GLOBAL BRIDGE COLLEGE

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

ASSESSMENT OF TAX COLLECTION PROBLEM IN CATEGORY “B” TAX

PAYER (IN CASE OF SODO MEHAL SUB-CITY)

A PROPOSAL PAPER SUBMITED TO DEPARTMENT OF ACCOUNTING IN

PARTIAL FULFILLMENT OF THE REQUIRMENTS FOR BACHLOR OF ART
(B.A) DEGRE IN ACCOUNTING.

BY:

ALULA SIMON

ADVISOR: MINDAYE (MBA)

APRIL, 2024

WOLAITA SODO, ETHIOPIA

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 TABLE OF CONTENTS
CHAPTER ONE...................................................................................................................... 1

1. INTRODUCTION................................................................................................................1

1.1 Back ground of the study................................................................................................1

1.2 Statement of the problem................................................................................................3

1.3 Research question...........................................................................................................4

1.4 Objectives of the study................................................................................................... 4

1.4.1 General objective.........................................................................................................4

1.4.1 Specific objective.........................................................................................................4

1.5 Significance of the study.................................................................................................4

1.6 Scope of the study...........................................................................................................4

1.7. Organization of the paper...............................................................................................5

CHAPTER TWO..................................................................................................................... 6

2. LITERATURE REVIEW.....................................................................................................6

2.1 Theoretical Review of Tax Administration.....................................................................6

2.1.1 Legal Structure for Effective Tax Administration........................................................6

2.1.2 Importance of Tax Administration...............................................................................7

2.1.3. Efficiency of Tax Administration...............................................................................9

2.1.4 Improving Tax Administration..................................................................................11

2.1.5 Service Commitments of Tax Administration............................................................11

2.1.6 Resource Cost (Collection Cost)................................................................................12

[Link] Administrative Cost................................................................................................12

[Link]. Compliance Cost....................................................................................................12

2.1.7. Tax Evasion, Avoidance and Compliance................................................................13

[Link] Tax Evasion and Avoidance...................................................................................13

I
 [Link] Tax evasion.............................................................................................................13

[Link] Determinants of Tax Evasion..................................................................................13

[Link] Tax Avoidance........................................................................................................14

[Link] Tax Compliance and Voluntary Compliance..........................................................15

[Link] VAT Compliance....................................................................................................15

2.1.9 Self-Assessment System (SAS).................................................................................16

2.1.10 Tax Assessment....................................................................................................... 17

2.1.11 Procedures for Tax Collection.................................................................................17

2.1.12 Identification and Registration of Taxpayers...........................................................17

2.2 Empirical literature review........................................................................................... 17

CHAPTER THREE................................................................................................................21

3. RESEARCH METHODOLOGY.......................................................................................21

3.1. Research approach...........................................................................................................21

3.2 Research design............................................................................................................ 21

3.3 Source of data............................................................................................................... 21

3.4 Data collection techniques............................................................................................21

3.5 sampling....................................................................................................................... 21

3.5.1 Target population.......................................................................................................21

3.5.2 Sampling size.............................................................................................................21

3.5.3 Sample selection technique........................................................................................22

REFERENCE.........................................................................................................................23

Appendix I.......................................................................................................................... 24

Budget Schedule.................................................................................................................24

Time Schedule.................................................................................................................... 24
 CHAPTER ONE
1. INTRODUCTION
1.1 Back ground of the study
Tax is financial charges or other levy imposes on an individual or legal entity by government.
All government require payment of money taxes from people. Taxation is a system of raising
money to financial government expenditure. Governments use tax revenue to pay soldiers
and police, to build dams and road to operate schools and hospitals to provide food to the
poor and medical care to the elderly and other purpose without tax to fund its activities
government will cease to exist (Gibrie, 2006).

Taxation policies depend on the socio economic and political structure of a country. In
Ethiopia though taxation came in to being with the emergence of state and government but
there is no reliable documentary evidence to introduce taxation.

The governments generate revenue from tax and other non-sustainable source, the collection
of money from available source of revenue by government need the availability of
democratic government, foreign and domestic creditors and donors, efficient tax system and
awareness of the society regarding the use of tax payment for government and its contribution
for the development of the country economy. In Ethiopia payment of tax is considered by the
society as a debt imposes by the government to increase the wealth of the government
officials. To avoid the negative attitude of the tax payer a well-designed tax systems
necessary. In addition educate the society regarding its obligation minimize the wrong
attitude of the tax payer. So, this designs to minimize problems that face during assessment of
collection minimize wrong altitudes of business tax payers (Gebrie, 2006).

Business income tax is an amount which is kept by the company to pay taxes again its profits.
It is considers as current liability. Business income taxes shall be imposes on the taxable
business income. A taxable business income shall be determines per tax period on the basis of
the profit and loss account or income statement, which shall be drawn incompliance with the
generally accepted accounting standard, subject to the provision of this proclamation and the
directives issued by the tax authority corporate business are requires to pay 30% rate of
business income tax. For unincorporated or individual businesses the business income tax
ranges from 10%-35%.

This is tax payable for each year of assessment on the profit of any company, these include
profit accruing in, derives from or bring in to or receives from a trade, business or

1
investment. There for business income tax payers with annual turnover of birr 1000,000 and
above are categorizes under category “B” tax payer business income tax payers and annual
turnover between birr 500,000 - birr 1000,000 birr under category: B: and business profit tax
payers with annual turnover less than birr 500,000 are under category “B” tax payers. (Gebre
Worku, tax accounting in Ethiopia context,1st edition).

