Study Of The Vat System In Ethiopia Finance Essay

Study Of The Vat organisation In Ethiopia Finance EssayG overnment needs receipts from contrary types of sources to clothe for public serve kindred didactics, health, road and infrastructure distri hardlyes equ in ally to the public. This r direct offue will be the superstar in which it levies from disparate income is called a evaluate.A levy is a blood vessel of a unpolished for fosterage, close of developed countries their evaluateation harmonies argon in truth attractive and pie-eyed, the people ar well known about the impose what and why you be ease up, if you ar non pay you accept like you didnt accomplished your occupation even your right. How of all time in most Sahara counties like Ethiopia the people do not well understand about the necessity of the value what and why you argon pay, thats why the fraudulent and smugglers would be many and high maturation country. whence the fuss of value revenue collection and assessment in Ethiopia is the gap in the midst of the evaluatepayers willingness to pay appraise is as a major with different death penalty and other problems by the tax collectors. In general in Ethiopia, where the sensory faculty of taxpayers, the culture of paying taxes and the capametropolis of tax administrators appear poor.The tax clay should be balance the economic activity and expected the people on the ability to pay a tax in proportion to their level of income.From the broad concepts of taxation the tax should be divided in to twain major groups.These ar direct and indirect tax, from these indirect tax the wiz in which highlyComprehensive that includes give risers, wholesalers and retailers is the value added assess ( ad valorem tax).The value added tax ( bathing tub) is a raw(a) tax scheme introduced in Ethiopia since 2003 as aReplacement to sales tax.This tax collects from domestic transaction and importation of fairs. Where this tax is replaced the sales tax the assumption was the sales tax does not collect on added value, the value added tax minimizes the damage that whitethorn be caused by attempts to avoid and evade the tax and serves to ascertain the profit obtained by the tax payers and the tax initiates saving and investment because the tax is levied on consumable goods and procedure and does not tax capital and enhance economic growth and make betters the proportionality relationship between gross domestic product and government revenue. And has a proclamation, cites as a proclamation No. 285/2002.This paper will solid ground the up-to-the-minute main issues of bathing tub presidential term like organizational structure, staffing and learning, measure Payers naming and mechanization, invoicing and check keeping Requirements, controlling of register and payment, Audit of value-added tax, Refunds management, penalties and bell of garbage disposal and compliances with its strength and weakness in Ethiopias as follows2. OBJECTIVE OF THE carr yHow it works the Administration and compliance of value-added tax system in Ethiopia with its unconditional and negative during implementation of the current system and explains what compliance risks thither ar and why and how the risks occur over all those problems will be discussed and elevate the solutions shall be recommended in the report of study.3. METHODOLOGY OF THE bailiwickThe study is self-collected from different secondary data of yearbook reports and from assessment of different researches of organization of ad valorem tax system In Ethiopia by different Authors.4. SCOPE OF THE STUDYThe study is limited on the current of bathing tub administration in Ethiopian and compliance risksWith its strength and weakness in which applies will be generalized.5. DEFINITIONS A value added tax is a modern tax system and broad based .It replaces the sales tax, live with two rates 15% and 0% with exemptions of the tax. The threshold is based on the annual sales of goods and services higher up 500,000 Ethiopia birr. Have two types of registration that is obligatory and involuntary registration, the voluntary registrants argon registered when 75% their sales are supplied for tubful registered. The reports are monthly which provides in the declaration format whether it computer address or nil.Any taxpayers who are not registered for bath automatically payable to turn over tax (TOT). The exemption in value-added tax also applies in TOT.6 .ANALYSIS (MAIN BODY) determine added tax in Ethiopia introduce in the year 2003 cited as proclamation No. 285/2002 which replaces the sales tax with the assumptions mentioned in the introduction part. The current Ethiopia gross and Customs Authority (ERCA) was Federal Inland gross Authority (FIRA) before 2008. During the gunpoint of FIRA the vat would introduced and implemented in our country and still exercises aft(prenominal) merging of FIRA and Customs Authority.The administration of ad valorem tax includes organizational structure, staffing and training, Tax Payers Identification and Automation, invoicing and book keeping