ST MARY’S UNIVERSITY

SCHOOL OF GRADUATE STUDIES

FACULTY OF BUSINESS AND ECONOMICS
MBA IN ACCOUNTING AND FINANCE

ASSESSMENT OF BUSINESS PROFIT TAX ADMINISTRATIONIN YEKA

SUB CITY REVENUE AND CUSTOMS AUTHORITY

By: BEZA KEBEDE

JUNE, 2015
ADDIS ABABA,
ETHIOPIA
 ASSESSMENT OF BUSINESS PROFIT TAX ADMINISTRATION IN
YEKA SUB CITY REVENUE AND CUSTOMS AUTHORITY

By: BEZA KEBEDE

A THESIS SUBMITTED TO ST. MARY’S UNIVERSITY COLLEGE, SCHOOL OF

GRADUATE STUDIES IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE
DEGREE OF MASTERS OF ACCOUNGING AND FINANCE.

JUNE, 2015
ADDIS ABABA,
ETHIOPIA
ST. MARY’S UNIVERSITY SCHOOL OF GRADUATE STUDIES
FACULTY OF BUSINESS AND ECONOMIC
MBA IN ACCOUNTING AND FINANCE

ASSESSMENT OF BUSINESS PROFIT TAX ADMINISTRATIONIN YEKA

SUB CITY REVENUE AND CUSTOMS AUTHORITY

By: BEZA KEBEDE

APPROVED BY BOARD OF EXAMINERS

__________________________________ __________________
Dean, Graduate Studies Signature

__________________________________ __________________
Advisor Signature

__________________________________ __________________
External Examiner Signature

__________________________________ __________________
Internal Examiner Signature
 DECLARATION

I, the undersigned declare that this thesis is my original work, prepared under the guidance of
AtoTirunehLegesse, Associate Professor.All source of materials used for the thesis have been
duly acknowledged. I further confirm that the thesis has not been submitted either in part of or
in full to any other higher learning institution for the purpose of earning any degree.

__________________________________ __________________
Name Signature

St. Mary’s University, Addis Ababa June 2015

 ENDORSMENT

This thesis has been submitted to St. Mary’s University, School of Graduate Studies of
examination with my approval as a university advisor.

__________________________________ __________________
Advisor Signature

St. Mary’s University, Addis Ababa June 2015

 TABLE OF CONTENTS

Table of contents.............................................................................................................i
Acknowledgment .......................................................................................................... iv
List of tables................................................................................................................... v
List of figure .................................................................................................................vi
List of abbreviations..................................................................................................... vi
Abstract .........................................................................................................................vii
CHAPTER ONE INTRODUCTION..........................................................................1
1.1 Background of the study ......................................................................................1
1.1.1 Background information of tax administration in Ethiopia………….. ..3
1.1.2 Yeka sub city Revenue and Customs Authority…………………… .....4
1.1.3 The structure and profile of Yeka sub city ERCA……………………..4
1.1.4 Profit tax administration………………………………………………..5
1.2 Statement of the problem......................................................................................6
1.3 Research Question……........................................................................................8
1.4 Objective of the study.........................................................................................9
1.5 Definition of Terms…..........................................................................................9
1.6 Significance of the Study…… ............................................................................11
1.7 Delimitation/Scope of the study.......................................................................... 12
CHAPTER TWO .........................................................................................................13
REVIEW OF RELATED LITERATURE................................................................13
2.1 Introduction……………………………………………………………….….....13
2.2 Theoretical review of tax administration..............................................................13
2.2.1 Definition of tax ................................................................................. ....13
2.2.2 Tax administration....................................................................................14
2.2.3 Tax Compliance ...............................................................................…....16
2.2.4 Principle of good tax administration………………………………….....17
2.2.5 Fairness/Equity…………………..….......................................................17
2.2.6 Certainty………………………………………………………………….18
2.2.7 Convenience of payment……………………………………………… ...19

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 2.2.8 Efficiency………………………………………………………………..19
2.2.9 Organizational strength of tax authority..................................................21
2.2.10 Awareness/ Tax education ................................................................….21
2.2.11 Culture....................................................................................... ………...22
2.2.12 Honesty of tax payer ………...........................................................…...22
2.2.13 Lack of ability to pay…………………………………………………. .23
2.2.14 Social factors……………………………………………………….…...23
2.2.15 Attitude toward the government………………………………….……..23
2.2.16 Convenience of payment ………………………………………….…..24
2.2.17 Simplicity……………………………………………………………....24
2.2.18 Transparency and visibility……………………………………………...24
2.3 Ethiopian tax system ……..................................................................................24
2.1.1 Tax administration in Ethiopia…………………………………… . ...24
2.1.2 Business profit tax…………………………………………………….27
2.1.3 Electronics sales register machine…………………………………….28
2.4 Empirical review……………………………………………………………….29
CHAPTER THREE ...................................................................................................34
RESEARCH DESIGN AND METHODOLOGY....................................................34
3.1 Research Design .............................................................................................34
3.2 Population and sampling technique …............................................................35
3.2.1 Population...............................................................................................35
3.2.2 Sampling technique.................................................................................35
3.3 Types of data and tools/Instrument of data collection....................................36
3.4 Procedure of data collection........................................................................... 37
3.5 Data analysis ...................................................................................................38
CHAPTER FOUR.......................................................................................................39
RESULTS AND DISCUSSION ................................................................................39
4.1 Introduction .....................................................................................................39
4.2 Survey Results..................................................................................................40
4.3 Content analysis of open ended question…. ...................................................53
4.4 Survey results of Tax officers and auditors…………………………………..55

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 4.5 Discussion………………………………………………………………….......57
CHAPTER FIVE .......................................................................................................60
CONCLUSIONS AND RECOMMENDATIONS ..................................................60
5.1 Introduction........................................................................................................60
5.2 Conclusion……………………………………………………………………..60
5.3 Recommendation.............................................................................................. 62
References.....................................................................................................................65
Appendix ……………………………………………………...…………………….70

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 Acknowledgment

First and for most, I would like to thank and praise almighty God for all his blessing,continuous
support and the strength he has given to me.

My second deepest gratitude goes to my genuine advisor, AtoTirunehLegesse, Associate

Professor, for his unreserved support and excellent guidance, constructive comment and
suggestions and encouragement to complete this thesis.

I am also greatly indebted to employees of Yeka sub city Revenue and Customs Authority and
taxpayers found in Yeka sub city for their invaluable cooperation and willingly spent their
precious time during the process of filling the questionnaire and responding the interview.
Furthermore, I express my gratitude to everyone who supported me throughout the course of this
MBA project.

Finally, I would like to acknowledge with much appreciation for the crucial role of my wife and
children while I was fully engaged in my MBA studies. They were always supporting me and
encouraging me with their best wishes throughoutthe entire process of this thesis work.

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 List of tables

Table 3.1 Business income tax rate

Table 4.1 Summary of Response Rate by Categories.
Table 4.2: Level of Education
Table 4.3: Duration in Business
Table 4.4:Evaluation of the strength of the business profit tax authority
Table 4.5: What is your level of understanding on paying business profit tax
Table 4.6: What is the level of understanding for paying tax
Table 4.7: Do you think that the annual business profit tax you are paying is fair
Table 4.8: Are you voluntarily paying your yearly profit tax obligation
Table 4.9: If you are not paying voluntary what is the reason for this?
Table 4.10: Provide awareness and education about business profit tax
Table 4.11: How many times you have attended the orientation
Table 4.12: Providing awareness and education for tax payers
Table 4.13: How long will it take to settle to your yearly profit tax?
Table 4.14: What is the reason for taking more days to settle your yearly profit tax?
Table 4.15: Are you currently using sales register machine
Table 4.16: How do you evaluate in using the sales register machine?
Table 4.17: Evaluation of the advantage of the sales register machine for your business?
Table 4.18: Do you get any support from the tax administration when facing problems on the
sales register machine?
Table 4.19: Taxpayers’ attitude towards the tax administration
Table 4.4.1: Level of education
Table 4.4.2: Types of profession

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 List of figure

Figure 4.1 Strength of the business profit tax authority

Figure 4.2Taxpayers’ attitude towards the tax administration.

List of abbreviations

ERCA: Ethiopian revenue and customs authority

VAT: Values Added Tax
GDP: Gross Domestic Product
IMF: International Monitory Fund
TIN: Tax Identification Number
SIRM: Standard Integrated Revenue Management
SIGTAS: Standard Integrated Government Tax Administration System

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 ABSTRACT

Tax is a compulsory payment and a personal obligation to the government without expectation of
direct return or benefit to tax payers. Tax administration basically consists of sets of rules and
regulations guiding the tax authority to discharge its responsibilities in the implementation of the
tax policy. Yeka sub city Revenue and Customs Authority is delegated to assess and collect both
direct and indirect taxes from Category “A” and “B” taxpayers who are performing different
types of business activities in thirteen Weredasbased on the tax proclamation No 286/2002 and
Addis Ababa city government charter proclamation No 311/2003.The main objective of Yeka sub
city Revenue and Custom office is to establish modern revenue assessment and collection system,
and provide equitable, effective and efficient and quality service to tax payers and encourages
voluntary compliance of the tax obligation and implementing applicable tax laws.

The objective of this study is to assess the business profit tax administration at Yeka sub city
revenue and Customs Authority“with regard to Category “A” and “B” taxpayers and to identify
the challenges. To achieve this objective, a descriptive survey was used and both primary and
secondary source of data was adopted. Both mixed method research approach questionnaire
were used to assess and answer the research questions. The questionnaire was administered for
371 tax payers and for 18 employees of the tax administration. According to the response
obtained from the questionnaire it is concluded that Yeka sub city tax administration is not
efficient and effective in various aspects. Such as: customer service, tax assessment and
collection procedures, enforcing the tax law, tax payer complaint handling and response,
providing awareness and information regarding tax. Due to these factors it was identified that
voluntary tax compliance of the tax payer at Yeka sub city is very low.It is recommended that the
tax authority should adopt a service-oriented attitude towards taxpayers and the tax payer must
be treated with respect, honesty and trustworthy. The tax administration needs to strengthen
itself and the employees should be capacitated with customer service oriented training and an
understanding of the entire system of tax administration. In addition to this, the authority should
make the tax law and procedures simple, understandable, and transparent. Sustainable
awareness creation programs and maintains good working relationships with the tax payers and

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consistently deliversup-to-date information and treat inquiries, requests and appeals in an
accurate and timely fashion.

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 CHAPTER ONE
INTRODUCTION

1.1 BACKGROUND OF THE STUDY

“The core purpose of taxation is revenue mobilization, providing resources for National
Budgets, and forming an important part of macroeconomic management”. Dr. Jack Itzhak
Barsheshet (2013). Taxes have become the life blood for governments to deliver essential
services and to make long-term investments in public goods.

“Tax is a compulsory payment and a personal obligation to government without expectation

of direct return or benefit to tax payers. Taxes received from the tax payers, may not be
incurred for their benefit alone”. Gebre.W, (2014, P.41-42). According to Prof. Richard M.
Bird, (2004). “The public sector is funded through tax, and taxes are a major component in
the state, local authorities and other public bodies’ funding. It is also used by the state as a
mechanism redistribution of wealth in society, to encourage economic activity and to direct
the behavior of residents”. Several types of taxes are introduced by the government to raise
enough revenue so as to cover its fundamental expenditures.

TAX ADMINISTRATION BASICALLY CONSISTS OF SETS OF RULES AND

REGULATIONS GUIDING THE TAX AUTHORITY TO DISCHARGE ITS
RESPONSIBILITIES IN THE IMPLEMENTATION OF THE TAX POLICY.
THE ACTIVITIES INVOLVED IN THE BUSINESS TAX ADMINISTRATION
INCLUDE: IDENTIFYING AND REGISTERING THE TAXPAYER,
ADMINISTRATIVE ASSESSMENT, MONITORING AND CONTROL,
CONTROL OF FILING AND PAYMENTS, REFUNDS, AUDITS AND
PENALTIES. FAILING TO CARRY OUT THESE ADMINISTRATION
RESPONSIBILITIES BY THE TAX ADMINISTRATOR AS WELL AS
EXISTENCE OF WEAKNESSES IN THE DESIGN OF THESE
ADMINISTRATION ACTIVITIES WILL DEFINITELY ADVERSELY IMPACT
ON THE ADMINISTRATION EFFICIENCY WHICH THIS IN TURN AFFECTS
THE ACHIEVEMENT OF THE TAX OBJECTIVES AND IMPLEMENTATION
OF THE POLICY. Misrak Tesfaye (2014).

Ethiopia has undertaken a comprehensive tax reform in the past couple of decades with the
major aim of creating modern business profit tax system, broadening the tax base,

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redistributing income and support economic efficiency. Many of the tax payers used to pay
business profit taxes under administrative assessment scheme (presumptive business profit
taxation).However due to technological advancement and growth of trade and business the
tax policies are also changing accordingly and electronics sales register machines are
introduced and also high and middle tax payers required to keep books of records. The tax
payers are classified in to three categories of Higher, Lower and Middle tax payers
represented by A, B & C respectively. The 1st two categories are obliged to use electronic
sales register machine and also are required to keep books of records. (ERCA)

CATEGORY “A”: WHOSE ANNUAL TURNOVER IS MORE THAN OR

EQUAL TO BIRR 500,000.00, CATEGORY “B” WHOSE ANNUAL
TURNOVER IS MORE THAN BIRR 100,000.00 BUT LESS THAN BIRR
500,000.00 AND CATEGORY “C”: WHOSE ANNUAL TURNOVER IS LESS
THAN OR EQUAL TO BIRR 100,000.00 AND PAYING ANNUL BUSINESS
PROFIT TAX UNDER THE ADMINISTRATIVE ASSESSMENT SCHEME
(PRESUMPTIVE BUSINESS PROFIT TAXATION). Income Tax Regulation No.
(78/2002).

Ethiopia improves tax collection systems to increase government revenue and decrease
evasion through automated system for Customers data management. Automation facilitates
the clearance of legitimate trade, improves the efficiency of business profit tax controls and
secures revenue collection. “This automated system helps traders in having timely and
accurate business profit tax information, saves time initially wasted in perusing of records,
reduction in business profit tax preparation costs, reduces costs of business profit tax refund
claims, reduction in labor, reduces costs of business profit tax refund claims, good record
keeping and increases efficiency in the businesses”. ERCA, (2013)..

Yeka Sub City is composed of thirteen Weredas administrations and there are a total of
14,917 tax payers. Among these 4,650 are from category “A”, 5,685 from category “B” and
the rest 4,582 are from category “C” tax payers. ERCA Report (2013). Each Wereda has
revenue and Customs offices to better serve the tax payers and also in an effort to closely
follow up taxpayers who are said to be mostly noncompliant with the business profit tax
system.

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1.2 Background information of tax administration in Ethiopia

The tax administration in Ethiopia is divided in two levels as federal and regional. At the
federal level ERCA is in charge of collecting revenues, both tax and none tax, from different
organizations owned by federal government and from customs duties. The ten sub cities
have their own revenue and customs administration offices and are in charge of tax
assessment, collection, and control of variety of the tax bases declared by Category “A” and
“B” taxpayers in their jurisdiction. The tasks of Wereda, at each sub city are responsible for
assessment and collection of taxes and other liabilities of Category “C” tax payers.

The study focus here is Category “A” and “B” business profit tax payers residing in Yeka
sub city. In the sub city, tax assessments and collections are carried out according to income
tax regulation No. 78/2002 article 18.

Category “A” includes any company incorporated under the tax law of Ethiopia or in or a
foreign country and other entities having annual turnover of Birr 500,000 and more. Those
who are under category “A” have to maintain all records which will enable them to submit a
balance sheet and Income statement disclosing the gross profit, general and administrative
expenses, depreciation, and provisions and reserves together with supporting vouchers.
Council of Ministers Regulation no. 78/2002: (Article 18, Sub Article 2).

Category ‘B’ includes those enterprises having annual turnover of more than Birr 100,000
and less than Birr 500,000. This category of taxpayers must submit profit and loss statement
at the end of the year. The law requires all entries in the records and accounts to be
supported by appropriate vouchers. Council of Ministers Regulation (no. 78/2002: Article
18, Sub Article 2).

Category “A” and “B” taxpayers are obliged to keep books of records. Category “A”
required to submit the financial statement, balance sheet and Income statement/ to the tax
office within four months Hamle to Tikemt 30 of Ethiopian calendar, whereas Category “B”
taxpayers are required to submit the financial statement to the tax office within two months
Hamle to Nehase 30 of Ethiopian calendar. Next the Auditors receive the documents and
then it is reassessed based on proclamation No. 286/2002 and 311/2003, during the period of

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Hamle to Tikemt 30 and then assessment notification will be distributed to tax payers for
payment.

