1

VALUE ADDED TAX

(VAT)

BASIC VAT GUIDE

FOR TAX PAYERS

Tax Reform Program

Office
VAT Sub-program
June/2002
Addis Ababa
Ethiopia
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VALUE ADDED TAX (VAT)

TAX PAYERS GUIDE

TABLE OF CONTENTS
Page
No.
Chapter 1. Introduction 1
1.1. VAT to replace current sales tax 1
1.2. VAT is a broad based tax 1
1.3. Benefits of VAT 1
1.4. Adoption of VAT 1
1.5. VAT minimizes avoidance 1
1.6. Exemptions from VAT 1
1.7. VAT threshold 2
1.8. Consultation with Stakeholders 2

Chapter 2 A BRIEF EXPLANATION OF VAT

2.1 What is Value Added Tax (VAT)? 3
2.2. What is Output Tax? 3
2.3. What are Taxable Supplies? 3
2.4. Are there other kinds of supplies? 3
2.5. What are the rates of VAT? 4
2.6. How do I know if my supplies are exempt or zero- 4
rated?
2.7. What is the difference between exempt and zero-rated 4
supplies?
2.8. What other taxable supplies may be liable to VAT? 4
2.9. Do I still have to account for VAT if no money is paid? 4
2.10. What is input Tax? 5
2.11. Can I always get back my input tax? 5
2.12. What if I make exempt supplies? 5
2.13. What proof do I need to show before to claim a credit 5
for input tax?
2.14. How is input tax credit allowed? 5
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Chapter 3. BASIC VAT VOCABULARY 7

Chapter 4. WHAT IS THE TAX IN THE VALUE ADDED TAX SYSTEM?

4.1. How does VAT work? 8
4.2. Computation of VAT? 8
4.3. VAT Payment at Various Levels 9
4.4. 9
4.5. 10

Chapter 5. PERSONS TO BE REGISTERED

5.1. Who has to be registered for VAT? 11
5.2. How does an officer determine whether one has to 11
register or not?
5.3. How do I work out whether I have to be registered or 12
not?
5.4. How do I calculate my turnover? 12
5.5. Can I be registered if my turnover is below the limit? 12
5.6. Can FIRA/VAT refuse voluntary registration? 12
5.7. How do I register for VAT? 12
5.8. What records are to be kept for VAT purposes 13
5.9. What about the VAT returns? 13

Chapter 6. ZERO RATED GOODS AND SERVICES

6.1. What are zero rated goods and services? 14
6.2. What are zero rated supplies? 14

Chapter 7. EXEMPT GOODS AND SERVICES

7.1. What are exempt goods and services? 15
7.2. What are included in exempt supplies under VAT? 15

Chapter 8. VALUE ADDED TAX ON EXPORTS

8.1. Are exports subject to Value Added Tax? 17
8.2. What does this mean in practice? 17
8.3. Why should I register for VAT if I only export? 17
8.4. What do I do to claim VAT refunds on exports of 17
goods?
8.5. What about the export of services? 17
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9. VALUE ADDED TAX ON IMPORTS

9.1. Is VAT chargeable on imported goods?
9.2. Who has to pay VAT on imported goods?
9.3. When does have to be paid VAT? 19
9.4. Do I have to pay VAT if I am registered for VAT? 19
9.5. What is the Value on which I have to pay VAT at 19
importation?
9.6. How do I claim the VAT credit for VAT paid on 19
imports?
9.7. Is VAT chargeable on services imported from abroad? 19
9.8. When do I account for VAT on these services? 20

Chapter 10. VAT ACCOUNTS AND RECORDS

10.1. A VAT account 21
10.2. Purchase record 21
10.3. Sales records 21
10.4. Debit notes and credit notes 22
10.5. Do you export? 22
10.6. Cash records 22
10.7. Stock and manufacturing records 22
10.8. Do you use a computer in your business? 22
10.9. Exempt sales 22
10.10. Transitional relief of sales tax 22

Chapter 11. CANCELLATION OF REGISTRATION

11.1. When must I cancel my registration? 23
11.2. When can I ask to have my registration cancelled? 23
11.3. Can I still use tax invoices after cancellation? 24
11.4. Can I reclaim any VAT I am charged after cancellation 24
of his registration?
11.5. What about stock and assets on hand at the time of 24
cancellation of registration?
11.6. Do I still need to keep my VAT records? 24
11.7. What happens if I apply to cancel my VAT registration? 25
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Chapter 12. AGENTS AND THEIR PRINCIPALS

12.1. How are agents affected by VAT? 29
12.2 Who must register for VAT in an agency situation? 29
12.3. How does a principal issue invoices in a VAT system? 29
12.4. How does an agent issue invoices in a VAT system? 30
12.5. How does the principal calculate the value for tax? 30
12.6. How does the agent calculate the value for tax? 30
12.7. What credit for input tax can a principal claim? 30
12.8. What credit for input tax can an agent claim? 31
12.9. Demonstration of how VAT works in an agency 32
situation

Chapter 13. VALUE ADDED TAX RETURN

13.1 Value Added TAX Return Form
13.2 Completion notes to Value Added Tax Return Form
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VALUE ADDED TAX (VAT)

1. INTRODUCTION

1.1. The VAT will replace the current sales tax on manufactured and imported
goods and services on January 1. 2003.

1.2. The VAT is a broad based tax on the consumption of goods and services. It
is collected at all stages 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 at the preceding level.
 Unlike the current sales tax system, whereby relief is granted only to raw
materials used directly in the production of goods, under a VAT, relief is
granted for tax paid on capital goods, distribution and administration
inputs.
 Sales of exported goods are not subject to the VAT.

