administer levies, fines and other taxes.pdf

Training, Teaching and Learning Materials (TTLM)
TTLM Development Manual Date: September ,2017
Compiled by: Business & Finance Department
ADMAS UNIVERSITY
The Ethiopian TVET-System
ACCOUNTS AND BUDGET SERVICE LEVEL IV
Unit of Competence Administer Levies, Fines and other Taxes
Module Title Administering Levies, Fines and other Taxes
LG Code: EIS ABS4 16 0812
TTLM Code: EIS ABS4M 16 0812
Learning Guide

INTRODUCTION
Welcome to the module “Administer Levies, Fines and other
Taxes”. This learner’s guide was prepared to help you achieve the required
competence in “Accounts and Budget Support Level IV ”. This will be the source
of information for you to acquire knowledge attitude and skills in this particular
occupation with minimum supervision or help from your trainer.
Summary of Learning Outcomes
After completing this learning guide, you should be able to:
Lo1:- . Assess liability for payment of levies, fines and other taxes
Lo2:- . Determine amount payable
Lo3:- Deal with enquiries and complaints
How to Use this TTLM
o Read through the Learning Guide carefully. It is divided into sections
that cover all the knowledge, skills and attitude that you need.
o Read Information Sheets and complete the Self-Check at the end of
each section to check your progress
o Read and make sure to Practice the activities in the Operation Sheets.
Ask your trainer to show you the correct way to do things or talk to
more experienced person for guidance.
o When you are ready, ask your trainer for institutional assessment and
provide you with feedback from your performance.

Lo1:-Assess liability for payment of levies, fines and other taxes
1. Taxes
Taxes are a forced contribution imposed on the citizens by the government.
Citizens are given no choice but to pay. Taxes must be paid, regardless of whether
or not the citizen being taxed is receiving any direct benefit as a result of paying
the tax. There are a number of different kinds of taxes possible, including: proper
(land use), Sales, excise, income, customer duty, capital gains, etc. The federal
and/or regular governments of Ethiopia currently employ all these types of taxes in
some form or another.
Taxes are of a particular importance because 1) they provide a very large portion
of the revenue of governmental units on all levels and 2) They are compulsory
contributions to the cost of government whether the affected tax payer approves or
disapproves of the levy.
Taxes are typically calculated by applying a rate to a base. For example income tax
is calculated by applying the income tax rate to on employee’s monthly income. A
monthly salary of 500 Birr is taxed at 10% which equals 50 birr. Excise taxes are
calculated by applying a certain rate to a particular type of good or service.
Giving formal notice of a tax to be paid is called a levy. A tax levy, especially on
goods or property, also typically creates a lien, which gives the taxing authority the
power to confiscate the goods or property in the event of non-payment of the tax.
Incorrect calculation of taxes by the tax payer may result in penalties. Taxes which
are not paid on time usually accrue interest on any unpaid balance. These penalties
and interest create an additional revenue source for the government.
Since taxes constitute the primary revenue source for most governments,
accounting for them will be given the most coverage of the revenue types.

Taxes may be levied in a lumps sum, or sub-divided according to the purpose for
which they may (or must) be used. Subdividing the levy according to purpose may
also require the use of a special revenue fund to account for it. Most taxes,
however, would be expected to into the general fund.
In addition to revenue accounts, the following accounts may also be needed to
account for tax collections: Taxes receivable-current, taxes receivable-Delinquent
Tax lien-Receivable, Interest and penalties Receivable on Delinquent taxes (all
four are Assets). Deferred Taxes, Trust for property owners (Both are Liabilities),
allowance for un collectable taxes (contra asset). Bad debt expense is not used for
taxes. Any uncollected taxes are accounted for as a reduction of revenue. Note
that this is different from for profit accounting.
The deferred Taxes account is credited for taxes which are paid in a year before
they may legally be used for expenditure. The taxes receivable-current account is
used to accrue taxes which are due in the current year. The taxes Receivable-
Delinquent account is used to record any taxes which are past due. The tax lien-
receivable account is used to record taking position of goods on which an owed tax
has not been paid. If those possessed goods are sold in an attempt to cover the tax
and any additional cost incurred in collecting it the trust for property owners
account is used to record any balance remaining from the selling price after the tax
and collection cost are deducted.
The interest and penalties Receivable on Delinquent Taxes account is used,
obviously, to record interest and penalties due on unpaid taxes. The allowance for

