ACKNOWLEDGGMENTS

First, I would like to praise the lord who gave me the courage and patience for the completion
then paper.
Secondly, my warmest thinks goes to my family and my friends.
Thirdly, I would like , thankful to my advisor Hail emikael for his constructive critiques and
advice , and to the employees of in Adigrat town for their support.
Finally, my special gratitude goes to employer my brother assistant for his an endless support in
computer operations.

TABLE OF CONTENT
CONTENT
PAGE
CHAPTER ONE
1. Introduction...
1.1. Back ground of the study.....................................................................................................
1.2. Objective of the study
1.2.1.
General objective.........................................................................................................
1.2.2.
Specific objective........................................................................................................
1.3. Statement of the problem.....................................................................................................
1.4. Scope of the study................................................................................................................
1.5. Significance of the study.....................................................................................................
1.6. Research methodology&analysis.........................................................................................
1.6.1.
Data type and source...................................................................................................
1.6.2.
Method of data collection............................................................................................
1.6.3.
Samplong design.........................................................................................................
1.6.4.
Data analysis................................................................................................................
1.7. Limitation of the study.........................................................................................................
1.8. Chapter two
2. Related lirerature reviw
2.1. Ddefinition of revenue.........................................................................................................
2.2. Source revenue....................................................................................................................
2.2.1.
Taxation as source of revenue.....................................................................................
2.2.2.
Requiremenys for a good tax system..........................................................................
2.2.3.
Principles of taxation..................................................................................................
2.2.4.
Classification of taxes.................................................................................................
2.2.5.
Basic characterstics of taxation..................................................................................
2.2.6.
Effects of taxes............................................................................................................
2.2.7.
Simple versus multiple tax system..............................................................................
2.2.8.
Tax system and structure.............................................................................................
2.3. Non tax source of Revenue.................................................................................................
2.4. Internal control....................................................................................................................
2.4.1.
Structure of intrnal control.........................................................................................
2.4.2.
Classification of internal control.................................................................................
2.4.3.
Objectives of internal control.....................................................................................
2.4.4.
CHAPTER THREE
3. Finding and data analysis
3.1. Data collection procedures and methodology.....................................................................
3.2. To identify and classify the types and sources of revenue..................................................
3.2.1.
Tax revenue................................................................................................................
3.2.2.
Non tax siurces of revenue..........................................................................................
3.3. To identify the criteria that bureau use to collect revenues.................................................
3.4. Internal control and adminisrtration system........................................................................
3.5. Methods and procedures followed by the bureau................................................................
3.6. Problems encounterd during the implementation of TOT...................................................

3.7. Attitudes of the society/tax payers.......................................................................................

3.8. CHAPTER FOUR
4. CONCLUSION AND RECOMMENDATION
4.1. CONCLUSION....................................................................................................................
4.1.1.
Strength of the bureau.................................................................................................
4.1.2.
Weakness of the bureau...............................................................................................
4.2. Recommendation..................................................................................................................
5. Appendex...............................................................................................................................
6. Reference

CHAPTER ONE
INTRODUCTION
1.1Background of the study
Revenue is defined as the inflow or other enhacement of assets of a business enterpriise
settlement of its liabilities(b combination of both) during ann accounting period from delivering
or producing goods, rendering services or other activities that constitute the enterprises on going
central operation.
Revenue generally results is increase cash and receivables.
It belived that revenue is one of the majior factors that shape the course of economic
development. It affects recourses use and finacing patterns, and also infuences the spending
capacity , the behavior of producers and customers, and influences the distribution of wealth
and income in the economy. The major source of government revenue is tax. Tax has played an
imperative role to raise governments income and revenue so as to finance its expenditure to
each units and departments, to redistribute income , to

encourage

the

production and

distrubition socialy desirable goods and servece, and to discourage thoise which are undesirable
goods and servives. And also it served as a measurement of economic performance of businesas
entities. As other governmenttala units, this bureau of finnce and economic development
generates its revenue more or less through taxation. This rtaxation is ranged from land
VAT( Value added tax) To be implemented governmental polices, to build democratic

governance system , to maintaain peace and security and to run a business operation smoothly,
revenue is the most crucial element in both governmental and non governmental entities.

1.2Statement of the problem

Revenue is an essential instrument in every where torn the over all organizations activity and it
helps to distribute e wealth and income of the society in fairly and justifiable manner through
tax structure and other mechanisms. To provide effective and efferent service to the public even
to the governmental units, sufficient revenue controlling system over it is mandatory. One of the
domestic and primary source of revenue for the government is taxation.
The fundamental problems observed on internal revenue control and tax structure are

Inability of revenue control system

Tax evasion
Lack of educated man power
Weakness of tax administration
Lack of awareness in the society based on tax.
Therefore, this paper tries to address the above mentioned problems and limitations in
generating internal revenue of Adigrat town and their solutions advanced by the researcher to
mitigate these problems.

1.3 Objective of the study

Fundamental problems are observed in the internal revenue control system and generating
capacity. The objective of this study is classified as general objective and specific objectives.
1.3.1 General objectives of the study
The general objective of the study is to analyze the internal revenue system of bureau of
finance and economic development in revenue controlling and generating capacity and tax

structures, and helps to indicate problem areas of OFED in internal revenue control system and
to give conclusions and possible recommendations in order to solve or minimize the problems
relating to controlling mechanisms.
1.3.2 Specific objectives
The objective of the study particularly focuses in the following points.
To identify the criteria that the company uses to collect revenue from the society.
To identify and classify the types and source of revenue.
To describe and examine the major impediments encountered in the implementation of VAT and
other tax system.
To identify the internal control system and the mechanism used by the management on the
implementation of revenue collecting.
To know the commitment of the organization to accomplish their tasks and duties based on the
criteria that are structured by higher governmental authorities which are designed to generate
revenue.
To identify the understanding of the society towards the payment of tax and its consequence.
Finally, to draws conclusion and suggests the possible way revenue generating system and give
recommendation towards the improvement of the overall tax structure.

