Genzeb 2 On Tax
Genzeb 2 On Tax
The objective of this study is to assess the challenges of business income tax administration with
special emphasis on collection process in the case of Hadiya zone, Hossana town. To answer the
research questions, the researcher used both primary and secondary data as a source of information.
Initially, by using proportionally stratified sampling technique, 341 tax payers were selected as a
sample size from the total population of 3077 tax payers of which 131, 163, and 2783 were categories
“A”, “B”, and “C”, respectively. All the proposed sample size (341) was distributed to respondents.
However, from the total distributed sample size, 280 (82% response rate) questionnaires were
accurately responded and returned back. The descriptive statistical method was employed as a method
of data analysis. As the results of this study revealed, there are some major challenges in the business
income tax collection process such as: challenges associated with business income tax collection
procedures, challenges associated with tax payers‟ attitude towards tax system, lack of good tax
administration and implementation; tax collectors unethical practice during tax collection; availability of
unregistered traders or illegal traders; tax evasion and avoidance. Finally, the researcher gave some
recommendations like distributing the tax laws and procedures to tax payers, increasing awareness to
tax payers both in a short run and long run plan, developing tax authority’s administrative capacity
using advanced technology to collect tax, revision of tax policy and others.
Key words: Tax administration challenges, business income tax compliance, tax payers‟ attitude, tax payers‟
perception, income tax collection procedure.
INTRODUCTION
Tax payers‟ behavior towards tax system has evoked countries as they concentrate more in studies which
great attention among many revenue authorities in the would increase their budgets “bottom-line” in terms of
world especially in developed countries. However, it is huge revenue collection and enforcement efforts at the
debatable on what has been done towards the study of expense of studies on taxpayers behavior which would
tax payers behavior towards tax system in developing make increase in this tax revenue to be realized and
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86 J. Account. Taxation
enforcement efforts work. Perhaps the less developed that a taxpayer may be committing an act of
countries are not to blame as they run on “budget noncompliance which occurs through failure to file tax
deficits”; hence, scarce resources to see through such return, misreporting income or misreporting allowable
studies which are perceived as adding no direct value to subtractions from taxable income or tax due.
revenue collection. However, in the recent years even As Baer and Silvani (1997) stated, tax collection
developing countries started to concentrate different institutions and agencies should be well organized,
studies on attitudes of taxpayers towards taxation by properly managed and capable. For example, taxpayers‟
taking into account its contribution for economic noncompliance depends directly on the possibility of
development. And all countries follow their own tax control of their activities records or incomes. He stated
regulation to collect the tax revenue (Marti et al., 2010). that, “administrators overall effectiveness will be low if
The best instrument which the governments can use as auditing are not effective in discouraging evasion”.
a source of revenue is taxation. It can be said, therefore, Again, Allingham and Sandmo (1972) stated that tax
that a major function of taxation is to marshal the payers‟ behavior is also influenced by the tax laws of
necessary funds to finance the ever-expanding level of a given country. With a strong tax system, tax payers
public expenditures. As in all other countries, one of the perceive that they are treated equally by the government.
purposes of taxation in Ethiopia is the raising of as much But perceptions of unfairness limit both revenue and
revenue as possible to meet the ever-expanding public willingness to pay. So knowing the tax payers attitude
expenditure for the supply of public goods and services towards tax law such as appeal procedure, tax rate,
which otherwise would not be available to the general method of assessment, amount of penalties are very
public by the market. The central aim of the tax system in important.
Ethiopia is to collect sufficient money to finance the A research conducted in South Africa shows that there
administrative machinery of the government as well as to appears a substantial tax gap between the tax that is
finance the fulfillment of basic infrastructures like roads, theoretically collectable from economically active persons
telecommunication, electricity and other basic social in South Africa and the tax that is actually collected. One
services like education, health and water supply facilities of the main reasons for the tax gap was non-compliance
(The Ethiopian Chamber of Commerce, 2005). The tax by taxpayers and potential taxpayers, with tax legislation.
system in Ethiopia is not only meant to raise revenue for One of the causes of noncompliance has been
current expenditure but also aims at directing economic demonstrated to be the attitudes and perceptions of tax
agents to the development goals foreseen by the payers (Oberholzer, 2008).
