CHAPTER ONE

1. INTRODUCTION

1.1 Back ground of the study

Tax is a financial charge or other imposed on an individual or legal entity by a government.

Taxation is a system of raising money to finance government expenditures. All government

requires payment of money taxes from people. Government use tax revenue to pay soldiers and
police. To build dams and roads. To operate schools and hospitals, to provide food to the poor
and medical care to the elderly, and for hundreds of other purposes.

Ethiopian tax system dates back to ancient times, for example in the Axumite kingdom there was
a practical of traditional taxation. The traditional taxation provides for taxes on crops, line stock
and live stock products such as wool, butter and milk.

The current Ethiopia tax system is composed of direct and indirect taxes. The direct taxes include
income tax (employment income tax and business income tax), capital gain tax. And taxes on
other income such as taxes on income from game. Income from dividends, etc. the indirect tax
are composed of Excises tax, turn over tax. Value added tax (VAT) stamp duty and custom
duties (Gebrie, 2006 page, 170)

One of the mechanisms is which countries rise revenue to finance government spending on the
goods and service that most of us demand is taxation,

Value added tax (VAT) is a tax on value added to good and services by enterprises at each stage
of the production and distribution process (Gebrie, 2003).

Value added tax is a tax not on the total value of the good being sold but only on the value added
to it by the last seller (Bhatia, 2003).

The Ethiopian government has introduce, VAT 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.

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The need for value Added tax (VAT) emanates from the very weakness of the sales tax that it is
intended to replace (Purhot, 2000). VAT is an indirect tax that is changed whenever at a taxable
person make a taxable supply of goods and services in the course of his business although it is
finally borne by consumer (Hancock, 1998).
Service while other submit their VAT their VAT returns without payments. There is also
deliberate submission of nil returns non-issuance of VAT invoice and entertainment provides and
loaf operators refuse to use the VAT coupons.
Value added is one of taxing system that were introduced for the first time in the world in france
in 1954 by franch economist Maurice laurel director of the franc tax authority (Gebrie, 2006).

It was gradually has adopted for it consumption variety and selected on it own exception area
and multiple rate schedules (Bhatia, 2003). late it was gradually expand to African countries
especially countries which were colonies of france like cot-devour, Senegal, mail and other
western country which were under colony of franc.

The development of this tax system is fast it has now employed by large umber of Latin
America Asia ,Africa and pacific countries value added tax (vat has become a major tax
instrument world wide The global trend to introduced VAT I more countries is countersuing.
Ethiopian tax reform program has introduced VAT since January, 2003 (Gebrie, 2008).

The Ethiopian government has introduced ,VAT as part proceeded by tax reform program ,the
tax reform program is preceded by establishment of anew ministry of renewed as the first step to
improve tax collections and to combat fiscal frond , The need for value added tax (VAT)
tenements from the very wackiness of the sale tax that is intended to replace (Purhot ,2000).

value added tax is an in direct tax that is charged when ever a taxable person make taxable
supply of good and services in course of his business

Although it is finally borne by consumer (Hancock, 1998) service while other summit their VAT
their VAT returns without payments. There is also deliberate submission of nil returns non
issuance of VAT in voices and enter trainmen provides and operations refuse to use the VAT
coupons (Alemayehu, 2009).

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As compared to the developing countries, the developed countries have been able to generate
substantial revenue through imposing of taxes one of reasons for this has been the efficient tax
system operating in the developing economies which are characterized by weak monetary and
low development of the formal sectors.

Value added tax (VAT) is a new system introduced in Ethiopia. This tax system is not new to
other countries.
Beginning with the adoption of tax sur, lavaliere adopted by France in 1954, it was gradually
been adoption by other countries (purhot,2000). The development this tax system is so fast it has
now bee employed by a large number of Latin American, Asian, African and pacific countries
value Added tax (VAT) has become a major tax instrument worldwide. The global trend to
introduced VAT in more countries is continuing (Goode,1993). Ethiopians tax reform program
has introduced VAT since January 2003.