Category “B” taxpayers are composed of two groups. The first groups. The first group
comprises of those taxpayers whose annual turnover for a single tax year 1,000,000 or more.
In addition, any company incorporates under the laws of Ethiopians category “B” taxpayer
irrespective of their annual turnover. The rational for incorporating companies under category
“B” irrespective of their annual turnover seems to dwell upon the idea that given the present
local and international business environment by the time companies are established. They
must have at least 1,000,000 as a starting capital. Category “B” taxpayers are required to keep
books and accounts. The books and accounts among other details must include Gross profit
and the manner in which it is computes; General and administrative expenses; Deprecation;
Provisions and reserves; Business asset and liabilities; Date loss of acquisition and the current
book value of the good; All purchases and sales of goods and services related to the business
activity….etc.

Keeping books and accounts is a mandatory requirement for category “B” taxpayers.
Consequently, failure to keep books and accounts shall result in the payment of an
administrative penalty. Accordingly, if the taxpayer failed to keep books and accounts for one
year him or she shall pay 20% of the tax assesses as an administrative penalty. The books and
accounts kept by the taxpayers will later be used as a means of determining their tax liability
for period for category “B” and “B” taxpayers. In addition to administrative penalties, failure
to keep books and accounts results in determination of the tax liability of the taxpayer
through estimation.(Romaswoni Parameswaron,2006 ).

Nebile Ahmed &Getahun (2012) study an “assessment of tax collection problem” the
research, generally tries to see the problem of tax payers and found cut that view tax as an
obligation, tax payer’s lack of understanding and awareness are the major problem for tax
collection. The study fails to address the very causes of the identifies the problems moreover,
the major source the researchers relies on the tax payers, tax payer’s responses may nah be
100% free from bias the authors argued that the educational level of the business income tax
payers plays a vital time role for their poor awareness.
AbrhaTafere (2015) study on the tax assessment and collection problem in business income
tax. Tax collection problem is faces on a problem of knowledge of business income tax
payer’s, failure to pay tax on time & fraud. Forwards to the solution is use moderns tax
collection system and do not any mention.

Different studies have been done during the past years with regard to the topic of business
income tax in general. The reviewed researches and argue that lack of awareness’, viewing
tax as obligation, intention of frauds are finding to be the major challenges of business
income tax collection system. This study tried to answer as much as possible not only singles
out problem. Why the problem exist and how they can at least be minimizes but only
identifying the problem do not worth as finding the main causes for the problems.

1.2 Statement of the problem

The role of taxation in well-functioning governmental operation is so high. Development of
infrastructure, basic social services institutions are apparently build by government.
Moreover the public servants, defence force and public forces are employee of the state, to
cover those and other developmental cost the states uses tax as principal source of revenue.
Consequently, huge amount of money that should have been paid is not really collected by
the government, which could have been uses to meet the various objectives of a government.
Moreover, the prevalence of such significant deficit demands the government to improve
internal revenue generating activities to reduce dependence on foreign funding. Tax
administration has to secure compliance with the laws by applying an array of registration,
assessment and collection procedures. Tax administration should aim at improving on laws
regarding the registration, assessment, collection revenue, and exploiting fully taxation
potential of a country. ([Link]

The need to build speed economic progresses and over all development activities call for
strong tax revenue. If no arguments in the above assertion, therefore the Ethiopia government
ought to adopt sound taxation policy on collection system and in making awareness on tax
payer societies. No doubt that the existence of better tax collection system is decisive for the
existence of well develop and economically strong states. If no complain that better tax
collection system is decisive in one country's overall capacity, that is the main reason
motivate the researchers to study is the poor income tax collection and its level on generation
of income tax category ‘’B’’ and to review the assessment of business income tax in sodo
mehal sub-city. As good income tax collection level in Ethiopia is more than 78 %.(
[Link] Book of Public Finance) to reach the town to desired level we need to determine
the problem on assessment of business income tax problem by using qualitative data.

1.3 Research question

This study attempt to address the following question:

1. What look like business income tax collection problem in category “B” tax payer in sodo
mehal sub-city?

2. What are the problems of tax collection in category “B” tax payer in sodo mehal sub-city?

3. What are the mechanisms to reduce the tax collection problem?

1.4 Objectives of the study

1.4.1 General objective
The general objective of this study is Assessment of business income tax collection problem
in category “B” tax payer (in case of Wolaita Sodo Town mehal sub-city.

1.4.1 Specific objective

The specific objectives of the study are:

 to assess business income tax collection problem in category “B” tax payer in sodo
mehal sub-city
 To identify the problem of tax collection in category “B” tax payer in sodo mehal sub-
city.
 to identify the mechanism to reduce the tax collection problem.

1.5 Significance of the study

The researchers will provide some importance for the concerned stakeholders. Initially the
research finding will provide some sort of input as information to tax collection office.
Secondly the research may serve as reference or guide line for those who intend to conduct
further studies on this area and related research topics.

1.6 Scope of the study

Taxation is a very vast and crucial issue however; this study is restricts only on the tax
collection problem of business income tax in category “B” tax payers.
1.7. Organization of the paper
This paper consists of chapter the first chapter consists the introduction part which includes
back ground of the study, significance of the study scope and limitation of the study , the
second chapter consist only the literature review. The third chapter includes the term research
design, source of data, data collection techniques, method of data analysis and presentation,
target population and sampling methods. Chapter four of this research deals with analysis of
data that gathered from business income tax payers and employees of the revenue
bureau .The fifth and the end chapter of this research deals with conclusion and
recommendation, questionnaires and references that used to conduct this study.
 CHAPTER TWO
2. LITERATURE REVIEW
This section presents a brief review of existing theoretical and empirical literature of tax
administration. At the end of the review, an attempt is made to summarize the major
drawbacks of the existing empirical studies and to identify the knowledge gap to be files with
in by further investigation.