government through the incentive schemes embedded According to Ho et al. (2013), the Inland Revenue
within the prevailing tax laws. The specific purposes of Services of USA indicated that there are 64 factors that
taxation in Ethiopia as indicated by The Ethiopian are related with tax non-compliance by taxpayers or
Chamber of Commerce, 2005 are: raising of as much companies. Among the factors that are commonly used
revenue as possible to finance the country‟s social by previous researchers relating to tax non-compliance
and economic development programs and to alleviate among individual taxpayers is tax system complexity.
poverty; promotion of capital investment and trade; Milliron (1986) concluded that the impact of tax
ensuring equity, fairness and consistency in the complexity on tax compliance is a bit more complicated
administration of tax laws; encouraging certain industries because of the interaction of two factors, that is,
which are held important in developing the country; perception of fairness and opportunity for non-
discouraging other industries which are likewise not compliance.
important to the long run development of the country. Aligned with the aforementioned facts, Hossana town
revenue bureau might face different challenges while
collecting and administering business income tax.
Statement of the problem Therefore, the objective of this study is to assess
challenges of business income tax administration with
Taxes are one of the main sources of revenue for the special emphasis on collection process in Ethiopia (The
government. Well organized business tax assessment case of Hadiya zone, Hossana town). Hence, in order to
and collection has good contribution for economic successfully conduct this research, the researcher has
development of the country in general and Hosanna town set the following leading research questions.
in particular. In this regard, previous study by Alabede et
al. (2011) shows that income taxes are important source Research questions
of revenue to government in both developing and
developed countries, but the amount of revenue to be (1) Do the business tax collection procedures affect the
generated by government from such taxes for its tax payers‟ compliance and non -compliance behavior in
expenditure program depends among other things, on the the study area?
willingness of the taxpayers to comply with tax laws of a (2) Does attitude of tax payers towards business income
country. The failure to follow the tax provisions suggests tax affect income tax collection in the study area?
(3) How do the existences of informal traders affect services (Alm and Martinez-vatquer, 2001). This shows
business income tax collection process in the study area? the willingness to pay taxes depends on the transaction
(4) What is the extent to which unethical behavior affects of taxes in the public goods and services.
business income tax collection process in the study area? Tax payer consciousness of the exchange relationship
(5) What are the problems/challenges associated with tax with the government (scarifying purchasing power in
administration and implementation by the tax authority in return for public goods and services) can be postulated
the study area? as vital to the tax compliance decision. If it can be
assumed that the tax payer implicitly carries out a cost
benefit analysis of the taxes paid-benefits received
Objectives of the study tradeoff, then it follows that the amount of satisfaction
(dissatisfaction) perceived in this exchange will be a
This study focuses on the challenges of business income powerful determent of the degree of tax compliance
tax administration with special emphasis on collection (Mann and Smith, 1988). This indicates that the tax
process in Ethiopia. payers are positive about paying tax if the government
applies it appropriately for the benefit of the tax payers.
A survey conducted on tax payers‟ attitude in Scotland
The specific objectives of this study are: shows that the majority of the respondents did not think
that the government spends tax payers‟ money
(1) To investigate the effect of business income tax wisely. And they said they would be ready to pay tax if
collection procedures towards tax payers‟ compliance governments show that public revenues are well spent
and non-compliance in the study area. (Dean et al., 1980). These shows knowing tax payer‟s
(2) To investigate the attitudes of tax payers towards attitudes towards public goods and services and
business income taxation in the study area explaining how taxes are spent and maintaining a
(3) To analyze the effect of informal traders on business relationship of trust with tax payers are crucial to increase
income tax collection process in the study area. the compliance behave of the taxpayer because the
(4) To investigate the extent to which unethical behavior willingness to pay taxes depends on the transaction of
affects business income tax collection process in the taxes into public goods and services.