The Ethiopian government has introduce, VAT 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.

The need for value Added tax (VAT) emanates from the very weakness of the sales tax that it is
intended to replace (Purhot, 2000). VAT is an indirect tax that is changed whenever at a taxable
person make a taxable supply of goods and services in the course of his business although it is
finally borne by consumer (Hancock, 1998).
Service while other submit their VAT their VAT returns without payments. There is also
deliberate submission of nil returns non-issuance of VAT invoice and entertainment provides and
loaf operators refuse to use the VAT coupons.

Vat Collection Problem Page 3

1.2 Statement of Problem
It is known that most of the nations in the world have applied value added tax so as to develop
their economy. Even if VAT is being observed since it is a newly introduced type of tax, official
and tax experts, VAT collectors and VAT payers gave their own suggestions related to the
implementation problems of VAT. Therefore this study tries to answer the following principal
questions.
1. What are the possible reasons that may encourage business enter prize and individual
business persons to evading VAT?
2. Is there any measures taken by hawassa town tax administration to control VAT evasion
or avoidance?
3. What are the major problems of Vat collection?
4. Do executive bodies properly execute their duties in relation to avoidance and evasion of
tax?

1.3 Objectives of the study

1.3.1 General objective
The general objective of the study is to identify the major problems of VAT collection faced
hawassa town tax administration.

1.3.2 Specific objectives

The specific objectives of this paper are:-
1. Identify the factors affecting collection of VAT.
2. Identify measure taken by Hawassa twon tax administration to control VAT evasion or
avoidance.
3. Assess whether the collection of VAT has met is objective in generating the expected level of
government revenue and
4. Identify the performance of executive bodies is relation to avoidance and evasion of tax by
VAT payers.

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1.4 Significance of the study
Government organizations like hawassa town tax administration business enter price, school and
some VAT registered enterprises are expected to be beneficiary from this study.
This Study would help the organization that the recommendation provide may be use full in
directing decision to ward controlling the problem of hawassa town tax administration and also
the issue discussed contribute to filling the literature gap on VAT.
The study helps to initiate further studies to great and depth and it help to create responsible
citizen by giving butter knowledge about VAT.

1.5 Scope of the study

This study focus on VAT collection problem of hawassa town tax administration. In the
investigating the VAT system of (hawassa town tax administration) the study will compromise
along with book, magazine, proclamation news paper, are the basic points or source.

1.6 Limitation Of the study

In conducting this study the researcher faced several problems which have negative impact on
this paper. One of the problems that hinder the researcher objective was un availability of
compiled documents in the office.
 Lock of sufficient time to collect data.
 Absence materials equipment and supplies that have to be provided by the universities.
 Lack of sufficient data in the office.

1.7. Organization of the paper

This paper consists of two chapters. The first chapter presents interdiction. The second chapter
describes review of related literature relevant to the major them of the study.

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 CHAPTER TWO
REVIEW OF LITERATURE
2. Value added tax (VAT)
2.1 Introduction
VAT is a tax on the value added TAX to good services by enterprises at each stage of the
production and distribution processes. It arises whenever a “taxable person” makes a “supply of
goods or services” in the course of his business. Thus in some countries it is called “good and
services tax” or GST VAT was invented by French economist in 1954 by Maurice lour director
of the French tax authority VAT was invented because very high sales taxes and tariffs
encourage cheating and smuggling. (Gebrie, 2008).