2.1 Theoretical Review of Tax Administration

Tax administration refers to the identification of tax liability bases on the existing tax law, the
assessment of this liability, and the collection, prosecution and penalties imposes on
recalcitrant taxpayers. Tax administration, therefore, covers a wide area of study,
encompassing aspects such as registration of taxpayers, assessments, returns processing,
collection, and audits (Kangave, 2005). The low revenue yield of taxation can only be
attributes to the fact that tax provisions are not properly enforces either on account of the
inability of administration to cope with them or on account of straight forward collusion
between the tax administration and taxpayers.(World Bank, 1999).

Since taxes are an involuntary payment for government services, taxpayers have a strong
inventive to minimize their tax liabilities either through avoidance (legal) or through evasion
(illegal). Tax administration has to secure compliance with the laws by applying an array of
registration, assessment and collection procedures. How a government can keep taxpayers
from doing these activities, and thus successfully avoid tax evasion depends on the nature of
economy’s actual tax base. Tax administration therefore, should aim at improving on laws
regarding the registration, assessment, collection revenue, and exploiting fully taxation
potential of a country (World Bank, 1999).

2.1.1 Legal Structure for Effective Tax Administration

The legal rules requires for effective tax administration might be categorized under four
broad Headings:

 Rules for the establishment of an individual’s tax liability;

 Rules establishing a system of appeals from the initial assessment of tax;
 Rules for the collection of taxes that have been establishes to be owing; and

Rules relating to tax offences and their punishment The importance of a sound legal structure
for effective tax administration and the importance of incorporating principles that will
further tax compliance in the design of that legal structure. Since each stage of the
administrative process is dependent upon the other, to achieve a significant improvement in
the overall effectiveness of the tax administration each element of the legal structure needs to
be designs for maximum effectiveness (Asian Development Bank, 2001). In addition to the
legal structure for tax administration, obviously, the organizational structure of the tax
administration is also of crucial importance. According to the Asian Development Bank,
2001, the range of issues that must be resolves, in this regard, include:

 Agreement of autonomy from the executive branch

 Accountability to legislative assembly
 Relationship to the Ministry responsible for the tax legislation
 Type of organization structure in relation to taxes administers
 Decentralization
 Personnel policy
 Policies for internal audits
 Mission statement and strategic plan

2.1.2 Importance of Tax Administration

According to Asian Development Bank, 2001, tax administration dictates tax policy. Ends
with, tax administration and compliance issues determine the broad evolution of tax systems.
The shift in industrialized countries over a century ago from reliance on excise, customs and
property taxes to corporate income and progressive income taxes can be explained, in large
part, by the relative decline in the rural sector, the concentration of employment in large
corporations and the growing literacy of the population. In recent years, the shift away from
these taxes - corporate income and progressive individual income tax - and toward tax
systems that rely more on broad base consumption taxes such as the value-added tax, flatter
rate structures, and the adoption of “dual income taxes,” in which a progressive tax on labor
income is accompanies as with a low flat-rate tax on capital income, as adopt in certain
Scandinavian countries, can be explains, in large part, by the forces of globalization and
developments in financial innovation and the inability of tax administrators to develop
technologies to cope with these forces and developments (Asian Development Bank, 2001).

In tax reforms there is a close correlation between successful tax policy and efficient tax
administration. In other words, there is no good tax policy without efficient tax
administration (Jenkins, 1994). Over the past century, changes in the size of governments
themselves, and differences in the relative size of governments around the world, can be
explains the changes and differences in the environment, resources and technologies available
to the country’s tax administrators (Asian Development Bank, 2001). Aside from the role of
tax compliance and administrative issues on the evolution and general features of the tax
system, there is no question that administrative considerations influence, and often impose
decisive limits, on particular tax laws. Most obviously, the failure to tax all sources of
economic power, such as the imputes rental value of homes or accruing capital gains, are
often justifies by reference to practical concerns of administer ability. It is futile to design a
complex and sophisticate response to a tax policy problem if the rules to implement the
regime cannot be administer (Asian Development Bank, 2001). Ensuring that taxes are
collects from those who owns them has always been an elusive challenge for tax departments.
It has never been easy to collect taxes from lawyers who take cash for a Saturday office visit;
waiters who receive most of their income as tips; landlords who collect rent in cash; small
business people who skim part of their profits or hire people off the books; cash-only window
cleaners, roofers and painters; or large corporations that contract out to sweatshops. It has
been even more difficult to collect taxes from crack cocaine dealers, smugglers, hit men and
hit-women, and those who make their living defrauding and extorting their clients. The
underground economy has always been diverse and even vaster than these examples suggest
(Asian Development Bank, 2001). However, as if these traditional forms of tax evasion are
not challenge enough, the combines to effects of information technology and globalization is
now alleges to allow those who have been able to hide in the shadow economy to evade
paying their fair share of tax to disappear altogether. Many individuals are no longer tied to
one national jurisdiction; those that are increasingly receive payments from work and
investment abroad; anyone can have access to an over sea’s bank; anyone with access to a
computer can transact business anywhere in the world; property is becoming increasingly
Intangible and consumption difficult to locate; and, capital is becoming increasingly fungible
and can be shifts relatively too easily between jurisdictions. These and other developments
are said to call into question governments’ continue the ability to levy taxes in a world in
which companies, assets and people are infinitely mobile (Asian Development Bank, 2001).
Tax administrators face a formidable number of challenges in every country.