1.3. The benefits of the VAT include the following:-

 Removing the tax content (on inputs) from exported goods makes the
goods more competitive in international markets;
 Domestically produced goods will be more competitive with imported
goods;
 Relief from tax on capital goods will encourage investment,

1.4. The adoption of the VAT is consistent with the direction many countries have
been taking in shifting away from a reliance on import duties and income tax
towards a VAT. (e.g. Ghana, Uganda, Tanzania, Kenya, Zambia).

 Potential investors consider tax legislation as one of the factors in

making investment decisions.

1.5. As a VAT is less easily evaded, the minimizing of tax avoidance supports the
maintenance of equity and fairness in the application of tax legislation.

1.6. The design of the VAT has been done in such a way that an unfair burden
has not been placed on the lower income families.

The following products are exempted:-

 the sale, transfer or lease of immovable property;

 the rendering of medical services;
 the rendering of educational services;
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 the supply of electricity and water;

 post office operations and the provision of public transport permits and
license fees.

1.7. The design of the VAT also includes concessions to small scale business to
lessen the administrative burden, such as the relief from the requirement to
register to collect VAT. The registration threshold is at the turnover value of
Birr 500,000 ( However an Equalization Tax Scheme is being worked out to
ensure equity considerations for all levels of taxpayers.

1.8. The Government has been consulting and will continue to consult with the
various stakeholders to obtain their views and contributions in order to effect
a smooth implementation of the VAT on the 1st January, 2003.
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2. A BRIEF EXPLANATION OF VALUE ADDED TAX (VAT)

2.1. WHAT IS VALUE ADDED TAX (VAT)?

VAT is a tax on consumer expenditure. It is collected on business

transactions and imports.

Most business transactions involve supplies of goods or services.

VAT is payable if they are:-

 supplies made in Ethiopia

 made by a taxable person
 made in the course or furtherance of a business
 are not specifically exempted or zero-rated.

Supplies which are made in Ethiopia which are not exempt are called
taxable supplies. A taxable person can be an individual, firm, company,
as long as such a person is required to be registered for VAT

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.

2.2. WHAT IS OUTPUT TAX?

This is the VAT you charge your customer. It is only the taxable person
who will charge VAT in the course of effecting their supplies.

2.3. WHAT ARE TAXABLE SUPPLIES?

If you are in business and sells goods ( making a supply of goods) or if

you do something for someone else and are paid for doing it ( making a
supply of services) it is likely that you are making taxable supplies. When
you are registered, VAT is chargeable on all the taxable supplies you
make. This is your OUTPUT TAX.

2.4. ARE THERE OTHER KINDS OF SUPPLIES?

There are other kinds of supplies. These are the exempt supplies as
given in the VAT Legislation. They include ( Refer to Article 19).
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It is very important to know whether you are making any exempt supplies
because this will affect the amount of VAT to be reclaimed.

2.5. WHAT ARE THE RATES OF VAT?

There are two rates of tax. The standard rate which is 15% and the zero
rate, which is 0%.

2.6. HOW DO I KNOW IF MY SUPPLIES ARE EXEMPT OR ZERO-RATED?

The VAT legislation lists the supplies which are exempt and those which
are zero-rated. (Refer to Article 18 and 19).

2.7. WHAT IS THE DIFFERENCE BETWEEN EXEMPT AND ZERO-RATED

SUPPLIES?

Zero rate tax is charged at 0%, and exempt rate tax is where no tax is
charged at all. Therefore, exempt rate supplies are outside the VAT
system so it does not attract Input Credit or Refund.

2.8. WHAT OTHER TAXABLE SUPPLIES MAY BE LIABLE TO VAT?

VAT is not accounted for on day-to-day sales. There are other taxable
supplies which may be taxable. VAT is paid on monthly basis.

Here are some examples:-

a) sales to the staff ( e.g. meals – even if supplied free of charge, or

goods at reduced prices or free) ; or sales from vending machines;
b) sales of business assets ( e.g. equipment, furniture, commercial
vehicles);
c) hire or loan of goods to someone else;
d) gifts to friends or business representatives;
e) goods which the proprietor or his family have taken from the business
for their own use;
f) commission received in return for selling something on behalf of
someone else.

2.9. DO I STILL HAVE TO ACCOUNT FOR VAT IF NO MONEY IS PAID?

You must account for VAT on any gift of goods or services from the
business based on the fair market value of the goods or services at the
time the supply is made.

Similarly you must account for VAT on the full value of anything you supply
if you receive goods or services in return ( e.g. in a barter situation). If you
do not charge VAT where you should, you will still have to account for
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output tax. Whatever price you charge to your customer will be treated as
including VAT.

