Tax is the backbone of finance of government every where. One of important sources from indirect taxes is VAT. This research has importance to understand how government revenue, specially, of developing countries, is affected by change in VAT application. Its detail is concentrated on VAT exemptions, more specifically, on imported food products to Ethiopia from 1996 - 2001EC(2004-2009GC). Within this few years, large amounts of food products are imported to Ethiopia. As a result, it has been lost a recognized amount of revenue because of the fact that the government applied VAT exemption on those goods to control Inflation of that period. So this paper will provide information about the impact of VAT exemption on total Government revenue of Developing Countries like Ethiopia.VAT exemption is made for different purposes.one of this purpose is to reduce inflation. It is due to this reason that the Ethiopian government applied VAT exemption on some imported food products.