According to Asian Development Bank, (2001), in many developing countries tax

administration reforms are needs to simply to achieve macroeconomic stability. In countries
with economies in transition there is a need to establish a tax administration that can respond
to the demands of a growing market economy and the resulting increase in the number of
taxpayers. Moreover, there is the need to establish the legitimacy of tax collection. In all
countries tax administrators face the challenge of modernizing the tax administration so that
it can operate effectively in an increasingly global economy. In spite of these challenges,
several countries’ recent experiences in improving the effectiveness of their tax
administration have shown that fundamental reform is possible. In recent years, there has
been a considerable amount of study on the steps that should be taken to improve tax
administration and reform. Of fundamental importance to all reform efforts, to improve the
effectiveness of tax administration significantly, the government must be Politically
committees to reform, the major obstacles to an effective tax administration have to be
identifies, and there has to be well-designed strategies for addressing them (Asian
Development Bank, 2001). As a preliminary step to developing a successful strategy for the
reform of a revenue agency, the “Tax Policy and Administration Thematic Group” of the
World Bank has Develops a useful diagnostic framework for revenue administration. It
includes a description of quantitative indicators and indicators of effectiveness and efficiency
that might be uses to get a general idea of the physical dimensions of the revenue
administration and how effectively and efficiently it is currently performing its functions and
where performance problems might be acute. It also provides a framework and checklist of
questions relating to all aspects of revenue departments operations, environment, resources,
history, organization and management functions and informal culture that can be uses to
assess its operations and diagnose its failings (Asian Development Bank, 2001). A reform
strategy to increase compliance requires a concerts, a longterm, coordinate and
comprehensive plan. It is vital that tax administrators ensure that every compliance policy
instrument at their disposal is being uses as effectively as possible. The uses of these
instruments complement one another.

2.1.3. Efficiency of Tax Administration

The key precondition for efficient tax administration is tax structure with minimizing
distortions, strictly tax exemptions and elimination of the differences in tax treatment of
particular parts of economy. This will mean extending the VAT to all but a few goods and
services (notably export, which should be zero - rate, and banking and insurance services,
where it may be difficult to determine the amount of value added to be taxes) (Hesse,2005).

Badly conceives or unnecessarily complicates the tax structure greatly complicates the
operating function of the tax administration, while simple and transparent tax structure could
affect it in the opposite way. So, the increase of efficiency of the tax administration could be
attributes mainly to the simplification of the tax system. Tax administration cannot change
legislation as a means for improvement of tax structure, but could propose necessary changes
in laws that can improve tax structure and / or can do in application of the law. (Mansfield,
2003).

Effective tax administration in a market economy is bases on voluntary compliance by a large

number of decentralized taxpayers. Most transition economies have only recently starts to
address compliance issues and build up a modern tax administration with better overall
revenue performance. A first step is restructuring how the work is organize. In transitional
countries, tax administration can be organize to respecting the functional principle
(collecting, recording, auditing, and enforcement) according to the type of taxpayers; the type
of taxes; and type of enterprises in economy. Tax administration should develop around
activities (such as recording or auditing), as in Hungary, rather than according to the type of
tax and taxpayers. More generally, tax payment needs to be assessed, collected and recorded
more efficiently. Current procedures are rarely up to the job of dealing with a growing
number of taxpayers, many of which - particularly private businesses and service enterprises
are tricky to tax at best. The government might start by assigning an identification number to
all taxpayers, focusing its efforts on large taxpayers who generate the bulk of revenue, and
withholding wage tax at the source. This, however, does not mean that results of successful
monitoring of large taxpayers can be excuses for neglecting medium and small taxpayers.
This can lead to the decrease of their Compliance, resulting with lowers total revenue. Next
should be improve auditing and Follow-up actions against those who fail to file returns or
make payment. Latvia, for example, has issue as regulations for an improve taxpayers'
register: every taxpayer must register with the State Revenue Service; financial institutions
will not be allows to open accounts for any business or individuals without a taxpayer code
(Hesse 2005).

Most transitional economies are in the midst of a comprehensive reform of their government
(that include the tax administration) and tailor them to the changing needs of a market
environment. In that task they can use the experiences from West European countries and
from countries that have recently realizes the tax reforms as a stepping stone to further
development and/or as a challenge and incentive for reaching a higher level of efficiency and
success (Musgrave, 1991). The reform of tax administration in these countries is a part of a
complete transformation of public administration, so there are no reasons to be too optimistic
about the speed of change and about expected results (Hesse, 2005).

2.1.4 Improving Tax Administration

In reform of tax administration the importance of tax structure is clearly reflects, because tax
administration and tax structure are interconnects and they have to be improve
simultaneously in the tax reforms (The World Bank, 1991). Reaping revenues from tax rate
changes (whether up or down) requires effective tax administration. Raising revenues through
base expansion requires even better administration. New taxpayers must be identifies and
bring into the tax net and new collection techniques develop. Such changes take time to
implement. The best tax Policy in the world is worth little if it cannot be implements
effectively. What can be done to a considerable extent inevitably determines what is done.
One cannot assume that whatever policy designers can think up can be implement or that any
administrative problems encounters as can be easily and quickly remedies. How a tax system
is administer to affects its yield, its incidence, and its efficiency. Administration that is unfair
and capricious may bring the tax system into disrepute and weaken the legitimacy of state
actions.