Unlike the turn over tax which is applied to the full value of a product every time the item
changes hands in the process of production and distribution the VAT is assessed at each stage on
only the increment in value acquired by the product since the last taxable transaction. At the end
of the chain the total amount of tax paid on a given commodity is determined only by the tax rate
and the final price of the commodity, required less of the number of stages through which is has
passed what has been collected in fractional payments is equivalent to a single stage tax on the
value of the final product. The theory is that the end consumer carves the burden of VAT not the
business, which is merely collecting the VAT on behalf of tax all Hoity. But the reality is not
quite so simple (Gebrie, 2008). For fully taxable businesses VAT is not a cast but is merely an
accounting headache whatever you collect in output tax must be handed over to tax authority
whatever you collect in output tax must be handed over to tax authority whatever you pay in put
tax can be recovered from tax authority (apart from the input VAT on personal passenger vehicle
and entertainment but on has taken care full on purchase and sales of taxable supplies otherwise
VAT will affect his/her cash flow (Gebrie, 2008).
2.2 Computation of vat
In modern taxation there are four types of value added taxation system there are:
A. Gross product value added tax.
B. Income type value added tax.
C. Capital exemption type value added tax.
D. Consumption type value added tax. (Gebrie, 2008).

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2.3 VAT Administration in Ethiopia
The VAT replaced the current sales tax on manufactured and imported good and service on
January 1, 2003. The responsibility for the correct calculation and timely payment of VAT rests
on the tax payer himself. The VAT is a broad based tax on the consumption of goods and
services it is collected at all stage in the production and distribution process beginning with the
importers and producers of raw materials and ending with the retailers cascading of the tax (i.e
tax on tax) is avoided by providing for a credit for the tax paid only to raw materials used
directly in the production of good under a VAT. Relief is a granted for goods are not subject to
the VAT. Removing that tax content (on in puts) from exported goods makes the goods more
competitive in international markets.
VAT is at ax consumer expenditure it is collected on business transaction and important most
business transactions involve supplies of good or services and VAT is payable if they are:
 Supplies made in Ethiopia
 Made by a taxable person
 Made in the course of furtherance of a business
 Are not specifically exempted or zero-rated-
Supplies are outside the scope of the tax if they are
 Made by someone who is not a taxable person or

 Not made in the course or furtherance of business Curse or furtherance the way a taxable
person has to carry out its activity to develop advance and progress the taxable activity it
refers to the normal and expected events or processes to develop the taxable activity.
Anything done in connection with the commencement or termination of a taxable
activity is treated as carried out in the course or furtherance of that taxable activity
(Gebrie, 2008).
2.4 VAT Refund
VAT registered person shall got refund
If at least 25% of the value of a registered persons taxable transactions for the accounting period
other registered person in a single transaction of substantially all of the asset of a taxable activity
provide a notice in writing signet by the transferred is finished with 21 days after the supply

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taken place is taxed at a zero rate the authority shall refund the amount of VAT applied as a
credit in excess of the amount of VAT charged for the accounting period with in a period of two
months after the registered person files an application for refund accompanied by documentary
proof of payment of the excess amounts.
In the case of other registered persons the amount of VAT charged for the accounting period is to
be carried for word the next five accounting period is to be carried for word to the next five
accounting periods and credited against payment for these period and any unused excess
remaining after the end of this five month period shall be refunded by the authority with a period
of two month after the registered person files an application for refund accompanied by
documentary proof of payment of the excess amounts. Where the tax authority satisfied for
refund application in over paid tax the tax authority shall

 First apply the amount of the excess in reduction of any tax levy interest of penalty
payable by the person under the customs proclamation the income tell proclamation and
excise tax proclamation.
 The repay any amount remaining to the person if the amount to be refunded is move than
50 by.

When registered person is entitled to refund and the tax authority is satisfied but does not pay the
refund with in specified date the authority shall pay the person the refund plus interest set at 25%
over and above the highest cam mercies lending interest rate that prevailed during the preceding
quarter (Gebrie, 2008).

2.5 Registration
In Ethiopia, registration for VAT is categorized in two

2.5.1 A Obligatory registration

Any person conducting a commercial enterprise or intending to conduct a commercial enterprise
may apply to be registered for VAT. However if the taxable turnover of the enterprise which is
gross income for 12 calendar months exceeds or is likely to exceed birr 500.000 the person
conducting the enterprise must register for VAT with FIRA. Turn registration is compulsory
(Gebrie, 2008).

