Chapter One: 1.1. Background of The Study
Chapter One: 1.1. Background of The Study
Chapter One: 1.1. Background of The Study
1. INTRODUCTION
1.1. BACKGROUND OF THE STUDY
Tax is the most source of government income. Taxes are imposed by government on taxpayer
based on their respective ability to pay without receiving any benefit in return. To administrate
and establish effective and efficient tax system in the country the tax unit must follow some
principle, rule and regulation. (Gebre Worku, 2006, p-1)
Every taxpayer in the country should be taxed according to his ability to pay and the time of
payment, the manner of payment, the quality to pay must be certain.
The tax levying and collecting system must be economical for the government. i.e., the amount
of collected and the cost collection must be proportional and the system should be simple to
understand and administer. (Gebre Worku, 2006, p-1)
Tax is a payment, which is paid by citizens to the government without expectation of direct
benefit to the amount paid. However, the problem is the most time occurs in tax levying,
collecting efficiency, luck of motivation of employees to collect the tax required and poor
awareness of the people to pay the tax. Therefore, the research will focus in assessing tax levying
and collecting system in Adwa town to answer the following questions;
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To asses factor to be consider in levying the tax.
To know the motivation made to employees to collect tax.
To identify the main source (areas) for the for the tax revenue of Adwa town.
To assess the awareness of Adwa town employee to collect tax.
Secondary data was obtained different documents and reviewing different record of the
organization.
10 employees of Adwa town who are 20% of the total population 50 were select as a sample
unit. 20% is considered more representative and 20% from all taxpayer.
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From workers 20% x 50=10 person
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CHAPTER TWO
2. LETREACURE REWIEW
Taxes are as old as government. The general level of taxes has varied through the years; depend
on the role of governments. In modern times, many governments especially in advanced
industrial countries have rapidly expended their roles and take new responsibility. As a result,
their need for tax revenue has become great. (Gebrie Werku, 2006, p-1)
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This canon lay down that both the time and manner of payment should be convenient to the
taxpayer. In the words of Smith, “every tax ought to be levied of the tame on the manner in
which it is most likely to be convenient for the contribution to pay. The payment of sale tax and
excise duty by the consumer is also convenient because the pays theses taxes when he buys
commodities and at a time when he has the means to buy.
Now a day, Smith canon get wider acceptance and some other philosopher also are added
principles. Todaro tried to put factors, which determine the tax potential in to five categories
these, are;
A person who evades the declaration or payment of tax, commits an offence and in
addition to any penalty may be prosecuted and be subject to a term of
imprisonment of not less than five (5) years. If any amount of tax is not paid by the
due date, the person liable is obliged to pay interest on such amount for the period
From the due date to the date the tax is paid. The interest rate is set at 25% over
and above the highest commercial banks lending interest rate that prevailed during
the preceding quarter. A person who fails to file a timely return is liable for a
penalty equal to 5% of the amount of tax underpayment for each month (or portion
thereof) during which the failure continues, up to 25% of such amount. The
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penalty’s limited to 50, 000 Birr for the first month in which no return is filed.
(Www. bds-forum.net)
2.4 Tax structure
Tax structure is an exasperation of the relative incidence (burden of tax system on individual at
different economic levels. Generally, there are 4 types of tax structure such as progressive,
proportional, regressive and digressive.
In developed countries, they owe a progressive income tax, for example US income tax in the
most progressive tax in the USA. Progressive tax the most equitable than regressive or
proportional taxes in the senses that they are lived according to the ability to pay. In Ethiopia
some of the progressive taxes are personal income tax of proclamation 30/1992 and 107/1994
and the rental income tax of proclamation No 64/1993. The income level will be categorized in
different income bracket and taxed by progressive rate.
This kind of taxes in Ethiopia are seen in the mining income tax proclamation No 23/1996 which
states that both lose and small scale minors shall pay 35% of their mining income.
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consumed may rise as income rise, however the rate of tax decrease with increasing income and
thus can be called regressive.
Most of indirect taxes are regressive, for example excise tax and sale tax; the same amount of tax
is paid per unit purchases. This the amount tax represents higher proportion of income to the
poor, some people argue that regressive tax encourages people to work harder to be elevated
above lower income group.
The following examples illustrative the relationship between tax structure (proportional,
progressive and regressive) tax rate.
2000 10 20 40
3000 10 30 30
4000 10 40 20
5000 10 50 10
This tax structure is an alternative type of progressive tax structure, which is marked by a
steadily declining in the increasing rate of progressive taxes. (Gebrie worku, 2006, p-35)
To understand the effect of any tax, one must determine who bears the burden of the tax. The
way a tax affects people is called the tax incidences the statuary incidences of tax refer to the
individual group who must legal pay in contrast, the economics of a tax refers to its actually
effect s on people incomes. The economics incidences of a tax depends on how buyer and seller
of the commodity when the tax is imposed. It have also been used to reducing the inequality of
income and wealthy.
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2.5.1 Effect on the ability to work, save and invest
Taxation refer the money income from the public to the government and their by reducing their
purchasing power. The reduction in purchasing power reduces their ability to obtain necessity
luxuries of life.
Thus, the levies of tax on peoples reduce their competitions of necessities and comforts, which
lower the standard of living, when the standard of living is affected. This effect is strongly felt by
the poor people. However, the efficiency and ability of rich people is not so much affected by
taxation.