1.2.1 Yeka sub city Revenue and Customs Authority

Yeka sub city Revenue and Customs Authority is the tax authority, which is delegated to
assess and collect both direct and indirect taxes from Category “A” and “B” taxpayers
performing different types of business activities in thirteen Weredas found in Yeka Sub city.
The office is found around Megenagna road in Addis Ababa. The tax assessment, collection
and controlling core process office performs assessment of taxes and collection based on
income tax proclamation No 286/2002 and Addis Ababa city government charter
proclamation No 311/2003, which are delegated powers to sub-city and Weredas for the
purpose of efficient provision of various social goods and services.

The main objective of Yeka sub city Revenue and Customs office is to establish modern
revenue assessment and collection system, and provide equitable, effective and efficient and
quality service to tax payers and encourages voluntary compliance of the tax obligation and
implementing applicable tax laws.

SIRM (Standard Integrated Revenue Management) and SIGTAS (Standard Integrated

Government Tax Administration System) software are applicable for regular tax assessment
and collection.

1.2.2 The structure and profile of Yeka sub city Revenue and Customs Authority

The organizational structure is designed on the basis of different activities to be performed

rather than depending on the different tax types. Taxpayer’s registration and information
officers are responsible for registration of taxpayers based on the regulation of licensing by
receiving necessary information, and then passing the documents to documentation section.

Tax assessment auditors receive records of the required books and supporting documents
with regard to categories ‘’ A” and “B” taxpayers to verify according to business income tax
regulation for the purpose of taxation. After statements are verified, a copy will be given to

4
the taxpayer and also send to documentation section, which is based on by the approval of
income tax assessment, collection and controlling core process owner.

The following are the major sections of the tax administration. Documentation, Officers’
Section, Income Intelligence & Investigation, Officer & Income Tax Law Accomplisher and
Controlling Process, Tax Payers Registration & Information Section, Tax Assessment &
Collection Office Section, Tax Assessment & Audit Section

Income tax inelegancy investigation and income tax law accomplisher and controlling
process officers are responsible to check whether taxpayers are performing in compliance
with the applicable rules and regulations and to take legal action on the bases of
proclamation no 311/2003 on those who receive tax assessment notification and refused to
pay their liability.

1.2.3 Profit tax administration

If a taxpayer has submitted a declaration of income within the time and manner as
prescribed in the proclamation, the Yeka sub city Revenue and Customs administration has
five years to amend the assessment. The five years assessment period runs from the due date
of the declaration. In case where the taxpayer has not declared his/her income or has
submitted a fraudulent declaration, assessment is made by the tax by the Tax Authority.
Every assessment notification should contain the following elements: gross income and
deductions applicable; taxable income; rates applicable or Percentage; taxes paid and due;
any penalty or interest; taxpayer’s name, address, and TIN; and brief explanation of the
assessment and a statement of the taxpayer’s rights.

Category “A” and “B” taxpayers shall be liable for a penalty of 20% of the tax assessed if
he/she failed to keep proper books of account, records, and other documents regarding a
certain tax year. If the Tax Authority finds that taxpayer has failed for two consecutive
years, to keep proper books of account, records, and other documents the licensing authority
would suspend the taxpayer’s license on notification by the Tax Authority. If the amount of
income tax shown on a tax declaration by a Category “A” taxpayer is less than the amount

5
of income tax required genuinely, the understatement of tax results in the following
penalties:

 10% of the understatement if the understated amount of tax is considered not

substantial, or
 50% of the understatement if the understated amount is considered substantial.

However, there is no any stated parameter to say a certain amount is substantial or not.
Therefore, it is up to the perceptions of the individuals, which is very subjective and
subjected it to undesired bargaining and complaints that in fact made the administration on
such regard very difficult and complicated.

1.2 STATEMENT OF THE PROBLEM

A good tax administration is capable of providing effective and efficient service and
enhancing voluntary compliance. “A tax organization, which collects the highest amount of
taxes from the existing resources in the fastest possible time duration and with the lowest
possible collection costs, can be regarded as an efficient organization”. Samiei, (1999.
P.35). Tax efficiency involves using the least resources to achieve maximum tax collection
output and attaining higher productivity in tax collection mechanism. The critical success
factor of the tax division is its tax payers. Voehl, (1992). These taxpaying institutions and
individuals needs to be treated with care, respect and dignity. They are therefore considered
as strategic partners of the tax division. “Tax payer satisfaction is the core business of tax
efficiency. It is a set of momentary emotional responses affected by the gap between
expected and perceived outcome by the concerned parties” Parasuraman & Zeithaml,
(1982).

“The fundamental role of the Tax Administration is to render quality taxpayer services and
to encourage voluntary compliance, to detect and penalize noncompliance. Facilitating
compliance involves such elements as improving services to taxpayers by providing them
clear instructions, understandable forms, and assistance and information as necessary”
Prof. Richard M. Bird (2004).

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The tax administration should apply the tax laws in a fairly, reliable and transparent manner
and also consistently deliver quality customer service and treat inquiries, requests and
appeals from business profit taxpayers in an accurate and timely fashion. Taxpayers are
sensitive to tax and causes high rate of non-compliance if there is no proper tax
administration. “Non-compliance is caused by factors such as lack of awareness on tax rules
and regulations, corruption, tax evasion/fraud practices, unclear policy and poor tax
administration”, Simon James & Clinton Alley (1999).

“The greatest challenge for any tax administration is achieving and maintaining a high
degree of voluntary compliance. Voluntary compliance is promoted not only by an
awareness of rights and expectations of a fair and efficient treatment but also by clear,
simple and “user-friendly” administrative systems and procedures”, Barrie Russell, (2010).

The availability of encouraged and motivated employees who can effectively and efficiently
discharge their duty and responsibility is very important to provide better service to the
business profit tax payer. The capacity to monitor each business profit tax payer and the
existence of strong and specialized audit system is also the other major aspects of the
business profit tax administration.

The amount of tax revenue collected depends not solely on how well a tax authority enforces
compliance but also on how efficiently a tax authority operates in collecting tax revenues. In
an environment where increased tax rates are stridently opposed and a pervasive culture of
non-compliance persists.

Category “A” and “B” Business profit taxpayers are required by law to determine their
business profit taxable income, compute their business profit tax liability and submit their
business profit tax returns based on existing tax laws and policy statements issued by the tax
authorities.

The tax department needs to ascertain that taxpayers receive adequate information on their
obligations, the types of taxes facing them, deadlines for submitting tax returns, and

7
payments to be made. Taxpayers also need to be informed about changes in tax legislation,
have tax forms readily available, and have easy access to information. The provision of tax
education has affected the way the taxpayer makes tax compliance decision. Taxpayer
education will provide the necessary tax knowledge to comply with the tax matter and
change the perceptions and attitudes towards tax-compliance by creating more positive
attitudes.

In Ethiopia, the government has restructured its tax administration and working hard to
provide efficient and effective services for tax payers, beginning with strengthening the
organization and management of the revenue agency, implementing vigorous collection
systems and building capacity in core tax administration functions. Hence, this study
attempts to assess as to how the tax administration is providing its service effectively and
efficiently for business profit tax payers and to identify challenges affecting the tax
administration of Yeka Sub city revenue and Customs Authority.

1.3 RESEARCH QUESTIONS:

 How does the tax authority implement the profit tax policy, rules and regulation
concerning business profit tax administration?

 What are the advantages and challenges in using electronics sales register machine
by both the business profit tax payer and the tax authority in administering business
profit tax?

 How does the tax authority supports and provide efficient service to business profit
tax payer and encourages voluntary business profit tax compliance?

 How does the tax authority administer business profit tax and its effort in revenue
generation and its level of enforcement?

 What is the capacity of the tax authority in inspecting and detecting the non-tax
compliers, business profit tax fraud and evasion that are committed by business
profit tax payers?

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 1.4 OBJECTIVE OF THE STUDY:

The study has both the general and specific objectives.

1.4.1 General Objective

 The general objective of the study is to assess the business profit tax administration
with regard to efficiently and effectively implementing the tax policy of the country
and to identify the challenges at Yeka Sub City Revenue & Customs Authority.

1.4.2 Specific Objectives

 To assess as to how the tax policy, rules and regulation are being implemented in
administering the Business profit tax.

 To assess the extent to which the Electronic Seles Registers machine is being used
by the tax payers for annual tax revenue determination.

 To assess as to how the tax authority supports and provide effective and efficient
service to the business profit tax payers and enhance voluntary tax compliance.

 To assess the capacity of the tax administration in revenue generation effort and the
challenges.

 To assess as to how the tax authority inspects the non-tax compliers and to detect
business tax fraud and evasion committed by the tax payer.

1.5 DEFINATION OF TERMS

Tax “is simply defined as a financial charge or other levy imposed on an individual or a
legal entity by government”, (Gebrie Worku, (2008)

Business: According to Ethiopian Income Tax Proclamation No. 286/ 2002, “defined
business as any industrial commercial, professional or vocational activity any other

9
activities recognized as trade by the commercial code of Ethiopia and carried on by any
person for profit”.

Equity means “a tax system should be fair among individuals and taxes should be levied
based on taxpayers’ capacity. Horizontal equity means that taxpayers with the same income
or wealth should pay the same amount of tax (tax burden) while vertical equity means that
taxpayers with high income (capacity) should pay higher tax (tax burden)”. AICPA, (March
2001)

Certainty “is defined as a taxpayer knowing his other tax liability and when and where to
pay the tax. It relates to the simplicity of the tax systems so that the taxpayers are easily
understood and capable of calculating their tax liability”. AICPA, (March, 2001)

Convenience “The practical explanation of this is that tax should be close to the ability to
pay, both in terms of the amount of tax and in terms of the timing of the imposition of the
tax. Tax should be based on fair principles and be close to taxpayers’ ability to pay.” (Dr.
Jack Itzhak Barsheshet (2013). The introduction of electronic filing is another example of a
facility provided by the tax authority to ease the method of filing tax returns.

Efficiency “refers to how the tax authority collects the tax revenues and can be divided into
two subsections: administrative efficiency and economic efficiency. Administrative efficiency
refers to the costs involved when collecting tax revenues. The administrative cost should be
as small as possible to achieve desirable economic efficiency”. AICPA, (March 2001).
Economic efficiency referring to tax should not interfere with the working of the markets.

Presumptive tax is a tax system whereby the taxpayer does not maintain books of records
and submit such financial documents. “It uses objective factors and indices to estimate the
income of taxpayers who do not keep records of physical inputs; these factors include: gross
turn over, number of employees, stock, asset, the different kind of services provided, and the
equipment used in the establishment, etc.”,Misrak Tesfaye (2014)

Self-Assessment: system is essentially an approach whereby taxpayers are required by law

to keep books of records and to determine their taxable income, compute their tax liability

10
and submit their profit tax returns based on existing tax laws and policy statements issued by
the tax authorities. “The basic feature of a Self-Assessments that it is the taxpayer rather
than the tax authority that is responsible for the assessment of tax liability”, Tapan K.
Sarker, (2003)

Tax Compliance “is defined as in its most simple form is usually cast in terms of the degree
to which taxpayers comply with the tax law”, Simon James & Clinton Alley (1999). The
degree of non-compliance may be measured in terms of the ‘tax gap’. This represents the
difference between the actual revenue collected and the amount that would be collected if
there were 100 per cent compliance.

Voluntary Tax Compliance: tax compliance is defined by several tax authorities as the
ability and willingness of taxpayers to comply with tax laws, declare the correct income in
each year and pays. According to, Andreoni, Erard, and Feinstein (1998) “tax compliance is
defined as taxpayers’ willingness to obey tax laws in order to obtain the economy
equilibrium of a country”. And also defined by Song and Yarbrough, (1978) “as taxpayers’
ability and willingness to comply with tax laws which are determined by ethics, legal
environment and other situational factors at a particular time and place”

Tax avoidance “is the legal utilization of the tax regime to one’s own advantage, to reduce
the amount of tax that is payable by means that are within the law. By contrast, tax evasion
is the general term for efforts not to pay taxes by illegal means” , Pencavel, J., (1979).

Electronic Tax Register (ETRs) “is an automated system for business data management
and modernization of tax collection system”. ERCA, (2013). “It assists traders in such a
way that it saves their time in perusing records and reduction in tax preparation costs that
used to be paid to tax agencies. Tax refund claims can also be easily handled and as result
reduces costs of businesses.” IMF, (2005)

1.6 SIGNIFICANCE OF THE STUDY

This assessment provides significant information to ERCA pertaining to the business profit
tax administration and challenges of Yeka Sub city Revenue and Customs Authority.

11
It assists Yeka Sub City Revenue and Customs Administration in identifying administrative
gaps in fulfilling and providing effective and efficient service to the business profit tax
payers and provides information where improvement is required. It also assists identifying
areas that need attitudinal change from both tax administration and tax payer.

Assist Yeka Sub City Revenue and Customs Administration to identify aspects or areas
where taxpayers experience challenges and search for improvement and tax reform.

This study will be useful for further study to those who are interested in undertaking more
research in this area.

1.7 DELIMITATION/ SCOPE OF THE STUDY:

The study was confined only on business profit tax administration of at Yeka sub city
Revenue and Customs Authority on category “A” and “B” tax payers. Other types of taxes
such as the Customs, Excise tax, Personal income tax, rental, Value Added Tax (VAT) and
other tax categories which are administered under the revenue and Customs Authority are
not included in this study.

As tax is a very sensitive issue the researcher has faced big challenge and difficulty in
collecting data and information from both tax payers and tax officers. Some tax payers were
not willing to fill the questioner taking in to account that the researchers may be inspector
from the tax authority disguising himself as researchers and some business profit tax payers
were not provide true and clear information because of mistrust of the researcher and some
are filling the form indiscriminately without giving much attention to it, as it may interfere
with their daily routine.

12
 CHAPTER TWO
LITERATURE REVIEW

2.1 INTRODUCITON

This chapter discusses on the literature review in the context of defining taxation, tax
administration and the concepts of Tax Compliance. It further looks at various concepts and
theoretical framework concerning presumptive and self-assessment tax system, electronic
sales register machine and principles of good taxation systems. The empirical work of
various researchers and other reference materials are scanned to have basic conceptual
framework of the subject matter.

The literature review has three sections. Section 2.2 presents a theoretical review on tax
administration and on major tax principles such as: Equity and fairness principle,
convenience of payment principle, simplicity principle, certainty principle, transparency
principle and neutrality principle proposed by different writers. Literature on electronics
register machine and voluntary compliance is also presented in this section. Section 2.3
presents the Ethiopian context on business profit tax administration, voluntary compliance
and tax evasion studied by different researchers and factors that affects the tax
administration and 2.4 discuss on the empirical review.

2.2 THEORICTICAL REVIEW

2.2.1 DEFINATION OF TAX

Tax is defined by many scholars in many ways. But all definition revolves around the same
concepts and theoretical conclusions. According to Bhatia, (1976) “tax is defined as a
compulsory levy and those who are taxed have to pay the sums irrespective of any
corresponding return of services or goods by the government”. In general terms, tax can be
defined as a contribution from individuals out of their private property for the maintenance

13
and defense of government, so that it may perform its functions and the ends of the state be
realized. “In simpler terms, “tax is a financial charge or other levy imposed on an
individual or a legal entity by government”. Gebrie Worku, (2008).

There are different approaches in classifying taxes, but all of them can be placed in one of
two large classes either direct or indirect. “direct taxes are those taxes whose impact
(immediate burden) and incidence (ultimate burden) fall on the same or single person, on
the other hand indirect tax is are those taxes whose impact (immediate burden) and
incidence (ultimate burden) fall on different persons (tax payers)”. Misrak Tesfaye, (2014).
Similarly, according to Yohannes Mesfin & SisayBogale, (2009), “a direct tax is one which
is demanded from the very persons who it is intended or desired from”. On the other hand,
indirect taxes are those which are demanded from one person in expectation and intention
that he/she shall indemnify himself/herself at the expense of another. Obvious examples are
the income and inheritance taxes on the one hand, and value added tax and customs duties
on the other.

Some taxes are flat, while others increase as the amount being taxed increases, which is
termed as are progressive. “Regardless of what is being taxed or how it is calculated, there
is one certainty “the tax is being levied to finance the activities that the population deems
necessary for government to provide”. Justice Oliver & Wendell Holmes, (1904)

2.2.2 TAX ADMINISTRATION

“There is no single set of prescriptions that, once introduced, will ensure improved tax
administration in any country”. Prof. Richard M. Bird, (2004). Tax administration basically
consists of sets of rules and regulations guiding the tax authority to discharge its
responsibilities in the implementation of the tax policy. “The activities involved in the tax
administration include: identifying and registering the business profit taxpayer, invoicing,
filing and payment requirements, control of filing and payments, refunds, audits and
penalties”. Yesegat, (2008).

