Generally the previous tax systems were out dated

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Generally the previous tax systems were: - Out dated tariffs and tax laws; - Weak customs and tax administrations; - Poor to attract investments, facilitate trade, and generate adequate revenue to cover current and capital expenditure and hence, cannot finance development and poverty reducing projects. Of course, taxation plays vital role in raising the substantive revenue to finance the state as the engine of development and to redistribute income and wealth among members of the community residing in a state. This basically necessitates a state to follow modern taxation (VAT) in its legal system. The major rationales behind introducing VAT in Ethiopia includes, among others, the following: I .sales tax doesn‟t allow collection on the added value created wherever sales transaction is conducted but VAT does . II.VAT allows little room for evasion. Taxes in VAT are collected at multi stages and business entities are allowed to have refund on the tax they paid for inputs (raw materials such as labor, transportation, ware housing, etc).This leaves little room for evasion. But this is not true in sales tax as it is collected only at one stage. III.VAT enhances saving and investment. VAT is a consumption variety tax. The fact that the final burden lies on consumers raises awareness to have means of reduction of
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Page | 65 payment for consumption at any possible incident. This undoubtedly will change the extravagant way of life imposed from the custom, on the part of final consumers. IV.Out dated sales tax is not capable to generate adequate revenue for the government to cover necessary expenditures. All in all, Ethiopia adopted VAT proclamation No 285/2002 applied and practiced from January, 1, 2003 onwards. Good TAX administration such as VAT is challenging in all countries especially, developing ones. It takes time, skill and resources all of which are in short supply in many countries including Ethiopia. There fore, the writers believe that with strong struggle towards its implementation, on the part of general population. Ethiopians can realize the prone consequences of VAT with in near future and hence such shall be encouraged. 3.2.Definition of VAT In the previous section, we have witnessed that due to acute problems on the application of sales tax, partly it was introduced for unitary state structure and partly it is accompanied by many failures to comply with modern tax administrations, VAT was instead introduced. VAT is thus, inherently a sales tax with its unique features that makes it distinct from other forms of sales tax. There exists confusion to identify VAT from other sales taxes in its introduction for the first time. VAT appears to be imposed on business entities as it belongs to sales tax family. In reality however, business entities are simple agents to collect tax from individuals, who bear the final burden, final consumers. On the other hand, whereas the income tax proclamation (proc.No 286/2002 defines clearly what in -come tax is, the VAT proclamation (Proc. No 285/2002) failed to define VAT.
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