1.4 Scope of the study

Even though bureau of finance and economic development has many branches in different
town, the study was limited to internal revenue control of Adigrat town based on their manual
and the related literatures.
The researcher will carry out the investigation with in six month and the respondents of the
information required was both personnel of the organization and any other external bodies who
are concerned.
Revenue is an essential instrument in every where to run the over all organization]s activity and
it helps to distribute wealth and income of the

1.5 Significance of the study

This study will be expected to give some importance for both organization and for the
researcher.
The significance for the researcher is to apply the theoretical knowledge with the real practical
activity, it increases the knowledge how to conduct and perform a better research and also the
researcher is able to be graduated BA degree in accounting as a result of this study.
In the other direction the organization benefited in how to developed a good tax administration
and tax structures are maintained and implemented , and also it provides an essential
suggestions and recommendations to finance and revenue collection department and finally, it

gives a good chance for further investigation on same and related problems to be verified and
analyzed in more detailed and depth.

1.6 Research methodology and analysis

1.6.1 Data type and source
In this investigation the data will be collected from both primary and secondary source in order
to achieve the objective of the study.

1.6.2 Methods of data collections

The study was based on primary and secondary data. The primary data was collected through
interview and dissions with the personnels and employs of the organization and other
concerned body out side of the organization ,and trough observation by the researcher.
The secondary data was maintained from different books and documents in the bureau like
performa evaluation document of the previous years, reports, negarit gazeta that shows and
guides the way of taxation and its structure in every governmental unit, and other related
documents which available in the organization.

1.6.3 Sampling design

In this study the researcher designs non statistical sampling to select samples in order to
gathering the required information. To collect these,6 of them are selected randomly from the
organization those who constitutes higher authority and the remains are taking from out side of
the organization those who are come to the bureau in order to pay and perform their obligations
at comfortable date and time the 5 respondents are taken from the tax payers.

1.6.4 Data analysis

Finally these colected data and facts will be analyzed by using statistical techniques of different
tables, percentages and ratios.

1.7 Limitation of the study

The major bottlenecks that are faced during conducting of the study(field work) are
Shortage of time to collect and gathering of data.
Unavailability of required documents that could helps the study to make comprehensive or
general.
Unwillingness of some employees to for ward their opinion and response
Shortage of financial aspects.

 Unavailability the required samples for interview.

CHAPTER TWO

RELATED LITERATURE REVIEW

Definition of Revenue
The financial board has difined revenue as the inflow oer other enhancement of assets of
abusiness enterprise or settlement of its liability ( or acombination of both) during an accounting
period from delivering or producing goods, rendering service, or other activity that constitute
the enterprises on going major or central operation.
Revenue generally results in increase in cash and receivable.
The theory of public finance provides theoretical foundation undelying the principle of
taxation. As defined by musgrave, the public sector refer to the part of government activities
that

find

their

expression

of

in

the

budgetary(revenue

and

expenditure)

measures(Musgrave1984). Government revenue and expenditure is important constituent of

public finace. The national government is assigned a great importance in the study of public
finance. The national government is assigned agreat importance in thestudy of public finance
since it is through govrnment that a state realized its policies and objectives.

2.2 Source of revenue

The source of governmental revenue are classified in following category

2.2.1 Taxation as sources of revenue

Tax is the involuntary contribution or compulsory payable

by an economic unit to the

government with out any corresponding entitlement to receive a direct definite quido proqo
them the government or taxes are a compulsory payments or contribution by every citizen of a
country to the government to enable the government to fulfill its commitment to the society.

2.2.2 Requirements for a good tax system

Having dealt the nature and characteristics of taxation, it is not worthy to discus some of the
important economic principles underlying a sound tax system . the brief explanation of these is
as follows.

A) Efficiency
Efficiency consideration of taxation requires the tax system to facilitate convenience in tax
collection. It should be also efficient in private consumption, saving production and investment.
(Devereaux:1996)

B) Equity
This requirement is justified by the fact that every tax payer should be paying his/her fair share.
In other words, the tax system should be equitable in the distribution of the tax burden,
Although , every one agrees on this principle, there is no such agreement on how the termfair
share is defined. Theoretically, there two approaches that seek define this term on equity ground
namely the benefit and the liability to-pay approach.
The benefit principle is justified in line with the assumption that is fair to pay what you get.
Under this principle, every tax payer contributes his/her share according to the benefit he/she
receive from the public sector, However, the application of the benefit principle is limited as
appropriate tax formula requires the computation of price and income elasticity of demand for
social goods which are un known or not readily from market observation of demand for social
goods which are un known or not readily from market observation.( Musgrave:1984).
Under the ability-to-pay principle, the basic for taxation is reviewed independent of the
expenditure determination. According to this approach, people with equal ability pay the same
rate and people with higher capacity pay more. The former referred to as a horizontal equity
while the latter as vertical equity.(Ibid).

C) Administration
The goal of administration suggests that the tax system should not be complicated. This goal
can be attained by making the tax system scheduler and relying on a limited number of rates
under different taxes.(Devereaux,1996).

D) Transparency
The tax system should be transparent in sense that laws and regulations concerning taxation
should be clear. Besides this , tax liability should be determined in accordance with law not
arbitrary.(Due, 1959).

E) Revenue adequacy
This requirement dictates that the tax system should be able to yield enough revenue for the
treasury and government should not be forced to frequently deficit financing (Ibid).

2.2.3 principles of taxation

A tax system ( That is , the set of all taxes) for achieving certain objectives chooses and adheres
to certain principle which are termed its characteristics. A good tax system therefore is designed
on the basis of an appropriate set of principles, such as equality and certainty.
Mostly, however , an objective of taxation conflict with each other and comprises is needed.
Therefore, economists select more important objectives and work out the

corresponding

principles which the tax should adhere to the first such principles was enumerated by Adam
smith( Which he called can nouns of taxation). The following cannons of taxation as prescribed
by Adam smith.
1. Can non of equity The subject of every state ought to contribute towards the support of
government, as nearly as possible, in proportion to their perspective ability that is in proportion
to the revenue which they respectively enjoy under the protection of the state. It dilates that in
absolute terms the richer should pay more taxes because with out the protection of the state they
could not have earn and enjoy that extra income.
2. Cannon of certainty:- This is mean to protect the tax payers from un necessary harassment by
then tax officials The tax which each individuals is bound to pay ought to be certain, and
arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all: to be
clear and pain to the contributor and to every person.
3. Common of convenience:- The made and timing tax payments should be, so far as possible
convenient to the tax payer. These cannon recommend that un necessary trouble to the tax payer
should be avoided: otherwise various ill effects may result.