14
In general studies have identified that the main obstacles of tax administration are lack of tax
education among the taxpayers, poor public relation activities, and lack of awareness,
corruption, tax evasion/fraud practices, and policy and administration defects. “The need to
increase training and improve the working environment of tax officials, as well as establish
an information management system are also seen as important factors to be met for better
tax administration”. Center for tax policy and administration, (September, 2001)

Modern tax administrations seek to optimize tax collections while minimizing

administration costs and taxpayer compliance costs. The most cost effective systems of
collecting taxes are those that induce the vast majority of taxpayers to meet their tax
obligations voluntarily, leaving tax officials to concentrate their efforts on those taxpayers
who do not comply. Taxpayers are more likely to comply voluntarily when the tax
administration: (1) adopts a service-oriented attitude toward taxpayers, and educates and
assists them in meeting their obligations; (2) creates strong deterrents to non-compliance
through effective audit programs and consistent use of penalties; and (3) is transparent and
seen by the public to be honest, fair, and even-handed in its administration of the tax laws.
“Experience shows that voluntary compliance is best achieved through a system of self-
assessment”. Andrew Okello, (March, 2014)

In pursuing their mission, all tax administrations confront similar challenges, such as how to
broaden the tax base by continually bringing non-registrants and non-filers into compliance,
strengthen organization and management, control tax evasion, improve tax collection, and
facilitate voluntary compliance. “The greatest challenge for any tax administration is
achieving and maintaining a high degree of voluntary compliance, which can be facilitated
by vigorous tax payer service and education programs and creative measures to minimize
the burden on tax payers in complying with their tax obligations”. Arturo Jac (2011).

A major challenge of revenue authorities is to be responsive to the individual circumstances

of tax payers while at the same time being consistent. Responsiveness translates into
accessible, dependable and timely information service as well as the accurate and timely
treatment of requests and appeals. This can be achieved by constructing systems and
procedures that are aimed more towards the needs of the tax payers than those of the tax

15
administration. Examples of this would be to facilitate links with tax payers through single
points of contact to ensure that services are available when and where needed. “Efforts to
develop enhanced electronic means of communication between tax payers and the revenue
authority which could include enabling the electronic submission of returns, introducing
facilities for electronic payments and on-line access to account balances”. Center for tax
policy and administration, (September, 2001)

2.2.3 TAX COMPLIANCE

“Tax compliance is a major problem for many tax authorities and it is not an easy task to
persuade taxpayers to comply with tax requirements even though ‘tax laws are not always
precise” James and Alley, (2004).

The exact meaning of tax compliance has been defined in various ways. For example,
Andreoni, Erard, and Feinstein (1998) claimed that “tax compliance should be defined as
taxpayers’ willingness to obey tax laws in order to obtain the economy equilibrium of a
country”. According to Singh (2003), “the definition of tax compliance is an action by a
person filing his Income Tax Form (or usually referred as Returns), declaring all taxable
income accurately, and disbursing the payable tax within the stipulated time without getting
the tax authority to keep reminding or taking action”. Kirchler, (2007) perceived a simpler
definition in which “tax compliance is defined as the most neutral term to describe
taxpayers’ willingness to pay their taxes”. A wider definition of tax compliance, defined by
Song and Yarbrough, (1978 defined as “taxpayers’ ability and willingness to comply with
tax laws which are determined by ethics, legal environment and other situational factors at
a particular time and place”. Similarly, tax compliance is also defined as “the ability and
willingness of taxpayers to comply with tax laws, declare the correct income in each year
and pays the right amount of taxes on time”. Simon James & Clinton Alley, (1999).

The promotion of voluntary compliance should be a primary concern of revenue authorities.

The ways by which revenue authorities interact with tax payers and employees impact on
the public perception of the tax system and the degree of voluntary compliance. Voluntary
compliance is promoted not only by an awareness of rights and expectations of a fair and

16
efficient treatment but also by clear, simple and “user-friendly” administrative systems and
procedures and when it is easier for tax payers to do so. The main role of revenue authorities
is to ensure compliance with tax laws. The tax law should be simple so that taxpayers
understand the rules and can comply with them correctly and in a cost-efficient manner. Tax
payers who are aware of their rights and expect, and in fact receive, a fair and efficient
treatment are more willing to comply.

2.2.4 PRINCIPLES OF GOOD TAX ADMINSTRATION

Generally, governments levy taxes for multiple of purposes, but mainly to raise funds in
order to cover public expenditures and on the other hand to properly allocate resources.
Whatever its function and essence, tax is fundamentally important for the existence of a
government and a nation. Hence, the taxes that governments levy have to be governed by
certain principles.

As stated in Bhatia, (1976), “a good tax system, in order to achieve various objectives,
chooses and adheres to certain principles which become its characteristics. A good tax
system, therefore, is one which is designed on the basis of an appropriate set of principles,
such as equality or fairness and certainty”. Adam Smith, in his book ‘The Wealth of
Nations’ which was published in 1776 suggested that “a tax system is based on certain basic
principles, namely equity, certainty, convenience and efficiency”.

2.2.5 FAIRNESS /EQUITY

According to James, (2000), “the most obvious requirement of equity or fairness is to treat
equal people in equal circumstances in an equal way”. The problem here is in deciding who
is equal to whom. Similarly, Due and Friedlander, (1981), also argue that “what is fair or
equitable in taxation is inevitably a value judgment; no scientific specification of an
equitable distribution pattern is possible, or people may be equal income wise while they
may be unequal regarding their expenditure, wealth, total utility and so on”. Such a pattern
can be specified only on the basis of a consensus of attitudes of persons in the contemporary
society. Lemessa, (2005) also adds that “a major responsibility is to ensure that all

17
taxpayers dealt with by a given official are accorded similar treatment and that all officials
dealing with a given taxpayer would accord the same treatment”. Similarly, Brooks (2001)
states that “fairness has always been widely regarded as the most important criteria in
judging a tax system”.

The fairness of a tax system may also be perceived in different ways by the taxpayers and
tax authorities. What is fair in the eye of the tax authorities may not have the same image in
the mind of the taxpayers. According to Bhatia, (1976), “the attitude of taxpayers is an
important variable determining the contents of a good tax system”. It may be assumed that
each taxpayer would like to be exempted from taxpaying, while he would not mind if others
bear that burden. In any case, he would want his share to be within the general level of tax
burden being borne by others. If this is not so, he will feel exploited.

Similarly, Due and Friedlander, (1981), argue that “persons will oppose taxes that they feel
strike them “unfairly” and allow others to escape a “reasonable” burden, and they will
favor taxes they accept to concentrate on others, especially when “others” are non-humans
such as corporations”.

2.2.6 CERTAINTY

The tax rules should specify when the tax is to be paid, how it is to be paid, and how the
amount to be paid is to be determined. A person's tax liability should be certain rather than
ambiguous. The tax rules should specify when the tax is to be paid, how it is to be paid, and
the amount to be paid. A tax system’s rules must enable taxpayers to determine what is
subject to tax (the tax base) and at what tax rate(s). Taxpayers should be able to determine
their tax liabilities with reasonable certainty based on the nature of their transactions.
AICPA, (2001). If the transactions subject to tax are easy to identify and value, the principle
of certainty is more likely to be attained. On the other hand, if the tax base is dependent on
subjective valuations or transactions that are difficult to categorize, the principle of certainty
might not be attained. In addition, how the taxes are paid and when the taxes are due should
be spelled out in the applicable laws, as well as in the tax forms and instructions.

18
Certainty is important to a tax system because it helps to improve compliance with the rules
and to increase respect for the system. Certainty generally comes from clear statutes as well
as timely and understandable administrative guidance that is readily available to taxpayers.

2.2.7 CONVENIENCE OF PAYMENT

A tax should be due at a time or in a manner that is most likely to be convenient for the taxpayer. A
tax should be due at a time or in a manner that is most likely to be convenient for the taxpayer. A tax
should be payable when it is most likely to be convenient for the taxpayer. Convenience of
payment is important in helping to ensure compliance with the tax system AICPA, (2001).
The more difficult a tax is to pay the more likely that it will not be paid. Typical payment
mechanisms include withholding (such as the withholding of income taxes from employee
paychecks) and periodic payments of estimated tax liability. The appropriate payment
mechanism should depend on the amount of the liability and ease of collection.

2.2.8 EFFICIENCY

A good tax system should be efficient in that it should be able to waste as little money and
resources as possible. Administrative costs are the costs to the government (and ultimately to
the taxpayer) of collecting tax revenue. In order to collect taxes, the government must hire
collectors to collect the revenue; data entry clerks to process the tax returns; auditors to
inspect questionable returns; lawyers to deal with disputes; and accountants to track the
flow of money. It is also costs of the tax payer of making tax payments to the government
and the time spent in filing tax returns and keeping records. Yohannes Mesfin (2009, P-11)

2.2.9. ORGANIZATIONAL STRENGTH OF TAX AUTHORITIES

According to Bird and Oldman, (1967), “no tax will work effectively, unless its
administrators maintain an aggressive attitude with respect to the correctness of the
taxpayers’ actions. Some taxpayers will fail to file or make mistakes through ignorance or
neglect; others will deliberately cheat”. A passive attitude by the authorities towards these
errors and falsifications will soon undermine the entire structure, since the diligent and

19
honest taxpayers will almost in self-defense be forced to the level of the careless and
dishonest. A tax administration which seeks compliance must protect those who comply or
else compliance will not be forthcoming.

Bird and Oldman, (1967) further state that “the sure sign of ineffective tax administration is
the presence of a very large delinquency in tax payments for it indicates the lack of taxpayer
respect for the tax system”. The taxpayer in effect is acting on his belief that the
administrative machinery may bark, but that it has no bite. These writers argue that in large
part the solution for the large delinquency lies in providing the bite. In this sense effective
tax collection is a facet of the larger problem of providing adequate penalties, to which
reference will later made. In other words tax is evaded to the extent that tax authorities are
perceived as weak by taxpayers.

A tax system doesn’t function in a vacuum. Its relationship with at every turn are with the
public, and since the combination of taxes reaches nearly every individual in one way or
another, the administration finds itself dealing with the nation as a whole. “Hence, inevitably
its operations and effectiveness are affected by the attitudes of the nation towards the tax
system”. Bird and Oldman, (1967).

But while tax administration is thus affected by these national attitudes Bird and Old man,
(1967), “it is equally true that the attitudes can in turn be affected by tax administration”.
Rational and efficient procedures, higher personnel standards, better management,
improvement in relation with the public and in the daily contacts between tax official and
taxpayer, can operate to increase the public respect for the tax administration”. Moreover,
once the tax administration has been placed on a sound basis, it is in a position to assert that
compliance must be forthcoming. Such an assertion would hardly be tolerated or even taken
seriously, as long as tax officials were themselves inefficient and corrupt. But if the
administration has brought stability and honesty to its own operations, the self-respect thus
achieved can form the foundation for its demand of respect and compliance from the
taxpayer.

20
Lemessa (2005) states that “tax systems that depend on ad hoc administrative procedures
rapidly become discredited and endanger compliance. To encourage compliance it is
equally important that tax authorities administer the law fairly”. This implies both an
absence of arbitrary or corrupt behavior on the part of the officials, and “normative
standards” to ensure that the same laws are applied and administered in a standard fashion
across the board. A taxpayer, Peacock and Forte, (1981) will be more receptive to
information on his obligation if, in his efforts to comply, he receives a reasonable degree of
service from the revenue administration. “Poorly drafted forms, long waiting lines and even
charges for acquiring them, bureaucratic hassle in processing the case, rudeness from the
officials, cumbersome appeal procedures, and the like, can repel even the most loyal
taxpayers”.

On the other hand the ways in which revenue authorities interact with taxpayers and their
own employees have an impact on public perception of the tax system and the degree of
voluntary compliance. Taxpayers who are aware of their rights and expect, and in fact
receive, a fair and efficient treatment are more willing to comply. Voluntary compliance is
promoted not only by an awareness of rights and expectations of a fair and efficient
treatment but also by clear, simple and “user friendly” administrative systems and
procedures. Voluntary compliance is enhanced when it is easier for taxpayer to do so and it
is essential that a good tax system should appear equitable to the tax payers.

2.2.10. AWARENESS/TAX EDUCATION

James, (2000) argues that “the norm is usually to comply rather than not to comply. “For a
tax system to be effective the majority of the taxpayers have to comply. It follows that there
may be greater gains in assisting basically compliant taxpayers to meet their fiscal
obligations than in spending more resources in pursuing the minority of non-compliers”.
Many taxpayers might be willing to comply in full, but are unable to do so because they are
not aware of, or do not understand, their full obligations. Even if such tax payers understand
their obligations, they may not know how to meet them or may be unable to do so for other
reasons. On other side, other writers such as Smith and Kinsey, (1987) argue that “tax
noncompliance is an intentional behavior”. In countries like Ethiopia where most of the

21
business community have no access to information, lack of awareness cannot simply be
overlooked rather it can be assumed as a major determinant of tax compliance behavior.

2.2.11 CULTURE

According to Fjeldstad and Ranker, (2003), “increased efficiency of the tax administration,
however, is not enough. Many observers conclude that a lack of taxpaying ‘culture’ is the
largest obstacle to building a firm long-term revenue base”. The opposite may, however,
also be the case: “as long as the tax administration culture is perceived to be influenced by
sectarianism, nepotism, and corruption, it is unlikely to contribute to the fostering of a more
conducive taxpaying culture”.

Gaining a better understanding of why people do and do not accurately report and fully pay
the taxes they owe is obviously interesting to policy makers. Smith and Kinsey, (1987). In
Ethiopia where the system of government has evolved from feudal (where taxes were used
by individuals in government) to current one, it is obvious that negative attitude towards tax
has been developed in the society. In this sense it is difficult to conclude that there is a
culture in the country that appreciates voluntary compliance.

2.2.12. HONESTY OF THE TAXPAYERS

It is pointed out by Adams, (1921) that “the success of income tax rests primarily upon the
honesty of taxpayers”. Some authors, Brooks, (2001) indicated that “tax morality has
declined over the past few decades and this is attributed to wasteful, inefficient, and even
perverse governments. Adams further states that one of the factors that contribute to the
dishonesty of the taxpayers is the complexity of the tax system, as it may lead to
administrative failures”.

This can be viewed as it has relation with the tax culture of the society. Practically it is
difficult to obtain genuine information from taxpayers regarding their income. Hence, tax
gap is created to the extent the taxpayers hide information regarding their business activity.

22
2.2.13. LACK OF ABILITY TO PAY

Some observers Fjeldstad and Ranker, (2003) argue that “in African countries like Namibia
and South Africa, the nonpayment is due to poverty or inability to pay”. This issue holds
true in Ethiopia also where several business operators are not willing to pay their annual tax
obligations due to lack of ability to pay. Generally when taxpayers have no enough
disposable income and they used to consume the return from sales, it is clear that tax evasion
is inevitable and leads to tax arrears.

2.2.14. SOCIAL FACTORS

The issue of non-compliance is not only a question of state-society relationships but also a
question of relationship between citizens and/ or groups of citizens within local
communities. There is an existing social bond between the society and this bond influences
the members of the society in complying with the tax law. That is taxpayers may be
influenced by their peer groups to comply or not to comply with the tax law. As cited by
Levi, (1988) and Fjeldstad and Ranker, (2003), “the dimension of trust that seem to affect
compliance is trust another citizens to pay their share of service charges. In particular, trust
in other citizens to pay their share seems to be important”. The larger the fraction of the
local population that is observed not paying, the lower perceived risk of being prosecuted.
This has impacts on the individual taxpayer’s perception of the credibility and
trustworthiness of the revenue administration.

2.2.15 ATTITUDE TOWARDS THE GOVERNMENT

Attitudes towards the government, Levi, (1988) “may affect the taxpayer’s normative
commitment to comply with law”. Similarly, Due and Friedlander, (1981), also argue that,
“attitudes toward the general level of taxation and tax increases are dependent, of course,
on attitudes about the desirability of governmental programs and on attitudes toward the
government itself”. On the other hand, Fjeldstad, (2004) “citizens’ willingness to pay taxes
voluntarily rests on the local government’s capacity to provide services and its
demonstrated readiness to secure the compliance of the otherwise on-compliant”.

23
2.2.16 CONVENIENCE OF PAYMENT

A tax should be due at a time or in a manner that is most likely to be convenient for the
taxpayer. A tax should be payable when it is most likely to be convenient for the taxpayer.
Convenience of payment is important in helping to ensure compliance with the tax system.
According to Dr. Jack Itzhak Barsheshet, (2013) “tax should be close to the ability to pay,
both in terms of the amount of tax and in terms of the timing of the imposition of the tax.
Tax should be based on fair principles and be close to taxpayers’ ability to pay. Tax must be
imposed in manner that is least offensive to the taxpayer and is just and equal”.

