used by the tax
office?

30
 Response Frequency Percent (%)
A) Very effective 6 6.4
B) Effective 22 23.4
C) Neutral 23 24.5
D) Ineffective 25 26.6
E) Very ineffective 18 19.1
TOTAL 94 100

Source: from own questionnaire 2024

This table indicates perceptions of the effectiveness of communication channels used by the tax
office, highlighting areas where improvements in communication strategies could enhance
effectiveness.

5. How confident are you in your ability to comply with VAT regulations?
Response Frequency Percent (%)
A) Very confident 28 29.8
B) Confident 32 34.0
C) Unconfident 18 26.1
D) Neutral 14 14.9
TOTAL 94 100
Source: from own questionnaire 2024

This table shows respondents' confidence levels in complying with VAT regulations, indicating a
majority expressing confidence, with a notable portion uncertain or lacking confidence.

6. What sources of information do you use to learn about VAT regulations? (Check all that
apply)
Source of Information Frequency Percent (%)
A) Tax office publications 25 26.2
B) Workshops and seminars 18 26.1
C) Online resources 26 27.6

31
Source of Information Frequency Percent (%)
D) Professional advisors 13 13.8
E) Other (please specify) 12 12.7
TOTAL 94 100
Source: from own questionnaire 2024

Understanding these sources can help in tailoring educational initiatives and improving access to
information about VAT regulations, ensuring that stakeholders have diverse and reliable avenues
to stay informed and compliant.

Section 5: VAT Administration System

1. What type of system does the branch office use to administer VAT?
Response Frequency Percent (%)
a. Manual paper-based system 5 5.3

b. Computerized system 30 31.9

c. Integrated online system 25 26.6

d. Don't know 34 36.2

TOTAL 94 100

Source: from own questionnaire 2024

The table presents the types of systems used by the MOR office for VAT administration,
indicating a majority utilizing computerized or integrated online systems, with a minority on
manual systems.

2. How would you rate the reliability of the VAT administration system used by the branch
office?

Response Frequency Percent (%)

A) Very reliable 16 17.4
B) Reliable 32 40.6
C) Neutral 21 21.7
D) Unreliable 16 11.0

32
Response Frequency Percent (%)
E) Very unreliable 9 10.1
TOTAL 94 100
Source: from own questionnaire 2024

This table shows perceptions of the reliability of the VAT administration system, indicating a
generally positive view with some areas for improvement noted.

3. How user-friendly is the VAT administration system?

Response Frequency Percent (%)

A) Very user-friendly 12 12.7
B) User friendly 30 31.91
C) Neutral 23 24.47
D) Unfriendly 19 20.2
E) Very unfriendly 10 10.6
TOTAL 94 100
Source: from own questionnaire 2024

This table illustrates perceptions of the user-friendliness of the VAT administration system, with
a majority finding it user-friendly or neutral, suggesting room for improvement in usability.

4. How often does the VAT administration system experience technical issues?
Response Frequency Percent (%)
a. Very often 10 10.6
b. Often 16 17.0
c. Occasionally 25 26.6
d. Rarely 27 28.7
e. Never 16 17.0
TOTAL 94 100
Source: from own questionnaire 2024

This table indicates the frequency of technical issues experienced by the VAT administration
system, highlighting occasional occurrences as the most common response.

5. How satisfied are you with the electronic services provided by the tax office?
Response Frequency Percent (%)

A) Very satisfied 17 18.08

33
Response Frequency Percent (%)

B) Satisfied 33 35.1
C) Neutral 25 26.6
D) Dissatisfied 12 12.7
E) Very dissatisfied 7 7.44
TOTAL 94 100
Source: from own questionnaire 2024

table shows satisfaction levels with electronic services provided by the tax office, with a majority
expressing satisfaction, though areas for improvement are identified.

6. Do you think the current VAT administration system effectively meets the needs of small
businesses?
Response Frequency Percent (%)
Yes 29 30.8
No 41 43.6
Unsure 24 25.5
TOTAL 94 100
Source: from own questionnaire 2024
This question evaluates perceptions regarding whether the current VAT administration system
adequately caters to the needs of small businesses. The responses provide insights into whether
improvements are necessary to better support this segment of taxpayers.