2.10. WHAT IS INPUT TAX?

Many of the things a person buys will carry a VAT charge, but if you are
registered for VAT you can normally claim a credit for the VAT charged
on business purchases and expenses. This is your INPUT TAX. It
includes not only the VAT on purchases of raw materials or on goods
purchased for resale, but also the VAT on things like:-

a) office equipment for the business;

b) commercial vehicles used in the business for the carriage of goods;
c) the telephone bill ( for the business)
d) payments for services in connection with the business (e.g.
Accountants’ or Lawyers’ fees). It does not include VAT paid on
goods or services for someone else’s business or VAT on private
purchases, such as furnishings for the home of the proprietor. VAT
charged in these circumstances is not considered as INPUT TAX.

2.11. CAN I ALWAYS GET BACK MY INPUT TAX?

When you spend money and have to pay VAT, the question to ask your
self is this expense wholly for the business? If it is, you will more than
likely be able to deduct as INPUT TAX.

There are some purchases which cannot be allowed as credit for INPUT
TAX.

These are:-

(i) passenger automobiles, unless the business is dealing in or hiring

such automobiles;
(ii) the repair and maintenance of passenger automobiles unless the
business is dealing in or hiring such automobiles;
(iii) entertainment unless the business is in the business of providing
entertainment.

2.12. WHAT IF I MAKE EXEMPT SUPPLIES?

If as well as making taxable supplies, you make exempt supplies?

You may not be entitled to claim a credit for all your input tax.
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WHAT PROOF DO I NEED TO SHOW TO CLAIM A CREDIT FOR

INPUT TAX?

You must have an original copy of a Tax Invoice including a simplified Tax
Invoice, or Certified Customs import declaration or warehousing Entry to
substantiate a claim for input tax credit.

2.13. HOW IS INPUT TAX CREDIT ALLOWED? /CLAIMED?

When the VAT Return is completed each month the amounts entered in
Box or Box is the claim for credit.

If the total in Box exceeds the amount in Box of the return the
FIRA/VAT will allow the claim to credit the balance to the succeeding
month until after the end of the 5 th month when the FIRA/VAT will refund
the balance.
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3. BASIC VAT VOCABULARY

3.1. The following jargon is normally used in VAT literature. We need to familiaize
ourselves with them.
a) Input Tax : this is the VAT paid on purchase
b) Output Tax : this is the VAT paid on sales.
c) VAT Payable : this is the net VAT to be paid to the FIRA/VAT by a taxable
person. It is arrived at by the formula;

OUTPUT TAX minus INPUT TAX = VAT PAYABLE.

d) Zero-Rating: the supply is charged with VAT at 0% but credit can be taken
for VAT paid on purchases used to make the supply.
e) Exemption: the supply is exempted from VAT. No VAT is charged on the
supply and no credit can be taken for VAT paid on purchases used to
make the supply.

Exempt Supplies: - supplies, which are not liable to VAT. Exempt supplies
are not taxable supplies and do not form part of the taxable turnover for
VAT purposes. A person making only exempt supplies cannot be
registered for VAT.

f) Threshold: this is the level of turnover of taxable supplies prescribed by

the law at or above which a person must register for VAT.

g) Taxable Person :- ‘‘ Person’’ i.e. legal entity such as company, partnership,

sole proprietor, who is liable to be registered for VAT. It is the person, not
the business, that is registered for VAT.

h) Taxable Supplies: these are business transactions which are liable to VAT
at the zero or standard rate.
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4. WHAT IS THE TAX IN THE VALUE ADDED TAX SYSTEM?

4.1 HOW DOES VAT WORK?

When a vendor is supplied with goods or services by another vendor,

the supplier of those goods or services will levy VAT. The VAT on
those goods or services received, is the INPUT TAX of the vendor
who received those goods or services. When that vendor in turn
supplies goods or services. When those vendors in turn supplies
goods or services to other persons (or vendors), VAT must be
included in the price charged for those goods or services. This is the
output TAX of the vendor.

The difference between the amounts of output tax and input tax is the
VAT payable to the FIRA/VAT.

Output TAX Minus INPUT TAX = VAT PAYABLE

When input tax exceed output tax, a taxpayer may be allowed to carry
the credit forward and a refund made after 5 months if input tax still
exceed output tax.

INPUT TAX minus OUTPUT TAX = VAT REFUNDABLE/CREDITED.

4.2 COMPUTATIONS OF VAT

The following examples illustrate how VAT is charged as goods move

from one vendor to the next in the manufacturing, wholesale and retail
chain, until they reach the final consumer.