Good tax administration is a difficult task even at the best of times and in the best of places
(Auriol and Warlters 2005). Conditions in few developing countries match these
specifications. How revenue is raises to the effect of revenue-generation effort on social
capital, equity, the political fortunes of the government, and the level of economic welfare -
may be more important from many perspectives than how much revenue is raise. The private
costs of tax compliance as well as the public costs of tax administration must be taken into
account. Assessing the relation between administrative effort and revenue outcome is by no
means simple: it is important, for example to distinguish the extent to which revenue is
attributable to the active intervention of the administration rather than its relatively passive
role as the recipient of revenues generates by other features of the system. Improving
administrative efforts and outcomes is not impossible but it is neither easy nor quick.

2.1.5 Service Commitments of Tax Administration

The tax administration should provide impartial and professional courteous service and must
keep private and confidential information regarding the individual taxpayers. It should also
offer clear, understandable and current tax information and will make this information
available to tax payer through various media and provide timely, accurate written information
that one can rely on to questions and requests for tax information. Education and information
programs on specific tax issues should be arrange with taxpayers to enhance their awareness
and taxpayers should be allows to voluntarily disclose their tax situation without incurring a
penalty or being prosecute for tax violations under certain conditions (Asian Development
Bank, 2001).

2.1.6 Resource Cost (Collection Cost)

In order to evaluate the administrative capabilities of a system, resource cost associates with
the operation of any tax are significant aspect. There are two broad types of resource cost
associates with the operation of any tax: administrative costs incurred the tax authorities and
compliance costs .the taxpayers taken together, they are referred to here as collection costs.

[Link] Administrative Cost

The most obvious administrative costs are those insure the revenue departments in bringing
in the tax revenue. It includes salaries and wages of staff at all level, accommodation cost
(rent, rates, lighting and cleaning), postage, telephone, printing, stationary, travel, computing
and other equipment cost etc. An important problem that arises in studying administrative
cost is the limitation on available information. Many countries do not record the details
component of expenditure or allocate that expenditure to particular tax (IFA 1989 cited in
Sanford et. al., 1989:6). To study the administrative cost it is worthwhile to scrutinize it
intends to the purpose or practical tax administration first.

[Link]. Compliance Cost

Compliance cost are defines as those costs incurred the tax payers, or third parties such as
businesses, in meeting the requirements laid upon them in complying with a given tax
structure. They include, for individual, the cost of acquiring sufficient knowledge to meet
their legal requirements; of compiling the necessary receipts and other data and of completing
tax returns; payment for professional advisers for tax advice; and incidental costs of postage,
telephone and travel in order to communicate with the advisers or the tax office. For a
business, the compliance cost include the costs of collecting, remitting and accounting for tax
on the products or profits of the business and on the wages and salaries of its employees
together with the cost of acquiring the knowledge to enable this work to be done including
knowledge of their legal obligation and penalties. The existence of uncertainty about the
meaning of some aspect of the legislation will generate additional compliance costs (Sand
ford et. al., 2008:12).
Psychic (psychological) costs, whilst difficult or impossible to measure satisfactorily are an
important component of compliance costs. Many people experience considerable anxiety and
frustration in dealing with their tax affairs; some employ professional adviser primarily to
reduce this burden of worry. Another source of psychic cost is the anxiety, which may be
generate, even for the most honest taxpayers, by a tax investigation. The above explanation of
administrative and compliance cost highlight the difference between taxes in terms of
administrative and compliance costs. This helps to identify areas of high compliance costs, to
indicate policy makers the importance of administrative and especially compliance costs, and
to provide tax policy-makers with guidelines on how the costs of operating the tax system
must be minimize.

2.1.7. Tax Evasion, Avoidance and Compliance

[Link] Tax Evasion and Avoidance
Tax evasion and avoidance are a worldwide phenomenon. The problem is especially acute in
transition and developing economies, since they do not have an appropriate infrastructure in
place to collect taxes (McGee and Tyler, 2006:1). Tax avoidance is the legal arrangement of
the taxpayer’s affairs in order to minimize the tax liability, whereas tax evasion is illegal.
Sometimes, however, the borderline between avoidance and evasion can become blurred, a
fact that is evidenced by the huge body of anti-avoidance legislation and the development of
case law in this area (Nightingale, 2003:44).

[Link] Tax evasion

Tax evasion involves the intentional disregard of the legislation in order to escape the liability
to tax. Tax evasion must be achieve the understating income, overstating expenses, making
false claims for allowances or failing to disclose a chargeability tax. Because of its illegal
nature, there is little hard evidence as to measure the true extent of tax evasion. (Nightingale,
2003:44). Tax evasion is illegal and the offender may be liable to prosecution, however, the
authorities will usually only resort to criminal prosecution where the case involves substantial
amount of lost revenue, many minor cases of tax evasion that are discovers the revenue are
generally steels the out of court.

[Link] Determinants of Tax Evasion

In the standard approach to tax evasion a risk-averse individual chooses either the amount or
the share of income to be concealed so as to maximize his or her expected utility of income,
considering
1. The probability of detection,

2. The penalty tax rate applies when tax evasion has been detect,

3. The marginal tax rate, and

4. The level of true income

All theoretical studies conclude that both the probability of detection and the penalty tax rate
will negatively affect underreporting of income (Hennemann 2004). That is, if taxpayers
believe the probability of detection is low they will tend to underreport. In addition, if the
penalty tax rate applies when tax evasion has been detestation is low again taxpayers might
tend to underreport. When underreporting is measure the absolute amount of income
concealed, a risk-averse individual experiencing an increase in his or her true income will
underreport more.