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The term any person for proposes of VAT registration includes
 Sole profiteer
 Company
 Partnership
 Exmate of the decease
 Trust
 Incorporated body or unincorporated bod
 Club or association

A commercial enterprise refers to any business of whatever nature and include

 Ordinary business e.g. shop contractors manufacture whole sellers etc.
 Trades and professions e.g. Builders, Engineers, Accouters laurersete
 Activities of non-profit moving bodies e.g. societies, Associations, sporting club, etc.
The turn is calculated on an ongoing basis two periods need to be considered the past 12 calendar
months and the next 12 calendar mother-by month basis. There is the need to estimate at the end
of each trading calendar month the total value of taxable goods and services supplies by all the
business for the past 12 months where the total exceeds birr 500.000 the then there is the real
utrement to register for VAT.

2.5.2 Voluntary Registration

A person, who carried on taxable activity and is not required to be registered for VAT max
voluntarily apply to the authority for such registration if he/ she regularly is supplying or
rendering least 75% of his goods and services to registered persons.

2.6 Benefits of voluntary registered

In put VAT can be recovered if a person registered it will therefore be beneficial to voluntarily
resister where the person makes mainly zero rated supplies in such a case input VAT will be
recovered and on VAT will be charged on zero rated out puts (Gebrie, 2008).

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2.7 Registration procedure

Application for compulsory as well as voluntary registration must be made on application form
called “application for VAT registration” on application for cale and the authority is required to
register the person in the VAT register and issue a certificate of registration within 30 days of the
registration containing details of.

 The full name and other relevant details of the registered person.
 The date of issuance of the certificate.
 The data from which the registration takes effect and
 The registered person’s tax payer identification number.

If registration is disallowed FTRA will have to notify the applicator and the reasons for the
refusal. The tax authority many deny the application for voluntary registration if the person.

 Has no fixed place of residence or business

 Does not keep proper accenting records
 Has no bank account
 Has previously been registered for VAT purposes but failed to perform his duties under
the VAT law (Gebrie, 2008)

2.8 Time of application

A person who carries on taxable activity and is not registered is required to file an application for
VAT registration it shall fill an application for registration on later than the last day of the month
after the end of the period if.

1. At the end of any period of 12 calendar month the person made during that period, taxable
transactions with a total value exceeding 500.000 birr or the last day of the month of the
period if
2. At the beginning of any period of 12 calendar moths when there is reasonable around to
expect that the total value of taxable transactions to be made by the person during that period
will exceed 500.000 birr (Gebrie, 2008).

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2.9 Time of registration
Registration takes place on one of the following dates depending on which date comes first.
 In case of obligatory registration on the first day of the accounting period following the
month in which the obligation to apply for registration arose.
 In the case of voluntary registration on the first day of the accounting period following the
month in which the person applied for registration or.
 On the date selected by the registered person on his application for a registration person
who conducts taxable activity in a branch or division shall be registered only in the name of
the registered person to register one or more of its branches or divisions as separate
registered person. The tax authority allow when its satisfied on such case that divisions or
branches maintains and independent accounting system and can be identified by the nature
of its activities or location (Gebria, 2008).

2.10 Cancellation of registration

VAT registered person can apply for cancelation of registration

 If tax payer ceased to make taxable transactions.

 At any time after a period of 3 years of the date of his most recent registration for VAT
if the registration persons total taxable transactions in the period of 12 months then
beginning reasonable are expected to be not more than 500.000 birr.