VAT Payable to FIRA

Birr Birr

1. Manufacturer sells to wholesales

at VAT @ 15% 10,000
Sale Price including VAT 1,500

Total 11,500

2. Whole sales sells to Retailer at

VAT @ 15% 12,000
Sale Price including VAT 1,800

Total 13,800
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{Out put Tax – Input Tax}

Birr { 1,800 – 1,500}

3. Retailer sells to consumer at 14,400

VAT @ 15% 2,160
Final Price including VAT 16,560

{Out put Tax – Input Tax}

Birr {2,160 -1800} 360
Total Tax 2,160

4.3 VAT PAYMENT AT VARIOUS LEVELS

Note that the total VAT due of Birr 2,160 which is reflected in the
price of Birr 16,560 collected by the retailer from the final consumer
is payable at different stages by three separate business enterprises
as follows:

Birr
Manufacturer 1,500
Wholesaler 300
Retailer 360
2,160

5. PESONS TO BE REGISTERED

5.1. WHO HAS TO BE REGISTERED FOR VAT?

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, that 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/VAT

Turnover related to exempt supplies as listed in the law is not to be

included in the total for deciding if VAT registration is compulsory.

The term any person for purposes of VAT registration includes:-

 Sole proprietor.
 Company
 Partnership
 Estate of the deceased
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 Trust
 Incorporated body or
 Un in corporated body
 Club or Association

A commercial enterprise :- this refers to any business of whatever nature

and it includes examples such as:-

a) Ordinary business e.g. shop, contractors, manufactures, wholesalers,

etc.,
b) Trades and Professions, e.g. Builders, Engineers, Accountants,
Lawyers etc.
c) Activities of non-profit making bodies e.g. Societies, Associations,
sporting Clubs, etc.

5.2. HOW DOES AN OFFICER DETERMINE WHETHER ONE HAS TO

REGISTER OR NOT?

A person is obliged by law to register if one is doing any business

which on 1st January, 2003 or there after is likely to have taxable
turnover in 12 months exceeding Birr 500,000.

5.3. HOW DO I WORK OUT WHETHER I HAVE TO BE REGISTERED

OR NOT?

Normally you have to consider the business turnover for the past 12
months. If during the past 12 months you made taxable supplies
whose gross value excluding tax exceeds Birr 500,000 then you have
to register for VAT.

Also if one reasonably expects that during the next 12 months the
total value of taxable supplies excluding tax is likely to exceed Birr
500,000 then the person needs to register for VAT.

5.4. HOW DO I CALCULATE MY TURNOVER?

The turnover is calculated on an ongoing basis. Two periods need

to be considered- the past 12 calendar months and the next 12
calendar months on a month 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 supplied by all the business for the past
12 months. Where the total exceeds Birr 500,000 then there is the
requirement to register for VAT.

5.5. CAN I BE REGISTERED IF MY TURNOVER IS BELOW THE

LIMIT?
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If the turnover is below Birr 500,000 of business activity you may

apply for voluntary registration. You can apply for voluntary
registration only if you regularly supply or render at least 75% of
your goods and services to registered persons.

5.6. CAN FIRA/VAT REFUSE VOLUNTARY REGISTRATION?

Voluntary registration is at the discretion of FIRA/VAT and also the

person must be regularly supplying or rendering at least 75% of its
goods and services to registered persons. FIRA/VAT can also
refuse to register any person who :-

 has no fixed place of abode or business;

 does not keep proper accounting records,
 has no bank account;
 has previously been registered for VAT purposes but failed to
perform his duties under the VAT law.

5.7. HOW DO I REGISTER FOR VAT?

Application for compulsory as well as voluntary registration must be

made on form VAT - ‘‘ APPLICATION FOR VAT REGISTRATION’’
This will be issued by FIRA/VAT starting from June 1, 2002. Once
an application for registration has been made, FIRA/VAT will have
to advice you of your VAT Registration. Number and Tax
Identification Number (TIN). A certificate of Registration will be
issued to you which will have to be displayed at the main business
premises with effect from January 1, 2003. If registration is
disallowed FIRA/VAT will have to notify you and the reasons for the
refusal explained.

5.8. WHAT RECORDS ARE TO BE KEPT FOR VAT PURPOSES?

You are is required to keep records of all supplies and purchases

made and received and a summary of VAT for each period covered
by the VAT Returns . This is called a ‘’ VAT ACCOUNT’’

5.9. WHAT ABOUT THE VAT RETURNS?

Every Month, you must file a VAT RETURN. The period covered by
the return is called a tax period. You have to fill in details of the
supplies made and received in that period and pay the total owed to
FIRA/VAT, or claim a further credit or repayment of tax as the case
may be.
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6. ZERO RATED GOODS AND SERVICES

6.1. WHAT ARE ZERO RATED GOODS AND SERVICES?

Supplies of zero- rated goods or services are business transactions which

VAT is chargeable at 0% (in effect no VAT is charged). Zero rate supplies
are taxable supplies although no VAT is charged and the value of these
supplies forms part of the taxable turnover for registration purposes.

You can claim full INPUT TAX (tax paid on purchases) credit related to
your zero rated supplies. If you make only zero-rated supplies you should
be able to claim refunds from FIRA/VAT.