study area
(5) To evaluate the tax authority regarding with tax
administration and implementation in the study area. Attitudes of tax payers towards organizational
effectiveness of the tax authority
RELATED LITERATURE REVIEW As empirical evidence by Baurer (2005) shows, from the
various operating functions of the tax administration, the
Tax payers‟ attitude towards tax system staff of the tax payer service function has by far the most
interactions with tax payers and the general public. Their
Attitudes of tax payers is dependent on the tax law of a service will shape the tax payers feeling towards the tax
given country; service providing by the tax authority as administration. In most cases they are initial point of
well as general activities of the government such as contact with tax payers. As such they are expected to
education, health, electricity, water supply, etc., and have a good working knowledge of tax law, office
personal, demographic and attitudinal characteristics. procedures, filling requirements and the obligation of the
This idea is empirically supported by different tax payers. It is clear that the people are more likely
researchers subsequently. comply with the tax laws if they perceive the tax collecting
agency to be fair and efficient. If they believe that the tax
revenue is wasted by corrupt employees may be
Tax payers‟ attitude towards public goods and disinclined to pay taxes.
services Another evidence by Fray and Holler (1998) shows that
the relationship between tax authorities and tax payers
People‟s normative commitment to paying taxes is reflects a country‟s tax culture; therefore, how the tax
undoubtedly influenced by many factors. Among these authority treats different segments of the formal and
their attitude towards government spending programs, informal economy shapes the tax culture at the same
that is, the use to which the taxes they pay are put is one time, the attitudes of tax payers in the different aspects of
of them. These factors establish a climate that may be the government, and the extent of corruption, are critical
more or less conducive to honest taxpaying behavior to trust in the government on which economic growth
(Brooks, 2001). depends. This shows the way on which revenue
Citizens‟ tax culture and morale are significantly authorities interact with tax payers have an impact on
and positively associated with their perception of the public perception of the tax system and the degree of
benefits delivered by society from the public delivery of voluntary compliance.
goods and
Attitudes of tax payers towards tax law collection processes, and to answer the research questions, a
descriptive research design was employed.
A number of theories of human behavior would suggest
that reducing the inequality in the tax system might Sources of data
increase compliance. For example “equity theory” in
psychology suggests that people are more likely to In this study, both primary and secondary data were used as a
comply with rules if they perceive the system which source of information. The sources of primary data were responses
determines the rules to be equitable (Brooks, 2001). This from both tax payers and employees in the tax authority bureau of
shows tax payers are more likely to obey laws if it is Hosanna town. The secondary data were relevant published and
unpublished materials, journals, articles, proclamations,
simple and easy to understand. A person‟s behavior procedures, ERCA directives, regulations, website information, and
is also influenced by the tax law (Allingham and Sandmo, information available in the tax authority office like annual reports
1972). With a strong tax system, tax payers perceive that and revenue enhancement plan.
they are treated equally by the government. But
perceptions of unfairness limit both revenue and
willingness to pay. So knowing the tax payers attitude Sampling technique
towards tax law such as appeal procedure, tax rate, To select sample from the total population (tax payers),
method of assessment, and amount of penalties are very proportionally stratified sampling technique was employed because
important. As an empirical study by James et al. (2006) the total population of the tax payers are divided into three sub-
states, citizens‟ attitudes towards paying taxes depend on populations (categories): category “A” tax payers, category “B” tax
personal, demographic and attitudinal characteristics. payers and category “C” tax payers that enables to ensure
elements to be more homogeneous within each stratum.
Evidence by Everest-Phillips (2008) shows,
However, structured interview was conducted with most
understanding attitudes towards the level of tax morale, experienced and educated employees of the tax authority because
the effectiveness of the tax authority, and the resulting their educational level and experience may determine the quality of
extent of compliance provides an essential diagnostic of response and they might easily understand the interview than from
the political realities for reform. It also offers a baseline those who are less educated and inexperienced employees.
for measuring progress on all aspects of success of tax
reform, not least on tax morale and state legitimacy. Sample size determination
Attitude and perception surveys of current and potential
tax payers identify perceived weaknesses in the fairness There are 3,077 total population (number of tax payers) in Hosanna
of the tax system. Survey results clarify the extent of town which is divided into three strata (categories) such as category
quasi-voluntary compliance, revealing the governance “A” tax payers which constitute 131, category “B” tax payers which
issues underlying tax reform and offering a baseline for constitute 163, and category “C” tax payers which constitute 2,783
(Hosanna town tax payers‟ list as of May 30, 2008 EC).