Section 6: INTERVIEW QUESTIONS

1. Responses may include suggestions such as implementing a more user-friendly online
platform, providing clearer guidance on VAT compliance, simplifying VAT reporting
processes, improving accessibility to VAT information and resources, enhancing training
programs for taxpayers, or any other specific improvements.
2. Responses may highlight strengths such as timely response to queries and concerns,
professionalism of tax office staff, accessibility of tax administration services, clarity of

34
 VAT regulations and procedures, effective communication channels, or other perceived
strengths.
3. Responses may identify areas such as reducing complexity of VAT procedures,
increasing clarity of information provided, improving support from tax officials,
enhancing reliability of the VAT administration system, addressing technical issues with
VAT systems, or any other areas needing improvement.
4. Responses may vary from "Yes" to "No" based on the respondent's satisfaction with the
VAT administration services. Below is an example of how responses could be presented
in a table format: This question assesses the overall satisfaction and willingness of
taxpayers to recommend the VAT administration services in Lemi Kura sub-city to
others.

35
 CHAPTER FOUR

SUMMARY FINDING, CONCLUSION AND

RECOMMENDATIONS
4.1 Summary of Research Findings
The study on VAT administration at the MOR Lemi Kura branch office identified significant
operational and administrative challenges that hinder effective VAT assessment and collection.
Internally, the office suffers from understaffing, inadequate training, unethical conduct among
staff, poor customer service, and outdated IT infrastructure, which collectively lead to
inefficiencies and widespread taxpayer dissatisfaction. Externally, taxpayers perceive tax rates as
unfair and disproportionate to their ability to pay. They also face complex and opaque tax
procedures and possess insufficient knowledge about VAT regulations, largely due to inadequate
educational initiatives provided by the tax authority. High compliance costs and frequent
personnel turnover further exacerbate these challenges.

Additionally, the study found that tax officers lack the necessary skills and capacity to
effectively carry out their duties, and there is a lack of sustainable training programs for these
officers. Taxpayers' attitudes towards compliance are negatively influenced by their
dissatisfaction with government dealings and the overall taxation system. The inadequate support
from tax officials, the prevalence of errors in VAT administration processes, and the general
inefficiency of tax services further compound the issues faced by taxpayers.

The study concludes that addressing these multifaceted challenges requires comprehensive
reforms. These include enhancing internal processes, investing in staff training and IT
infrastructure, simplifying tax procedures, and improving taxpayer education. Establishing a
transparent and user-friendly administrative structure for tax laws and procedures, implementing
fair and equitable tax rates, and leveraging advanced information technology to streamline
processes and prevent tax evasion are also crucial. Additionally, fostering a culture of

36
transparency and fairness, conducting regular tax audits, and ensuring effective communication
channels can significantly improve service delivery, increase taxpayer satisfaction, and enhance
overall compliance with VAT regulations.

4.2 CONCLUSION
The information gathered from the survey and interviews reveals several issues that hinder the
VAT administration procedures. The research questions address problems related to the
execution of assessment and collection procedures, as well as the understanding of VAT
concepts.

The respondents highlighted several operational and administrative challenges faced by the
MOR Lemi Kura branch office. Tax assessment and collection officers are understaffed and
inefficient, leading to subpar service performance. Additionally, there are issues with poor
customer service and unethical conduct among staff (lack of integrity and openness), which
hinder the tax assessment and collection process. The tax office also faces significant obstacles
due to unfair tax rates, taxpayers' inadequate comprehension of tax regulations, frequent
personnel turnover, the complexity of tax declarations, a shortage of qualified professional tax
assessors, and a subpar IT infrastructure.

The tax assessors lack the necessary skills and capabilities. The tax authority does not provide
sustainable training to build the capacity of the tax officers, and capacity building is not
considered a vital activity. Little or no attention is paid to skills, techniques, procedures,
customer relations, or managerial training, which directly or indirectly affects tax administration.

Taxpayers' inadequate knowledge and abilities, particularly regarding the technical aspects of
income tax, were also noted. Because taxpayers did not receive the necessary training from the
tax authority to understand the country's tax laws and regulations, they made errors in paying
their taxes on time and resorted to evasion as a short-term solution.

Regarding factors that affect taxpayers’ perceptions of the tax administration system, the study
revealed that the VAT burden imposed on VAT payers was perceived as unfair and did not
consider their ability to pay. The study concluded that a tradition of high compliance with tax
law helps reduce tax evasion strategies and facilitates tax compliance behavior. When the culture

37
of paying taxes is high, the level of tax compliance is also high. Furthermore, it was concluded
that taxpayers' behavior is affected by their lack of satisfaction with government dealings and the
general level of taxation. Tax compliance attitudes depend on individual satisfaction with the
government.

4.3 Recommendations
This section presents the appropriate suggestions that may help taxpayers, the tax authority and
other policy makers to improve the problems associated with assessment and administration
taxpayers and to MOR Lemi Kura branch office at large.