6.2. WHAT ARE ZERO RATED SUPPLIES

These include:-

 The supply of exports of goods or services

a) Goods are treated as exported from Ethiopia if the goods are delivered
to or made available at an address outside Ethiopia as evidenced by
documentary proof from ECuA acceptable to the FIRA/VAT.

b) Services are treated as exported if the services are supplied for use or
consumption outside Ethiopia as evidenced by documentary proof from
.ECuA acceptable to FIRA/VAT

 The rendering / supply of transportation or other services directly

connected with international transport of goods or passengers, as well
as the supply of lubricants and other consumable technical supplies
taken on board for consumption during international flights.
 International transport of goods or passengers occur where the goods
or passengers are transported by road, rail , water or air.

a) from a place outside Ethiopia or another place outside Ethiopia where

the transport or port of the transport is across the territory of Ethiopia,
or
b) from a place outside Ethiopia to a place in Ethiopia.

Or
c) from a place in Ethiopia to a place outside Ethiopia

 the supply of gold to the National Bank of Ethiopia.

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7. EXEMPT GOODS AND SERVICES

7.1. WHAT ARE EXEMPT GOODS AND SERVICES?

Supplies of exempt goods and services are business transactions on

which VAT is not chargeable at either the standard or zero-rate. EXEMPT
SUPPLIES are not taxable supplies and do not form part of the taxable
turnover for VAT registration purposes.

If you make only exempt supplies you cannot be registered for VAT.

If you make taxable and exempt supplies you cannot reclaim the INPUT
TAX (tax paid on purchases) related to the exempt supplies.

7.2. WHAT ARE INCLUDED IN THE EXEMPT SUPPLIES UNDER VAT?

a) the sale, transfer or lease of immovable property, except for the

following:-

 the sale or transfer of hotel or holiday accommodation;

 the sale or transfer of newly constructed residential property, unless
the property has been occupied as a residence for at least two
years.

b) the rendering of financial services;

Financial services means:-

 granting, negotiating and dealing with loans, credit guarantees, and
any security for money, including management of loans, credit or credit
guarantees by the grantor.
 transactions concerning deposits and current accounts, payments,
transfers, debts, cheques and negotiable installments other than debt
collection and factoring;
 transactions relating to share, stocks, bonds, and other securities other
than custody services;
 management of investment funds

c) the supply or import of national or foreign currency ( except for that

used for numismatic purposes) and of securities.
d) The import of gold to be transferred to the National Bank of Ethiopia.
e) The rendering by religious organizations of religious or church- related
services,
f) The rendering of medical services;
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g) The rendering of educational services provided by educational

institutions, as well as child care services for children at pre-school
institutions.
h) The supply of goods and rendering of services in the form of
humanitarian aid, as well as import of goods transferred to state
agencies of Ethiopia and public organizations for purpose of
rehabilitation after natural disasters, industrial accidents, and
catastrophes.
i) The supply of electricity and water
j) The supply of goods for the official use of diplomatic missions,
k) Post office operations and the provision of public transport permits and
license fees.
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8. VALUE ADDED TAX ON EXPORTS

8.1. ARE EXPORTS SUBJECT TO VALUE ADDED TAX?

All exports of goods and services are liable to VAT at the zero rate.

8.2. WHAT DOES THIS MEAN IN PRACTICE?

It means that you have to charge VAT at 0% in other words no VAT has
to be charged. However, more importantly you are entitled to reclaim
the VAT on all the goods and services purchased to produce the
exports.

8.3. WHY SHOULD I REGISTER FOR VAT IF I ONLY EXPORT?

Firstly you are still making taxable supplies even it a NIL rate and the
law requires you to register if the turnover exceeds the registration
limits. Secondly you will be entitled to refunds of VAT from the
FIRA/VAT if you export goods or services, and it will therefore be in
your interest to register regardless of the level of turnover, to be able to
claim VAT refunds.

8.4. WHAT DO I DO TO CLAIM VAT REFUNDS ON EXPORTS OF

GOODS?

If you are exporting goods from Ethiopia you have to ensure that the
proper customs export entry is completed and presented to ECuA
before the goods are dispatched. Make sure that the ECuA Customs
Certified copy of the export entry is obtained WITHOUT THIS
DOCUMENT THE CLAIM FOR ZERO – RATING SHOULD BE
DISALLOWED AND THE REFUND ALSO BE DISALLOWED.

You may also be required to produce some additional evidence in the

form of an order for the goods from a foreign customer, a copy of the
invoice issued to the foreign customer on a copy of the commercial
transit document ( i.e. Airway bill, bill of leading of Ethiopia Railway
transit note)

8.5. WHAT ABOUT THE EXPORT OF SERVICES?

This is rather different as you have nothing to show to the ECuA at

exportation.

To qualify for zero-rating an exporter of services has to be able to

demonstrate that the service you provided was used or consumed
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outside Ethiopia. For example an Ethiopian architect may produce

plans in Ethiopia for a building to be built by a customer outside
Ethiopia. This would involve an export of service.

You must therefore be able to prove that the service was used in a
foreign country. The evidence that will be considered to substantiate
this claim will be a contract that clearly specifies the place of use or
consumption of the service outside Ethiopia or evidence that the
service was provided at or for a building or premises located outside
Ethiopia. The evidence must be clear, other wise you will be expected
to charge VAT.
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9. VALUE ADDED TAX ON IMPORT

9.1 IS VAT CHARGEABLE ON IMPORTED GOODS?

All goods imported into Ethiopia are liable to VAT, except:

a) Goods which are zero-rated
b) Goods, which are exempted.