uncollectable Taxes account is used for recording the estimate of taxes which the
government will not be able to collect.
Illustration
Land use taxes were assessed in August 2004, and they are levied (formally made
due) in January, 2005. They are payable by February 25, 2005. They are to be used
to meet 2005 Expenditures. Ninety-Nine percent (99%) of the taxes are expected to
be collected.
You are required to record the necessary transactions.
Taxes, Receivable current……………………..…….100, 000
Allowance-for Un collectable current tax……………… 1,000
Revenues……………………………………………………..99,000
(To Record accrual of tax levy)
Note that the amount recorded as revenue is the net of the receivable less the
allowance for un collectable taxes. This is different from for profit accounting,
where the gross is recorded as income, and the estimated uncollectable amounts are
charged to expense.
To Review, the entry in for profit account would be
Accounts receivable……………………………..100,000
Sales ………………………………………………100,000
Un collectable Account Expense…………………..1,000
Allowance for un collectable A/R……...…..………..1,000

As the taxes are collected in cash, cash is debited, and the receivable is credited.
Assume no collections were made before the due date (February 28, in this case),
and on the due date, 80,000 Birr was received.
Cash …………………………….80, 000
Taxes receivable current……………………..80,000
(To record collection of taxes)
After the due date, there are no more current taxes receivables, so that account
should be cleared out, and the balance made zero. All taxes which are paid are
credited to the current taxes receivable account, of course, as was shown above.
Any taxes which are not paid by the due date become delinquent, and should be
reclassified from the current taxes receivable to the delinquent taxes account. This
entry follows:
Taxes receivable-Delinquent ………………….20,000
Taxes Receivable-current…………………………….20,000
(To record taxes becoming delinquent)
(Delinquent)- Delinquent taxes are those which are not paid by the due date.
At the same time, the uncollectable allowance related to delinquent taxes should
also be reclassified to an allowance for uncollectable taxes account. This entry
follows.
Allowance for uncollectable current tax …………………..1,000
Allowance for uncollectable Delinquent tax ……………..1,000
(To record reclassification of allowance of estimated losses on taxes)

When taxes become delinquent, there is usually some penalty and/or interest
assessed. The penalty and interest may be accrued, although some times it is not.
Assume a flat penalty of 10% plus simple interest of 12% per annum (1% per
month). Penalties on the above delinquent taxes would be 2,000 birr (20,000*
10%). The accrual entry is:
Penalties & Interests on Delinquent Taxes ………………….2,000
Revenue…………………………………………………………..2,000
(To record penalties due on delinquent taxes)
Monthly, Quarterly, or some other interim period, or at year-end, interest could be
accrued. If it is accrued monthly, the following entry would be required each
month (20,000 Birr* 1% per month =200). The entry would be adjusted each
month, of course, for any Payment received during that month.
Penalties and interest on Delinquent taxes……………..200
Revenues…………………………………………………..200
(To record monthly interest due on delinquent taxes.)
Assume that 75% of the delinquent taxes plus applicable interest and penalties on
those taxes were received on March 31, 2005, one month late [15,000 + 1,500
(10% Penalty) + 150 (1% interest)]
Cash…………………………………………16,650
Tax receivable-Delinquent…………………….15, 000
Penalties and Interest on Delinquents tax … 1,650