4. Cannon of economy: these cannon recommended that cost of collection of taxes should be the
minimum possible. It is unless to impose taxes which are too widespread and difficult to
administer. These taxes entail unnecessary burden up on the society in the form of additional
administrative expense.
5. Cannon of productivity: It is called the cannon of fiscal adequacy. According to this principle,
the tax system should be able to yield enough revenue for the treasurt and the government
should have no need to resort deficit financing.
6. Cannon of flexibility:- The tax revenue should have an inherent tendency to increase along with
an increase in national income, even if the rates and coverage of taxes are not revised.
7. Cannon of flexibility: it should be possible for authoriteis, without un due delay, to revise the tax
structure, both with respect to its coverage and rates rates, to suit the changes requirements of
the economy and of the treasury.
8. Cannon of simplicity:- The tax system should not be too complicated . That make it difficult to
understand and administer and breeds problems of interpretation and legal disputes.
9. Cannon of diversity: It is risky for the sate to depend up on too few a sources of public revenue.
Such a system is bound to breed a lot of uncertainty.

2.2.4 classification of taxes

There are two broad classification of taxes which are frequently used by many writers
Namely direct and in direct taxes. Direct taxes are taxes which are levied initially on the
Individual or on households that supposed to bear the burden. Person taxes such as
individual income tax, tax, on capital gains and property tax embraced under this
category .(Musgrave,, 1984). Different from direct taxes , indirect taxes can be defined
taxes on goods and services . these are paid when a particular of a commodity or
service), turn over tax, and value added. Similarly excise taxes, stamp duty and tax on
international trade namely export taxes and import duties belong to the category of
indirect tax (Ibid).
Generally direct taxes are categorized in the following types.

A) Personal income tax

According to the proclamation No 286/ 2002 , every person deriving monthly income from
employment is liable to pay tax on the tax income at the rate specified in schedule A the
current income tax schedule is made up of the six brackets.
Table 2.1 Employment income tax rate( Schedule A).
Employment tax
over
0
151
651
1401
2350
3550
>5000

To birr
150
650
1400
2350
3550
5000

Tax rate

Deducti birr

%
0
10
15
20
25
35

0
15
47.5
117.5
235
412.5
662.5

Source tax accounting in Ethiopia context.

B) Business Profit tax:

This is the tax imposed on the taxable business income/net profit/ realized from entrepreneurial
activity. Taxable business income would be obtained per tax period on the basis of the profit and
loss accounted or income statement which shall be drawn in compliance with the generally
accepted accounting standards. Corporate business( bodies) , are required to pay 30% flat rate of
business income tax. For un incorporate
Individual business income tax ranges from 10%-35 as presented bellow in schedule C
Table 2.2 Business income tax rate (schedule C)
Taxable rental income per year
Over birr
To birr
0
1800
1801
650
7801
16800
16801
28200
28201
42600
42601
60000
>60001
Source-tax accounting in Ethiopia context.

Tax rate

Deduction in birr

%
0
exed
10
15
25
30
35

0
15
47.5
117.5
235
412.5
662.5

C)Land Use tax

According to the proclamation No 777/1976, No 153/1978 individual farmers who are not
member of producer cooperatives, are required to pay a land use fee Birr 10% per her hectare
per annum, where as government agriculture organizations are paying 2 Birr per hectare per
annum.
D)Tax on dividend
Every person driving income from dividend from Share Company or withdrawal of profit from
a private limited company shall be subject to tax at the rate of ten percent (10%). The holding
agent withholds or collects the tax and account to the tax authority. This tax is a final tax in lieu
income tax.
E) Rental income tax
At the earliest of the time construction of rental building is completed or when a building is
rented, the owner and the builder are required to notify the administration of the kebele in which
the building is situated about such completion and the name, address, and tax identification
numbered of the person subject to tax on income from rental of the building.
The tax rate payable on rented house shall be charged, levied and collected at the following
rates.
1. On income of bodies 30% on taxable income
2. On income of persons according to schedules which is depicted bellow.
Table 2.3 Rental income tax rate (schedule).
Taxable rental income( per

Tax rate

Deduction in birr

year)
Over birr
0-1800

0
exempted

1801 -7800

10%

180

7801 -16800

15%

570

16801 -28200

20%

1410

28201 -42600

25%

2820

42601-60000

30%

4950

>60001

35%

7950

Source- Tax accounting in Ethiopia context.

The indirect taxes also classified as follow.
A)Value added tax( VAT)
The gross product VAT is computed by subtracting from firms sales only purchase of those
goods that are used up currently, not purchase of machinery or other capital goods. The gross
product VAT, because it disallows deduction on both purchases of capital goods and
depreciation, discriminates strongly against the use capital goods. This alone seems enough to
explain its restricted use,(WB,1990).
Exemption and zero rating VAT
Two striking different techniques are available for freeing from VAT either:
a. All sakes by a giving type of firm such as small firm
b. All sales of a giving goods or service
These techniques are exemption and zero rating respectively.( Alan: 1998). Exemption of an
entire firm on all its sales can be granted if its the firm is bellow the acceptable level of size. It
is also implemented with the aim of facilitating administration or compliance. However, as Alan
argued exemption is not needed to facilitate administration or compliance since the firm is
deemed able to pay tax on the things it sells ( Ibid).
Zero rating follow quite difference approach . with zero rating the freeing from VAT is not
intended to avoid administrative and compliance difficulty. The aim of zero rating is to lift the
entire VAT, including that already collected at earlier stages, From a particular goods or
service, zero rating is to be given for the purpose of social or economic ends.(WB: 1991).
VAT in developing nations
The tax structure in developing nations is characterized by number of limitations and
problems. This arise the need for overhauling the tax system. Among the economic reforms, the
introduction of new tax bases was the major one.( Tanzi: 1991).