9.2. WHO HAS TO PAY VAT ON IMPORTED GOODS?

The importer regardless of whether the goods are private or for business
purposes, and whether or not the importer is registered for Value Added Tax.

9.3. WHEN DOES HAVE TO BE PAID ?

At the point of clearing the goods in the Customs Department – ECuA.

9.4. DO I HAVE TO PAY VAT IF I AM REGISTERED FOR VAT

You have to pay the VAT that is due. However you should provide your TIN
and VAT Registration Numbers on your Customs import entry and declare if
the goods imported are for your business. If they are imported for taxable
business purposes, you will be able to claim a credit for the tax paid on the
VAT Tax Return.

9.5. WHAT IS THE VALUE ON WHICH I HAVE TO PAY VAT AT IMPORTATION?

The value on which you will have to pay VAT at importation is in accordance
with the VAT law as the CIF(cost, insurance and freight) duty plus the custom
duty plus all the cost of any service supplied incidental to the delivery of the
goods. The ECuA will give the basis of value for VAT purposes

9.6. HOW DO I CLAIM THE VAT CREDIT FOR VAT PAID ON IMPORTS?

(i) You must be a registered VAT Client.

(ii) The imports must be for the business and not for private use. You must
obtain a copy of the Customs Bill of Entry certified by ECuA as to the
amount of VAT paid. This amount must be entered in Box 2 on the
VAT RETURN and claim it as a CREDIT. YOU MUST RETAIN A
COPY OF THE CUSTOMS BILL OF ENTRY.

9.7. IS VAT CHARGEABLE ON SERVICES IMPORTED FROM ABROAD?

If the supplier of the service conducts business in Ethiopia and is registered

for Value Added Tax then VAT will have to be paid. If the service is supplied
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by a foreign who is not registered for VAT in Ethiopia, then you must account
for VAT your self if you are registered for VAT in Ethiopia

9.8 WHEN DO I ACCOUNT FOR VAT ON THESE SERVICES?

At the same time as you would account for the tax if you were supplying the
goods or services in Ethiopia i.e. at the time the service is completed, or when
the invoice is received from the foreign supplier.
 19

10. VAT ACCOUNTS AND RECORDS

WHAT ARE VAT ACCOUNTS AND RECORDS?

The VAT REGULATIONS REQUIRE A VAT REGISTERED person to display his

VAT Registration Certificate at one’s principal place of business.

The VAT Statute/Regulations defines the records which a VAT registered person is
required to keep.

These requirements are :-

10.1. A VAT ACCOUNT :- This is the information which is entered on your VAT
RETURN. The information can be retained in an account book, or on
computer.

10.2. Purchase Record :- This should be divided into three separate accounts:-
a) Local purchases , and the VAT thereon;
b) Imports and the VAT thereon;
c) All other purchases, including exempt, zero-rated purchases and
purchases from suppliers who are not registered for VAT where you will
not have been charged any VAT.

One must also retain and file separately the following in order of date.

a) Original tax invoices including simplified invoices, received from local

suppliers, including original debit and credit notes received from the
suppliers.
b) Certified copies of Customs import entries.
c) Purchases invoices received for all other purchases
10.3. Sales Record :- this should be divided into three separate accounts:-

a) Taxable sales at the standard rate and the VAT thereon, or VAT charged
therefrom,
b) Taxable Sales at the zero rate
c) Exempt Sales.

One must also retain and separately file the following in order of date:-

a) Copies of tax invoices, including simplified invoices related to one’s taxable

sales, and copies of any debit or credit notes issued to one’s customers. If
one is using cash accounting or a small trader scheme one must keep a
daily record of his gross takings at the standard rate.
 20

b) Copies of invoices of goods sold at the zero-rate or a daily record of the value
of one’s sales at the zero rate if using cash accounting or a small trader
scheme.
c) Copies of invoices of exempt goods sold or a daily record of the value of all
exempt sales of using cash accounting or a small trader schemes.

10.4. DEBIT NOTES AND CREDIT NOTES:- Copies of Debit and Credit Notes
issued should be separately filed from Debit and Credit Notes received.
They should all be filed in order of date.

10.5. DOES YOU EXPORT? Then you must retain the following:-

 a certified copy of the Customs Export entry.

 a purchase order from or contract with the foreign customer;
 a copy of the invoice issued to the foreign customer;
 evidence of transportation from Ethiopia in the form of copies of transit
documents, such as airway bills, shipping bills or road or rail transit
documents.

10.6. CASH RECORDS :- All records of one’s cash transaction must be retained
including cash books, petty cash vouchers, all account books, records of
daily takings records.

10.7. STOCK AND MAINFACTURING RECORDS:- These records must be

maintained if appropriate to the business.

10.8. DO YOU USE A COMPUTER IN YOUR BUSINESS: - If so, you must retain
all computer records to tally with the manual records.