The following actions shall be taken to improve the assessment and collection problems of the
branch office.

 The management of the branch office should work towards bringing the team spirit by
solving internal problem of their staffs particularly they should give special attention to
training and personal development, to cop up the new science and technology and also
employees must be aware about the current tax rule, regulation, and procedures in order
to serve the taxpayers in a professional manner.
 The tax office should create a clear, straightforward, intelligible, transparent, and user-
friendly administrative structure for income tax laws and procedures. Additionally, be
sure to properly explain to ensure knowledge and compliance.
 The tax authorities should revise their system not only to ensure that equal taxes are
levied on individuals who have equal income but also to make sure that each taxpayer is
paying according to his/her ability to pay;
 In order to improve the efficiency of tax collection, the tax office should leverage
advanced information technology to streamline processes such as filing, payment, record-
keeping, and registration. It is crucial to employ cutting-edge computerization techniques
not only to enhance human resource capabilities but also to monitor and prevent tax
evasion effectively within taxpayers' workplaces. By embracing modern technology, the
tax office can optimize the overall tax collection process and ensure better compliance.
 Tax audits have an impact on revenue collection because they encourage taxpayers to
comply voluntarily, which boosts revenue. Strong audit follow-up is therefore a crucial
component.

38
 Tax audit makes it simple to determine the amount of tax owed, and people are then
protected from paying unnecessary penalties and interest. Tax audits increase revenue
collection and make it simple to stop tax avoidance.
 The core process should establish appropriate procedure and system of tax collection and
assessment procedure and assigning relatively best and capable professionals. The
management of the revenue office should work towards bringing the team spirit by
solving internal problem.
 It’s also recommend that all taxpayers needs to have a well understanding of their
current and future tax obligation while establishing a business at its early stage.
 Finally, it is recommended that a joint effort should be made by the tax payers and all
concerned bodies of the Government to bring about a spirit of team work, so that
sustainable growth and development will be ensured in the nearest future.

39
REFERENCES
Asamnew, G. (2008). Mechanisms of government financing through taxation.
African Tax Administration Forum. (2019). Value Added Tax in African countries.
Bird, R. M., & Gendron, P. P. (2007). The VAT in developing and transitional countries.
Cambridge University Press.
Ebrill, L., Keen, M., Bodin, J.-P., & Summers, V. (2001). The modern VAT. International
Monetary Fund.
Gebreselassie. (2011). Tax assessment and collection problems of category "A" taxpayers in
Yeka Sub City.
Habtamu, R., Reddy, R., & Debela, T. (2015). Ethiopian tax reform program and VAT
legislation.
Henok. (2014). Impact of VAT administration on revenue performance in Yeka Sub City.
International Monetary Fund. (2011). Value added tax: International experience and lessons for
developing countries.
International Monetary Fund. (2018). Challenges in VAT implementation and collection in
developing countries.
Kassu. (2011). Challenges of tax administration in Arada Sub City.
Keen, M. (2012). VAT, tariffs, and withholding: Border taxes and informality in developing
countries. International Tax and Public Finance, 19(1), 60-87.
Kaldor, N. (1980). Definition and role of taxation in government revenue.
Moore, M., Prichard, W., & Fjeldstad, O.-H. (2018). Taxing Africa: Coercion, reform, and
development. Zed Books.
Ministry of Revenue Ethiopia. (2018). Ethiopian Ministry of Revenue VAT guidelines.
Parameswaran, R. (2005). Taxation as a mechanism for government financing and economic
stabilization.
Rosen. (2011). Tax administration challenges in Arada Sub City.
Russell, B. (2010). Taxation in the development of low and middle-income nations. Development
Policy Review, 28(4), 441-457.
Teklu. (2011). Revenue authority challenges in Ethiopia.

40
Yesegat, W. (2008). VAT administration issues in Ethiopia. Journal of African Taxation, 3(2),
34-45.
Yamane, T. (1967). Statistics: An introductory analysis (2nd ed.). Harper & Row.

Bizualem, T. (2015). Challenges in VAT Collection and Administration in Ethiopia: The Case
of Ministry of Revenues of Ethiopia. Journal of Finance and Accounting, 3(5), 126-135.

Jebessa, B. (2005). Tax Administration and Reform in Ethiopia: The Experience of the
Ethiopian Revenues and Customs Authority. Addis Ababa: Forum for Social Studies.

