Value Added Tax as a Tool for National Development in Ethiopia

Abstract

Ethiopia aspires to be a middle income country by 2020. And to meet such aspiration, sufficient amount of revenue is required for the purpose of social, economic and political development. Ever since 2002, the Ethiopian governments have tended to continue its taxing reform package with targets for attaining such outlined issues. To that extent, replacement of the outdated sales tax that operated for about four decades with that of Value added tax (VAT) is one of the main pillars and land mark of such reform. This paper therefore discusses how VAT becomes a tool for national development in Ethiopian context from its adoptions (2003) to 2012. Consequently,the OLS method is applied to investigate the relationship between VAT and national development in terms of GDP. In doing so, the annual quantitative time seriessecondary data sourced from the Ethiopian Revenue and Custom Authority (ERCA), Ministry of Finance and Economic Development (MOFED), and Ethiopian Economic Associations (EEA) was employed. This research work is both descriptive and inferential in nature that analyzed by both SPSS statistical package version 20.0 and Stata/SE version 11.0. The descriptive finding revealed that,after the adoptions of VAT, the GDP growth rate alarmingly increased and reached about 21.9% on average and the average ratio of VAT revenue to that of GDP was 2.95%, while the growth rates of VAT itself was 66.27% on average. In addition to that, the OLS findings showed as the Ethiopian National development is significantly influenced by the VAT revenue with ?1 of 23.500. So, the study concluded that VAT revenue plays an energetic role for the national development of Ethiopia and it enables to succeed the current growth and transformation plan (GTP) of the country.Therefore the paper recommends that the Ethiopian government should make a full-fledged effort to efficiently collect and effectively utilize such tax revenue through closing the door to corruptions and creating harmonized cooperation’s at different levels which can be possible through making the VAT administrations more fashionable than ever before.

Keywords: Value Added Tax (VAT), National Development, Gross Domestic Products (GDP), Ethiopia