10.9. IF YOU ARE REGISTERED AND MAKE EXEMPT SALES:- In these

circumstances you must retain records of all calculations to credit INPUT
TAX.
10.10. IF YOU MAKE A CLAIM for Transitional Relief of Sales Tax- You must
retain the documents and records related to those claim.

c) VAT REGISTERED PERSONS WHOSE TAXABLE TURNOVER

EXCEEDS – Birr per annum must retain the following, in addition :-

 orders and delivery notes;

 all business correspondence;
 appointment and job books
 annual accounts – including trading accounts profit and loss accounts
and balance sheet;
 bank statements and paying in records.
 21

11. CANCELLATION OF REGISTRATION

11.1.WHEN MUST I CANCEL MY REGISTRATION?

You must cancel your registration if :

 You close down or sell your business. If you have more than one business
and is not closing down or selling them all, you may not be able to cancel
– it will depend on the level of taxable turnover of the remaining
businesses.
 You ceases to make taxable supplies of goods or services as part of a
business activity if :-

i) Your legal status changes, for example

ii) You are a sole proprietor and now forms a partnership;
iii) You dissolve a partnership and run the business as a sole proprietor;
iv) The sole proprietorship or partnership is replaced by an incorporated
company;
v) The company is wound up and replaced by a partnership or sole
proprietorship.

 You stop making taxable supplies for any other reason (e.g. if a VAT
registered sole proprietor dies, his executors have the responsibility of
canceling his registration).

11.2. WHEN CAN I ASK TO HAVE MY REGISTRATION CANCELLED?

You can ask for cancellation if :-

 You can satisfy the FIRA/VAT that for the most recent period of
__________ calendar months, the value of his taxable supplies
exclusive of VAT do not exceed Birr ___________ and the value of his
taxable supplies exclusive of VAT did not exceed Birr 500,000 for the
previous 12 calendar months.

You may only apply for cancellation under these provisions after 2 years
from the date of registration 4 you registered voluntarily

 you registered voluntarily and after 2 years the value of your taxable
supplies is below the limits defined above.
 you change your business to Exempt Supplies.
 22

11.3. CAN I STILL USE TAX INVOICES AFTER CONCELLATION?

No. From the date the registration is cancelled you cannot charge VAT or
issue tax invoices for any supplies made.

11.4. CAN I RECLAIM ANY VAT I AM CHARGED AFTER CANCELLATION OF

MY REGISTRATION?

No: After registration is cancelled you cannot claim a refund of VAT incurred
on any goods or services purchased.

11.5. WHAT ABOUT STOCK AND ASSETS ON HAND AT THE TIME OF

CANCELLATION OF REGISTRATION?

The VAT treatment of business stock and assets would depend on why the
registration was cancelled.

 If you are closing the business, or continuing to trade below the

registration limits, you must account for VAT on all stock and assets on
hand at the close of business on the day your registration is cancelled.

You should value goods on which tax is due at a fair current market price in
their present condition and account for the VAT on your final return which will
be issued by the VAT office.

This means that there will be no tax liability in respect of:-

 goods bought from unregistered persons;

 passenger automobile including spare parts unless you are is in the
business of dealing in or hiring such vehicles;
 goods purchased for entertainment unless you are in the business of
providing entertainment ;
 goods not bought for business purposes;
 if you are transferring stocks and assets as part of a transfer of a
business as a going concern.

11.6. DO I STILL NEED TO KEEP MY VAT RECORDS?

YES you must keep all the business records related to your VAT registration
for a period of at least (10 )Ten years
 23

11.7. WHAT HAPPENS IF I APPLY TO CANCEL MY VAT REGISTRATION?

The VAT/FIRA will notify you if the application is acceptable and the date from
which the registration is to be cancelled. The FIRA/VAT will send a final VAT
Return for the period up to the date of cancellation of the registration. You
will then complete the return in the normal way and include any tax due on
stock and assets. The VAT Registration Certificate will be surrendered to the
FIRA/VAT office with the final return. The FIRA/VAT office will then confirm
the final cancellation of the registration after satisfying themselves with the
final return.
 24

12. AGENTS AND THEIR PRINCIPALS

12.1 HOW ARE AGENTS AFFECTED BY VAT?

The VAT Legislation, Art. 24 prescribes that ‘’A supply of goods or rendering
of services by a person as agent (‘’proxy’’) for another person (‘’principal’’)
on behalf and on instruction of that other person is considered as a
transaction made by the principal. Both agent and taxpayer shall be held
liable to pay the tax according to the provisions of this Proclamation.’’ This
means that where an agency agreement exists between an agent and his
principal the agent should act on behalf of his principal and issue and
receive tax documents on his behalf if the principal is registered for VAT. It
should be understood that in acting as an agent the monies handled by the
agent for the principal are disbursements, that is monies passed to the
principal. The only VAT supplies by the agent are the supplies made to the
principal which will be paid in the form of a commission, discount, or direct
payment from the principal, if the agent is registered for VAT.

12.2 WHO MUST REGISTER FOR VAT IN AN AGENCY SITUATION?

Any principal who is engaged in business activities and whose taxable

turnover, that is gross income exceeds Birr 500,000 must register for VAT
with FIRA/VAT. A principal engaged in business activities whose taxable
turnover does not exceed Birr 500,000 may seek voluntary registration.

The same rules apply to an agent, but in considering the Birr 500,000 taxable
turnover level he has only to consider his gross income to the agency
business, not the income collected as a disbursement on behalf of his
principals.