The cancellation of VAT registration takes effect

 At the time the registration person ceased to male taxable translation for example, if one
close down or sell his business. How over if one has more than one business and is not
closing down or selling them all he max not be able to cancel it will depend on the level
of taxable turn of remaining businesses.
 If the registered person has not ceased to do so at the end of the accounting period during
which the person applies to the authority for cancellation of VAT registration.
When registered for VAT is canceled the authority is required to remove the person’s name and
all other details from the VAT register and the person is required to return back the issued
certificate of registration. VAT registered person con not charge VAT or issue tax invoices for

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any supplies made and cannot claim are fund of VAT incurred on any goods or services
purchased from the date of the registration is canceled (Gebrie, 2008).

2.11 Advantage and Disadvantage of VAT

2.11.1 Advantage of VAT
The following are some of the main Advantage of VAT.
A. It Avoids cascading effect of tax (tax on tax)
VAT works on the principle of that when raw material passes through various manufacturing
stages and manufactured products passes through various distribution stage, tax should be levied
on the incremental value at each stage and not on the gross sale price. This insures that some
commodity does not get taxed again and again and this, there is no cascading effect. Putting the
concept in simple terms, in vat system, each input is taxed only once.
B. It is major comprehensive and equitable tax system.
Even though the ultimate burden of VAT full on the final customer, VAT is collected by the
government from all sectors, that is from import manufacturing, whole sale and retail sectors.
Therefore, it is a more compressive and equitable taxes system on the contrary; sales tax is
normally levied at one stage of the whole marketing (MisrakTesfaye (MSc))
C. It reduces the possibility of tax erosion
In the case of VAT the taxes are divided in to several parts depending on the number of stage of
production and sales. In each stage every transaction is made using VAT invoice approved by tax
authority. In addition each VAT registered person (supplier) has to maintain appropriate records
on their sale and purchase transaction. Those obligations make tax evasion difficult

It has less Tax burden

Under VAT system, the tax is collected is small fragments at different stage of production and
sale. Hence, the vat payers feel the burden of the tax less (MisrakTesfaye (2008)).

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 D. It us neutral
Regardless of the number of stage of production and distribution, VAT is collected in each stage,
therefore; VAT is expected to be perfectly neutral in the location of resources in the form of
production and commercialization. (misrakTesfaye, (MSc)).
E. It Improves Productivity
In VAT system, a firm has to par tax even though it van in to loss. The firm cannot claim any
exception for loss because it pats taxes on the value produced and not on profits. So, firms will
always try to improve their performance and reduce the cost of production. As a result, the
overall productivity of the country will be improved (MisrakTesfaye, (2008).
F. It promotes capital investment and saving
VAT is a consumption tax since one pays VAT on its expenditure and has the option to sure so
as not to be taxed. Furthermore, relief from tax on capital goods may encourage investment.
Potential investors also consider tax legislation as one of the factors in making investment
decision (MisrakTesfaye(MSc)).
G. It enhances exports
Exports of good and services in most countries that implement VAT are liable to VAT. At zero
rates this may make exports internationally competitive and, thus encourage exports
(MisrakTesfaye, (2008).

2.11.2 Disadvantage of VAT

The following are some of the main disadvantage of VAT.
A. It is regressive in nature
A Straight forward single rate VAT with few exemptions would tax lower income groups (the
poor) more heavily than the higher income groups (the rich). It is, thus incongruent with the
basic.
Principles of taxation which states that reason should be taxed according to his ability to par.
This makes Vat regressive tax system. In order to compensate for its regressive effect a number
of countries have expected basic goods particularly food items from VAT. (Misraktesfaye,
(MSc)).

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 B. It require advanced economic structure
The proper implementation of VAT system required organization and advanced financial and
economic structure as it complicated system. VAT system also requires proper record keeping of
invoice at each stage of production and sale by both the seller and buyer. Hence, it becomes,
difficult to implement the system in all types of economy (MisrakTesfaye, (2008).

C. It put additional burden to tax authority.

In VAT system, the manufactures, whole sealers and retailers have to fulfill various legal
formalities in the form of manufactures various records, accounts, books, etc. the verification of
those formalities put additional burden to the tax enforcing authorities. (MisrakTesfaye (MSc)).