Requirements, controlling of file and payment, Audit of bathing tub, Refunds management, penalties and cost of administration all these activities are pertain to how applies and appropriates the government revenue and strategy powerful will be describe as follows6.1 Organizational structure, staffing and trainingEthiopia Revenue Authority should be interpreted an organizational structure for bath to be implemented through the branches of the Authority and the staff recruited and trained during the preparation of the tub introduced. Hence due the complication of the system in the Ethiopia case a special tubful unit in FIRA was setting up.Along this line, there were efforts to design the organization structure and to determine the recite of staff to be trained and deployed. Some go for been taken from the ex-sales tax unit, near suck up gone from the tax refo rm program and the Ministry of Revenue and some have been newly recruited.At present, the newly introduced Value Added Tax is administered by a newly established segment located at the Mexico square and some branches in the country and by the Ethiopian Revenue and springer Authority. The new department in ERCA is answerable to the General theatre director. The staffs are graduates of explanation, economics and the management profession.The organo-gram and staff assignment is depicted in the following diagram.General ManagerERCATax Payers registration and Education member (7)VAT DEPARTMENT precede (5)VAT Administration(2)Revenue Collection and EnforcementAssessment and Audit DivisionRevenue Accounts and ConsolidationDiagram 1- Organo- gram of the VAT incisionBy Arega Hailu Teffera June/2004 scour though, the VAT is computerized, considering the current and future challenges, the VAT department requires additional psychenel in all areas- taxpayer education and service, accoun ting and collection, enforcement and audit. Efforts soon underway within the Ministry and ERCA to strengthen the VAT administration, to improve service delivery, training of staff should continue to address the shortfall encountered. Specially, the administration should focus in strengthening its audit and enforcement wings.6.2 Tax Payers Identification and AutomationTaxpayer Identification occur (TIN) and VAT SIGTAS were implemented during 2000-2003. These systems have been operational by the FIRA and regional states and city administrations revenue regime through country-wide lucreAs earlier depict the system introduced during Federal In land Revenue Authority where it is Ethiopian Revenue and Customs Authority (ERCA). The system is an principal(prenominal) for efficient and sound tax and usance administration. Any taxpayer has only one identification number this will be used for VAT purpose, for with holding tax, for property tax e.t.c. In our country case taxpayers couldn t used different identification number. objectThe trade license number issued by Ministry of Trade and sedulousnessAutomation of VAT administration commenced with a simple software package package developed by a local IT blotto. In an attempt to deploy better software that integrates the different functions and processes of VAT administration, the government entered an agreement with a Canadian firm known as CRC-SOGEMA in April 2003. The software development project, VAT SIGTAS, was finalized and do operational at the VAT Department during February 2004. Later on, the new software rolled out to the regional branches of the ERCA. It was also made operational in four regional states and two city administration revenue administration following the delegation of VAT administration.Large taxpayers, started applying VAT SIGTAS in October 2005 upon the finality of the tax authority to administer all taxes of large taxpayers under one office. Previously the large taxpayers used to s ettle their VAT obligations at the VAT Department.The proper implementation of SIGTAS all taxes would help realize the following judge benefits of the projectincreased revenues and enhanced control,better service to taxpayers,standardize practices passim operational departments,reduction of non-value adding activities,real-time management (re approximationers, remittances, etc.), andIntegrated management of all taxes (e in particular for audit).The regional and city administration tax offices are also using the new system for their VAT operations with the previous VAT functionalities provided unchanged. Efforts are underway to deploy SIGTAS all taxes, with certain modifications, in all regional states and city administrations. The CRC-SOGEMA has already conducted requirements study.6.3 invoicing and book keeping RequirementsIs a very important for issuance of invoices during transaction of VAT system these invoices are printed by registered printing press after getting approval from ERCA. The invoices are separately printed for nonexempt and exempted transactions.In addition to the printing of invoice recording are obligatory for every VAT registered and postulate separate of nonexempt invoice and exempted. The VAT proclamation