[Link] Tax Avoidance

A tax such as VAT can be avoid simply by not buying the taxed good or services. The
arrangement of an individual’s affairs so as to mitigate the liability to tax is tax avoidance,
and provide that the taxpayer acts within the framework of the law, tax avoidance is legal.
However, where the activity is within the letter of the law but outside the sprite of the law,
the distinction between avoidance and evasion may become blurred. (Nightingale 2003:46).
Many form of tax avoidance are merely tax planning opportunities that exist in the legislation
for reducing the liability to tax, for example, choosing the most tax efficient savings and
investments, or making sure that all available relief are used to their full advantage. However,
loopholes in the legislation also create opportunities for tax avoidance. However, once
loopholes have been exploits, the revenue reacts by introducing legislations to close those
particular loopholes. The increasing body of anti-avoidance legislation merely makes the tax
system more complicate, detracting from the cannon of simplicity even though it has been
suggests that ‘an economy breaths through its loopholes’. The tax avoidance industry grew to
enormous proportions during the 1970s as high rates of tax mate the cost elaborate avoidance
schemes worthwhile, supporting the view that ‘the existence of wide spread avoidance is
evidence that the system, not the taxpayer, stand in need of radical reform. (Ibid: 47).

General anti-avoidance rules have been tried in Australia, New Zealand and Canada with
little success, which would indicate that target legislation must be more desirable. However,
the policy makers are faces with the dilemma of how wide or narrow anti-avoidance
legislation should be; too narrow and it may fail in its objectives, too wide and it must be
applies to the situations for which it is not intended. Whatever steps are taken to counter tax
avoidance the principles of certainty of taxation would require a definition of legitimate tax
planning which must be difficult to frame as ‘the boundaries move with public sentiment’
with developing financial techniques and with the introduction of new statutory relief. Tax
law will always have to address this equation and to determine where the line will be drawn.
(Ibid: 47).

[Link] Tax Compliance and Voluntary Compliance

Tax compliance can be defined as the degree to which a taxpayer complies (or fails to
comply) with the tax rules of his country. It is widely accepts the goal of an efficient tax
administration is to foster voluntary tax compliance using all possible methods including
penalties. Penalizing tax evaders or going after delinquent taxpayers are not in themselves the
object of tax administration, although it would serve to encourage voluntary compliance if the
taxpayers believe that the tax administration can effectively detect and punish noncompliance
(Webley et al, 2002).

[Link] VAT Compliance

It is difficult to get an accurate picture, but it is clear that VAT evasion is widespread and
involves significant revenue losses, though the extent varies considerably across countries.
(Webley et al 2002) suggests five factors seem likely to be particularly crucial: sanctions and
punishments (deterrence), equity, personality, satisfaction with the tax authorities and mental
accounting. Each will be considers in turn. To minimize the gap between the tax reports the
taxpayers and the statutory tax, an adequate audit plan should be implemented (Tait,
1991:67). Economic models clearly predict that higher penalties and audit probabilities
should discourage non-compliance (Webley et al., 2002:2). Even if both have some
deterrence effect, higher audit probabilities probably have more impact than higher penalties.
2.1.8 Improving Voluntary Compliance

The growing concern of tax administrations throughout the world is on how to simplify the
tax assessment system to encourage voluntary compliance, and many countries have adopt
the self assessment system as a solution (SAS). Thus, the recent trend in developing countries
sees a shift from the official assessment system to a SAS. Thus, setting up of a simple and
broad based tax system is crucial to the development of a better tax administration. Studies
have identifies the main impediments as the lack of tax education among the taxpayers
followed by poor public relation activities and inadequate penalty provisions for errant
taxpayers. 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. (Sarker, 2003).

2.1.9 Self-Assessment System (SAS)

In a SAS, a taxpayer is requires to assess his tax liability using a tax return form in which he
declares his gross income, allowable deductions, etc. This tax return must then be files with
the tax authority together with a payment for the tax liability computes in said the return. The
basic feature of a SAS is that it is the taxpayer rather than the tax authority that is responsible
for the assessment of tax liability. A SAS has distinct merits compares to an official
assessment system. The chief merits are:

 SAS is more cost effective as it only selects exceptional cases for further scrutiny;
 SAS eliminates the administrative nature of assessment work,
 SAS encourages an early and timely collection of taxes, and,
 SAS reduces corruption by reducing contacts with taxpayer.

For a SAS to effectively implement there are certain critical factors that need to be considers
are:

A. His process of deciding which tax returns should be audit is crucial. Taxpayers, who know
that they may not be selects for an audit, would be motivates to cheat. A deficient process
will also reduce compliance,

B. Under SAS, non-compliance should be dealt with justly and swiftly to encourage the
majority of taxpayers to comply. In order to detect fraud or non-compliance, taxpayer data is
important and this requires a certain level of computerization. In its absence, it would be
extremely difficult to maintain compliance in a SAS,

C. The educational level of taxpayers is crucial in determining whether the SAS will work
effectively. There must also be an observance of proper accounting standard of business. For
small traders, this means that must be a minimum level of record keeping. In the absence of
proper accounting standards or record keeping, a taxpayer would not be able to declare his
income accurately or enable the tax authority to conduct an accurate audit. (Tanzi, 2001).
2.1.10 Tax Assessment
A tax assessor is responsible for preparing and maintaining the assessment roll, the tax roll
and collecting the tax levies in accordance with the quality standards. The core service
responsibilities include:

1. Preparing annual market value assessments for all properties

2. Preparing the business assessment valuations for all business premises

3. Maintaining accurate property information and ownership on all realty accounts

4. Maintaining accurate business information and ownership on all business accounts

defending assessments before municipal and provincial assessment tribunals

5. Responding to inquiries and requests for information relates to assessment and taxation 6.
Producing and mailing annual assessment and tax notices to tax payers reporting assessment
rolls and meeting annual audits.