The reputation in favor of VAT in industrialized countries made the developing ones to take
measures towards implementation it. The pioneering step was taken by Brazil. After the
introduction of VAT, many developing nations registered remarkable growth in their tax
revenues. For example, Argentina, Chile and costarica the ratio of revenue to GDP grow by at
least 50 % with in the three years of VAT adoption.
Many problems have been encountered in the implementation of VAT. Lack of trained man
power, problems related to issuing invoice and keeping accounting records are among the
major ones.(WBo:1990).
VAT performance and its implementation In Ethiopia
The need overhaul the tax system of Ethiopia lies on following major lessons:a. Complex and out dated tax the tax law no 173153 was put in to practice for more than 40 years
with out major changes. As a result, it could not serve from current economic set up of the
country and could not go with current world economic system of globalization. Besides this,
high tax rate and narrow tax base were the major features of the tax structures prior to the
reform.

Weak tax administration

The tax

administration is constrained by skilled man power , modern equipment

work

procured.The tax administration is very much weak in the area of tax assessment,
collection,following and enforcement. Therefore, one key area of then reform was to improve
tax administration.
\Failure of tax system to generate adequate revenue to finance government expenditure was one
of the reasons for then tax reform .
The tax reform of the country generally consists of six projects
1.Tax policy and legislation process
2. Tax payer identification ( TIN) project
3. Presumptive tax project

4. Value added tax project

5. Reorganization of and work producer development
6. Tax payer education project
According the VAT has been made effective since , Jan, 1,2003 as apart the tax reform.

Administration issue of VAT

Before dealing with VAT administration issue, it is important to further investigate
some crucial issue VAT implementation . As mentioned in the previous , the number of VAT
registstrant has exceeded the potential target significantly. The initial targeted to registered
3500 was primary based on recommendation of IMF. The following are believed to be the major
reasons for the increment in VAT register.
The tax administration has strengthened its follow up and force registration programs on those
tax payers whose annual taxable transactions are above Birr 500,000 but have not applied for
registration.
Directive by the government stating that any government procurement direction above 100,000
Birr is limited only for VAT registrants.
Incentive awareness prgorams have been conducted using mass media, seminars and workshops
to disseminate information and to increase the awareness of the business community. The main
tasks that must be performed by any department in change of VAT are: identification and
registration of taxa payers, processsing returns, conrolling of tax arrears, making refunds,
auditing tax payers, investigation for tax

fraud and evasion, and levying penalties. To

effectively carry out these tasks, the VAT department has to be organized and promote publicity
and tax payers education . The Ethiopian experience will be analyzed in the line with the above
dimensions.

Organizational structure
One of the major decisions that be made in preparation for introduction of VAT is the choice of
orgigination and organizational chages to administer VAT. Other countries experience suggest
that there are several alternatives as to choose the institutional arrangement to administer the

VAT. In others, either they establish to administer by the exiting conventional and some what
out dated methods, or integrate it with the income tax administration taking in to account better
planning andn coordination of enforcement effortss and use of current tax audit expertise.
Having analyzed critically the above alternatives, the Ethiopia government has established a
speared department to administer the VAT. There are also branches located at some parts of the
country and the Ethiopian customs authority has its own VAT department.

Tax payes identification/Registration and computerization

A single tax payes identification number for all taxes is ause full for effective tax
administration. This is a number given to bodies(persons) identifying their as tax payers.
A tax payer will use this number in this income tax return, for VAT purpose, for with holding
taxes and to pay this property tax. This number helps the tax authority to identify tax payers
who deliberately under state income declarations, fail submit returns and those who fail to pay
their tax liability on time. To make the registration effective, the registration forVAT is assisted
by computerized system.

Invoiceng and book keeping requirements

In all

countries that have implemented

the VAT, book keeping requirementts are

countries,invoices are required to be issued for transaction between VAT tax payers. Most
developing countries that introduced the VAT, by contrast,require some form of invoicing for all
transactions on which VAT is charged, including sales to final customers by using simplified
from of invoice or cash register receipt. As far as the Ethiopia case is concerned , according to
VAT proclamation No285/2002 article 22/1 stipulated that a person register for VAT is required
to issue a VAT invoice for a taxable transition. However, effective implementation of this
legislation is hardily possible since practice of holding books and accounts and issuing invoices
is still at embryonic stage.

Refunds Management
According to article271/1 of VAT proclamation 285/2002, if at least of the value of a registered
person taxable transaction for the accountings period is taxed at zero rate, the federal Inland
Revenue Authority shall refund the amount of VAT applied as accredit in excess of the amount
of VAT charged for accounting period with in two months after the registered person files an
application for refund, accompanied by documentary proof of payment of the excess amounts.
B) Progressive tax structure: Progressive tax is that is larger a percentage of income for those
with larger income is usually applied indifferent income tax, where peoples with more income

pay higher percentage it on taxes. The term progressive refers to the way the rate progress from
low to high. The rate of limitation on increase as tax base increases.
C) Regressive tax structure:
A regressive tax is when takes a large percentage of income from poeple whose income is low.
Often it is a fixed tax every person has tax for each person pays the same amount of money,
such as poll tax . A poll tax is a fixed for each person since each person pays the amount of
money: it is fall more highly on poor sections of the community, than on the richer section.
Thus, it violates the principle of equity and social justice.
D) Digressive tax structure: It is an alternative of progressive tax marked by asteadily
declining rate of increase in the progressive tax rate which is applied to the upper segment of the
tax base. An incremental tax rate in each additional layer of tax bracket ( Mariginal tax rate)
decreases as the segments of the bases increase
2.3 NON TAX SOURCES OF REVENUE
Non tax sources of revenue are revenue which are generated other than taxation. Among these
some of them are listed below:
1) Special assessment: Special assessment differs from advalorem real property taxes in that the
latter are levied against all taxable property with the geographic boundary of the government
levying the taxes, where as the former are levied against certain property to defray part of all
cost a specific improvement or service that is presumed to be particular benefit to the property
against with a special assessment are levied. Briefly, when routine servece( stret cleaning , snow
plowing, and so on) are extended to property owners outside the normal service area of the
government , or provide at at a higher level or at more frequent interval than for the general
public, service type special assessment are levied . Special assement for
Capital improvement should be accounted for by a capital project fund during the contraction
phase.
2) Licenses and permits: Licenses and permits included those revenue colleted by governmental
unit from individual or business concerns for various rights or privilege granted by the
government. Some licence and permits are primary regulatory in nature, with minor
considerations to revenue drived, where as all not only regulatory but provide large amount of

