Factor Affecting Value Added Tax Revenue Collection In Ethiopia

Abstract

A growing issue of improving value added tax revenues comes at the forefront of all crucial issues in the context of increasing recognition of the role of domestic revenue mobilization for sustainable financial and social advancement of nations. This paper is then explored the factor affecting value added tax revenue using Ethiopian cases. Using data from 2004 to 2021collected from different sources on variables such as real GDP per capita, trade openness, service share of GDP, corruption perception index, and others; we estimated their effect on value added tax revenue using long run regression model. The findings show that control of corruption (corruption perception index); economic growth (GDP per capita), trade openness, fiscal deficit and tax administration efficiency play a significant role in determining the VAT revenue collection in Ethiopia. On the other hand, although the VAT reform has found to have negative effect on the VAT revenue collection in Ethiopia, the effect is not statistically significant which may be linked to the low percentage of individual or group unregistered for VAT in Ethiopian since the 2017 VAT increase threshold from 500 thousand ETB to 1million ETB. Therefore, this study recommends supportive policies to encourage policy toward improving control of corruption; policy toward improving economic growth; policy toward improving the expansion of trade and policy toward improving tax administration efficiency in order to improve VAT revenue.