measuring progress. When higher compliance The sample size from the total population is determined using
strengthens effective enforcement, a virtuous circle of Yamane (1967) as follows:
mutually reinforcing taxation and governance emerges,
enabling tax authorities to focus attention efficiently on n = NZ2pq / e2 (N - 1) + Z 2pq
high-risk categories of taxpayers. These types of surveys
n = 3077 × 1.962 × 0.5 × 0.5 / (0.052(3077-1) + 1.962 × 0.5 × 0.5)
are well established for OECD countries but are nascent
n = 341
in developing country contexts. However, surveys may be
controversial in countries where the political contest is where N = size of population, n = sample size, Z = the value of the
oppressive and tax authorities are unwilling to invite standard variant at a given confidence level, e = acceptable error
criticism of their integrity, public acceptance, and (the precision), p = sample proportion, and q = 1 – p.
effectiveness. By using 95% confidence interval the sample size is 341. After
determining the sample size, sample for each stratum can be
Recently in March 2008 in Yemen the surveys on
determined by adopting proportional allocation method.
private sector views on problems in the tax system found Accordingly, if Pi represents the proportion of population included
that 57% believed reducing time to comply with tax was in stratum i, and n represents the total sample size, the number of
very important, 71% thought reducing the cost of tax elements selected from stratum i = n. Pi. Hence, my sample size n
compliance to be a top priority, 91% regarded as critical = 341 which is drawn from a population of size N = 3077 which is
simplifying tax laws using revenues fairly and efficiently, divided into three strata of size A = 131, B = 163 and C = 2783.
Adopting proportional allocation, the sample sizes for each stratum
97% thought tax equity mattered to ensure that all firms is determined as follows:
paid a fair amount of tax and 100% believed tackling
corruption was essential (ibid). For strata “A” with N1 = 131, n. P1 = 131 / 3077(341) = 15
For strata “B” with N2 = 163, n.p2 = 163 / 3077(341) = 18
For strata “C” with N3 = 2783, n.p3 = 2783 / 3077(341) = 308
RESEARCH METHODS
To study the challenges of business income administration and In this study the primary data was collected using both
Table 1. Response rate.
questionnaires and structured interview. The questionnaires are required to understand all the laws and regulations that
designed on a Likert type-scale with a 5- point scale. Accordingly, 1 govern taxation in the country. This is necessary because
for “strongly disagree”, 2 for “disagree”, 3 for “neutral”, 4 for “agree”,
and 5 for “strongly agree”. Then the questionnaires were distributed
tax payers are required to file and pay taxes for which
to tax payers and the structured interview was conducted on they are liable in the period specified by law. Tax payers
employees of tax office by the assumption that it would enable to are also required to pay any penalties and interests which
get more information. the law requires as a consequence of their non-
compliance and if they are not satisfied by the amount of
tax imposed, within 10 days after the decision is given,
Method of data analysis
he/she can present a complaint by the established tax
Since the data which was collected from the respondents (business commissioner. Previous study shows that there is a
income tax payers and tax authority officials) are mostly qualitative positive relationship between individuals understanding of
data, the descriptive statistical methods such as, percentage and tax law and tax compliance (Milliron cited in Manaf et al.,
mean were employed as a method of data analysis. 2005).
As shown in Table 2, 66.66% of category „A‟, 55.4% of
category „B‟ and 0% of category „C‟ respondents were
RESULTS AND DISCUSSION agreed on the statement of easy understanding of tax
laws. On the other hand, 33.33% of category „A‟, 44.43%
Response rate of category „B‟ and 100% of category „C‟ opposed the
statement. This result revealed that, more than half
This chapter presents analysis, interpretation and findings percent of categories „A‟ and „B‟ tax payers can
of data collected from categories „A‟, „B‟ and „C‟ business understand the tax laws and procedures than category
income tax payers of Hosanna town. For category „A‟ 15, „C‟ tax payers from which 100% of the respondents
for category „B‟ 18 and for category „C‟ tax payers 308 answered as the tax laws are difficult to understand. This
questionnaires were distributed, and 15, 18 and 247 may be due to the educational gap and awareness
questionnaires from categories „A‟, „B‟ and problem. As we have seen in the demographic
„C‟, respectively were collected back. Accordingly, the characteristics of the respondents, category „A‟ and
response rate for categories „A‟, „B‟, and „C‟ is 100, 100, „B‟ tax payers are more educated than category „C‟ tax
and 80%, respectively. In general, from 341(sample size) payers as the result of both categories A‟ and „B‟ tax
questionnaires distributed to the business tax payers, 280 payers have good understanding (awareness) about tax
questionnaires were accurately responded and returned procedures. As supported by previous study in the
back. So the total response rate is 82% thus it is aforementioned paragraph, this can be one of the
representative (Table 1). challenges in the business income tax collection process
or in tax compliance behavior.