2.1.11 Procedures for Tax Collection

It is expect that people’s tax payments should be in line with their income and they are
requires to pay a tax in proportion to their level of income. On the other part of the tax
collectors, collection of tax should be time conscious and convenient and the cost of
collecting the taxes should not be high to discourage business. Alternatively, this means that
the ideal tax system in developing countries should raise essential revenue without excessive
government borrowing and should do so without discouraging economic activity and without
deviating too much from tax system in other countries (Tanzi, 2001). The procedures
undertaken by tax authority to ensure compliance are discusses as follows.

2.1.12 Identification and Registration of Taxpayers

Tax Identification Number (TIN) is use to identify taxpayers. Every taxpayer has a unique
TIN, which he or she is supposed to use in all his or her correspondence with the tax
authority, and no taxpayer should have more than one TIN. In countries like Uganda, they
issue TIN free of charge upon the taxpayer completing a TIN application form (Kangave,
2005).

2.2 Empirical literature review

Kangave (2005) discussed tax administration in Uganda’s context. It then discuses Uganda’s
tax structure, the problems faces in administering taxes, and it gave possible solutions to the
problems the author identifies in his research. The author, in his research, identifies
corruption, tax evasion, and inadequate resources for tax administration poor quality of audits
and inadequate support for tax administration as problems or challenges of tax administration
that have weakens the ability to achieve desire the revenue targets. The author did not purport
to address all of the problems. Neither does it set out to address in detail the causes of these
problems. Instead, it points out the problems. Besides, the author recommendations for
solving the tax administration problems are adopted from the Canadian tax administration
system. The researcher do not believe that the tax Canadian tax administration system should
not be taken as standard for measuring the performance of tax administration system. In
addition to this, the author uses interview with the tax officials and relies on secondary
sources. However, author could have also gather responses from the target taxpayers to get
additional information for his research.

James (1999) examines issues affecting the formulation of tax policy through the
development of actual proposals by tax policy-makers. This will be done taking account of
the possibility that too narrow an approach to this process can produce misleading
conclusions and that proposals for tax reform may be inappropriate when the wider context of
the tax system as a whole and the environment in which it has to operate must be consider.
Two issues are used to illustrate the situation - tax compliance and tax simplification. The
paper concludes that in developing tax policy it is important to ensure that the wider context
is taken into account and it also outlines a practical approach to achieve this aim.

Jenkins (1991) emphasizes that the tax system can never work better than its tax
administration, but even the best tax administration would certainly fail to turn a bad tax
system into a welloperating one. The researcher also warns that many ambitious tax reforms
failed because of the inefficient tax administration. Without the permanent reorganization of
the tax administration and almost daily improvements in methods of its management, it is
impossible to expect that tax reforms could be realize successfully. The removal of
exemptions, loopholes, and concessions can simplify administration and reduce evasion.
Taking a systematic view of the tax system, rationalization, simplification, and the removal of
anomalies should have the effect of reducing the administrative costs of identification,
assessment, auditing and enforcement. The administrative simplicity of "tax handles",
however, while influencing tax policy, should not be allows to dictate it. Concentrating on
just a few handles can lead to highly distortion structures (Burges and Stern, 1993).
Sahota (1961) undertook a study on the tax performance of the tax system of India for the
period 1948-1958 using the proportional adjustment method and found that the tax system is
inelastic even though the country had a highly progressive income tax at that time. The
reason is due to a defective tax structure and rate schedule, wide spread tax evasion and
income distribution in favor of the "non-income tax payers group" or in favor of the low-
income brackets within the taxpaying group. Sahota (1931), on his part, studied the
performance of the Indian tax system for the period 1948-58. This study use the proportional
adjustment method to estimate elasticity of the system. Results of the study showed that the
Indian tax system will be inelastic, the causes of which are found to be a defective tax
structure and wide spread tax evasion.

(Kussi 1994) tries to show the effect of tax reforms of 1983 on the revenue productivity of
the tax system in Ghana. To this end, two separate regressions for the perform period (1970-
82) and the reform period (1983-1993) are fittest for some major tax types. It is found out that
there is a progress of both buoyancy and elasticity for personal income tax, company income
tax, sales tax and import tax. The study attributes to the improvements to growth in GDP and
general improvement of the tax administration. This study on the other hand showed that
there is a fall in buoyancy and elasticity for excise duty whose cause is states to be abolition
of all excise duties on products other than beverages and tobacco in 1987 and the successive
reduction in the duty rates of the affect the goods. The following part will be discussing the
empirical review specific to Ethiopia relates to tax administration in the country Wogene
(1983) tries to examine the contribution of taxation. He argued that taxation and tax system is
use as a tool for establishing the material basis of socialism. He estimate the buoyancy and
built-in elasticity of the total tax revenue and examine the difference between the two
measures to reflect the impact of the tax reforms on tax revenue for the period 1975-1981. He
used the constant rate structure method to separate the revenue impact of discretionary tax
measure. His result indicates that the tax reforms have significantly contributes to the
increasing tax revenue in the country. The study by (Wogene 2004) showed that for the
period 1975-81 tax reforms has enable as an increase in tax collection.