revenue as well, and some are almost exclusively revenue proceeds. Licenses and permits
related to the privilege of caring on business for a stipulated period , the right to do acertain
ppublic property. Vehieles and alcoholic beverage licence are found extensively on the sate level
and serve both regulatory and revenue functions. State makes widespead use of professional and
occupational licenses for the purpose of control. Local government makes extensive use of
licence and permit to control the activity of their citizens, and from some they drive substantial
and permits to control the activity of their citizens, and from some they dirve substanial amount
of revenue.
Regardless of governmental level or purpose of all licenses or permits, the revenue is
produced is ordinarily amounted for on a cash basis.
3) Inter governmental Revenue: inte governmental revenue includes grantees and other financial
assistance. Grantees are useually intended for either operating or capital purpose.AGASB
standard provide thefollowing definitions.
a) Grantees and other financial assistances are defined as transactions in which one governmental
entity transfer cash or other item value to other governmental entity, an individual, or
organization as a means of sharing program costs, subsidizing other governments or entities or
otherwise reallocating resource to the pecipients.
b) A capital grantee is a contribution or gift of cash or other assets restricted by the grantor for the
aquistions of or construction of fixed( capital) assets.
c) An operating grant is one that bis intended to finance operations or that may be used for either
operation or capital out lay at the direction of the grantee.
4) Charges for services: charges for srvice the government funds includes charges for goods and
service provided by a governmental fund to enterpise fund, individuals and organizations and
governments. A few of the many revenue items included in this category are court costs, special
police servece, social waste walk, and curve repairs, and tuition. The group of charges for
service revenue may be correlated with functional classification of expenditures.
5) Fines and Forfeits: revenue from fines and forfeits includes fines and penalities for commission
of statutory offense and for negligent of official duty forteitures of amount help as security
agains less or damage, or collection from bonds or sureties placed with the government for the
sme purpose and penalty any sort, except those levied on delinquent tax . Library fines are
included in this category. If desired, fines and forfeits may be titles of two accounts with in this
revenue classes, or they may sub grouped heading for more detailed break downs. Revenue of
this classification should be accrured to the extent practicable. In direct contract with general

property taxes neither rates not bases or volume may sub grouped heading for more detailed
breakdowns. Revenue of this classification should be accrued to the extent practicable. In
indirect contract with general property taxes neither rate nor bases or volume may
prederetmineed with any reasonalble dgree of accuracy for type of this of revenue.
6) Miscellameous Revenue: although the word miscellance is not informative and should be used
sparingly, iit uses as the title of revenue category is necessary.it(1) substitutes for other possible
service classes that might have rather slight and infrequent usage and (2) minimizes the need for
forcing some kinds of revenue in to source classification in which they do not generally
belong . while miscellancous revenue in t self represent a compromise, its existences aids in
sharing the meaning of others source classes. The heterogeneous nature of items served by the
title is indicated by the following listing items. Interst earning rates and royalties, sales and
compensation for loss of capital asset, contribution from public enterprises.
2.4 Internal control
Internal control was considered as acontrol measure taken an organizations to protect the assets
the organization from fraud. Theft misapproriation by employees. The committee of sponsoring
organizations report defines internal control as the process affected by an entitiys board of
directions, management and other perdonnel, designed to provide reasonable assurance,
regardin the achievements of objectives in the following categories.
Reliability of financial report
Compliance with applicable laws and regulations
Effectiveness and efficiency of operations.
2.4.1 Structure of internal control
According to Miens and other in their book principle of auditing , internal control structure
varies significantly from organization to the other. The elements of internal control are:
a) Control environment: The control enviroment of the over all set of factors designed to achieve
the organization policies and procedures. These control environments includes internal and
external factors includes managements philosophy and operating style and the external factor
includes law and regulations.
b) Control procedures: are designed to provide proper authorization of transactions and activity ,
appropriaate segregation of duties,adequate documntation and recording of transactions and
events, efective accountability for asset and proper valuation of recorde amounts.
c) Accounting system: To achieve the objective of internal control the accounting sytem must
function effectively to properly rescored, process, summarize and report transaction. An
I.

accounting system should include:

Adequate internal documentation to focus responsibility

II.
III.

Chart of accounts
Amount of accounting plocies and flow chart depcting the established methods of processing
transactions.

2.4.2 Classifacations of internal control

Intrnal control is classified in to two type which are accounting and administrative controls.
Accounting internal control is directly depends on the accounting records and financial
statement . Administrative internal control heavily depends on the managerial aspects of control
with the organization.
John W book and other in auditing philosophie and principles defined accounting contorl
consists of the methods, procedures and plan of organization that pertain mainly to protection of
the asset assure that the amounts and financial report are reliable administrative control are
procedures and methods that pertain primarily operation of an enterprise and managerial
directives policies and reports.

2.4.3 Objectives of internal control

According to Alivin and A. Arens and other rthere are seven objectives for internal control,
which must be applied to every material type transactions in the control that provide reasonable
assurance.
1. Validity: the internal control has assure the recorded transactions are true or have existed.
2. Authorization: to make sure whether the transactions are authorized to protect from fraud and
waste of the company assets.
3. Completeness: whether all existed transactions have been recoreded to prevent omission.
4. Valuation: Internal control structure has to assure correct valuation of accounts of the recored
transactions
5. Classifications: transactions must be properly classified according to the chart accounts. In order
to financial statements to stated properly.
6. Timing: recoring of transaction in act will prevent misstatements and failing to record.
Transactions should not before or after the time they occurred.
7. Posting and summarizing: transactionsmust be inclided in master files and must be summarizes
crrectly by tppe in journal from and by accounts in general ledger.