Regarding the annual turnover specified to each
Analysis on business income tax collection category in Table 2, 19.99% of category „A‟, 66.66%
procedures or tax laws of category „B‟, and 52.94% of category „C‟
agreed. However, 79.99% of category „A‟, 22.28% of
Here was analyzed to identify how the business income category „B‟, and 21.86% of category „C‟ disagreed and
tax procedures are operated or implemented and to know the remaining percent of each category had no opinion or
the attitude or feeling of business income tax payers they remained neutral. This implies that a higher
towards the procedure. In relating to this procedure, proportion of categories „B‟ and „C‟ agreed on the
developing the tax payers‟ knowledge about taxation and annual turnover specified to each category than
its purposes, providing sufficient services and category „A‟ tax payers. This might have happened
constructing close relationship with tax payers to guide because of the gap of the annual turnover between each
and support them enables to increase tax compliance category and additional responsibilities of category „A‟ tax
and decreases non-compliance for taxation. Tax payers payers like preparation of financial statement.
of the country in general and the town in particular, As further indicated in Table 2, majority of respondents,
Table 2. Responses related to business income tax collection procedures.
that is, 80% of category „A‟, 77.8% of category „B‟ of this reason knowing the attitudes of the taxpayers
and 65.9% of category „C‟ responded as they disagree on towards service delivery, tax collection efficiency, their
the administrative penalties listed in the provision. This is knowledge on tax related issue and their awareness
due to the amount of money that is specified in the creation activity are vital to increase the tax compliance
provision to each penalty. As past research shows tax of Hosana town. Thus an attempt is made to address
payers comply within their tax obligation to avoid legal these issues through the data gathered from the
sanctions (that is, penalties) whenever those sanctions respondents (Table 3).
are expected to be more costly than compliance Doran As shown in Table 3, majority of the respondents with a
(2009). In this study, majority of the total respondents mean value of 3.57 agreed on the question stated as
disagreed on the provision. This will have a positive “There is a poor service delivery by the tax authority”. As
impact on their compliance behavior if the probability of the interview conducted on the tax authority shows, there
getting and penalizing them is very high. was lack of good service delivery to the tax payers. The
Regarding the statement “the provision of declaration of other problems like lack of modern record keeping
taxable income and assessment of tax is good”, 86.7% of system and lack of cooperation by tax payers themselves
category „A‟, 66.7% of category „B‟ and 15.3% of category and other stakeholders like town administration were the
„C‟ agreed but 13.3% of category ‟A‟, 22.2% of category main reasons of delaying tax payers‟ service delivery
„B‟ and 68.4% of category „C‟ show their disagreement. In which in turn might reduce the tax collection efficiency.