(To record collection of delinquent taxes plus penalties and interest)
Note that if penalties and interests had not been previously accrued, that credit to
1,650 above would have been to revenues.
After a certain time period had passed from the due date, for instance, Six months,
the lien would come in to effect, and the property on which the tax was due could
be seized by the governmental unit. At the time of seizure the following entry
would be necessary [5,000 (tax owed) + 500 (Penalty) + 300 (Interest 5000* 1%* 6
months)]
Taxes lien-Receivable………………………..Br.5, 800
Taxes Receivable – Delinquent…………………………Br.5, 000
Penalties and interests on Delinquent taxes……………..800
(To record Seizure of property for unpaid taxes)
When the seized property is sold, the taxes, plus interest and penalties, plus any
cost of the sale should be paid. Any excess is held in trust for the owner of the
property.
Assume that the property is sold for 7,000. For simplicity, assuming there is no
cost associated with the sale, the following entry is needed:

Cash…………………………….Br.7000
Tax lien Receivable………………….Br.5, 800
Trust for penalty owner………………Br.1200
(To recorded sale of seized property)
When the owner claimed back the birr 1,200 excess the trust for the property
owners account would be debited, and cash credited.
Trust for property owners………………….Br.1, 200
Cash……………………………………………Br.1, 200
2. Licenses and permits
Licenses and permits include those revenues collected by governmental unit from
individuals or business concerns for various rights or privileges granted by the
government. Some licenses and permits are primarily regulatory in nature, with
minor consideration to revenue derived, whereas other are not only regulatory but
provide large amounts or revenue as well, and some are almost exclusively revenue
producers. Licenses and permits may relate to the privilege of carrying on business
for a stipulated period, the right to do a certain thing that may affect the public
welfare, or the right to use certain public property.

Generally, Licenses and permits may be divided in to two categories: business and
non business. Under the business category comes merchant’s licenses, customs
clearing, agency licenses, Professional (Physician, attorney, and authorized
accountant) Licenses, etc. Included in the non-business category are driving
licenses, Hunting Licenses, marriage Licenses, Residence Permits for foreigners,
etc.
Revenue from licenses and permits are normally not accrued because it is not
earned and it is not compulsory, if the particular privilege granted is not desired.

Lo2:- . Determine amount payable
3. Inter Governmental Revenues (Grants and Revenue Sharing)
a) Grants
A grant is a contribution or gift of cash or other assets from another governmental
unit to be used or expended to a specified purpose, activity, or facility. A grant is
money which is given for a specific purpose and it should be classified according
to both its source and its purpose. A grant could be given from the federal
governmental to a regional state governmental (called a subsidy), or as it is also
common in Ethiopia, from a foreign governmental to the federal government.
Grants can be divided in to two types: Capital and Operating. Capital grants are
restricted by the grants for the acquisition and/or construction of fixed (Capital)
assets. All other grants are operating grants.
Accounting for a grant becomes slightly complicated when it has specific
requirements for spending or matching requirements n do. If it has specific
requirements for spending, revenue is recognized as qualifying expenses are
incurred.

For example, imagine that a grant of 500,000 Birr has been given for building a
new road from Mekelle to Dessie. When the money for the grant is promised,
Deferred Revenue (liability) is credited.
Grants Receivable ………………………………………Br.500, 000
Deferred Revenue (liability)………………………………….Br.500,
000
Subsequently, assume that 100,000 birr is spent for gravel of the road. The
following entries would be needed.
Expenditures………………………………….100, 000
Cash…………………………………………………100,000
Deferred Revenues …………………………...100,000
Revenues…………………………………………….100, 000
When the money is finally used up, Deferred Revenues should have a zero balance.
On the other hand, consider a grant with matching requirements. Suppose the
European Union (EU) offers to match every dollar that Ethiopia raises for road
building in the country in a particular year.
In the case, revenue would be recognized from the grant as other revenues for road
building were raised. Suppose the equivalent of $.100, 000 (Approximation