CHAPTER-THREE
Finding and data analysis
III.1
Data collection procedures and methodology
Under this chapter the study mainly focuses on the techniques and analysis of data which are
collected from both primary and secondary sources.
The important primary data are colected through interview and discussion with manager and
personnnels of the revenue department by taking 6 samples from the total 10 employees of the
department as well as out of the burea the investigator selects randomly 5 tax payers in order to
generate information regarding the burea administration and implementation in assessing and
collecting the revenue from the society.
The necessary secondary data also collected through observation and assessing documents and
reports and other related provisions which are available in the bureau.

This finding and data analysis mainly designed to address or tom meet the following specific
objectives:
To identify and classify the types and sources of revenue
To identify the criteria that the burea follows to collect the revenue from the society.
To describe and examine the major impediments encountered in the implementation of TOT and
other taxes.
To identify the internal control system and mechanism used by the bureau
To know the commitment of the organization to accomplish tasks and duties based on the criteria
that are designed.
To identify the understanding of the society towards the payment of taxes and its importances.
Finally, to draw conclusions and possible recommendation to wards the improvement of revenue
collecting mechanism in order to generate adequate revenue.
III.2
To identify and classify the type and source of revenue
According to the interview conducted with the persons of the department, the type and sources
of governmental revenue are mainly categorized as tax non sources of revenue.
III.2.1 Tax revenue: Tax is finamcial charge or other levy imposed on individuals or legal entities by
the government. Accordingly, there are two category of governmental tax for sources of revenue
namely direct tax and indirect tax.
1.Direct tax: tax which are levied initally on individuals or households that suppose to bear
the burden. The direct taxes are sub divided in to 5 sub divisions.

a) Government employ income tax: this income tax is levied on the wage and
salary of governmental workers from what they earn monthly. Based on the proclamation
No286/2002, every person deriving monthly income from employment is liable to tax on that
income at the specified rate in scheduleA which contains six tax brackets. The employment
income tax is depicted below in table 3.1
Table3.1 Shows employment income tax rate in Ethiopia context 2006.
Employment

income

tax( per h)
Over birr

Tax rate( in

Deduction( in

%)
To birr

exempted

0
151
651
1401
2351
3551
>5000

150
650
1400
2350
3550
5000

10
15
20
25
30
35

15
47.5
117.5
235
412.5
662.5

Source-( employment income tax in Ethiopia contex2006).

Regardless the amount an employ earns,he/she pay according to the above tax rate. A person
whose monthly income is less tahn 150 would not pay employment income tax.

b) Non governmental employ income tax: this type oftax gernerated from monthly
income of employees who are working in nongovernmental/private organizations.
The tax rates and was of computation is the same as what we have seen in table 3.1 this types of
direct tax has some advantages and disadvantages.
advantages
It is important when private investments are increased
It is easy o compute.
Disadvantages:
Non governmaental employ income tax is more fluctuates.
More or less non governmental empolyees are contractual and daily based workers, as a result
they are not subject to income tax.
This tax also discourages employees to work-mean that if an employ work with low income but
his/her earns above the exmpted amount, he/she is
Subjected to income tax,as aresult itself the tax discourages the individual to work.
It needs more acurate control: The non government organization may not give emphasis
regarding the employs number, monthly income and otehr related information in transferring to
the government revenue collection department. At this time tax evasion may happen.
C. Rental income tax: this type of income is a percentage from rent of property any
buildings these buildings which are rented for business operations and for residential are
indifferent in tax rate.
1. Building for business operation is charged at 30% of the income.
2. Building rented for residential is taxed at sheduleB which is shown below in table

3. Other properities are taxed at 10%

The residential house are based on the following tax rates.

Table 3.2 schedule B rental house tax rate

Taxable rental income

Tax rate in

Deduction in

%
Over birr
0
1801
7801
16801
28201
42601
>60000

To birr
1800
7800
16800
28200
42600
60000

exempted
10
15
25
25
30
35

180
570
1410
2820
4950
7950

Source-tax declaration and provision available in the bureau in Ethiopia context 2006

d)Business profit tax:

Business profit includes any income which is derived business or trade activity. This business
income is imposed on taxable business profit realizes from entrpreneurial activity and it is
imposed in two ways based on the nature of the business. If the business type is a body which
means corporations and share of private limited company, the tax is imposed at 30% of the gross
profit. Whereas, the business type is an individual, it is imposed according to the rate which
described in table 3.2
According to the interview with employees of the bureau and by observing their reports and
their revenue sources lists, the business/ profit income tax is limited to the individual traders due
to the unavailability of the other types of business.

E) Agricultural tax

Under this category the tax is imposed on indiduals and cooperatives who own a land for
agricultural use. According to the discssion and interview was made with the manager, this type
of tax is include the highest portion of the population in the woreda.
Even though, the involvement of the society is under this type is high, the amount generated
from them is low.
The way and the basis of computation is applied according to the guide lines of the regional
government of Tigray. These rule and bases of taxation are based on hectare their rates are listed
as follow.
Hectare

Fixed birr

0.1-0.5

20

0.51-1

35

1.1-2

70

2.1-3

90

The word as maximum tax payers are under the interval of 0.1 hectare to 2 hectare, as aresult
the mount is ranged frombirr 20 to 70 . This type of source of revvenue has some advantages
and disadvantages.
Advantage
No tax avoidance since the hectare of each and every individual is know
It easy to calculate and to compute.

Diasvantages
Fixed amount is charged measns there is no any considerations either the productivity of the
farmers increased or decreased in imposing the tax .
The amount they payis low
Difficult to collect from each and every individual.
No any consideeration when drouoghts and poverty occurs.

2) Indirect tax source of revenue

Indirect tax source can be defined as taxation on ggoods and service. These are paid when a
particular purchase of commodity or service are rendered. Thse source of revenue are clssified
in to four subdivisions.
A) Turn over tax(TOT): turn over tax would be on goods sold and services rendered by persons
not registered for VAT according to their annual taxable transaction under the total volume of
birr 500000. Currently tax payers under this categorized as levelB and levelC as per income
proclamation 286/02 are expected to collect the TOT.
As the interview and discussion was made with the tax assesors under the department of
revenue. There are a few number of levelC tax payers in turn over tax in the woreda. The turn
1.
2.
a.
b.

over tax is imposed according to the two ways.