stipulates that VAT registrants should keep records of account for at least 10 years.However, due to lack of tax administrators follow-up and control, lack of awareness among the federation and the prevalence of poverty.these rules are not applied perfectly as to the truth required many problems face with getting invoices, using duplicated invoices, lack of conformity in using invoice, most business holds two books one for tax Authority and for Banks . usually the understated income holds book for tax Authority and the over stated book would be for Banks, Do not use invoices sanctioned by the Authority, dealing with buyer to issue the lower price in the invoice , also issue fraudulent invoices using invented VAT number of their own and collect VAT for their own e.t.c. These will be paralyzing the function of revenue as a whole. In order to solve this problem of invoicing the ERCA gets the expiriance from Latine America to be used the electronical cash registered at retailer on a net work with the SIGTAS.6.4 controlling of filing and payment harmonise to proclamation No. 285, word 26/1, every registerd person is required to file VAT return with ERCA for each accounting hitch and to pay the tax for accounting period by the deadline for filling the VAT return. Article 26/2 , the VAT return for every accounting period shall be filled no later than the last day of the schedule month following the accounting period, where as VAT on dutiable imports is collected at Customs and made by C.P.O automatically. The VAT obligation is computed based on the invoice recognize method in that the registered person will remit the difference between VAT received and VAT paid during transactions conducted during th e accounting period.ERCA made a controlling and filing of VAT using computerized system to administer VAT properly political science use computer programs, namely Standard Integrated political sympathies Tax Administration System (SIGTAS) and Automated System for Customs Data concern (ASYCUDA). The computer programs are used to maintain taxpayer register and process VAT returns. Detection of non-filers learnms to be carried out mainly manually. The authority tries to identify non-filers in collaboration with the Ministry of Trade and Industry. In Ethiopia every trader is required to renew business license annually with the pertinent offices under the Ministry of Trade and Industry or regional governments. To renew business licenses, traders are required to produce evidence from tax authorities that all taxes have beenPaid. The tax authorities on their part, before providing the evidence to taxpayers,6.5, Audit of VATAuditing is a elementary measuring of for effective tax collec tion, Audit of VAT in our country was very complicated before the introduction of computerized the tax system, due to different fraudulent of using invoice as mentioned in the above invoicing and book keeping requirements. However, the audit case by the audit endurance committee. The selection criteria include conviction declaration, nil VAT declaration, non filers, unusual VAT filing and information obtained from third parties and customs decleracion. Based on the above selected criteria would be subject to audit. Most of VAT registrant provides monthly report as credit or nil. This is the effect of tax evasion by the taxpayers. All these problems affect the potential of revenue this would be due to lack of taxpayers awareness, human resources listener in particular, the number of VAT registrant compare to auditors or the employees in tax authority is very low they cannot cover by the real(a) current employees in the ERCA.6.6 Refunds ManagementThe VAT proclamation No. 285/2002 Article 27/1 stated that at least 25% of the value of a a registered persons taxable transaction for the accounting period is taxed at zero in rate, the ERCA shall refund the amount of the VAT applied as a credit in surplusage of the amount of VAT charged for the accounting period within two months after the registered person files an application for refund, accompanied by documentary proof of payment of the excess amount. The second Article 27/2 relates to overbold excess credit. For non-zero rated transactions, the amount of VAT applied as a credit in excess of the amount charged for the accounting period is to be carried forward to the next five accounting periods and credit against payments for these periods. The registered person can claim refund if it has still unused excess credit at the end of the five month period. Refund claims are subject to checks and audit by the tax authority. In view of promoting exportation supplies, the tax authority effects VAT refund for export ers in 15 days after checking and verifying the documents presented to it.6.7. PenaltiesTaxpayers that are not compliant to the VAT law are subject to administrative criminal penalties. According to the VAT proclamation, articles 45-47 administrative penalties are imposed while persons are not registered for VAT where registration is required, when any registered