A Study on Contraband Trade, Causes and Challenges on Value Added Tax (VAT):A Case Study of Dire Dawa City Administration, Ethiopia

The objective of this study is to analyze The Causes of Contraband Trade and its Effect on the collection of Value Added Tax (VAT), the case of Dire Dawa Administration. It also assessed the causes and other socio-economic effects of contraband trade. The study used both quantitative and qualitative research methods to collect and analyze both primary and secondary data. Questionnaires were distributed to the importers, ERCA employees and DDRA employees in order to collect primary data. The Statistical Package for Social Science (SPSS) version 24 and STATA 13 were the software's used for quantitative analysis. The study used data from the year 2004 to 2018 for the secondary data analysis. The study discovered that there are two broad categories for the causes of contraband trade: societal and governmental causes. From the societal causes, consumer's preferences to buy goods with lower price, political instability in the border area are identified to be the major ones. Whereas governmental causes are increase in exchange rate and unemployment rate are identified. According to the findings of the study contraband trade has a significant negative effect on the collection of government revenue, increases unemployment rate, market competitiveness of legal traders and political stability of the country. Since VAT is the main government revenue collected both from import and domestic production, the empirical analysis revealed that contraband trade has negative effect on the collection of VAT. Finally, this study forwarded possible recommendations that would help to minimize contraband trade and generate substantial revenue for economic growth of the country.