2.2.17 SIMPLICITY

The tax law should be simple so that taxpayers understand the rules and can comply with
them correctly and in a cost-efficient manner. Simplicity in the tax system is important both
to taxpayers and to those who administer the various taxes. Complex rules lead to errors and
disrespect for the system that can reduce compliance. “Simplicity is important both to
improve the compliance process and to enable taxpayers to better understand the tax
consequences of transactions in which they engage in or plan to engage”. The American
Institute of Certified Public Accountants/AICPA (March, 2001)

2.2.18 TRANSPARENCY AND VISIBILITY

Taxpayers should know that a tax exists and how and when it is imposed upon them and
others. Visibility enables individuals and businesses to know the true cost of transactions. It
also enables them to see what their total tax liability is and to which level of government it is
being paid. When a tax is not visible, it can be easily retained or raised with little, if any,
awareness among taxpayers about how the tax affects them.

2.3 ETHIOPIAN TAX SYSTEM

2.3.1 Tax Administration in Ethiopia

24
“The current Ethiopian Revenue and Customs Authority/ERCA/ is an autonomous federal
government agency having its own legal personality and whose basic duties are to
implement and enforce the tax and Customs law of the country and to administer the tax
revenue collection of the federal government”. Misrak Tesfaye, (2014). The Ethiopian
Revenue and Customs Authority/ERCA/ was established and came in to existence on 14th
July 2008 by proclamation No. 587/2008 merging the three executive organs namely the
Federal Inland Revenue Authority, the Customs Authority and the National Lottery
Administration.

The main objective of ERCA according to the proclamation No.587/2008 “is to establish
modern revenue assessment and collection systems and provide customers with equitable,
efficient and quality service, to enable taxpayers voluntarily discharge their tax obligations,
to enforce tax and Customslaws, to collect efficiently and effectively tax revenues and to
provide the necessary support to regional tax administration”.

“Tax Identification Number/TIN/ is a unique code such as a numeric number or

alphanumeric member given by the tax administration of a county to each tax payer to
identify them as a tax paying entities”, Misrak Tesfaye, (2014). TIN supply to tax payer in
Ethiopia was started in December 2003 by the federal government revenue authority. In
reference to Article 43-47 of Income tax Proclamation No. 286/2002 and related TIN supply
directives No. 11/2001, every person having a tax obligation (a potential tax payer) is
required to obtain a maximum of one tax payer identification number through registration
with no charge of fee for obtaining the TIN.

The income tax statutory instrument currently enforce by the federal (central) government of
Ethiopia consists of Income tax proclamation No. 286/2002, Income tax proclamation No.
608/2008, Income tax proclamation No. 693/2010, Income tax regulation No. 78/2002 and
related income tax directives.

Under Ethiopian taxing system, all incomes other than income from mining activities and
income from agricultural activities which qualify the definition of income under the income
tax legislation of Ethiopia are categorized in to four heads or schedules. “Employment

25
income (Schedule “A” income), Rental income (Schedule “B” income), Business profit
income (Schedule “C” income), and income from other sources (Schedule “D” income)”.

For effective and efficient tax administration purpose the above mentioned schedule “B”
(Rental income) and “C” (Business profit income) is classified in to three categories of
Higher, Lower and Middle tax payers represented by “A”, “B” & “C” respectively. The 1st
two categories are obliged to use electronic sales register machine and also are required to
keep books of records. ERCA, (2008). The basis for categorization is their legal personality
and annual gross turn over. In fact the tax authority continually assesses and will determine
whether the taxpayer shall continue in the same category or should be shifted from one
category to the other.

CATEGORY “A” INCLUDES ANY COMPANY INCORPORATED UNDER

THE TAX LAW OF ETHIOPIA OR IN OR A FOREIGN COUNTRY AND
OTHER ENTITIES HAVING ANNUAL TURNOVER OF BIRR 500,000 AND
MORE. THOSE WHO ARE CATEGORIZED UNDER “A” HAVE TO
MAINTAIN ALL RECORDS AND ACCOUNTS WHICH WILL ENABLE
THEM TO SUBMIT A BALANCE SHEET AND PROFIT AND LOSS
ACCOUNT DISCLOSING THE GROSS PROFIT, GENERAL AND
ADMINISTRATIVE EXPENSES, DEPRECIATION, AND PROVISIONS AND
RESERVES TOGETHER WITH SUPPORTING VOUCHERS (Council of
Ministers Regulation no. 78/2002: Article 18, Sub Article 2).

“Category ‘B’ includes those enterprises having annual turnover of more than Birr 100,000
and less than Birr 500,000. This category of taxpayers must submit profit and loss statement
at the end of the year. The law requires all entries in the records and accounts to be
supported by appropriate vouchers” (Council of Ministers Regulation no. 78/2002: Article
18, Sub Article 2).

“Category ‘C’ unless already classified in categories ‘A’ and ‘B’ include those taxpayers
whose annual turnover is estimated by the Tax Authority at Birr 100,000 or less. On the
other hand, standard assessment is used to determine the income tax liability of Category
‘C’ taxpayers”. This type of assessment is a fixed amount of tax determined in accordance
with the Council of Ministers Regulation established Schedules. This category of taxpayers
is the most problematic category of taxpayers and it is considered as hard to tax group. This
is due to the fact that these taxpayers pay taxes at fixed rate on the income estimated by the

26
income tax authority rather than declaring their income by themselves. Their daily income is
estimated by assessment committee and the taxpayers have little room to address their view
so that frequent friction is observed in this area.

The authority collects the taxes from the taxpayers either through its office or through third
parties including the Commercial Bank of Ethiopia and the Ethiopian Post Office. In
general, the Authority is responsible for the collection of all taxes from income earned in the
federal government whereas the regional governments are responsible for the collection of
taxes from income earned in the states. The Authority is further bestowed with the duty of
implementing and enforcing the laws of the country that deal with income taxation.
According to the Constitution of Federal Democratic Republic of Ethiopia, revenue sources
are assigned between Federal government and Regional states. Regional states can endorse
their income tax proclamation and regulations based on the constitution in conformity with
the federal income tax proclamation.

2.3.2 Business Profit Tax

According to Article 2(6) of the Income Tax Proclamation No. 286/ 2002, “defined business
as any industrial commercial, professional activation or any other activities recognized as
trade by the commercial code of Ethiopia and carried on by any person for profit”. Taxable
business income would be determined per tax period on the basis of the profit and loss
account or income statement, which shall be drawn in compliance with the generally
accepted accounting standards.

Accordingly, businesses (bodies) are required to pay 30% flat rate of business income tax;
and other taxpayers under Schedule C, i.e., unincorporated or individual businesses are
required to pay taxes ranging from 10% to 35% according to the following table.

27
Table 3.1 Business income tax rate

Taxable Business Income / Tax Rate (in %) Deduction

Net Profit per year (in Birr)

over
Birr to Birr

0 1,800 Exempt threshold

1,801 7,800 10% 180.00
7, 801 16,800 15% 570.00
16, 801 28, 200 20% 1410.00
28, 201 42,600 25% 2520.00

42, 601 60,000 30% 4950.00

Over 60, 000 35% 7950.00

In the determination of business income subject to tax in Ethiopia, deductions would

be allowed for expenses incurred for the purpose of earning, securing, and maintaining
that business income to the extent that the expenses can be proven by the taxpayer.

The current profit taxation system of Ethiopia is a combination of both self and presumptive
assessment, and efforts were constantly made to fully engage the system into self-
assessment system. However due to the nature and complexity of small and petty traders
who are labeled” hard to tax group” and level of awareness of the business community it
was in vain.

2.3.3 ELECTRONICS SALES REGISTER MACHINE

Ethiopian revenues and customs authority (ERCA) has started the application of sales
register machines nationwide for its provision of information from its taxpayers since
February 2008. The Directive No 139/2007 is a special law to make it obligatory for any
person who sells goods or services to consumers to use sales Register Machines. This
provides a reliable means for the Authority to check the total sales and tax payable by

28
individual taxpayer. “The tax payers who use the machine can quickly process their
customer’s transactions and accurately keeps records. ERCA also obtains information
regarding total sales and this would enable the authority to levy tax based on information”
ERCA, (2013).

Automation is not an end in itself, but a crucial component of taxation reforms, which aims
at modernizing tax administrations and aligning the legal framework and procedures with
international standards and best practices. “Automation facilitates the clearance of legitimate
trade, improves the efficiency of taxation controls and secures revenue collection. In
addition, it helps address expectations of traders and transport operators regarding
transparency, predictability and reliability, as well as the simplification of border-crossing
and administrative procedures”. Jon M. Peha, (1999).

Benefits of automation include a reduction of fraud, remote access to information, improved

collection of statistics, and uniform application of tax legislation. The introduction of tax
automation minimizes direct contacts between tax collection officers and traders or their
agents, and hence leads to a reduction of corruption. Further benefits achieved through
customs automation include improved reporting, control of file transfers, automatic
reconciliation of tax returns declarations, and compliance testing of bank files. Paperless
declarations and customs automation save time and make it easier to focus on inspecting
high-risk consignments. “The possibility of submitting tax returns declarations on-line has
in some cases made it possible to reduce the associated fees; in other cases it has helped
eliminate the obligatory contracting of Customs agents.(Robert S. 1997).African Journal of
Business & Management” (AJBUMA) Vol. 1 (2010),

2.4 EMPERCICAL REVIEW

Countries exhibit a wide variety of tax compliance levels, reflecting not only the
effectiveness of their tax administrations, but also taxpayer attitudes toward taxation and
government in general. A problem appears to have been the search for one overarching
model of taxpayer compliance that allows predictions to be made about the taxpaying
population as a whole, McKerchar and Evans (2009). However, as argued by Alm et al.
(1992), individuals exhibit much diversity in their tax behavior. Some people are primarily

29
worried about getting caught and penalized; others are more concerned about the behavior of
other taxpayers (or neighbors or business competitors); others think in terms of civic duty
and/or public services and may weigh those considerations against the perceived
accountability and efficiency of the state. Such different factors are all likely to vary across
different countries, institutions, and cultures.

Asamenew G/silassie (2010) on his research on collection problems of Category “A”

taxpayers in Yeka Sub city it was indicated that there exit lack of knowledge on the
applicable tax rules and regulations and thus, negligence, delay in tax payment and evasion
were taken by taxpayers as solution to escape from payment of taxes. Besides, taxpayers do
not record their book timely and do not submit their book of records for assessment and do
not pay their taxes on time. But the study did not say anything as to how the tax
administration should addresses the non-tax compliers. Some evidence support the relevance
of deterrence strategies to addressing non-compliance, McKerchar and Evans (2009), the
fear of getting caught, or the probability of detection, has been found in some contexts to be
an effective strategy to induce truthful behavior. The study was also underlined that power
failure was also one of the major problems which attributes for low performance of Yeka
sub city tax administration.

Teklu Kassu, (June, 2011) Challenges of Tax Administration in Arada Sub-City of Addis
Ababa City Administration by Teklu Kassu. The title of the study was on the challenges of
the tax administration but the overall study was focused mainly on VAT. However, the
finding of this study indicated that the taxpayer identification and registration for VAT
particularly, enforced registration by estimation of the daily income of taxpayers not
processed by well trained and credible tax officials. This is one of the reasons for non-
registration of many potential taxpayers for VAT in the Sub City. The other reason for non-
registration of many potential taxpayers for VAT is unwillingness and lack of awareness of
taxpayers to be register for VAT.

Lemessa Tulu. (2007) A Research Project on Determinants of Taxpayers’ Voluntary

Compliance with Taxation the Case Study of Dire Dawa City concluded that the tax rate was
a lot higher than what most taxpayer’s ability to pay and also the tax which was levied was

30
not fair and equitable due to this the tax payers were not motivated to pay the tax
voluntarily. It was also indicated that the city tax administration is not efficient and effective
in tax assessment, collection procedure, creating awareness on tax laws and enforcing it and
providing quality services. It was also mentioned that diverse collection of cultures,
languages, beliefs and backgrounds as one of the major cause for non-compliance. But the
research could not substantiate as to how this diversity affects voluntary compliance. For
instance, Alm et al. (1992) note that compliance increases with (perceptions of) the
availability of public goods and services. They suggest that governments can increase
compliance by providing goods that citizens prefer in a more efficient and accessible
manner, or by more effectively emphasizing that taxes are necessary for the receipt of
government services.

According to the research conducted by DR Clifford G. Machogu and DR Jairus B.

Amayithe on the Effect of Taxpayer Education on Voluntary Tax Compliance at Mwanza
City- Tanzania, (August, 2013), the findings revealed that the level of taxpayer education
affects the tax compliance. In their studies, they concluded that there was a significant
positive relationship between the level of tax knowledge and tax compliance. Taxpayer
education will provide the necessary tax knowledge to comply with the tax matter and
change the perceptions and attitudes towards tax-compliance by creating more positive
attitudes. However these findings contradicts with the findings obtained by Lin and Carrol
(2000), which concluded that there was no significant positive relationship between the level
of tax knowledge and tax compliance.

Agbedzani Yayra (2011) in his research Effectiveness and Efficiency of Income Tax
Collection In Berekum District Tax Office, concluded that poor performance of the tax
administration was attributed to inadequate tax education campaigns through newspapers,
local radio stations and other electronic media among others and also indicated that higher
tax rates was also posed opportunity for evasion.

According to the study conducted by Fadjar O.P. Siahaan , (November, 2012), on the
Influence of Tax Fairness and Communication on Voluntary Tax Compliance in Indonesia
the findings of this study showed that tax fairness and trust has direct effect on voluntary tax

31
compliance. This study is consistent with the findings of Etzioni (1986) and Bradley (1994)
that tax fairness could increase compliance behavior. These results indicate that feeling of
unfair tax system increase the tendency to evade. This finding is consistent with the previous
researchers that taxpayer need and ability to pay were the most significant variables related
to perceptions of a fair tax system. Also, the amount of taxes evaded increase when
taxpayers perceived themselves to be victims of fiscal inequity. However, this study focus
only on three factors that influence compliance behavior. Namely: Procedural and
distributive fairness, equity and equality. Other factors that influence compliance behavior
may exist that were not examined in this study. Such as, gender, age, probability of
detection, tax morale might influence taxpayers’ compliance.

As a study was conducted by Larissa-Margareta, (2012) Understanding The Determinants of

Tax Compliance Behavior as a Prerequisite for Increasing Public Levies, in Romania,
indicated that theoretical and empirical studies reported that tax compliance behavior is as
complex as taxpayer’s personality. Various types of factors influence the decision to
comply, starting from the socio psychological determinants (attitudes, norms, fairness,
motivational postures), political determinants (complexity of law and tax system, fiscal
policy), to the economic ones (audit probabilities, fines, tax rates, income).Hence, assessing
the factors which impact on the ordinary taxpayer is a prerequisite for finding ways of
increasing tax compliance. The most robust findings reported in empirical studies should be
analyzed with the aim of developing a tax system which fosters compliance and reduces the
distance between taxpayers and tax authorities, as Owens and Hamilton (2004) suggest.

Evaluating taxpayers’ attitude and its influence on tax compliance decisions, Abubakari
Abdul – Razak and Christopher Jwayire Adafula, (September, 2013) conducted in Tamale,
Ghana, identified that the levels of understanding of the tax laws influence to a significant
degree the attitudes of taxpayers. Taxpayers’ levels of understanding positively correlated to
a significant degree with their tax compliance decisions. That study also concluded in part
that people doubted the real benefits of paying taxes. Tax education is very crucial as the
levels of transparency in the government use of revenue affects tax compliance. Atubuga (
2006) captured this notions briefly when he concluded in part “the transparency of the tax
system is directly proportional to people’s willingness to pay taxes and hence the amount of

32
taxes that may be mobilized”. It was further elaborated that a strong positive correlation
exists between perceived levels of tax burden and compliance decisions. The policy
implication of this is for the tax authorities to adopt strategies towards making the tax
system more equitable taking the taxpayers views into account.

Gloria Mesiku, (2008) Tax Administration, Procedural Justice, Tax Payers’ Attitude and
Tax Compliance among Small Business Income Earners in Arua District, The study revealed
a significant positive relationship between procedural justice and tax payers’ attitude of
among small business income earners. This therefore means that when tax payers experience
procedural justice they will have a positive attitude towards paying tax. Procedural justice is
in terms of respectful treatment of tax payer, neutrality and trusting the tax payers as if they
can do the right thing meaning that if the tax office is procedurally just then tax compliance
is bound to improve. Further finding showed that there is a positive relationship between
Procedural justice and perceived enforcement of tax law. This implies that when tax payers
perceive the enforcement process of tax laws to be procedurally just, then they will be
compelled to comply. Additionally results show a significant and positive relationship
between perceived enforcement of tax law and tax Compliance .This implies that if there is
an enforcement of the tax law in place there will be an increase in tax compliance The
relationship between tax payers’ attitude and tax compliance implies that when tax payers
have a positive attitude towards the tax system, they will become committed to paying taxes
thus an increase in tax compliance levels. Vogel (1994) believes that if taxpayers are
convinced that the tax system is administered fairly and all taxpayers contribute by law and
reasonably equally, then they are prepared to pay. Thus perceptions of fairness in the tax
system, and commitment to paying tax are important compliance factors.

