Developed and developing countries of the world generate most of their government’s revenues from taxes. Taxes can be classified as direct and indirect taxes. Direct taxes are taxes that are directly related to the taxpayers; whereas indirect taxes are taxes paid by an individual through the purchase of goods and services. VAT is one of the indirect taxes levied on consumption where the value of goods and services increases as they charge hands in course of production, distribution and final sales to the consumer. Ethiopia has implemented the Value Added Tax in January, 2003 primarily to raise more revenue, modernizing its tax administration and encourage investment and trades. The Ethiopian Customs and Revenue Authority (ERCA), who takes the responsibility is facing with a substantial problem of tax collections and implementations of tax rules. The authority couldn’t collect sufficient revenue from the proper implementation of the Value Added Tax. This study was focused particularly on identifying and assessing the problems rose in association with the implementations of VAT by the Ethiopian Revenue and Customs Authority. To achieve this objective, the researcher used both qualitative and quantitative descriptive research designs and a sample of taxpayers and employees of the authority were selected using stratified random sampling method. The researcher used questionnaires, Interviews and relevant documents to collect primary and secondary data from the data sources. Pie charts, graphs, table, Percentages were used in analyzing the collected data (findings). VAT is a tax system that has replaced the sales tax in Ethiopia and has applied a uniform rate of 15% on most consumption of goods and services. Since VAT is applied on the value added at each stage of production and distributions, it solves the tax cascading effect and reduces tax evasion with its modern administration system that sales tax cannot. VAT is payable if there are supplies made in Ethiopia, made by a taxable person, made in the course of making of another business and is not specifically exempted or zero rated. VAT implementation in Ethiopia has faced different challenges. The main problems that encountered are: misunderstanding of the public in general and business community in particular regarding the VAT laws, resistance against registrations for VAT by some traders, administration inefficiency from ERCA, provisions of understated financial statements, and non-issuance of invoices or issuance of illegal invoices exercised by registered business enterprises. All these constraints hinder the smooth implementations of VAT and achieve the desired objectives as possible. On the basis of these findings, the study recommends that the authority should train the taxpayers about the rules and regulations of VAT continuously, recruiting new employees and give nonstop training for the existing once, delegate the tax authority to regional and city administration and it should also increase its follow-up and investigation to control noncompliance enterprises, as well as effectively and efficiently performing the tasks of identification of VAT taxpayers, processing of returns, controlling collections, making refunds on time, auditing taxpayers, recognizing genuine taxpayers and levying penalties to tackle the problems it has encountered. The business communities should also obey the current VAT rules and regulations and they should perform their activities according to the current VAT laws as well as start to work in cooperation with the authority in fighting against those enterprises that are violating the rules and regulations of VAT.

Hailemariam Mamo