Value Added Tax (VAT) Administration and Revenue Performance: Challenges and Opportunities in the Mekelle Branch of the Ethiopian Revenue and Custom Authority (ERCA)

Abstract

As most of the developing countries do, Ethiopia was highly dependent on external financial resources to finance its development activities. For many decades, the tax contribution to GDP was very less and this needs an improvement. On the other hand, the Ethiopian Government has a strong belief and commitment to eradicate poverty and assure sustainable development; and it is impossible to achieve such a goal without generating sufficient revenue that can cover at least the budget of the government. To narrow the gap, VAT was introduced before seven years and is showing dramatic changes in generating government revenue. Hence, this research tries to fill the gap that existed in VAT administration and revenue generation in the branch office. The research had an objective of investigating how VAT was administered and performed in the last five year (in terms of efficiency and effectiveness) at the Mekelle Branch of the Revenue and Customs Authority. In order to attain the stated objective, after the taxpayers are stratified, 120 taxpayers were randomly selected using systematic random sampling and 20 tax officers were purposely selected and then all were required to fill the questionnaire that was prepared for that purpose. In addition, secondary data was used and analyzed, mainly to show the trend of the last five years. Ate federal level, a total amount of 13.78 billion birr was collected from the Inland Revenue in the form of VAT at Federal level in five years time. In the Mekelle Branch of the Revenue and Customs Authority, a total amount of 879.4 million birr is collected in the last five years (1997 E.C. – 2001 E.C.) and out of this, 782.36 million (88.96%) is collected from VAT. In the process of VAT administration and revenue generation, different problems were observed, the main ones being attitudinal problem of the tax payers and implementation capacity of the government employees. As a result, the data show that there are many business men and companies that should be registered for VAT but are not. As a result, the branch office is losing millions of birr per year. The opportunities and challenges of the VAT administration of the branch office is well-studied and as a result recommendations are made on the issues. Changing the attitude of the taxpayers and building the implementation capacity of the employees of the branch office are some of the important recommendations made by the study. It is also suggested that further research on the area is needed and it is important and timely to make collaborations with the nearby universities such as the Mekelle University and Axum University.