33
 CHAPTER THREE
RESEARCH DESIGN AND METHODOLOGY:

3.1 RESEARCH DESIGN

The study employed descriptive survey. Creswell, (2003) defines descriptive survey as a
method of collecting data for the purpose of testing hypothesis or answering research
questions concerning the current status of the subjects under study. It attempts to describe,
explain and interpret conditions of the present i.e. “what is’. According to Cohen and
maroon (1999) descriptive survey is a design used to gather data at a particular point in time
with the intention of describing the nature of existing conditions or identifying standards
against which existing conditions can be compared or determining the relationship that exist
between events. Thus, a descriptive study is undertaken in order to ascertain and be able to
describe the characteristics of the variables of interest in a situation. This is done through the
use of strategies and procedures to describe, clarify and interpret existing variables based on
frequencies, averages, and other statistical calculations.

Descriptive survey sometime associated with limited disadvantages. Setert and Hofnung,
(1997) maintained that there is the difficulty of ensuring that the questions to be answered in
descriptive survey are clear and not misleading. This is so because survey reports can vary
significantly because of the exact wording of questions. Newman, (2003) also claims that
the method may produce unreliable results because questions asked into private matters that
people may not be willing to talk about.

Notwithstanding the above disadvantages, the descriptive survey is found to be most

appropriate for this study. This is largely due to the fact that the design is considered to be
relatively easy to conduct because data are fairly easy to obtain and interpret by the use of
simple descriptive statistics and it has the advantage of producing a good amount of
responses from a wide range of taxpayers at Yeka Sub City on issues of the tax
administration.

34
3.2 POPULATION AND SAMPLING TECHNIQUE

3.2.1. POPULATION

The target population of this study constitutes the tax payer who are legally registered
category “A” and “B” tax payers and operating in this Sub city and the tax officer and tax
auditors from the tax authority of Yeka Sub city. The total population under this study is
10, 314 tax payers. Among these 4629 are from category-A, 5685 from category-B.

The questionnaires were designed specifically for the three major actors who are involved in
the process of business profit tax operation and presumed to give sufficient information
concerning the business profit tax administration. Namely tax payers, tax officers and tax
auditors and a separate questioner were distributed for these groups. The justification for
choosing these groups is in that they are directly involved in the processes of implementing
the business profit tax and are affecting and be affected by the process and are also critical in
the execution of the tax policy.

3.2.2 SAMPLING TECHNIQUE

Data for the study was collected from both primary and secondary sources. The
administration of questionnaires was the basis for primary data. Data collected from this
source was centered on the overall administration of business profit tax and the challenges
involved in the process of tax collection.

Considering the fact that the study covers such a vast population, not all the population was
included in the study. It is thus a significant sample from the population was drowned. Both
the probability and non-probability sampling methods was employed to select the sample for
the study.

A probability sampling method was used to select respondents from the taxpaying public for
the study. In order to determine the total sample size, www.raosoft.com and
www.checkmarket.com sample size calculators were used. Accordingly a sample size of 371
is determined from the total taxpaying population of 10,342. For manual sample selection

35
the Fisher, Laing, Stoeckel and Townsend (1998) has been referenced and ascertained SS =
[N * z² * (p*q)] / [(ME² * (N – 1)) + (z² * (p*q))]. This sample size considered that a 5%
margin of error (or confidence intervals) and 95% confidence level parameters in order to
closely match the sample size with those of the entire population.

After the total sample size was determined a stratified sampling technique was used to select
respondents from each of the two business categories A and B. These business categories
were used as a strata and proportional allocation was used to select the samples from the two
strata.

In terms of the non-probability sampling, purposive sampling method was used to select tax
officers and auditors from Yeka Sub city revenue and Customs Authority. Thus out of 18 tax
officers 8 were selected and similarly out of 19 tax auditors 10 were selected and
questionnaire was distributed for them. Purposive sampling technique is used because it is
deemed appropriate means to select respondents who are knowledgeable and well
experienced in the subject matter. In sum, a combination of sampling techniques (stratified
random sampling, and purposive sampling) was used to select sample tax payers. This is to
ensure that major business sectors within a population are adequately represented in the
sample, and to improve efficiency by gaining greater control on the composition of the
sample.

3.3 TYPES OF DATA AND TOOLS/ INSTRUMENTSOF DATA COLLECTION

The researcher used both primary and secondary source of data to gather sufficient
information for the study under investigation.

The primary data were collected through standard questionnaire. Questionnaires were used
to collect data for the study. Prior to designing the instrument, a thorough literature search
was conducted to determine and categorize concepts and variables used in similar past
studies. These were modified to suit the goal of the present study. Accordingly, three
separate questionnaires were developed. One for the tax payer the other two separate
questionnaire for the tax officers and tax auditors.

36
The questionnaire elicit responses on issues regarding respondents’ background
characteristics, efficiency and effectiveness of the tax administration, reasons for low
compliance, challenges involved in the collection of taxes and the ways of ensuring that
business tax administration in Yeka Sub City is made effective and efficient.

The questionnaire comprised of both closed and open ended questions. Closed ended
questions are quicker and easier both for respondents and researcher. Most of the closed
ended questions are designed on an ordinal level of measurement basis, and others are
designed as ‘yes’ or ‘no’ questions, so that the variables can be ranked to measure the degree
of their strength or the agreement or the disagreement of the respondents with the variables
can be elicited. Adding open ended questions allows respondents to offer additional
information and to freely explain and also answer that the researcher didn’t include in the
questionnaire. The replies of open-ended questions were analyzed by content under different
categories.

3.4 PROCEDURE OF DATA COLLECTION

Simple random sampling technique was used to select the number of respondents to
participate in the study. In each of the business category, a sampling frame was formed
listing all the units of the population which constitute the tax payers. Care was taken to
avoid any defect that may occur in designing the frame such as inadequate, inaccurate and
incomplete frame. The population of each business category was numbered in an order from
one (1) to its population size. The total population is divided in to the total sample size of
371 and every nth is selected systematically to form the overall sample represented.

Questionnaire pre-test was done to indicate its effectiveness. This was to check whether the
replies provided the type of information needed or whether there are some elements of
ambiguity. The questionnaire was circulated to those tax payers who are randomly selected
and collected up on completion. The questioner was prepared in both English and Amharic.
However, in the cases where the respondent deemed illiterate the researcher and data
collectors were personally interviewed each individual tax payers to fill the questioner and

37
recording the responses. Field and central editing was done checking the legibility,
completeness and consistency of the data. Thus editing was preceded by coding which is
assigning a consecutive number and care was taken to clearly administer. Finally, data entry
was done.

Secondary data sources such as periodic and yearly reports, brochures, flayers and research
etc. were also used as backup to the major research instruments.

3.5 DATA ANALYSIS

Data collected from the field was analyzed using descriptive statistics. The Statistical
Package for Social Sciences (SPSS) Version 20.0 Software was employed to process and
analyze the instruments. Frequencies, Mean Mode, Percent %, proportions, charts and
diagrams were used to present the results. The likert scale questionnaire was analyzed using
mean and standard deviation.

The Qualitative data was transcribed and analyzed using content analysis.

38
 CHAPTER FOUR
RESULTS AND DISCUSSION

4.1 Introduction

The focus of this chapter is on the analysis of the data which was collected from the field
study according to the responses given by the respondents in all the questionnaires
administered. Among which 371 questionnaires were distributed to registered tax payers
selected at random and 18 questionnaires were distributed to the staff of the tax authority.
These eighteen questionnaires administered to tax office were analyzed separately since
their questions were different. In addition, secondary data was collected from the tax office
to analyze the evidence. In this section, efforts were made to provide meaning to the data
collected from the field. To do this, the responses were grouped into discrete variables like
age, sex, business category, type of business activity among others. The data was analyzed
using statistical tools like charts, graphs, Percentage %, among others with the Microsoft
Word, Microsoft Excel and Statistical Package for Social Sciences (SPSS) version 20.0
software.

The 371 respondents which constitutes the two business categories A and B tax payers
include; general importers and exporters, travel agencies, hotels and restaurants, sugar
retailers, construction contractors, consultancy firms, education centers, construction
machineries and equipment’s leasing, book stores, sales agencies, house hold gadgets
retailers, photo shops, travel agencies, insurance firm, butchers, decor firms, electric repair
shop, printing firms, building rent providers, clinics, transitory, fuel stations, whole sellers,
groceries, fruit and vegetable shops, stationeries, dairy product shops, cake and bread
bakeries, advertising firms, and boutiques.

39
4.2 SURVEY RESULTS

Table 4.1. Summary of Response Rate by Categories.

No. Categories Number of Response Response
questionnaires rate in rate in
distributed number Percent %
1 Category -A 167 157 94
2 Category -B 204 189 93
Total 371 346 93
Source: Field Survey Data 2015

The above field survey result indicated that from 371 questionnaires distributed to the three
business category taxpayers in Yeka Sub City, 346 of them have returned and representing
that 94 Percent from Category A and 93 present from Category B tax payers. Majority of the
respondents responded from both selected categories of tax payers,

Table 4.2. Level of Education

Level of Education Frequency Percent %
Below 12th Grade 55 15.9
12th Grade complete 78 22.54
Certificate/TEVT 110 31.79
Diploma 64 18.5
First Degree 31 8.96
Master’s Degree 8 2.31
Total 346 100.0
First Degree 45
Source: Field Survey Data 2015
13.0
Again education influences ones understanding of the role of tax in the economic
environment of any country. To this end, the study sought information on the level of
education of respondents. According to the results presented above indicated that, certificate
holders’ and 12th grade completed tax payers constitute the highest percentage 31.79%
and22.54% respectively, whereas First degree and Master’s Degree holder tax payers
constitute the lowest percentage 8.96 %. and 2.31% respectively. Diploma holders and
below 12th grade tax payers constitutes 18.5 and 15.9% respectively.

40
As we see from this data majority of the respondents are educated and at least completed
primary education and thus they can read and write. So the tax authority can easily
communicate and transmit its message and aware and educate the tax payer on tax laws.

Table 4.3. Duration in Business

Year Frequency Percent %

1-5 Years 196 56.6
6-10 Years 111 32.1
More than 10 years 39 11.3
Total 346 100.0
Source: Field Survey Data 2015

It is noted that most of the businesses that fall into this research are below 5 years existence
in business which constitutes 56.6% of the respondents whereas on the other extreme only
11.3 % respondents are more than 10 years in business. The 32.1% constitutes between 6 to
10 years in business.

4
3.5
3
2.5
2
1.5
1
0.5
0

Figure 4.1. Evaluation of the strength of the business profit tax authority
Source: Field Survey Data 2015

41
Table 4.4. How do you evaluate the strength of the tax administration with respect to
the following duty/responsibility?

Very Good Good Neutral Poor Very Poor

Variables Mean St.D
Fre % Fre % Fre % Fre % Fre %
q. q. q. q. q.
Customer service 8 2.3 63 18.2 15 4.3 168 48.6 92 26.6 3.77 1.1

The yearly profit tax payment

procedure 18 5.2 85 24.6 31 9 211 61 1 0.03 3.32 0.91

Capacity the authority in

implementing the tax laws 13 3.8 124 35.8 50 14.5 148 42.8 11 3.2 3.06 1.03

Honesty and integrity of the

tax officers 0 0 51 14.7 79 22.8 150 43.4 66 19.1 3.67 0.95

Transparency of the tax

administration 9 2.6 55 15.9 70 20.2 179 51.7 33 9.5 3.52 0.90

Tax payers compliant

handling and responsiveness 0 0 84 24.2 13 3.8 164 47.4 85 24.6 3.72 1.08

Efficiency in implementing
business profit tax system 23 6.6 50 14.5 32 9.2 240 69.4 1 0.03 3.62 0.73

Convenience of business
profit tax payment period 59 17.1 281 81.2 1 0.03 5 1.4 0 0 1.86 0.46

Location and facility of the

tax office 77 22.3 142 41 107 30.1 20 5.8 0 0 2.2 0.86

Simplicity of the tax liability

settlement forms 1 0.03 134 38.7 53 15.3 158 45.7 0 0 3.06 0.92

Attitude of taxpayers toward tax administration is the other key factor that has tobe
considered and analyzed appropriately. Accordingly, the respondents were asked the above
mentioned key questions so as to know their attitude towards the tax administration and their
responses is summarized in the above table.

According to the tax payers response summarized on the above table, for each question
raised above the majority of respondents rated higher percentage for poor and very poor
which indicates poor service delivery of the tax administration. Apart from this as it is
shown on the table the mean value of each response is calculated and compared with the
average value and indicated that the majority of respondents were in favor of poor and very

42
poor, i.e. the service of the tax authority is not good and need improvement on the various
aspects mentioned above. On the other hand the majority of the respondent responded in
favor of good and very good for convenience of the tax payment period, location and
facility of the tax office. So, this result indicates that the tax administration is virtuous in
these three areas of responsibility and the tax payers are also happy and satisfied with these.

Table 4.5. What is your level of understanding on business profit tax laws and
procedures?

Level Of Understanding Frequency Percent %

Very Poor 81 23.4
Poor 204 59.0
Good 57 16.5
Very Good 4 1.2
Total 346 100.0
Source: Field Survey Data 2015

With respect to the knowledge of the applicable tax laws as can be seen from above table,
59% and 23.4% of the respondents do have poor and very poor level of knowledge
regarding the applicable tax laws and regulations. However, the remaining 16.5% and 1.2%
of the respondents have constituted good and very good knowledge about tax laws and
regulations. This finding clearly shows that the majority of the tax payers do not have proper
knowledge about the tax laws and procedures to be followed in the tax system.

Table 4.6. What is the level of understanding for paying tax

Description Frequency Percent %
It is an obligation. 132 38.2
To avoid penalties, punishments 118 34.1
There is no opportunity to evade 41 11.8
In the anticipation of receiving public services 4 1.2
Contributes for the development effort of the country 51 14.7
Total 346 100.0
Source: Field Survey Data 2015

43
The tax payers were requested why they pay taxes and according to the response
summarized on the above table, 34.1 % of the respondents said that they are paying taxes to
avoid penalty and 38.2 % of the respondents said that they pay taxes because it is an
obligation to pay it to the government and also 11.8% are responded that there is no
opportunity to evade. This indicates that there is no good understanding as to why people
pay taxes and compliance behavior is questionable and also implies that they have the
intention not to pay if they have the opportunity to do so. On the other hand, 14.7% of the
respondents responded that they pay taxes to support and contribute for the development
effort of the country, and the remaining 1.2% of the respondents said that they pay taxes in
the anticipation of receiving public services.

Table 4.7. Do you think that the annual business profit tax you are paying is fair

Frequency Percent %
Yes 88 25.4
No 256 74.0
No opinion 2 .6
Total 346 100.0
Source: Field Survey Data 2015

When people asked whether the tax they are paying is fair and based on their ability-to pay,
74% of the respondents responded that the tax is not fair and not based on their ability-to
pay and 25.4% of the respondents responded that the tax they are paying is fair. The
remaining 0.6% of the respondents do not give opinion. From this response it is clear that
the tax rate is not based on the ability-to-pay principle or it is perceived to be unfair by
taxpayers. This can be either indeed true or human beings are benefit maximizes so that it
may be difficult to please all taxpayers. Even though the principle says the tax should be
based on the ability- to-pay, the problem here is in determining this ‘ability’ for each
taxpayer. Actually the tax rate may not be as such high but the communication gap between
the tax authority and taxpayers might have created this perception and it continues to be the
issue as far as the understanding of the taxpayers regarding tax rates, assessment, calculation
etc. is low.

44
Table 4.8. Are you voluntarily paying your yearly profit tax obligation

Frequency Percent %
Yes 113 32.7
No 233 67.3
Total 346 100.0
Source: Field Survey Data 2015

Analysis from the questionnaire revealed that 67.7 respondents responded that they are not
voluntarily paying their taxes where as 32.7% of the respondents are paying their taxes
voluntarily. From this result it can be said the level of understanding of the tax payer on
paying tax is law. Many taxpayers might be willing to comply in full but are unable to do so
because they are not aware of, or do not understand, the extent of their obligations. One of
the causes for non-compliance has been demonstrated to be the attitudes and perceptions of
people. It is of utmost importance to determine taxpayers’ perceptions towards taxation in
order to enable the sub city to market itself and its services more effectively to the general
public.

Table 4.9. If you are not paying voluntary what is the reason for this?

Frequency Percent %
Lack of awareness 85 36.48
Lack of ability to pay 57 24.46
Negligence 15 6.44
Complicated tax procedure 76 32.62
No opinion 0 0
Total 233 100.0

Source: Field Survey Data 2015

It is necessary to solicit the reasons why people do not pay tax voluntarily. This will give
ideas as to how the tax office could position itself in order to meet tax payer expectations.
The various reasons according to this research are presented in the above table:

As shows on the above table, the tax payers were asked the reason why the tax payers’ do
not pay their taxes voluntarily, 36.48 % are responded they have lack of awareness and

45
32.62% responded there is complicated tax procedure, 24.46 % of the respondents’
responded lack of ability to pay and 6.44 % responded that it because of negligence..