the same way, 11% of category „B‟, and 16.2% For the statement, “There is a poor public good and
of category „C‟ had no opinion. From this information, it is service provision in the town”, the mean value of 4.1
possible to generalize that a higher proportion of clearly shows that the majority of the respondents did
categories „A‟ and „B‟ agreed on the declaration. This support or agreed on the idea of poor public good and
may be due to the method of assessment. It is known that service delivery in the town. This poor public good and
the two categories‟ tax is levied based on their profit and service provision such as infrastructures like water,
loss account. This assessment method considers their electric power, road and the like can make a challenge on
paying ability. On the other hand, more than half of business income tax collection process. In other words,
category „C‟ respondents did not agree on the declaration the low provision of public good and services reduce the
and assessment of tax. This might be due to the fact that compliance behavior, and the reverse is also true. The
their tax is levied based on standard assessment. This interview conducted on tax officials also supports the tax
method is not considered tax payers specific conditions payers‟ idea. This finding was supported by previous
such as family size and loss in a particular year. And it studies. For instance, as stated in the previous study, the
may hurt tax payers due to high tax. Since more than taxpayer attitudes to the state (government) influence
90% of Hosanna town business income tax payers are willingness to pay tax are the least understood but most
category „C‟, the dissatisfaction may have a negative fundamental dimension of compliance. This dimension
impact on the collection process or amount of revenue emerges from taxpayers‟ assessment of the
that will be collected from the business traders of the overall quality of governance at the instrumental and
town. intrinsic levels (Everest-Phillips and Sandall, 2009). At the
instrumental level, taxpayers assess government
capacity to deliver the fiscal social contract, the
Analysis on tax administration and implementation instrumental side of governance in providing essential
problems public goods such as security and core services such as
infrastructure, health, and education. At the intrinsic level,
Since tax administration employees are amongst the taxpayer perceptions of the legitimacy of the state, called
most frequently contacted government officials and often tax morale, combines political acceptance of state
represent to the public what is right and wrong about the authority, the perceived fairness and effectiveness of
government, the responsiveness, integrity and quality of state institutions, and trust in public institutions and
tax administration staff must therefore meet a very high officials. This shows people paid taxes in anticipation of
standard (Baurer, 2005). An efficient tax administration services but if these services were not provided
system is integral to any country‟s well-being. Because satisfactorily, it will negatively affect their willingness to
Table 3. Responses related to tax administration by the tax authority.
S. Agree 14 5
There is creation of awareness to Agree 35 12.5
3 the tax payers by the tax Neutral 49 17.5 280 2.20
authority Disagree 77 27.5
S. Disagree 105 37.5
S. agree 0 0
Agree 63 22.5
Neutral 28 10
Qualification of tax collectors Disagree 98 35
(officials) and their experience is 91 32.5 280 2.22
4 S. disagree
good and is according to national Agree
tax system 84 30
Neutral 49 17.5
Disagree 63 22.5
S. Disagree 28 10
S. agree 56 20
Agree 150 53.6
There is no procedural fairness 14 5 280 3.65
5 Neutral
by the tax authority
Disagree 40 14.3
S. disagree 20 7.1
S. agree 98 35
There is unethical behavior by Agree 77 27.5
6 the tax collectors Neutral 35 12.5 280 3.55
Disagree 21 7.5
S. disagree 49 17.5
answered as there is no procedural fairness by the tax of tax assessment, appeal and selection of review
authority. This might be because of the dissatisfaction of committee, administrative penalties, etc. If the tax payers
tax payers with the treatment of tax authority as the time are not satisfied on the tax authorities‟ activity, they may
evaluate as the tax procedures or laws are not fair rather provides an essential diagnostic of the political realities
than evaluating individual or tax officials‟ for reform.
weakness. Regarding this issue, previous studies have As observe from Table 4, higher proportion of each
shown that when people evaluate authorities, they often category with a mean value of 4.07, 3.94, and 4.6 for
refer to the procedural justice aspects of their encounter categories „A‟,‟ B‟, and „C‟ respectively did agree. This
with that authority when making judgments; if they feel reflects almost all respondents know why they have to
they have been treated poorly by an authority, people are pay tax. However, their reason of why they have to pay
likely to judge the procedural justice aspects of their tax is not in line with taxation objective. As most of the
encounter as unfair. Alternatively, if they feel they have respondents suggested in the open ended question, they
been treated well by an authority, people are likely to were paying business income tax because of the fear of
judge the procedural justice aspects of their encounter as legal penalties but not as a once obligation of being
fair (Murphy, 2004). citizen of his or her country. This also might be because
Regarding the statement that “There is unethical of lack of awareness, negative attitude towards tax
behavior by the tax collectors”, higher proportion of the administration, and low understanding of the purpose of
total respondents with a mean value of 3.55 replied as taxation.
there was unethical behavior by the tax collectors or tax Regarding the statement, “the business income tax rate
administrators at the time of tax collection process. As should be reduced”, higher proportion of each category
interview conducted on employees of tax authority shows with a mean value of 3.6, 3.39, and 4.01 for categories
even though the tax authority did give training on ethical „A‟,‟ B‟, and „C‟ respectively wanted the business income
rules to newly hired employees before starting the normal tax rate to be reduced. For the poor tax culture or tax
work and recently office of ethics is established at a payers‟ non-compliance of the country in general and
department level, still it is one of the most difficult areas Hosanna town in particular, the high tax rate can be the
to solve. This might be due to the long close relationship reason to non-compliance behavior. In this regard, in
between the tax payers and tax collectors. So from this previous studies it has been indicated that tax
fact it is possible to conclude that unethical behavior by professionals believes reducing tax rate possess the best
tax collectors is also another challenge in the business opportunity for increasing tax compliance (Collins et al.,
income tax collection process. 1992).