person issued incorrect tax invoices, where invoices are issued without universe registered, where there is underpayment and late filing of returns. Administrative exquisitelys turn tail from a amercement 100 percent of the amount of tax payable and a fine of up to 50,000 Birr.According to articles 48-59 criminal offences are nonimmune to prosecution. A tax offence is a violation of the criminal law of the country and thence is subject to criminal charge and prosecution. Tax evasion, obstruction of tax administration, misadventure to notify changes in business address and business line, unauthorized VAT collection, i mproper tax debit and credit notes, aiding or abetting, offence by entities, offence by tax officers, offence by receivers are liable on convection to monetary fine of Birr 1000- 200,000 and imprisonment of not slight than 1 year to not more than 15 years depending on the gravity of the offence.6.8. Cost of AdministrationIn the case of Ethiopia the cost of VAT administration must be proportional with original standards of like developing countries. The researches indicate in most developing countries cost of administration estimates the range between 1 2% of collection. Actually low collection may not reflect efficiency but rather indicate unused of resources may occurred.In our country the administration be are salaries and reinforcement and top-ups to staff deployed to VAT department, the cost of fixed assets and consumables including telephones, faxes, internet, electricity and power, fuel and lubricants etc. Since customs collects duties and taxes in a single administrative document, i.e. the customs declaration, it is very difficult to apportion the cost of administration for VAT all these costs are the total consumable of ERCAs administration cost for VAT (the above costs are only for VAT actually expend ). thence when take 2003 2004 FIRA Customs report the total cost of administration for VAT was 9,718,848 birr and total collection of VAT during the year would be 5,234,730,000 birr, so total administration cost was 0.00186 this is under the standard from the point of professional standards sited. ( I think this information is too late, but it can see or indicate the current dressance, how ever now a day there are a lot changes to use resources effectively like the deployment of automation, recruitment of employees by allocate more budget how ever, it is not researched, but still it has a limitation)(Source FIRA and Customs- Administration and Finance, Budget for 2003/2004 fiscal year.)Tax Payers respectFrom any taxpayer that expected they must comply with the laws and regulations of tax and customs duty. How ever as an employee of tax and customs authority the real situation of the taxpayers behaviour is not what we are expected them. They are not complying with the tax and customs law. For instance with the fulfillment of the VAT registration requirement, timely reporting with the actual transaction they did, using authorized VAT collection, making true financial statement for tax purpose, providing the correct VAT invoice for any lymph node e.t.c. consider the above issues most of our taxpayers are not compliance. This would be approach in daily activity during tax and customs assessment and collection. Even there is a positive improvement to comply with law in changing the taxpayers attitude through different way of awareness creation. military force on VAT administrationWhen ever the VAT administration in Ethiopia has a problem, but there are positive actions are taken off by the Authority to facilitate the tax an d customs servies with toughened enforcement for non compliance taxpayers.Basically the Authority pursued the reform program in order to achieve the main objectives that are tax policy and administration reform, and customs reform and modernization. From the reforms the tax policy and administration reform have a result during the implementation would be income tax law that was in force for more than 40 years was replaced in July 2002VAT was introduced on January 1, 2003 to replace sales tax.Turnover tax was introduced on January 1, 2003 to apply to those taxpayers whose annual turnover is below VAT threshold.Excise tax was rationalized to more accurately reflect the current market situation.National implementation of the TIN network through the installation of communication equipment at FIRA, and City and Regional administrations sites. And taxpayers were registered for TIN.The switching of the estimated assessment method with the more standard assessment method in order to achie ve equity and administrative efficiency in conjunctive with presumptive taxation.Tax collection and audit manuals prepared and put in use.Large Taxpayers Office and VAT Department established.Operational departments are alter as part of the modernization of the FIRA. TIN system interface with the Ethiopian Customs Authority is operational.