As a result, this study identified the majority of the tax payers are not willing to pay taxes
because the tax which imposed on them is beyond their ability to pay. As stated on the
literature ability to pay principle AICPA, (March 2001) is one of the principles that should
be considered and addressed in the implementation of the tax. Many other tax payers also
indicated that the tax payment procedure is not simple and also indicated that the awareness
level of the tax payers are very law. Voluntary compliance is promoted not only by an
awareness of rights and expectations of a fair and efficient treatment, but also by clear,
simple and user friendly administrative systems and procedures.

Table 4.10. Does the profit tax authority regularly provide awareness and education
about business profit tax?
Frequency Percent %
Yes 94 27.2
No 196 56.6
Do not know 56 16.2
Total 346 100.0
Source: Field Survey Data 2015

According to the above table the tax payers were asked whether the tax administration
provides awareness on business profit tax and the result show that 56% of the respondents
said no, whereas 27.2 % of the respondents said yes and the remaining 16.2 % of the
respondents said do not know. This result indicates that the government is poor in delivering
training and awareness on taxes. The main impediment of tax administration among others
is lack of tax education and lack of awareness among the taxpayers. Providing education on
tax and enhancing the level of awareness can play important role in creating voluntary tax
compliance behavior.

46
Table 4.11. How many times you have attended the orientation
Frequency Percent %
One time in a year 95 27.5
Three times in a year 2 0.6
I have not taken at all 249 72.0
Total 346 100.0
Source: Field Survey Data 2015

According to the table shown above, the majority of respondents 72% said that they have
not received any orientation at all, whereas 27.5% have received one time in a year and only
0.6% has received the orientation three times. This table indicates that only few tax payers
attended the training whereas the majority of the tax payer did not attend any training at all.
Therefore, this finding shows that there is a big communication gap between the tax payer
and the tax authority. It also indicates that the tax authority is not transparent and does not
consider the tax payer as its major partner and provides the necessary support.

Table 4.12. Adequacy of the tax administration in providing awareness and education
for tax payers
Frequency Percent %
Good 37 10.69
Neutral 249 71.97
Poor 41 11.85
Very poor 19 5.49
Total 346 100.0
Source: Field Survey Data 2015

The respondents were also asked whether the tax authority has the capacity to deliver
orientation on business profit tax, 11.85 % and 5.49% of the respondents’ responded that the
tax authority is poor and very poor in providing orientation respectively and 10.9%
responded the tax authority is good in providing orientation. The rest of the 71.97%
respondents are neutral because they have never been participated and taken any training at
all. This finding indicates that the tax payer were not attracted on the way that the tax
authority provides the awareness program and also not happy on the capacity of tax
authority to deliver the necessary awareness and education sessions.

47
Table 4.13. How long will it take to settle your yearly profit tax
Frequency Percent %
Hours 3 .87
Half day 58 16.76
One day 48 25.43
Two to three days 174 38.73
Three to five days 51 14.74
One week 12 3.47
Total 346 100.00
Source: Field Survey Data 2015

From the table above, 38.73% tax payers responded that two to three days will take to settle
their yearly profit tax liability and also 14.74% responded that it will take three to six days.
16.76% and 25.43% of tax payers responded that it will take them half day and one day to
settle their yearly profit tax liability respectively. The remaining 0.87% of respondents
responded that it will take them hours to settle their yearly profit tax liability. This findings
show that majority of the respondents said that it will take them more than one day to settle
their annual profit tax obligation. It indicates that such practice does not encourage the tax
payer to pay his obligation voluntarily.

Table 4.14. If it takes more days to settle your yearly profit tax what is the reason for
this?
Frequency Percent
%
Lack of efficiency of the tax office 159 46.0
Shortage of tax officer/man power in the tax office 41 11.8
Do not declare the tax obligation on time 57 16.5
The tax payer do not submit completed document 5 1.4
The profit tax payment procedure is not easy and simple 84 24.3
Total 346 100.0
Source: Field Survey Data 2015

The respondents were asked why settlement of business profit tax takes more than one day,
the above table shows that 46.0% of the respondents responded that the reason for taking

48
more than one day is lack of efficiency of the tax office and 24.3% of respondents said that
the reason is the profit tax payment procedure is not easy and simple and 11.8% of
respondents responded that the reason is due to shortage of man power in the tax office. This
shows that it due to inefficient service of the tax administration. The remaining respondent
which constitutes 16.5% and 1.4% is due to the tax payer doesn’t declare on time and the tax
payers submit incomplete documents.

Table 4.15. Are you currently using sales register machine

Frequency Percent %
Yes 303 87.6
No 43 12.4
Total 346 100.0
Source: Field Survey Data 2015

From the above table the majority of respondents 87.6% are using sales register machine as
the law enforces them to use the machine, whereas only 12.4% of the respondents are not
using the sales register machine.

Table 4.16. How do you evaluate in using the sales register machine?
Frequency Percent %
Very Simple 115 33.2
Simple 152 43.9
Moderate 36 10.4
No opinion 43 12.4
Total 346 100.0
Source: Field Survey Data 2015

The above table shows that 43.9% and 33.2% tax payers responded that the sales register
machine is very simple and simple to use respectively and 10.4% tax payers responded that
the machine moderate. 12.4% decline to give their opinion as they are not using the
machine. This finding indicates that the sales register machine is easy and user friendly and
thus encourages the tax payer to use the machine.

49
Table 4.17. How do you evaluate the advantage of the sales register machine for your
business?
Frequency Percent %
Very good 154 44.5
Good 133 38.4
Neutral 56 16.2
Poor 3 .9
Total 346 100.0
Source: Field Survey Data 2015

The respondents were also asked for the advantage of the sales register machine for your
business, and 44.5% and 38.4% of the respondents are in favor of very good and good
respectively and 16.2% of respondents do not give opinion and the remaining .09% of the
respondents said that it is poor and don’t have advantage. It is good for the tax authority to
learn that the tax payer knowledge on the use of the machine is increased and learned that
the sales register machine is advantageous for both the tax payer and the tax authority.

Table 4.18. Do you get any support from the tax administration when facing problems
on the sales register machine?
Level of support Frequency Percent %
Good 128 37.0
Neutral 194 56.1
Poor 24 6.9
Total 346 100.0
Source: Field Survey Data 2015

The respondents were also asked whether the tax payers are getting any support from the tax
administration when they are facing problems with the sales register machine, 56.1% are
neutral and 37.0% tax payers responded they are receiving good support. Whereas 6.9% of
the respondents responded that the support is poor. The tax administration is expected to
give appropriate support for the tax payers because the law says the tax payer has to report
to the tax administration within two hours for any malfunction otherwise it will not be valid.
This survey indicates that the revenue administration expected to improve it service and
provide support for the tax payer with regard to the sales register machine.

50
Table 4.19. Questions related to taxpayers’ attitude towards the tax administration.

Attitude of taxpayers toward taxation and its administration is the other key factor that as to
be considered and analyzed duly. Accordingly, the respondents were asked for various
questions to know their attitude and their responses summarized in the following table.
Strongly Agree Neutral Disagree Strongly
Variable agree disagree Mea
St.D
Fre % Fre % Fre % Fre % Fre % n
q. q. q. q. q.
The tax laws on Business
profit tax are not clear and it
is difficult to understand 14 4 241 69.7 13 3.8 70 20.23 8 2.31 2.39 1.06
The profit tax payment
procedure is not simple and
easy to follow 58 16.8 191 55.2 2 0.58 81 23.41 14 4.05 2.43 0.93
The tax administration does
not trust and have positive
attitude towards the tax payer 163 47.1 86 24.9 47 13.6 26 7.514 24 6.94 1.95 1.09
The revenue administration
provides the necessary
encouragement and support
to the tax payer 6 1.73 24 6.94 33 9.54 127 36.71 156 45.09 4.18 0.93
The business profit tax
assessment is not fair in
general. 121 35 84 24.3 40 11.6 64 18.5 37 10.69 2.04 1.16
The awareness level of the
tax payer on business profit
tax is very low 40 11.6 191 55.2 83 24.0 11 3.179 21 6.069 2.25 0.69
Business profit tax rates are
too high 285 82.4 2 0.58 29 8.38 25 7.225 5 1.445 1.43 0.97
Source: Field Survey Data 2015

51
Figure 4.2 Taxpayers’ attitude towards the tax administration
Source: Field Survey Data 2015

As indicated on the above table and figure the tax payer response were analyzed based on
the mean value obtained for each question. Accordingly many of the respondents were
agreed the questions raised on the “Tax laws on Business profit tax are not clear and

52
difficult to understand, The profit tax payment procedure is not simple and easy to follow,
The tax administration does not trust and have positive attitude towards the tax payer, The
business profit tax assessment is not fair in general, The awareness level of the tax payer on
business profit tax is very low and Business profit tax rates are too high” and their mean
value is below the average. This result indicates that the tax payer are not provided with the
necessary support from the tax authority and also the payment procedure is not simple and
easy for the tax payer to exercise their business profit tax liabilities. On the other hand the
majority of the respondents were disagreed on the question rose “The revenue
administration provides the necessary encouragement and support to the tax payer” which
shows a higher mean value above the average. This response also indicates that the tax
payers are not getting the necessary encouragement and support from the tax
administration.

4.3. CONTENT ANALYSIS OF OPEN-ENDED QUESTIONS

The respondents were also given opportunities to indicate their comments on some open-
ended questions and to give general comment on the overall tax system. Accordingly they
forwarded several comments and mainly regarding problems and measures that has to be
undertaken. These comments were categorized and generally summarized under the under
mentioned six points:

• The tax system lacks fairness and equity.

• Lack of sufficient awareness and education on tax
• Poor communication between the tax authority and taxpayers.
• Poor customer service.
• The existing tax rate if high.
• Absence of transparency in the overall tax system.

The respondents also stated the possible actions that have to be undertaken in order to bring
about improvement in the tax system and ultimately ensure voluntary tax compliance. Based
on the detail comments given by the respondents, the above points were briefly explained
below.

53
Several respondents firmly commented that the tax system lacks fairness and equity. The
principle of taxing states that similar taxpayers should be taxed similarly, Lymer and Oats
(2009). However, the tax payers commented that individuals having equal income are not
paying equal tax and this highly affected the taxpayers’ motivation to pay taxes. In other
words, as long as the tax system lacks horizontal equity it is difficult to change taxpayers’
attitude in order to bring about voluntary compliance.

The other comment given by the respondents is that the tax authority does not provide
sufficient education to taxpayers to increase awareness. According to the respondents one of
the major causes in the overall tax system is lack of awareness which is attributed to poor
tax education practice and absence of proper support and consultation between taxpayers
and the authority.

There is no trust and culture of communication and consultation between the tax authority
and the tax payer. This practice gives rise to the existence of a tax gap. The tax
administration does not trust the tax payer and feel that the tax payer provides misleading
and fraudulent financial statement.

The respondent further explained that there are several taxpayers who are not included in the
tax bracket. Moreover, the tax authority exercises little effort in enforcing the tax law. This
could be as result of the authority’s lack of capacity.

Finally the respondents indicated that there is no transparency in the tax system. That is,
the taxpayers have no access to information and they do not know how the changes,
development, policies and procedures came in to existence. In other words, the policy and
procedures in tax are not objectively understood by taxpayers or the tax authority is
reluctant in making this procedures objective, transparent, and understandable to taxpayers.

54
4.4 SURVAY RESULTS FROM TAX OFFICER AND AUDITORS

Table 4.4.1 Level of education

Frequency Percent %
Below 12 grade - -
Certificate - -
Diploma - -
1st Degree 18 100
Post graduate - -
Total 100.0
Source: Field Survey Data 2015

The above table shows that all the tax officers and auditors who were selected to fill the
questionnaire are 1st degree graduate. It is a clear indication that all employees have basic
qualification and have the capacity to deliver better service to the tax payer. They also have
the capacity to understand the tax laws and are ready to take various capacity building
training which enhance their level of understanding.

Table 4.4.2 Type of profession

Frequency Percent %
Accounting 5 27.78
Management 0 0
Auditing 2 11.11
Accounting& finance 5 27.78
Business education 2 11.11
Economics 3 16.67
Others 1 5.55

Total 18 100.0
Source: Field Survey Data 2015

From the above table we can learn that 55.56% of the respondents constitute the
Accounting and the Accounting & finance professions each with 27.78% and 27.78%
respectively. The rest of respondents constitute 11.11%, 11.11%, 16.67% and 5.55% in
Auditing, Business education, Economics and Others respectively. Majority of the tax

55
officers and auditors have appropriate qualification in order to perform the duty of the tax
administration.

Many of the respondents responded that there is no incentive, motivation or encouragement

from the administration. Many of the respondents were not happy with the existing salary
and benefit packages comparing to the responsibility and loyalty expected of them. Tax
payers are mostly coming on the last days of the due date and they are overcrowded with
many tax payers and working in a stressful situation and exposed them to various risks and
errors.

Responses from the tax officers and auditors identified that there is inadequate resources as
one of the key reasons for poor tax administration. Shortage of staff and staff turnover are
also mentioned as the other major challenges.

Other challenges include poor network system and power interruption which is hindering the
efficiency of the tax administration.

The tax officers were also responded that the tax payer don’t submit fair and true financial
statement for settling their yearly profit tax liability. It is observed that taxpayers prepare of
financial statement showing low profit for the sake of paying reduced profit tax and even
there is also no willingness to submit complete financial documents for audit. Due to this the
tax administration lacked trust on the tax payer.

It was also indicated by the tax officer that many tax payer tend not to use the sales register
machine. Many tax payers were caught by the tax intelligence office and found guilty and
imprisoned. Sales register machine provides a reliable means for the tax authority to check
the total sales and tax payable by individual taxpayer and means of controlling.

Many of the respondents expressed their concern that staffs are not provided with regular
training to keep them abreast of developments in tax-related matters. This makes the
administration of taxes in terms of customer service and support and accurate assessment
very weak.

56
4.5 DISCUSSION

This section presents the discussion based on the identified findings shown above on the
various question raise for the tax payer.

According to the response from the tax payer on the question “How the tax payer evaluates
the strength of the tax authority with respect to major duty and responsibility” listed on the
questionnaire, many of the respondents rated the service of the tax payer below the average
level as shown on the above Table 4.6. This implies that the tax authority is not responsive
towards the needs of the tax payers and do not provide adequate services to the tax payer. It
also implies that the tax authority do not have the capacity to implement the tax laws and do
not provide timely treatment of requests and appeals of the tax payer. If the tax payers do
not get satisfactory service and treated as a major development partner of the government
they will be discouraged and do not settle their tax liability voluntarily. This finding is
supported by Bird and Casanegra de Jantscher, eds., (1992) who pointed out that an
inefficient tax administration weakens the willingness of the tax payers to comply with the
tax laws and creates room for political manipulation and in the process the government
losses revenue. The tax authority needs to be strong enough in order to implement the tax
law effectively and efficiently and efficient service delivery to taxpayers is a key factor
against which the strength of the authority is judged.

Tax compliance will be developed only with the voluntary participation of the society. One
of the areas to stress on while dealing with the issue of voluntary compliance is the
development of persuasive communications between the tax authorities and taxpayers. The
most effective tool for making people more positive is to empower them with knowledge. It
is submitted that there is no better tool for government to positively influence the taxpayers
than to provide them with knowledge on how taxpayers’ money is utilized. Any resistance
or inability by government to communicate this most important area, will lead to possible
speculation and resistance. Taxpayers’ attitude toward taxation is changed only through
sustainable awareness creation programs. Voluntary compliance is promoted by fair and
efficient treatment, clear, simple and user friendly administrative systems and procedures.
To encourage compliance it is equally important that tax authority administers the law fairly.

57
The tax payer also responded that the tax administration did not provide them awareness and
education on taxation. Tax education is a part of public relation activities, which can play
important role in creating tax awareness. The taxpayers should be provided with an
understanding of the significance and role of taxes in financing the government budget and
also of their duty as citizens to file accurate returns and pay taxes. Providing education on
tax and enhancing the level of awareness can play important role in creating voluntary tax
compliance behavior. The objective is to ensure that taxpayers are aware of and understand
their obligations and entitlements under the tax laws and also seek to elevate the sense of
moral responsibility to pay taxes. It is important that tax officials be provided with adequate
training, both at home and abroad, for a better understanding of recent domestic and
international tax issues, which could then be utilized to formulate successful tax compliance
strategies. But the tax officers lack uniform and satisfactory responses for the taxpayers’
questions.

With regard to equity and fairness the tax payer responded that they are not fairly treated by
the tax authority. Taxpayers will be discouraged to the extent that the tax is believed to be
unfair and inequitable or so many others are not paying. The most obvious requirement for
fairness or equity is to treat equal people in equal circumstances in an equal way.
Maintaining tax equity and fairness is not achieved only through levying equal taxes on
individuals who have equal income but also each taxpayer should pay according to his
ability- to pay. Ensuring equity means encouraging and protecting honest and loyal
taxpayers by adopting fair competition. This can be achieved by incorporating in to the tax
system all those who are eligible. Generally, the authority has to try its level best in ensuring
tax fairness and equity so that voluntary compliance behavior can be developed.