D. It is un economical
VAT system involves high of administration, assessment, verification collection, etc, hence, it is
highly un economical (MisrakTesfaye (MSc)).

E. It has reams loopholes for tax evasion

Although VAT system requires proper record keeping of invoices at each stage of production
and distribution by both the buyer and sealer, it has ream loopholes for tax evasion. This may
include the following:
 Tax payers could over report sales of zero rated goods
 Tax payers could use invoices they received for personal purchase to claim tax credits.
 It enables buyers and sellers to strike secret deals with regards the Issuance of
receipts.
 It could lead to the formulation of forged ponies’ receipts to claim tax credit on input
VAT, etc (Misrak Tesfaye (MSc)).

2.12. Computation of value added tax

The following examples illustrate how value added tax is charged as goods move from one
vender to the next tannery, shoe maker, whole seller and retailer. Until they reach the final
consumer. For example, tannery sold a leather product for Birr 50 to shoe manufacturer and the
shoe manufacturer sold it at Birr 60 for a whole seller and the whole seller sold it for a retailer at

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Birr 77 and the retailer sold it for the ultimate consumer at Birr 100. Thus, the computation of
VAT is illustrated as follows:

Tannery value added tax =15%X 50 = 7.50

Shoe maker value added tax =15% X60 =9-7.50 = 1.50

Whole seller value added tax =15%x70 =10.50-1.50-7.50=1.50

Retailer value added tax =15%100 =15-1.50-1.50-7.50 =4.50

Consumer total value added tax paid is 15.00 (i.e.7.50+1.50+1.50+4.50)

2.13. Briefly Explanation of Value Added Tax (VAT in Ethiopia)

What is Value Added Tax (VAT)
Vat is a tax on consumer expenditure. It is collected business transaction and import.

Most business transaction involved supplies of goods or services.

Vat is payable if they are:

 Supplies made in Ethiopia

 Made by taxable person
 Are not specifically exempted or zero rated
 Importers of goods and services
 Supplies that are made in Ethiopia which are not exempt are called taxable supplies

A taxable person can be an individual firm company, as long as much a person is required to be
registered for vat (Gebrie, 2006, p 174-175)

2.14. Rate of Tax

The amount and rate of value added tax vary from country to country and some countries have
two or more tax rate. In Ethiopia case, tax able supplies are charge at zero or standard rate of
15%

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2.15. Meaning of value added tax
The value added tax is simply a multistage sales tax that exempts the purchases of intermediate
goods and services from the tax base; value added is the difference between sales proceeds and
purchases of intermediates goods and services over a certain period.

Total transaction less intermediate transactions (that is purchases made from firms by other
firms) is equal to the sum of wages, interest, rent, and other input payment in the nation summing
up to GDP. This may be expressed as the following identity;

Value added= Total Transactions-Intermediate Transactions

= Final sales= GDP

= Wages+ Interest+ Profit+ Rent+ Depreciation

When intermediate transactions represent purchases by firms of goods and services to be further
proceeds in production. (Hyman 2005, p 632-633)

2.16. Evolution of the value added tax

The value added tax offers several potential advantages:

1. For many countries, the possibility of avoiding the adverse consequences of the turn over
tax, without concentrating the impact of the tax at any one stage in production and
distribution. The value added tax produces no economic distortions or loss of efficiency if
properly designed. The advantages of the retail sales tax are fully attained: yet a large
portion- more than half of the revenue is collected at pre-retail levels. This is of no great
important in the United States but is great merit in many countries.
2. Under other forms of sales tax, exclusion of sales of for business use requires check up
on both the seller and customer, with the value added tax; all sales among the business
firms are taxable: the purchaser takes credit for the tax paid on purchases. Therefore, that
audit must be made only up on the purchaser. Not up on the seller.
3. The cross audit check, tax reported as paid by one firm to its suppliers. For which it takes
credit against its own tax liability, should appear as tax paid to the government by the
supplier. This cross check is not automatic- but is can be made, by auditor or ultimately,
by computer (John F.Due 2006, p 420-21).