This study employee the constant rate of adjustment method to estimate elasticity of the tax
system. Likewise, the study by Eshetu compared tax productivity in the pre revolution, post
revolution periods of Ethiopia, and found out that there is certain improvement in the tax
collection of the government in post revolution Ethiopia. (Zelalem 2002) studied the
productivity of the Ethiopian tax system for the period 1961 - [Link] the buoyancy
and elasticity of the overall and major individual tax categories using the method of division
index. The results of this study show that the Ethiopian system is inefficient for most of the
coefficients are found to be less than one. The given for the low productivity of the tax
system is that the system suffer from the problems of weak administration and extensive tax
evasion.

Generally, one can see that the empirical studies undertaken thus far for developing countries,
particularly for Ethiopia, bothers little or no to see the potential challenges faces the
taxpayers and the tax authorities in administering different tax activities such as tax
assessment and collection. The performance of the tax administration will have a bearing on
the capacity to raise revenue for a country since it includes primarily the assessment and
collection activities. Therefore, this research will not only identify the problems of the sodo
mehal kifle ketema administration and tax payers, but also the cause of these problems.
Because the researcher believes that identifying the root cause of the problems is the best
ground to provide appropriate solutions.
 CHAPTER THREE
3. RESEARCH METHODOLOGY
3.1. Research approach
This research paper will be used research approach in such way that enables the researcher to
study problem more easily and clearly using quantitative and qualitative method it is structure
to provide relevant information both quantitative and qualitative, to sufficient level that will
be essential for further processing.

3.2 Research design

This study would be used descriptive type of research design use both primary and secondary
data. The primary data will be collected through questionnaires and unstructured interview.
Secondary data were collected from annual reports and the study would be used mixed
research approach quantitative data is expect to provide current stands and trends while
quantitative one would be useful to understand people feelings and expectations.

3.3 Source of data

The researchers were used both primary and secondary source of data.

3.4 Data collection techniques

The researchers will be used both primary and secondary source of data, the primary data will
be collected by using questionnaires from tax payers, employs of revenues bureau & personal
interview with the manager of the revenue bureau and the secondary data will be collected
from the previous year reports of the bureau from different books and related public
materials.

3.5 sampling
3.5.1 Target population
The Population of that it includes category “B” tax payers in sodo mehal kifle ketema, so
currently, the total population of category “B” tax par in Sodo town mehal kifle getema is
1760 respectively.

3.5.2 Sampling size

The research sampling techniques will be used in this stud may be probability sampling
technique because the list of population on category “B” income tax payers will known. After
computing the sample, the researcher used simple random sampling technique to make the
sample as representative, because it gives equal chance of being selected for all target
population and to get relevant and reliable information.

Total population 1760 from these 65 respondents will take by using Tayro Yemane 1967.

N
n=
1+ N ¿ ¿

Where, n= sample size

e= significance error

N= the total number of population size

1760 1760
n= = =65
1+ 1760¿ ¿ 18 .60

Thus, from the total members or population 1760 of the category “B” tax payers in Sodo
town mehal sub city, 65 members will be selected by using Yemane formula with a 90%
confidence level, 10% of degree of precision. Because they represent the main source of
information and not consume the time of the researcher.

3.5.3 Sample selection technique

The sampling technique of the researchers under this study is to use probability sampling
techniques, to select 58 sample sizes from the total population of 1760. The researcher’s uses
probability sampling techniques, under probability sampling techniques the researchers uses
to select simple random sampling techniques. The main reason to use this simple random
sampling technique is to explain that all the sample size has equal chance of occurrence or all
has equal probability to occur.

3.6 Data Presentation and Analysis

After the researchers collect necessarily and clear data from the primary and secondary
source. The Data has been analyzed by using descriptive methods of table, percentage,
frequency and interpretation the data collect from the respondent, table and percentage were
used to analyze quantitative data.
REFERENCE
AgeazinTeka (2003). saving and taxation in Ethiopia A.A,

Berand p. Herbert (2004). modern public finance(5th edition)

Encyclopedia (2009).of American

GibreWorkumengesha (2008). tax accounting in Ethiopia context 2nd edition, A.A

MisrakTesfaye (2008). Ethiopia tax accounting theory, A.A

KKGokmenog (2006). Money banking, international tread and public finance,

Worls (2007). book encyclopedia,

[Link]/menlik.(2018)

[Link] [Link] (2018)

[Link] [Link] (2018)

[Link] [Link] (2018)

Appendix I
Budget Schedule
No Reason Units Unit cost (Birr) Total cost in Birr
1 Paper 1 Rim 700 700
2 Ruler 1 50 50
3 Pen 2 30 60
4 Pencil 1 5 5
5 Flash 1 270 270
6 Transport cost - 200 200
7 Typing and printing 70 pages 10 700
8 Miscellan cous expense - 200
Total cost 2185

Time Schedule
No Reasons Time period in month
Nov Dec Jan Feb March April Ma June
y
1 Title selection 

2 Proposal writing 
3 Proposal submission  
4 Data collection  
5 Data processing and analyzing 
6 Report writing and presentation  