Regarding the statement “whether there is no reward to Concerning the statement “Some people do not pay tax
taxpayers that is, giving a trophy for being best taxpayer”, honestly because they believe that large portion of
almost all tax payers with a mean value of 4.57 said that collected money is not used to the public”, large
there was no reward to tax payers. If the tax payers have proportion of each category with mean value of 4.07, 4
given rewards to their best performance or being honest and 3.6 for categories „A‟, „B‟, and „C‟ respectively shows
tax payer, the compliance behavior of the tax payer may believes as the large portion of the collected money is not
increase which will increase tax collection efficiency, and used to the public. This indicates the tax payers do not
the reverse is true. In this regard the income tax trust those government officials who have the
proclamation article 85 sub article 1 clearly states that the responsibility and direct relation with tax revenue
tax authority shall reward tax payers for their outstanding collected. As some studies indicate, tax compliance is
performance or for their being best tax payer. However, low in many developing countries where citizens neither
there was no such practice in the case of Hosanna town believe governments nor trust the state to use revenue
tax authority. The previous research conducted in Kenya wisely (Everest-Phillips and Sandall, 2009). This shows
also supports this finding in which tax compliance and tax the compliance depends on the confidence of tax payers
non-compliance can be influenced by rewarding towards the wise use of tax revenue by the officials.
taxpayers, that is, giving a trophy for being best tax- For the statement “The burden of tax is so heavy that
payer, and motive for low profits, that is, through many people are forced to evade in order to survive”,
operating a legal business, accurate reporting of profits, respondents with mean value of 2.13, for category
etc. (Marti et al., 2010). „A‟, and 3.8 for category „B‟ said that the burden of tax is
not the reason for evading tax. But according to category
„C‟ tax payers heavy tax burden was the reason for tax
Analysis on attitudes of tax payers towards taxation evasion. The response of both categories „A‟ and „B‟ may
not be true because their response is controversial with
Here reflects attitudes of tax payers towards business their agreed response in another section of these
income tax collection process or tax payers feeling analyses. That means they agreed on the reduction of
towards tax system. In this case, attitude of taxpayers business income tax rate on one hand and opposing the
could be positive or negative on the tax system. Evidence heavy tax burden on the other hand even if both
by Everest-Phillips (2008) shows, understanding attitudes statements reflected the same idea. This may be due to
towards the level of tax morale, the effectiveness of the the fear to give right answer to tax evasion related
tax authority, and the resulting extent of compliance statement.
Table 4. Responses related to attitudes of tax payers towards taxation.
S. Agree 42 15
Agree 84 30
Unlicensed traders have no negative Neutral 0 0
2 2.78
impact on legal traders‟ turnover. Disagree 77 27.5
S. Disagree 77 27.5
Total 280 280
S. Agree 28 10
Agree 56 20
Unlicensed traders are important to Neutral 0 0
3 society since they sell with lesser prices 2.33
than legal traders. Disagree 91 32.5
S. Disagree 105 37.5
Total 280 100
S. agree 70 25
Agree 84 30
Legal traders refuse to pay tax honestly Neutral 35 12.5
6 by opposing of the existence of illegal 3.38
traders. Disagree 63 22.5
S. disagree 28 10
Total 280 100
S. agree 98 35
Agree 77 27.5
There is no strong action by the Neutral 0 0
7 government bodies to control illegal 3.45
traders. Disagree 63 22.5
S. disagree 42 15
Total 280 100
Source: Researcher‟s Own Survey Result (2016).
non-compliance behavior or have negative impact on understand the tax laws is mostly seen in category “C”
business income tax collection process. Inability to easily tax payers this is due to lack of awareness about taxation
and their low educational level compared to categories service and updating of past records.