2% on goods locallly sold
Service locally rendered:
2% on contractors, grain mills etc
10% on others
A presumptive turn over tax shall be payable categoryC tax payers who are not required to
keep records . The base for presumptive turn over tax shall be the total turn over used as abase
for for income tax. It is calculated as:
Sellling price*Rate.

B. mineral resources tax: are sources revenue that are generates from individuals who are
sold some natural resources by extracting from the earth.
According to the interview the woreda generates these types of revenue from an individuals
who sales some stones for construction purpose.

C. Stamp duty: revenue from stamp duty is comes from contract made different and body,
collective agreements, and also from selling of stamp to individuals. The following are some
terminologies pertaining stamp duty.
Award- means decision made in writing rendered by arbitrator on reference made otherwise
than by order of court in the course of suit by parities to compromise, conciliation or arbitral
submission or other similar matters. Bond-includes any instrument, where by a person obliges
himself to pay money to another on condition that the obligation shall be void , if specific act is

performed or is not performed, as the case is or instrument attested to by a witness and not
payable to order or bear, whos a person obliges him to pay money to other. Contract of
employment means an agreement formed where a persons agrees directly and indirectly, to
perform work for a definite or infinite period or price work in return remuneration.

3.2.2 Non tax sources of revenue

Non tax revenue sources are revenue which are collected other than taxation. The types of
revenue are slightly and infrequent when we compare to the other source of revenue. These
revenue source are classified in to some category.
1) Administration and penality payment rvenue : under this category. Fined andforfeits
included. Revenue from fines and forfits( penalty) for commission of statutory offence and for
neglet of officel duty, forfeiters of mounts held as security ageist loss or damages, or collection
from bonds or securities placed with government for the same purpose amd penalty of any sort,
except those levied on delinquent taxes.
In direct contrast with general property tax neither rates nor bases or values of money by
predetermined with any reasonable degree of accuracy for this type of rvenue.
2. Revenue from selling of government property: these types of revenue are generated from selling
of scrap materials and out dated property of government under the control under the control of
the bureau.
3. Land use revenue: according to the proclamation number77/1976 and number 152/1978
individual farmers, who are not members of the producers, cooperatives are required to pay a
land use birr 10 per hectare annum. This is not agricultural land tax rather land use fee.
4. Government investment: under this category some percentage is charged when government
invests in a given area, therefore the bureau charged some amounts from the investment.
5. Miscellaneous revenue: miscellaneous revenue by it self represents a compromise, its existence
aid in sharpening the meaning of other source classes. These heterogeneous natures of items
served by the title are indicated by the following lists:

Intested earning
Rent royalties
Sales off
Compensation
For loss off
Caputal assets

 Contribution from bpublic enterprise( utilities , air post ,etc

Escheat( taking of private properties and oters).
According to the interview the main sources for the separtments under this categort are interest
earings, revenue from bids, and taking of property from private source which has not legally
owners. 6, cost sharing: this type of revenue is stared before three years in the breau. It is an
amount of money paid by civil servants from their salary based on some rates is deducted from
the monthly income of the employees who are graduated in higher educational institutions.

1.2 To identify the creteria that the bureau use to collec

Criterials are t revenues guide lines or boundaries that limits from what type and from whom
the revenue are collected.
According to the interview conducted with revenue department, criteria in sense, some
restrictions and responsibility of tax assessors that should follow in charging and collecting
taxes, and other revenues are as follows:

Aperson who made payment should have any property to own or any service received
His/her income tax should be above exempted
Tax payers should have TIN( tax identification number) especially for TOT( turn over tax)
Computations and tax rates should be based on the guide lines of the regional federal

government.
The amount to be charged should be supported by different evidenceslike purchase invoiceand
selling invoices.
According discussion made with the personnel of the department, the bureau folows strictly
these criterias which are listed above other proclamations.

1.3 Internal control and administration system

Internal control was considered as control measures taken by an organization to protect the asset
of the organization from fraud, theft and misappropriation by employees. It is designed by an
entities board of directors, management and other personnels designed to provide reasonable
assurance regarding the achievements of objectives in the following category.
Reliability of financial reporting

 Compliance with the applicable ruls and regulations

Effectiveness and effiency of operation
As the discussion and interview ws conducted with the manager of the revenue department , the
manager administer and control the overall activities performed by the three sectional working
groups namely, expert of data and plan expert of tax assessors and declarations, and recording
sectional groups. However, to control each activity of the sectional groups ther is no designed
manual that provides some standards to measure the compliance the actual operation with the
rules and regulations related with the activity, effectiveness and eficiemcy of employee against
their job and performance.
As result , the investigator is observed from the discussion and interview, the bureau does not
have an internal auditor to audit for all activities of the department conseqently, the empliyees
are not got an expertise advices and consultation. From the above information the reseacher
conclude that the internal control of the bureau is weak.

1.4 Methods and procedures followed by the bureau

Methods and procedures are ways or approaches that are used how an organization has to go in
order to achieve the specific goal.According to the interview conducted made with the
personnel of the department , there are some procedures they follow in order to collect the
multidimensional sources of their revenue. These steps and procedures are listed as follow:
First inspections and stidies are taken by the expert of the plan and data sectional groups
especially for those who are involved in TOT.
Secondly , a formal paper is distributed to the tax payers specifies the name. TIN,. Income
category of the tax payer, daily income and other related informations are fill up by individual
two times per a year.
The paper also fills up by the expert of plan and data analysis sectional group two times per a
year relating to the inndividuals income per day and the type of the business.
Fourthy, from both the expert of data and plan, and from the individual, the tax assessors and
declaration group take the average amount of the two and individuals are paid the tax according
to the assessed average income.
Finally, after the above processes are completed, the manager is signed the amount and recorded
by recording sectional groups.