12.3 HOW DOES A PRINCIPAL ISSUE INVOICES IN A VAT SYSTEM?

Only a VAT registered principal can issue tax invoices, and tax invoices can
only be issued to a VAT registered customer. If the principal is VAT
registered he must charge VAT on all his taxable supplies. Tax invoices and
commercial invoices issued by principals can be prepared by the principal
and passed to the agent for issue. Alternatively the principal can authorize
the agent to issue tax invoice and invoices on his behalf. This authorization
has to be in writing and must be held by the agent as authority for issuing the
invoices on behalf of the principal. In these circumstances the authorization
commits the principal to meet the VAT obligations resulting from the agent’s
actions.
 25

12.4 HOW DOES AN AGENT ISSUE INVOICES IN A VAT SYSTEM?

Only a VAT registered agent can issue tax invoices, and tax invoices can
only be issued to a VAT registered customer.

If the agent receives payment by discounting the sums he collected on

behalf of a principal, he must issue the principal with a VAT invoice and
charge VAT if both are registered. If the agent is registered and the principal
is not he must issue a commercial invoice and charge VAT.

12.5 HOW DOES THE PRINCIPAL CALCULATE THE VALUE FOR TAX?

Where the principal is registered for VAT and the supply is liable to VAT, the
value for tax is the gross amount charged to the customer excluding VAT.
Deductions cannot be made to the value for agents charges, commissions or
discounts or for any other expenses in connection with the supply for
example charges for telephone, property maintenance, ground rent,
regardless of whether those charges are liable to VAT. These charges are
expenses to the business of the principal.

12.6 HOW DOES THE AGENT CALCULATE THE VALUE FOR TAX?

Where the agent is registered for VAT and the supply of services ( or goods)
made by the agent is liable to VAT the base for tax is the gross charge made
by the agent for the supply of his own services ( or good). The receipt of the
agent can be in the form of a commission, discount on monies collected for
the principal, or any other form of payment from the principal. The agent if
registered should issue a tax invoice to the VAT registered principal and
commercial invoices to a non registered principal. In each case VAT has to
be charged on the gross value base of the monies received by the agent for
his services.

12.7 WHAT CREDIT FOR INPUT TAX CAN A PRINCIPAL CLAIM?

If the principal is registered then any VAT charges he pays for his business
activities can be claimed as a credit on the VAT Return provided he holds a
VAT invoice or a Certified Customs Entry document. The principal can claim
this credit even if the payment is made by the agent from receipts collected,
provided the tax invoice is prepared for the principal, or the principal is shown
as the importer on the customs entry. If the agent acting for the principal is
VAT registered, the VAT charged by the agent can be claimed as a credit as
well.
 26

12.8 WHAT CREDIT FOR INPUT TAX CAN AN AGENT CLAIM?

If the agent is registered for VAT, then any VAT charges he pays directly for
his agency business activities on which VAT is charged can be claimed as a
credit on the VAT return provided he holds a VAT invoice or a Certified
Customs Entry. Charges paid on behalf of the principal where the tax invoice
is prepared for the principal or the principal is shown as the importer on the
customs entry CANNOT be claimed as a credit by the agent. If the agent as
part of the agency agreement is charged for goods or services resulting from
the agreement he can claim a VAT credit if the VAT invoice shows him as the
purchaser. The agent should then charge the principal for these supplies and
add VAT to the charge in the normal way.
 27

13.1.DEMONSTRATION OF HOW VAT WORKS IN AN AGENCY SITUATION?

Table 1 :
PRINCIPAL AND AGENT SITUATION

Holiday Lodge - Supplies Holiday Packages

(Registered VAT)
Travel Tours - Act as Travel Agent
(Registered VAT)
Mr. X - Buys a Holiday Package
(Not Registered VAT)

Charge for Holiday package 10,000 Birr

+ VAT 15% 1,500 Birr
11, 500 Birr

Mr. X pays Birr 11,500 to Travel Tours ( which Travel Tours collects for
Holiday Lodge).
Holiday Lodge pay Travel Tour 10% commission for the agency service.

VAT Situation

Mr. X pays Birr 1500 VAT

Travel Tours collects on behalf of Holiday Lodge
Output Tax to Holiday Lodge
Travel Tours deduct 10% from VAT exclusive price

 Issue Holiday Lodge with tax invoice of Birr 1000 + 150 Birr VAT.

Birr 150 VAT Output Tax to Travel Tours

Input Tax to Holiday Lodge

Mr. X ( consumer) pays 11,500 Birr Inc, 1,500 VAT.

Travel Tours collects 11,500 Birr

Travel Tours Accounts Out Put Tax To FIRA/VAT Birr 150

Holiday Lodge Accounts for Out Put Tax Birr 1,500
Collected by Travel tour as Agent for Holiday Lodge
Deduct as Input Tax VAT charged by Travel Tours To 150
FIRA/VAT 1350
Out Put Tax 1,500 Paid by Mr. X
150 To FIRA/VAT by Travel Tours
1,350 To FIRA/VAT by Holiday Lodge
1,500
28