“A” and “B” tax payers. Tax non-compliance in opposing
with the procedure of assessment and declaration of
amount of tax to be paid is a severe problem of RECOMMENDATIONS
presumptive tax payers compared to the other two
categories. This is due to subjective nature of Based on the findings and conclusions of this study, the
assessment or their tax is levied based on standard following recommendations have been given.
assessment or absence of the use of book of account. As To solve the problem of poor understanding of
the tax officials responded in the interview, standard business income tax procedures and laws, the tax
assessment is one of the most challenging areas in the authority should distribute the tax laws (that means
collection process and they stated that determining the income tax regulation, proclamations and directives) in
exact amount of tax to be paid is very difficult. written form to business traders. This can serve as a
As the findings show, variables such as poor service guide in explaining taxpayers‟ rights and
delivery by the tax authority, poor public good and service responsibilities as well as the consequence of non-
provision, lack of awareness creation to tax payers, compliance. In addition, the tax authority should provide
unethical practice by the tax collectors and absence of necessary awareness creation program.
reward or motivation to the best or honest tax payers are To develop positive attitude towards the payment of tax
the main tax administration and implementation problem and to increase awareness about taxation, both short run
found in this study. So, the researcher can conclude that and long run plan should be set. In the short run the tax
among other reasons lack of good tax administration and authority should introduce tax week, work shop, and
implementation problem is also the reason for the seminar as well as local medias. In the long run, the
business income tax collection challenges or non- government shall introduce different types of simple
compliance behavior of the tax payers. technologies and methods which enable to create
Under the challenges associated with tax awareness. Again, the tax authority should motivate tax
payers‟ attitude towards taxation, variables such as: high payers by providing rewards (trophy) for the best model
business income tax rate, perception of tax payers as the tax payers or for their outstanding performance which is
large portion of collected many is not used to the public already stated in the article 85 sub articles 1 of income
and negative peer attitude are found as the reasons to tax proclamation that will increase the voluntary tax
non-compliance behavior of tax payers or to the tax payment compliance behavior of tax payers.
evasion in this study. So it is possible to conclude that To solve problems associated with subjective nature of
taxpayers‟ attitude towards taxation is one of the reasons tax collection or assessment from presumptive tax
for the business income tax collection challenges and to payers, the tax authority should encourage this category
the noncompliance behavior of tax payers. of taxpayers to use book of account.
The findings also show the ever increasing informal To develop the capacity of the tax authority towards tax
business or illegal traders at each corner of Hosanna administration and tax collection efficiency, the tax
town is one of the major problems in business income tax authority should provide additional training and
collection process and is observed as one of the factor development to the employees on tax related issues,
that reduce the tax collection efficiency and effectiveness aware them about their accountability in compliance and
of the tax authority. As observed in this study this appeal procedures, and should provide education
problem is two directional: on one hand, since large opportunities especially for those who are bellow
number of illegal or unregistered traders are not in the tax certificate level. To increase tax collection effectiveness
payers net, the tax revenue that should be collected from and efficiency it is better to use modern tax collection
economically active person is decreasing. On the other technologies like SIGTAS.
hand, the existence of illegal traders has a negative To solve problems associated with unethical behavior
impact on the voluntary compliance of legal traders. It is of tax officials or tax collectors, establishing office of
observed that legal traders are refusing to pay tax liability ethics and training the tax officials towards ethical
by opposing the existence of illegal traders and absence standards are meaningless unless the tax authority or the
of strong controlling actions by the government body. As concerned body to take possible actions like punishments
the finding shows the reasons for this problem are (taking to imprisonment, imposing financial charge,
absence of properly managed market places, frequent terminating their job contract, and others) according to
displacement and leaving out of traders from trade the law on those tax officials who are acting an ethical
activities due to lack of follow up and support, poor behavior. Again, the tax authority should shrink down the
cooperation between the town administration and the tax long existing close relationship between the tax collectors
authority, poor application of trade laws and legal tax and tax payers by assigning different tax collectors at
enforcement, lack of systematic data recording and data different site and at different time rather than assigning
base and absence of modern technologies of tax the same individual at the same site for every tax
collection system limit the provision of fast registration collection period.
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