41
 APPENDIX A
Unity University

School of graduate studies

Questionnaire for VAT Administration Study in Lemi Kura

Sub-city
Researcher: Mathewos Nebyou

Research Topic: Assessment of VAT Administration in case of lemi kura subcity

---Dear Participants,

I sincerely appreciate and thank you in advance for your generous time and prompt
responses. This study is being conducted as part of the requirements for a BA in
Accounting and Finance. I kindly ask for your cooperation in answering the following
questions as clearly and honestly as possible. Your responses will be kept highly
confidential. If you have any questions or concerns, please contact me at
[email protected]

General Instructions for Respondents:

• There is no need to write your name.

• In all cases where answer options are available, please place a tick (√) in the
appropriate box.

• Please try to describe your answers honestly in the space provided.

i
 Section 1: Demographic Information

1. Gender:

- A. Male

- B. Female

2. Age:

- A. 21-30

- B. 31-40

- C. 41-50

- D. Above 50

3. Academic Qualification:

 Illiterate

 General secondary school or les

 TVET/certificate

 Diploma

 First Degree & above

4. Occupation:

- A. Business owner

- B. Employee

- C. Self-employed - D. Other

4. Type of Business Engaged? _______________

ii
5. For how many years you are in this business? ________________

SECTION 2 : Effectiveness and efficiency of tax administration

N0 Very effective neutral ineffective Very

Items of effectiv ineffective
assessment e

1. How would you

rate the overall
effectiveness of the
tax administration
in Lemi Kura sub-
city?

2. How would you

rate the overall
efficiency of the
tax administration
in Lemi Kura sub-
city?

3. How timely are the

tax administration
services in
addressing your
concerns and
queries?

4. How would you

rate the
professionalism of
the tax
administration

iii
 staff?

5. How accessible are

the tax
administration
services in your
area?

6. What improvements do you suggest for enhancing the effectiveness and efficiency of
tax administration?

Section 3: Challenges of VAT Administration

N Items Complex Lack of High Inadequat Other

0 of assessment clear compliance e support (please
procedure
specify
s informatio costs from tax
)
n officials

1. What are the

main
challenges you
face regarding
VAT
administration?

Very often occasionall never

y
often rarely

2.

iv
 How often do
you encounter
errors in VAT
administration
processes?

3. How satisfied
are you with
the current
level of
support
provided by
the tax office
regarding VAT
administration
?

Section 4: Knowledge and Awareness of VAT Administration

Question Response Options

A) Very knowledgeable
B) Knowledgeable
1. How would you rate your knowledge of VAT laws and
C) Neutral
regulations?
D) Unknowledgeable
E) Very unknowledgeable
2. How often do you receive information or updates about A) Very often
VAT regulations from the tax office? B) Often
C) Occasionally
D) Rarely

v
 E) Never
A) Strongly agree
B) Agree
3. Do you feel that the tax office provides adequate
C) Neutral
training and resources on VAT administration?
D) Disagree
E) Strongly disagree
A) Very effective
B) Effective
4. How would you rate the effectiveness of the
C) Neutral
communication channels used by the tax office?
D) Ineffective
E) Very ineffective
A) Very confident
5. How confident are you in your ability to comply with B) Confident
VAT regulations? C) Unconfident
D) Neutral
A) Tax office publications
B) Workshops and seminars
6. What sources of information do you use to learn about C) Online resources
VAT regulations? (Check all that apply) D) Professional advisors
E) Other (please
specify)____________

Section 5: VAT Administration System

1. What type of system does the branch office use to administer VAT?
a. Manual paper-based system b. Computerized system

c. Integrated online system d. Don't know

2. How would you rate the reliability of the VAT administration system used by the branch
office?

vi
 A.Very reliable B. Reliable C. neutral D. unreliable E. very unreliable

3.How user-friendly is the VAT administration system?

• Very user-friendly B. user friendly C. neutral d. unfriendly e. very unfriendly

4. How often does the VAT administration system experience technical issues?

• Very often b. often c. occasionally d. rarely e. never

5. How satisfied are you with the electronic services provided by the tax office?

• Very satisfied b. satisfied c. neutral d. dissatisfied e. very dissatisfied

6. Do you think the current VAT administration system effectively meets the needs of
small businesses?

APPENDIX B
Section 6: INTERVIEW QUESTIONS

1.What improvements do you suggest for the VAT administration system?

2.What are the main strengths of the VAT administration in Lemi Kura sub-city?

3.What areas of VAT administration need the most improvement?

4.would you recommend the VAT administration services in Lemi Kura sub-city to others?

5.Additional comments or suggestions:

vii