800,000 Birr) was raised in Ethiopia. At the same time as the local revenue was
recognized, the grant revenue would also be recognized. The entries would be:
Cash………………………………………………..800,000
Revenue ……………………………………………….800, 000
(To record cash for road building raised locally)
Grant Receivable (EU)…………………………800,000
Revenue……………………………………………800,000
(To Record Matching grant promised by EU)
b) Shared Revenues
Shared revenue is one, which is levied by one governmental unit, but shared with
another. In Ethiopia, Revenue sharing is done between the federal and regional
state governments through joint levying and collecting of the following types of
taxes:
1. Sales taxes and taxes on the income and profits of enterprises they
jointly establish.
2. Taxes on the profits of corporations and on dividends paid to
shareholders, and
3. Taxes on income derived from large sale mining, petroleum and gas
operations, and royalties.

4. Charges for services
Charges for services include revenue from charges for all activities of a
governmental unit except the operation of enterprise funds. The government may
charge for certain services that it renders. If the charges are intended to build up
capital for a certain purpose, those charges are normally accounted for in a
proprietary fund.
The Service which is charged may be rendered:
1. To the public
2. To other departments of the same government.
3. To other government
For example suppose that a private citizen wanted to use a paving machine
belonging to the city of Mekelle to pave the entrance to his business. The city
might do all this, if the citizen agreed to fully reimburse the cost.
If some time-lapse between Performing the service, billing the beneficiary, and
receipt of cash then the revenue should be accrued when it is earned (at the time
the work is done).
Assume that use of the paving machine for one day was permitted at a cost of 500
Birr. The machine is used on June 1, the bill is sent to the use on July-1, and
payment is received on Agust-1. On which day should revenue be recognized

under the modified accrual basis? It could be recognized on June 1, the day it was
earned, but practically speaking, it would probably be recorded the day the bill was
issued. The entries would be,
Accounts Receivable………………………………….5000
Revenue from charges for services …………………………5000
(To accrue revenue from charges for services)
Cash…………………………………………………….5000
Accounts Receivable…………………………………………….5000
(To record payment of account receivable)

Lo3:- Deal with enquiries and complaints
5. Fines
Fines are penalties, which are paid to the governmental unit, usually as punishment
violating the law. For Example, the driver of a car which goes through a red light
can be fined. If a person is discovered giving false information in an attempt to
avoid payment of excise taxes, he will be subject to pay a fine of 5,000 Birr. Note
that fines are to be distinguishing in classification from interest and penalties for
delinquent taxes.
Fines are normally not measurable in advance, so they are not accrued. After all
those who are breaking the law usually try to avoid detection, and it is difficult to
say how many will be caught and prosecuted in a given year. Fines are, therefore,
generally accounted for on a cash basis.
6. Miscellaneous Revenue
A miscellaneous revenue is simply defined as any revenue type that does not fit
one of the above five classification. Miscellaneous revenues may include interest
income, if the government invests its excess cash on a short-term basis. Sales of
fixed assets, or insurance claims for damaged assets are also miscellaneous
revenue.

2.5 Encumbrances and Expenditures
2.5.1 Expenditures Defined
Expenditures are recorded when liabilities are incurred pursuant to authority given
in an appropriation. If the accounts are kept on the accrual bases or the modified
accrual basis, this term designates the cost of goods delivered or services rendered,
whether paid or unpaid, including expenses, provision for debt retirement not
reported as a liability of the fund from which retired and capital outlays.
Since the primary measurement focus of Governmental funds is on financial
position and charges in financial position, activities financed through such fund are
usually planned, authorized controlled and evaluated in terms of expenditure.
Therefore, the primary” out flow” measurement in Governmental fund accounting
is Expenditure. Expenditures are a different measurement concept than expenses
in that-expenditure of funds current liability incurred during a period of operations,
capital outlay, and debt service where as expenses is a measure of cost expired or
consumed during a period. Expenditures may be defined in governmental fund
accounting context as all decreases in fund net assets for current operations, capital
outlays, or debt service.

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