All the tax experts have recognized the utilization of online services as an effective factor
for the efficiency of tax system. Exploitation of IT may also provide the grounds for
utilization of a more efficient and more advanced management system in the organizations.
This in turn will reduce time for tax payment and help curb the fraudulent activities in the
tax system as confirmed by tax payers as well. Taxpayers tend to evade to the extent they
feel that the authority is weak and unable to enforce the law. This directly hampers the
compliance behavior of compliers and motivates non compliers to continue evading.

58
One of the other challenges faced by the authority is solving problem of corruption.
Undesired communication of tax auditors with taxpayers was the major challenge that the
tax administration is facing. There is constant interaction between taxpayers and tax officials
since taxpayers have to file returns physically. This interaction encouraged the two parties to
negotiate tax liability. They also are facing problems in identifying corrupted tax officers
since corruption networks are between the two parties.

Tax audits in Yeka Sub City are conducted manually. Manual verification of taxpayer
information is not only susceptible to mistakes by revenue officers, but also slows down the
auditing process. Poor documentations are also the other challenge that was cited by the tax
payer. Each of the tax payer file has to be properly documented and accessible for the tax
audit and information. Effective and efficient documentation is also another manifestation of
a good tax administration.

59
 CHAPTER FIVE
CONCLUSION AND RECOMMENDATIONS

5.1. Introduction
This chapter presents a conclusion which is drawn from the study and recommendations on
how the tax administration efficiently and effectively delivers its service to the business
profit tax payers.

5.2. Conclusion

The sub city tax administration is the responsible body for assessing and collecting the tax
revenue. The amount of revenue collected is directly dependent on the efficiency and
effectiveness of the authority. In light of this fact the survey result showed the tax authority
of the city administration is not efficient and effective in various aspects such as poor
customer service, improving the tax assessment and collection procedures, creating
awareness, enforcing the tax law, providing services, and information regarding tax. It can
be concluded that, so long as this is the fact it is not easy to bring about voluntary
compliance and narrow the tax gap.

The greatest challenge for any tax administration is achieving and maintaining a high degree
of voluntary compliance, which can be facilitated by vigorous tax payer service and
education programs and creative measures to minimize the burden on tax payers in
complying with their tax obligations, Arturo Jac. (2011)

From this study it is concluded that the tax rate undoubtedly is a lot higher than what most
taxpayers would like it to be. Most of the respondents feel that people should pay taxes
according to their ability; in other words they feel that they do not pay about the same
amount of tax as others in similar situations. Generally as long as the tax being levied is not
fair and equitable it may reduce the motivation and voluntary compliance behavior of
current taxpayers and also deter potential taxpayers from joining the tax system voluntarily.

60
The survey data has shown that majority of the taxpayers do not have detail knowledge
about taxation and lack of awareness was cited as one of the major and leading reasons for
not compliance and tax evasion. The respondents strongly agreed and commented that great
effort has to be employed in this area. The respondents additionally commented on this issue
and they reasoned out that both the tax authority didn’t play their role well. Most of the
respondents have no trust in tax estimation, assessment and collection procedures. From this
it can be concluded that this problem has emanated from lack of awareness and problem of
transparency in the activities of the authority.

The study indicated that although the majority of the respondents did not feel it is unfair to
pay tax, all of the respondents have elicited certain factors that affect taxpayers’ voluntary
compliance and measures to be undertaken by the tax authority to ensure voluntary
compliance. These factors which influence the taxpayers’ voluntary compliance behavior
can be concluded in that :

• equity and fairness of the tax system

• level of awareness of taxpayers
• effectiveness and efficiency of tax authority and
• the tax rate

The survey data also revealed that other factors such as taxpayers’ attitude and
honesty/loyalty are found to be the result of lack of awareness on taxation. Hence, it is
advisable to capitalize on these factors to reinforce taxpayers’ voluntary compliance. There
is no magic or quick solution to increasing tax compliance. A reform strategy to increase
compliance requires a concerted, long-term, coordinated and comprehensive plan.

An overly complicated tax system can overburden a weak tax administration and deter
taxpayers from voluntarily paying their taxes. Too high tax rates can force taxpayers into the
underground economy and destroy all efforts to increase voluntary compliance.

The tax authority needs to be strong enough in order to implement the tax law effectively
and efficiently. Functions such as tax assessment, collection, awareness creation, providing
information, and enforcement has to be performed effectively and efficiently, so that it will

61
be perceived as strong and powerful by the taxpayers. In addition to this efficient service
delivery to taxpayers is a key factor against which the strength of the authority is judged.

The sales register machine is paramount important for its valuable contribution to collect tax
based on evidence from the taxpayers and also avoids frauds that could be made by sales
personnel's of different business entities.. It is also seen that it is very useful for the tax
payer too in maintain proper records of their daily sales. However, the survey data revealed
that the tax payers are not getting adequate support from the tax office when they are facing
machine failure and error records. Rather they were treated as if they are intending to cheat
and deliberately perpetrated to commit fraud.

To conclude, the survey result shows there is a negative attitude towards the tax
administration and the existing problems are drown to lack of awareness and absence of
transparency and poor tax payer service delivery and others summarized below:

 Absence of willingness and poor understanding about tax proclamations, rules and
regulations by taxpayers
 Lack of sustainable educative promotion by the government
 Lack of transparency and poor customer response
 Lack of sufficient, incompetent and motivated tax officers
 The bureaucracy and length procedure to settle tax obligation
 Unwillingness to give clear information by taxpayers
 Lack of awareness of the applicable tax proclamations and laws by taxpayers and tax
officers
 Frequent employee turnover
 Electric power failure
 Poor networking due to internet failure

5.3. RECOMMENDATIONS

One of the areas to stress is the development of persuasive communications between the tax
authorities and taxpayers. Any Changes made on the tax policy and procedures need to be

62
continuously communicated. The most effective tool for making people more positive is to
empower them with knowledge. Taxpayers’ attitude toward taxation is changed only
through sustainable awareness creation and education programs. Through taxpayer
education, the taxpayer is aware of the rights, obligations and the procedures of paying
taxes, as well as the consequences of non -compliance. The taxpayer can make rational
decisions of complying with the tax laws, as he/she is certain of the outcome.

The tax administration has to work on public relation activities to boast the awareness level
of the tax payer using radio and television and spots and consistently deliver tax education.
The tax administration should also use newspapers, magazines, fliers, brochures for
awareness creation strategy. With this people will be informed about their tax obligations
and noncompliance can be improved.

Individuals will continue to willingly pay their taxes if they know that their taxes are being
used appropriately for public goods. It is therefore recommended that the government should
continuously aware the taxpaying public about ongoing projects which are being financed
from their taxes. When taxpayers get feedback from their tax administration in connection
with the use to which their taxes are put, their voluntary tax compliance levels will definitely
increase and also the taxpayers trust on the government rises.

The tax administration should develop and maintain good working relationships with the tax
payers and consistently deliver quality information and treat inquiries, requests and appeals
in an accurate and timely fashion.

For efficiency and effectiveness to be attained, there is the need to increase manpower of the
tax administration. The quality of personnel in terms of academics and ability and devotion
has to be considered and should attract competent tax officers through incentive packages
and better job security. Skilled and committed employees who are valued and treated
equitably will be more likely to act fairly and professionally in all their dealings with tax
payers.

It is important that tax administration officers and auditors to be provided with adequate
trainings and refreshment courses, both on job and outside training and experience sharing

63
with other better performing sub city administration, for a better understanding and
knowledge building. The working conditions of tax officials also need to be improved in
order to motivate them to carry out their duties in a more efficient and professional manner.

The tax administration should adopt a service-oriented attitude towards taxpayers and must
make it as easy and as least costly as possible for taxpayers to file and meet their tax
obligations.

The tax administration should adopt and make simple the tax filing procedure and curtail the
bureaucratic formalities in tax collection process. It is necessary to shorten the procedures
such as tax assessment, tax collection and other administrative procedures. Such delay in tax
assessment and lengthy tax collection processes prevent tax payer voluntary compliance and
the tax administration could not reach its objectives.

There is a need to changing the attitude of tax officers towards taxpayers and avoid viewing
all tax payer as evaders. The tax payer must be treated in such a way that he/she is one of the
major development partners of the government and trust and due respect has to be provided
to tax paying population. This will motivate the tax payer to have a positive attitude towards
the tax administration and thus promote voluntary tax compliance.

Merit based and free and fair selection of best performers of the employees has to be
conducted and has to be given recognition and rewards. This will obviously motivate the tax
officials. An equivalent effort should be made to acknowledge and encourage the taxpayers
who are complying voluntarily with their tax obligations.

In general to create an efficient tax administration, the tax authority needs to strengthen
itself by educating and training its employees, improving its network operations, devoting
additional resources. Training should include customer service training and cross functional
training for employees so they have an understanding of the entire system of tax
administration. In addition to this, the authority should make the tax law and procedures
simple, understandable, and transparent. Voluntary compliance is enhanced when vibrant
and efficient tax authority exists.

64
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Hamdu Kedir Mohammed, Zinash Degife Gela, International Journal of Scientific

Knowledge, (July 2014). Vol. 5, No.3. “Challenges of electronics business profit tax
register machine (etrs) to businesses and its impact in improving business profit tax
revenue”.

International Journal of Scientific Knowledge Computing and Information Technology ©

(2012 – 2014) IJSK & K.A.J.

Jack Itzhak Barsheshet, Ph.D (2013). Rudiment Principles in the Theory of Tax

James, “Tax Compliance and Administration.” (1999), in Handbook on Taxation, edited by

W. Bartley Hildreth and James A. Richardson (New York: Marcel Dekker, Inc.), pp.
741-768.

James, S., and Alley, C. (2004).Tax Compliance, self-assessment and tax administration.
Journal of Finance and Management in Public Services, 2(2), 27-42.

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Joel Slemrod and Shlomo Yitzhak (2002), Tax Avoidance, Evasion and Administration,
Handbook of Public Economics, Oxford University Centre for Business Taxation.

Justice Oliver and Wendell Holmes. (Principles of Good Tax Policy (May, 2006).

Kirchler, E., Hoelzl, E., and Wahl, I. (2008).Enforced versus voluntary compliance: The
“slippery slope” framework. Journal of Economic Psychology, 29, 210-55.

Klemm, Alexander, and Stefan Van Parys. (2009). “Empirical Evidence on the Effects of
Tax Incentives.” IMF Working Paper WP/09/136, International Monetary Fund,
Washington, DC

Lemessa, B. (2005). Federal Income Tax Administration in Ethiopia: The Case of

Employment and Business Income Taxes, Unpublished Msc. Thesis, AAU.

Lemessa Tulu. (2007) A Research Project On Determinants Of Taxpayers’ Voluntary

Compliance with Taxation the Case Study of Dire Dawa City

Levi, M. (1988). Of Rule and Revenue. Los Angeles, USA: University of California Press.

McKerchar, M. & C. Evans (2009. Sustaining growth in developing economies through

improved taxpayer compliance: Challenges for policy makers and revenue
authorities. Journal of Tax Research, 7, 171-201.

Misrak Tesfaye Abate, Ethiopian Tax accounting Principles and Practice 2nd edition (2014).

Naibei, K. I.& Siringi, E. M, An International Multi-Disciplinary Journal, Ethiopia Vol. 5

(1), Serial No. 18, (January, 2011) Impact of Electronic Tax Registers on VAT
compliance: A Study of Private Business Firms

Parasuraman, M. & Zeithaml, A. (1982). Making groups effective. San Francisco, Jossey-
Bass.

Pencavel, J. (1979), "A note on income tax evasion, labor supply and nonlinear tax

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 schedules", Journal of Public Economics 12(1):115 124.

Richard M. Bird, Prof. International Administrative Dimensions of Tax Reform, (March

2004).

Samiei, A. (1999). Public Finance and Budget. Tehran, Governmental Management

Training Center:

Samuel Fambon, (January 2006), Taxation in Developing Countries, Research Paper No.
2006/02 Case Study of Cameroon

Simon James & Clinton Alley: (1999) Tax Compliance, Self-Assessment and Tax
Administration Journal of Finance and Management in Public Services. Volume 2
Number 2

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Handbook of Public Economics,

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Administration Review, 38(5), 442-452.American Society for Public Administration.

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Compliance in Developing Countries via Self-Assessment Systems - What Could
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69
 APPENDEX-A

St. MARY’S UNIVERSITY

School of Graduate Studies
Faculty of Business and Economics
MBA in Accounting and Finance

Dear tax payer

The general objective of the study is to assess the efficiency and effectiveness of the tax
administration on business profit tax and the challenges at Yeka Sub City Revenue & Custom
Authority

The topic of this study is “ASSESSMENT OF BUSINESS PROFIT TAX

ADMINISTRATION IN THE CASE OF YEKA SUB CITY REVENUE AND CUSTOM
AUTHORITY “and you are randomly selected for this study among the list of tax payers.

Participation on this study will be on voluntary basis. Your confidentiality and privacy will be
protected and any information provided would only be used for academic purpose. As a result it
would be kept confidential and utmost secrecy would be maintained. After completion of the
study you can get the final report if you are interested.

For any additional information you can contact the researcher through the following.

Mobile 0911-62-26-99

e-mail; bezakeb@yahoo.com

Beza Kebede
 1. Questionnaire ID _________

I. Personal Information
2. Sex: 1. Male 2. Female

3. Age________

4. Level of education:

1. Below 12th grade 5. First Degree

2.12th Grade completes 6. Masters/PhD

3. Certificate 7. Other:__________________________

4. College Diploma

5. For how many years you have been as business profit tax payer?

1. Less than a year

2. 1-5 years
3. 6-10 years
4. More than 10 years

6. Which business category you are in?

1. A 2. B ` 3.C
 Part II Tax payers’ attitude towards the service of the tax
administration
1. How do you evaluate the strength of the business profit tax authority with respect to the
following parameters?

Excellent Very Fair Poor Very

Good Poor

1 2 3 4 5
7 Customer service
8
The yearly profit tax payment procedure
9 Capacity the authority in implementing
the tax laws
10
Honesty and integrity of the tax officers
11
Transparency of the tax administration
12 Tax payers compliant handling and
responsiveness
13 Efficiency in implementing business
profit tax system
14 Convenience of business profit tax
payment period
15
Location and facility of the tax office
Simplicity of the tax liability settlement
16 forms

Part III. Tax payers’ knowledge and understanding on business profit tax?
17. What is your level of understanding on paying business profit taxes?

1. Very Poor 4. Good

2. Poor 5. Very Good
3. Fair

18. What is your understanding for paying business profit taxes (check all that you think
appropriate)?

1. It is an obligation.
 2. To avoid penalties, punishments

3. In the anticipation of receiving public services

4. There is no opportunity to evade.

5. Contributes for the development effort of the country

6. Don’t know.

State if any other. , ...........................................................................................................................

..........................................................................................................................................................

19. Do you think that the annual business profit tax you are paying is fair?

1. Yes 2. No 3. Do not know

If your answer is no. Why?.............................................................................................................

............................................................................................................................................................
............................................................................................................................................................
20. Are you voluntarily paying your tax obligation?

1. Yes 2. No

20. If not what is the reason for not paying business profit tax voluntarily?

1. Lack of awareness
2. Lack of ability to pay
3. Negligence
4. Complicated tax payment procedure
5. To commit fraud & to evade
6. Unknown
State if any other. , .............................................................................................................

........................................................................................................................................
21. Does the profit tax authority regularly provide awareness and education about business profit
tax?

1. Yes 2. No
 Excellent Good Fair Poor Very
Poor

1 2 3 4 5
22 Adequacy of the tax authority’s in
providing awareness and education
for tax payers

23. How often are you attending on the awareness and education sessions?

1. Four times per year 3. Twice a year

2. Once a year 4. Not at all

If the answer is no. Why?......................................................................................................

.........................................................................................................................................

24. Do you declare and settle your yearly business profit tax liability on time?

1. Yes 2. No

If your answer is no, do you have any reason for this?.....................................................................

...........................................................................................................................................................

25. How long will it take to settle your yearly business profit tax liability?

1. Hours 4. More than one day 7. Three weeks

2. Half day 5. One week 8. One month

3. One day 6. Two weeks 7. More than one month

26. If it takes more days to settle the yearly profit tax, what is the reason for this?

1. Lack of efficiency of the tax office

2. Shortage of tax officers
3. The tax payer do not declare the tax obligation on time
4. The tax payer do not submit completed document
5. The business tax payment period is short
 6. There is complicated tax procedure

State if any other. , .............................................................................................................

........................................................................................................................................

27. Are you currently using sales register machine?

1. Yes 2. No

If the answer is no what is the reason for not using it, ...................................................................