 Agricultural taxes are first collected byb individuals who are elected from the kebele/ tabia and
then transfer to the revenue department with their receipts.
1.5 Problems encountered during the implementation of TOT and other revenue sources
According to the interview conducted with personnel who are taking as a sample by the
researcher. During to the interview conducted with personnel who are taking as sample by the
researcher. During the implementation of TOT collection procedures, there are different
problems the burea faced.
Among these some of them are listed as follows:
Miss matching the amounts which are assessed by the tax payer and by the experts of plan and
data group.
Unfavorable nature of TOT in assessing the right amonunt and getting an accurate evidence like
grain mill
Lack of well trained and experienced man power in assessing these turn over tax propertye and
efficiently.
Remoteness of the bureau from the business owners.

1.6 Attitudes of the society/tax payers

To know the attitudes of the tax payers the investigator provides some questions to the
employees of the bureau. The responses and their percentage are presented in the table below
Table3.3 Questions forwared to employees to analye the awareness of the society.

description

responses

frequenc

percentage

Low

y
4

67%

attitudes of the

Medium

33%

society

High

total

100%

What

is

the

towards

the payment of
tax

its

consequences
Source interview 2002
As the interview conducted with the respondents of the revenue department, they are presented
their opinion on the above table, which indicates the awareness of the society is low.

Table 3.4 Questions related to tax payers

description

responses

frequenc

percentage

yes

y
1

20%

No

80%

total

100%

your income
Do you believe

yes

40%

that the method

no

60%

and system that

total

100%

Does the amount

you

pay

is

appropriate with

the bureau used

for tax collection

is appropriate
Does the
revenue collected
by
government

the

yes

40%

no
total

3
5

60%
100%

is

important to the
society
Source interview 2002
As in the table 3.4 showen the amount pay by the society to the government is not proportion
according to the 80% of the respondents.
The methods and system that are the organization follow to collect tax is not appropiate
according to 60% of the respondents.
While the investigator analysis the attitudes of the tax payers is low as the employees
anaswered in table 3.3.

CHAPTER FOUR
CONCLUSION AND RECOMMENDATION
4.1 CONCLUSION
Revenue is a vital instrument in an organization to finance the overall expenditure. Having
enough revenue to finance its expenditure is an indication of efficien of efficent and effectivev
revenue collection mechanism. As far as discussed in previous imbalance of revenue and
expenditure.
To forward such conclusion and recommendation, the investigator was taken reasonable data
and information which are collected from primary source through interview and discussion with

the respective personals, and by assessing some documents and reports which are available in
the bureau.
According the bureau has the following dtrengths and weakness:
4.1.1 Strength of the bureau
Some of the strengths of the bureau are listed follows:
The employees of the bureau have a good coordination and collaboration among them.
The bureau performs its activity according to the plan and procedure that are designed by higher
tax authority.
Its revenue is in its increasing stage or rate.
4.1.2. Weaknessof the bureau
The bureau has also some problem or weakness which is needed a remedial measurement.
The bureau has not manuals that provide standards fro measuring employees effieacy and
effectiveness against their performance.
The internal control of the burea is weak- there is un independent body that controls and provide

essential consultation, and to give remedial actions based on the performance of the employees.
In sufficient and in appropriate methods and procedure of revenue collection system
Low level of economics standareds and educational back ground of the society.
Lack of man power in quantity and quality.
Lack of investment based policy that helps to create a good environment for privet investors in

the woreda.
Under reporting of TOT(turn over tax)

4.2 Recommendation
By finding and analyzing the data, the investigator forwared some possible solution and
recommendation for the difference short comes that are appearing in the bureau. These obstacles
should be further investigated and remedial measures have to be taken as immediate as possible.
Unless such actions are taken, the revenue effectiveness and effiency may not improve
The following are the possible recommendations towards enhancing the revenue collection and
performance.
It is better when the bureau established clear standars that are used to measure the performance
and effectiveness of every employee.
The bureau has to hire an internal auditor to verify the compliance of rules and regulations with
actual activity of the employees , and to provide a constructive advices and consultations for
both to the management and to the employees.
Providing consulation programs and meeting to the society in order to increase the awareness of
the society in relation to importances of taxes to the public.
Encouraging investors and workers by providing tax incentives and exemptions so as to increase
the number of capital owners in the woreda.
The qualiy and quality of human resources should be given due emphasis since TOT and other
tax can be effectively implemented in the presence of well trained and sufficient quality of staffs
and also to assign employs in each of revenue area.
Designing appropriate techniques to control revenue source especially for TOT by preparing
receipt tickets that are to specify the amount of goods sold and sevices are rendered to inviduals
at specified price in order to increase the accuracy tax assessors in charging the right amount
turn over tax payers especially for grin mills.
The bureau should give promotion and demotion according to the performance of employees it
is difficult to conclude that the above remedial measures would solve the above problems
associated with revenue collection system But such measures would be contributing the
betterment revenue collection performance in terms of raising more revenue in the bureau.

Appendex
Interview questions relating to the employees of the organization
1.
2.
3.
4.

What are of internal revenue sources to bureau.

Is there any influence the economic level of the society
Does there any methods that the bureau use for revenue collection
How the organization control and manage the bureau in relation to segregation of duties and

5.
6.
7.
8.
9.

responsibility.
What are the major problems encountered during the implementation revenue collection process
Does the organization apply the rules and regulation which forwarded by responsible authority.
What is the attitudes of the society to fulfilling their obligation
Is there any imbalance between the revenue and expenditure of the bureau
Is there any tax evasion and avoidance by the tax payer
If so what type of measures you take
Question for tax payers

1. What type of tax you pay

2. Does the amount you pay is proportion with your income
3. Do you belive that the methods and system that the bureau follow to collect revenues are
appropriate
4. How much you pay
5. What is the importance of tax to public

Reference

Alan.A Tait,(1988),VAT international practice and problems

Aregaw Hailu-(2004), Assessment on VAT implementation in Ethiopia
Bird RM,(1992), Tax policy and economic development
Due J.F,(1959), Governmental finance

Gebre worku,(2001), Tax accounting in Ethiopia contex 1st edition

Minnistry of finance(MOF)1942-1995), ABC of tax in Ethiopia
Ministry of revenue(MOR)-2004),implemntation of tax in Ethiopia
Richard A. Muis grave and peggy musgrave-(1984), public accounting in theory and practice.