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2.17. Types of value added tax
Three major type of value added taxes (corresponding to the gross nationalproduct.net national
product. In addition, consumption bases) may be distinguished. Although only the consumption
type is up for practical consideration

1. GNPTYPE gross national product. Were subject to general sales tax. The tax would be
application to both consumer and capital goods. It would be paid by the seller. When the
product was sold to its last purchaser. Whether a consumer ,a firm which adds to its
inventory, gross receipts minus the cost of purchasing intermediate goods from prior
producers in production line. The tax base at each stage would thus equal depreciation
,wage, interest, profits and rent, it would be the most comprehensive form of value added
tax .and may be referred to as a value added tax of the GNP type .as noted , it is
equivalent to sales tax applicable to both consumer and capital goods, with its impact
point.
2. Income type this value added approach, as previous noted, may also be used to
implement a sales tax on net product, suppose that the intent is to tax net national product
equal to GNP, minus capital consumption allowances or depreciation such a tax may be
imposed in multiple-stage form by taxing the net value added by each firm, with net
value added defined as gross receipts minus purchases of intermediate goods and
depreciation. The same result may also be accomplished by general income tax, since the
bases of a new product and an income tax are impact the same. The value added tax of
the income type those differs from that of the consumption type in that the former permit
the firm to deduct depreciation.
3. CONSUNPTIONTYPE: the last method is referred to as the consumption type of value
added tax. The base of the value added tax is now defined as the firm’s gross receipts
minus the value of all its purchase of intermediate product (material and goods on
process) as well as its capital expenditure. We are left with value of consumer goods
output only. Such a tax is therefore equivalent to a general retail sales tax on consumer
goods the two differing in administrating procedure only (Musgary, 1989, p 400-401)

2.18. Why taxes are necessary

Government imposes taxes for those purposes:

 To cover the cost of administration ,maintain law and order in the country and for
defense, but now government’s expenditure pattern changed and gives service to the
public more than these basic purposes and it restore social justice in the society by
providing social, services such as education, public health, employment, pension,
housing, sanitation and other public services.
 To enforce government financial policy, such as in controlling and encouraging
investment in industry (Gebrie, 2006, p-16)

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2.19. Time of supply (the tax point)
Vat is normally accounted for on monthly basis, so it is important to know the time of supply to
identify the month of if falls in. Generally, a supply occurs when a vat invoice issued for that
transaction. This is known as the basic tax point. The basic tax point is amended into two
situations:

If a vat invoice is not issued within fixe days after the basic tax point, the supply is
treated as taking place.
 At the time the goods are made available to the recipients sold on transferred,
or the service are rendered; or
 In the case of a delivery of good, that involves shipment of these goods, when
the shipment starts.
If the payment is made in advance of the time described in (a) or (b) and if a vat invoice
is not issued within 5 days often the date of payment, the supply will be considered as
having taken place by the time at the time payment is made. If two or more payments
are made for a supply, which payment is treated as made for all separate supply to the
extent of the payment.
If services are rendered on a regular or continuing basis, a rendering of services is
treated as taking place on each occasion. When a vat invoice is issued in connection
with such services or. If payment is made earlier, at the time when payment made for
any part of such services.
In the case of supply of goods or rendering of services to employees, including
gratuitously in course or furtherance of a taxable activity. The time of a supply is the
time when the use or consumption of goods or services begins.
In case of vat registration is canceled, the time of supply is immediately before the
cancelation takes effect.
In the case of a supply for a consideration in many received by the supplier by means a
machine mater or other devices operated by coin, note or coupon occurs when the coin
note or coupon is taken from that machine meter or other device by or on behalf of the
supplier (Gebrie, 2006, p 179-180).

Vat Collection Problem Page 18