........................................................................................................................................

Very Simple Moderate Difficult Complica

Simple ted

1 2 3 4 5
28
How do you evaluate in using
the sales register machine?

Excellent Very Fair Poor Very

Good Poor

1 2 3 4 5
29 How do you evaluate the
advantage of the sales register
machine for your business?

What kind of problem did you face in using the sales register machine? ,........................................

...........................................................................................................................................................

30. Do you get any support from the tax authority when you are facing a problem on the sales
cash register machine?

1. Yes 2. No

If the answer is no, what is the reason for this?.........................................................................

......................................................................................................................................................

Questions related to taxpayers’ attitude towards the tax administration.

Strongl Agree Neutral Disagree Strongly
y agree disagree
1 2 3 4 5
31 The tax laws on Business profit is not
clear and it is difficult to understand
32 There is complicated business profit tax
payment procedure
33 The tax office do not have positive
attitude towards the tax payer
34 Business profit tax revenues are not
properly used for public services
35 The business profit tax assessment is not
fair in general.
36 The awareness level of the tax payer on
business profit tax is very low
37 Business profit tax rates are too high

38. If you have any additional opinion concerning the annual profit
tax:...........................................

................................................................
................................................................
.........

................................................................
................................................................
.........

................................................................
................................................................
.........

................................................................
................................................................
.........

Thank you very much for your participation and cooperation.

 APPENDEX-B

“
”

0911-62-26-99

; bezakeb@yahoo.com

/
 Questionnaire ID _________

1. : 1. 2.

2. ________

3.

1. 12 5.

2.12 / 6. /

3. 7. _______________________

4.

4.

1 4.

2 5.

3 6.
__________________________________

5.

1. 1 3. 5 10

2. 1 5 4 10

6. /Level/

1. 2. ` 3.
 2. ?

2 4
1 3 5
7
8

10

1
1
1
2
1
3
1
3
1
4
1
5

16. ?

1.
2.
3.
4.

17. ?

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2.
3.
4.
5.
 6.
7.
.........................................................
.
................................................................
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..................
18. ?

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2.
3.

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................................................................
................................................................
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................................................................
..................
19. ?

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20. 19 ( 1
)

1.
2.
3.
 4.
5.
6.
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.........
................................................................
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................................................................
................................................................
..................

21. ?
1.
2.
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22.
?
1.
2.
3.
4.
5.

?...............................
................................................................
................................................................
................................................................
................................................................
..................
 1 2 4
3 5
23

24. ?

1.
2.
3.

............................................................
....
................................................................
................................................................
................................................................
................................................................
..................

25. ?

1.
2.
3.
4.
5.

26. ?

1.
2.
 3.
4.
5.
6.
7.
....................................................
...........................................
.........................................................
.........................................................
.......

27. ?
1.
2.

28. ?
1.
2.
3.
4.
5.
6.

29. ?
1.
2.
3.
4.
5.

30.
?
 1.
2.
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6.

4 5
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38.
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................................................................
........
................................................................
................................................................
.........

................................................................
................................................................
.........

................................................................
................................................................
.........

................................................................
................................................................
.........

................................................................
................................................................
.........
 St. Marry University
Faculty of Business & Economics
Graduate Program (MBA) in Accounting and Finance
Questionnaires for tax Officers

The purpose of the study is to analyze the prevailing Business Profit Tax Administration
practice in Yeka Sub City Revenue and Tax Authority.

Responding to this questionnaire takes few minutes. Any information provided would only be
used for academic purpose. As a result it would be kept confidential and utmost secrecy would
be maintained. I thank you in advance for your cooperation.

Questionnaire ID _________

I. Personal Information
Age________

Sex: 1. Male 2. Female

Marital Status: 1. Single 2. Married 3. Divorced

Job Position: ______________________________________________

1.Secondary education 4. College/Univ. Student 7. Master Degree

2.TVET/College diploma 5. College/Univ. Dropout 8. PhD

3. Secondary education 6. First Degree 9. Other ____________

Types of qualification

1.Accounting 4. Business Education 7.Other ___________________

2.Management 5. Commerce

3. Accounting & Finance 6. Economics

Total work experience in tax administration office: _________________________

Total work experience in tax administration office: _________________________

II. QUESTIONS FOR TAX OFFICERS
Instruction: Please make a tick (√) mark for which you think appropriate and give your opinion for the
open ended questions.

1. What is your level of understanding on business profit tax policy, laws and regulation?

1. Very Poor 4. Good

2. Poor 5. Very Good
3. Fair
2. How often do you get refreshment training and updates your knowledge on business profit tax?

1. Monthly 4. Quarterly
2. Semiannually 5. Annually
3. Not at all

3. Does your current salary and benefits justify your duty and responsibility?

1. Yes 2. No

4. If the answer is no, why? _________________________________________________________

_____________________________________________________________________________________

5. How do you evaluate the Equity and Fairness of the business profit tax law?

1. Very Poor 4. Good

2. Poor 5. Very Good
3. Fair
If there is any other? ____________________________________________________________________

_____________________________________________________________________________________

6. Is the annual business profit tax payment time is Convenience for the business profit tax payers?

1. Yes 2. No

If no, when do you think the business profit tax should be paid?_________________________________

_____________________________________________________________________________________

7. How do you evaluate the efficiency of the tax authority in collecting the business profit tax?
1. Very Poor 4. Good
2. Poor 5. Very Good
 3. Fair
8. How often does the tax authority provide awareness and education to the business profit
taxpayers?

1. Four times per year 3. Many times

2. Once a year 4. Not at all

3.Twice a year

9. How do you provide the orientation and training?

1. Brochures and pamphlets 3. Electronics media TV,Radio,Internet

2. Discussion 4. With all means

3. Workshop

Any other:____________________________________________________________________________

10. How do you evaluate the participation of the business profit tax payers in attending the
orientation and training sessions?

1. Very Poor 4. Good

2. Poor 5. Very Good
3. Fair
11. How do you evaluate the capacity of the tax administration in undertaking the business profit tax
policy in terms of human resource and employees’ moral and discipline?

1. Very Poor 4. Good

2. Poor 5. Very Good
3. Fair
12. How do you evaluate honesty and loyalty of the business profit taxpayers to the business profit
tax system?

1. Very Poor 4. Good

2. Poor 5. Very Good
3. Fair
13. Do you think that social and cultural factors have an impact on business profit tax compliance?

1. Yes 2. No

If your answer is yes, state how it affects____________________________________________________

_____________________________________________________________________________________
_____________________________________________________________________________________

14. How do you estimate the size of business profit taxpayers who do not submit fair financial
statement?

1. Many 4. Average
2. Few 5. None
3. Unknown
15. How do you see the trend of business profit taxpayers who do not comply with business profit
taxes laws and regulation?

1. Increasing 4. Decreasing
2. Stable 5. None
3. Unknown

16. What are the types of assessment practiced in Ethiopia?

1. Administrative assessment 2. Self-assessment 3. Both

17. which tax payers are included in this tax system:_______________________________

18. Which type of assessment contribute (generate) higher revenue?

1. Administrative assessment 2. Self-assessment 3. Both

19. Which type of assessment is most vulnerable to the risk of fraud and corruption?

1. Administrative assessment 2. Self-assessment 3. both

20. Why?___________________________________________________________________
________________________________________________________________________

21. How does the presumptive tax are determined on the tax payers.
 1. Predetermined rate
2. By conducting assessment
3. Guessing
4. Location of the business
5. Size of the business
Please specify if there is any other ways:_____________________________________________

22. Why business profit taxpayers do not comply with business profit taxes laws and regulations
(check all that apply)?

1. Lack of awareness 4. Lack of ability to pay

2. Deliberately refusal 5. Negligence

3. Poor tax collection system 6.Lack of trust on the govt.

If any, mention here____________________________________________________________________

____________________________________________________________________________________.

23. Is the business profit tax payment period is Convenient for business profit tax payer?

1. Yes 2. No

If the answer is not what is your suggestion time_____________________________________________

_____________________________________________________________________________________

24. Wow do you measure the cost of business profit tax collection?

1. Expensive 3. Very minimum

2. Average 4. Not measurable

25. Who is to blame for the poor business profit tax compliance (check all that applies)?

1. Business profit tax authority 3. City government

2. Business profit taxpayers 4. License and permit authorities

Why?________________________________________________________________________________

_____________________________________________________________________________________
 26. Does the political system have an impact on your as well as other business profit taxpayers’
attitudes toward the business profit tax system?

1. Yes 2. No

27. How do you measure the business profit tax system and procedure?

1. Very Simple 4. Difficult

2. Simple 5. Complicated
3. Moderate
28. Does the business profit tax payer properly utilize the sales register machine? ________________
_____________________________________________________________________________________
_____________________________________________________________________________________

29. What kind support do you give to the business profit tax payer when error occurred on the sales
register machine?_______________________________________________________________.
______________________________________________________________________________
______________________________________________________________________________

30. Does the sales register machine have an advantage in controlling business profit tax?
1. Yes 2. No

If not why?___________________________________________________________________________

_____________________________________________________________________________________

31. What measures should be taken to improve compliance behavior of the business profit tax
payers?
1. Strengthening legal enforcement and penalties

2. Working more on awareness and education on tax policy, laws and regulation

3. Providing fair and equal treatment for all tax payers

4. Publicizing the development effort being made by the government

5. Reducing the current business profit tax rates

6. Improving the service delivery of the tax office

7. Improving the human and material capacity of the tax office

Add if you have additional comment_______________________________________________________

____________________________________________________________________________________

32. Give your general comment on the overall attitude of the public towards business profit taxation
and how positive attitude towards business profit taxation can be developed._________________

_____________________________________________________________________________________

_____________________________________________________________________________________

Thank You!!!
 St. Marry University
Faculty of Business & Economics
Graduate Program (MBA) in Accounting and Finance
Questionnaires for tax auditors

The purpose of the study is to analyze the prevailing Business Profit Tax Administration
practice in Yeka Sub City Revenue and Tax Authority.

Responding to this questionnaire takes few minutes. Any information provided would only be
used for academic purpose. As a result it would be kept confidential and utmost secrecy would
be maintained. I thank you in advance for your cooperation.

Questionnaire ID ___________

II. Personal Information

Age________

Sex: 1. Male 2. Female

Marital Status: 1. Single 2. Married 3. Divorced

Job Position ________________________________________

1. Secondary education 4. College/Univ. Student 7. First Degree

2.TVET/College diploma 5. College/Univ. Dropout 8. Masters/PhD

3. Secondary education 6. First Degree 9. Other ____________

Types of qualification

1.Accounting 4. Business Education 7.Other ___________________

2.Management 5. Commerce
3. Accounting & Finance 6. Economics

Total work experience in tax administration office: _________________________

II. QUESTIONS RELATED TO THE TAX AUDIT

Instruction: Please make a tick (√) mark you thought appropriate and your opinion for the open
ended questions.

Note: You can also give your opinion in Amharic language.

1. Is there any tax audit manual?

1. Yes 2. No

2. If you have the manual how do you evaluate it?

1. It is clear and workable

2. It lacks some clarity
3. It is completely unclear
4. No opinion
3. What is your level of knowledge on tax laws, rules and regulations of e business
profit tax?

1. Very Poor 4. Good

2. Poor 5. Very Good
3. Fair
4. If the answer for No. 3 is poor and very poor, how do you carry out your audit
work?

1. Referring rules and regulations

2. Working with someone who has better knowledge

3. As per the knowledge gained through education and training

5. How often do you get refreshment training and updates on tax audit?

1. Monthly 4. Quarterly
2. Semiannually 5. Annually
3. Not at all
 6. Is the annual business profit tax payment period is Convenient for business profit tax
payers?

1. Yes 2. No

7. What are the types of assessment practiced in Ethiopia?

1. Administrative assessment 2. Self-assessment 3. Both

8. Which type of assessment contribute (generate) higher revenue?

1. Administrative assessment 2. Self-assessment 3. Both

9. Which type of assessment is exposed to the risk of misappropriation?

1. Administrative assessment 2. Self-assessment 3. both

10. Why?__________________________________________________________________
________________________________________________________________________
________________________________________________________________________

11. Why business profit taxpayers do not comply with business profit taxes laws and
regulations (check all that apply)?

1. Lack of awareness 4. Lack of ability to pay

2. Deliberately refusal 5. Negligence

3. Poor and tiresome collection system 6. Lack of trust on the govt.

If any, mention here____________________________________________________________________

____________________________________________________________________________________.

12. Does the non-compliance of business profit taxpayers can put the credibility and
trustworthiness of the revenue administration under question mark.

1. Strongly Agree 3. Moderately agree

2. Moderately disagree 4. Strongly disagree

13. Do auditors and investigation staff have appropriate powers of access to
information held by the business profit tax payers and other parties?

1. Yes 2. No

14. Do the respective government officials give/pay close attention for the business
profit tax audit by assigning appropriate & skilled persons and allocating sufficient
resources?

1. Yes 2. No

15. What are the types of audit most usually applied?

1. Full audit
2. Limited scope/sample audit
3. Single issue audit
4. Any of the three depending on the risk identified
16. When do you audit the business tax payers’ books of records?

1. Annually
2. When the tax payers submit their annual financial statement
3. Every five year
4. Only when there are cases reported
5. Not at all

If there is any other, please specify: ___________________________________________

________________________________________________________________________

17. How do you evaluate honesty and loyalty of the business profit taxpayers on their financial
records and paying fairly the annual business profit tax?

1. Very Poor 4. Good

2. Poor 5. Very Good
3. Fair
18. How do you estimate the size of business profit taxpayers who do not submit fair financial
statement?
 1. Many 4. Unknown
2. Few 5. None
3. Average
19. How do you see the trend of business profit taxpayers who do not comply with business
profit taxes laws and regulation?

1. Increasing 4. Unknown
2. Stable 5. None
3. Decreasing

It there any reason for this:________________________________________________

________________________________________________________________________

20. How are audit cases selected? _____________________________________________

_____________________________________________________________________________

______________________________________________________________________________

21. Is only one individual auditor selecting the cases?

1. Yes 2. No

22. Does the selected business profit tax payers who are to be audited notified in
advance?

1. Yes 2. No

23. Does notification has impact?

1. Yes 2. No

What is the reason for this ? _______________________________________________

______________________________________________________________________________

_____________________________________________________________________________.

24. Is there any legal framework to investigate the business profit taxpayers' record
keeping?
 1. Yes 2. No

25. Are the business profit tax payers cooperative to give essential information's?

1. Yes 2. No 3. Partially (not all)

26. Do you think that you are performing the audit worksas per GASP (Generally
Auditing Standards Procedure)?

1. Yes 2. No 3. Partially (not all)

27. If the answer is "No" what kind of audit standard do you follow._______________

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

28. Which business tax category of business profit tax payers are more difficult to
audit?

1. Category A tax payers 3. Category B tax payers

2. Category C tax payers 4. All categories

29. What would the possible measures (solutions) to solve the problem?

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

30. How do you measure the simplicity of the business profit tax system and procedure?

1. Very Simple 4. Difficult

2. Simple 4. Complicated
3. Moderate
31. Wow do you measure the cost of business profit tax collection?

1. Expensive 3. Very minimum

2. Average 4. Not measurable
Do you have any reason for this? _________________________________________________

______________________________________________________________________________
______________________________________________________________________________

32. Is there anything to add in relation to business profit tax audit practice?

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

Thanks.
Equity and Fairness Similarly situated business profit taxpayers should be business profit taxed
similarly.

1. All business profit taxpayers are business profit taxed at the same business profit tax rate
(a flat business profit tax) because those with higher incomes will pay more than business
profit taxpayers with lower incomes.
2. Business profit taxpayers with higher incomes pay business profit tax at higher rates than
lower income business profit taxpayers (a progressive business profit tax).
3. Many different types of income are business profit taxed the same (meaning, for instance,
that few or no types of income are excluded from business profit taxation).
CertaintyThe business profit tax rules should specify when the business profit tax is to be paid, how it is
to be paid, and how the amount to be paid is to be determined.
Convenience of Payment A business profit tax should be due at a time or in a manner that is
most likely to be convenient for the business profit taxpayer.
Economy of Collection The costs to collect a business profit tax should be kept to a minimum for both
the government and business profit taxpayers.
Simplicity The business profit tax law should be simple so that business profit taxpayers understand the
rules and can comply with them correctly and in a cost-efficient manner.
Neutrality The effect of the business profit tax law on a business profit taxpayer’s decisions as to how
to carry out a particular transaction or whether to engage in a transaction should be kept to a minimum.
Economic Growth and Efficiency The business profit tax system should not impede or reduce the
productive capacity of the economy.
Transparency and Visibility Business profit taxpayers should know that a business profit tax exists and
how and when it is imposed upon them and others
Minimum Business profit tax Gap A business profit tax should be structured to minimize
noncompliance.
Appropriate Government Revenues The business profit tax system should enable the
government to determine how much business profit tax revenue will likely be collected and when.