(before merging the two Authority)Using this in mind the strength way of FIRA, currently ERCA would be perform many activities to improve services delivery and the potential of revenue on VAT administration. frankincense areThe reform introduced during FIRA would take as a base to perform effectively and introduced BPR. rat extensive consultation with stake holders, comprehensive taxpayers education program and aggressive advertisement campaign.strongly used of computerized tax and customs system ( SIGTAS, TIN, ASYCUDA ++)Create positive attitude for the tax collector with good payments.Conducted comprehensive trainings on the VAT law, regulation , directives and administration techniques for tax officers drawn from different area of the country.Create strong enforcement unit on VAT7. Measures were taken to enforce registration for non compliant8 Administrative and criminal cases are strongly followed-up9. Strongly applied deterrent provisions penalties and prosecution e.t.c, thereof would beTaken to improve performance of VAT administration.9. Basic flunk1. Lack of strong and follow up for non complaints2. Lack of human resources specially VAT auditors3. Lack of taxpayers awareness.4. In some lack of ethics .Although VAT was achieverfully introduced in Ethiopia due to adequate preparations, different challenges have been faced in implementation as I have stated in VAT administration. In general ERCA faced the following challenges in VAT administration still-Resistance against VAT registration,Failure to register due to the prevalence of large informal sector,Low level of tax awareness,Suppression of taxable sales,Failure to issue invoices during transaction,Negotiate with customers during transaction to account VAT or not,Print and use of identical invoices, one registered by the FIRA and the other not, issue of fictitious invoices among related persons without actual transaction to overstate input VAT and claim refund,Prevalence of significant number of constant credit filers, nil-filers and non-filers,Non-remittance of VAT collected,Prevalence of missing traders,poor audit and enforcement capacity of the tax authority, andMal-practices in the administration aspect.RecommendationsFrom the above study I recommended as following insert quality and quantity of human resource to be deployed and Training and development for staffs who will join and who have already joined.All liable businesses registered for VAT in all sectors of the economy must be registered and it needs strong and practical monitoring and controlling system. that fall within the threshold should be identified and an action to be com pliant..Must be apply patronage audit system ,donot delay the auditing.Due to lack of auditor, the auditors must selective based on the size of the business with return of tax from these.Make consistent tax educations for taxpayers in each tax Authority to piddle awareness.Create ethical tax servants e.t.cAll the basic challenges that mentioned must be change and improve with substantial monitoring and controlling effort.ConclusionsEthiopian Government committed to improve the tax harmony in each exhibit of the tax authority by allocating resources with the efforts of ERCA. The effort which applied is the introduction of tax reform in Ethiopia. The Government introduced the VAT since 2003, mainly to broaden the tax base, and to compensate for revenue loss as a result of duty reduction at customs, to reduce distortions by other indirect taxes, and to advertize trade and investment.With the challenges that already stated, the performance of tax from VAT would be increase. For the increase of VAT collection the introduction of IT has great role. The implementation of SIGTAS increases revenue collection, real time Management of Non-compliers, Facilitation of Assessments and Reassessments, Prompt Calculation of Penalty and Interest, Provision of Better service to Taxpayers, these are facilitated the collection of VAT progressively.Appreciating the role of IT in VAT administration, during FIRA headstrong to automate the administration of all taxes in an integrated manner. Thus, the functionalities of VAT SIGTAS were extensive to embrace the other taxes and ERCA would be catch-up the system and implemented successfully. SIGTAS all taxes was tried at the Large Taxpayers Office in August 2006. Currently, all tax centers of the FIRA are using SIGTAS all taxes software.The application of SIGTAS has been instrumental in improving the efficiency and effectiveness of the tax administration. And Extensive consultation with stakeholders, comprehensive taxpayer educat ion programmed, aggressive advertisement campaign and an intense registration drive did help the tax authority.Over all the experience of Ethiopia in automating tax administration, including VAT, shows that success in IT implementation is mainly dependent upon aggressive implementation as per schedule, strict control over procedural issues, active action in case of peculiarities, monitoring and feedback, continuous manpower development, timely provision of computer hardware and supporting services, and proactive and genuine participation of every member of the tax authority.