It is all the ground psychology reaction of the people. That is when the higher progressive of
taxation is levied, the government takes the major of protection of the additionally income book.
This many create a trends in the mind of the people not to take risk to work, hard to earn a
manager income.
However, fair and justices tax system may not have any such bad effective on the willingness to
the work save and invest.
If there is original imbalance with in the country, government can uses taxation to remove such
imbalance by tax examination and tax concession to investors who made investment in under
developed regions. The diversion may be beneficial diversion or harmful diversion. Taxation on
the commodities that has injuries to the health like cigarettes and liquid may discourage their
consumption, which in turn affects their production. The factors of production engaged in these
industries may be diverted some other industries. This is “beneficial diversion”. The taxation on
the goods of common consumption will increase their price.
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Hence may be diverted to the production of some other commodities which may be in the nature
of luxury or harmful to healthy, it is known as “harmful diversion”. (Public Finance, 7th edition)
Direct tax
According to Dalton, direct taxes are those, which are paid interlay by that person on whom they
are imposed. Direct tax are those taxes, which cannot be shifted others.
Indirect tax
Indirect tax is a tax in which the burden may not necessarily be swallowed by asses, which
means indirect tax can be shifted on the other persons.
Generally, the tax incidence of the indirect tax is an ultimate consumer; however, sometimes
seller might absorb such indirect tax to be competitive in the market. This action reduces its
profit. Indirect taxes are:
I. Excise tax: levied in respect of goods produced locally and imported goods. Excise
tax should be paid within 30 days, after the month the production has been
produced.
II. Turnover tax: the turnover tax would be payable on good sold and services
rendered by person not registered for value added tax, which their annual taxable
transactions are under the total value of 500,000 Birr.
III. Value added tax is a tax on the value added to good and services by enterprises at
each stage of production and distribution process. (Gebire worku, 2006)
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2.7 Objective of taxation
Taxes are the primary source of government revenue through the proportion of tax revenue
varies among level of government. Taxes may be regulatory in either a microeconomics or a
macroeconomics sense. In the micro economic contexts, they may influence the consumption of
particular good or the utilization of productive resources. In the macroeconomics, fiscal policy is
directed toward achievements of the stabilization goods of the society. In addition to source of
revenue, the tax policy of nation enables government to stabilize economy, to distribute income,
to allocate resource and used to stimulate private sector.
A. Stabilization function
Stabilization of function of tax goes with allocation and fiscal policies of government. The
increase and decrease of income has an impact on supply of goods and services. This can be seen
on the basic economic indicator as increment or decrement of an employment, value of goods
and services or on saving and investment.
In general, collection of revenue and using it for different economic and social sectors is given
priority and the country expenditure should correspond with its revenue to reduce the risk of
instability.
The goal of stabilization includes in order combating the undesirable condition of recession or
depression stabilization may also be applied in the pursuit of price stability in order to prevent
inflation. It may be directed toward the promotion of economic growth and implement in the
nation’s balance of international payment
B. Income redistribution
Income redistribution is made on the pattern in which aggregates income or wealth is divided
among the peoples so government levy tax not only to cover public expenditure such as
policies ,law and justice, for other partial public service be such education and health and for
constructing infrastructures but government also levies tax for income redistribution. The public
sector budget plays an important role in the distribution of income one unique approach to
income distribution is to view it as public good.
C. Resource allocation
Government collects tax revenue and uses it to allocate the limited productive resources to be
available to the society. The unlimited of aggregate human wants along with limited resources,
which produce the economic goods capable of satisfying this wants, make it necessary to collect
resources.
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Privet sector involvement is very important in planning and development program in free market
economy. This can be achieved by exemption, deductable, transferring loses and by allowing,
other incentives to increase the participation of privet sector in the development program of the
country to initiate the individual investor the government provide tax exemption and other
incentives. (Income Tax Fundamental, 1st edition)
Continuing efforts to improve tax administration and collection including strengthening the large
taxpayer unit, have resulted in increase tax revenue. Reforms have sought to stream more
efficient, strength, and the collection of domestic indirect tax through selective rate increase and
burden the tax base. The tax reform greatly benefited the country in;
There are a number of problems related to Ethiopia tax system to solve this problem tax reform
are necessary. The reason presently being for Ethiopia tax reforms include that the existing tax
system was:
Because of the above inefficiency service were given to taxpayers who discourage investment
and reduces the credibility of government by the societies. To attain sustainable economic
development radical’s change in domestic revenue should be made. Thus, tax reforms were taken
place with the objectives of increasing tax revenue and to have strong tax fiscal policy
instruments to encourage capital investment and economic development. The broad categories of
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the tax reforms are over having strong the tax system and improving tax administration. To
improve tax administration then following activity taxation:
1. Presumptive taxation
Simplified and cost effective method
Small business (hard-to-tax-groups)
2. Value added tax implementation-replaced sale tax
3. Computerized TIN (taxpayer identification number) system.
Needs huge computerization
Lay basis for modern tax administration system
Gives identification number to tax payers
Provide efficient tax operation service
Help to control tax evasion
4. Operation programs, recognition and tax payers education
Reorganization, better staffing, better salary for FIRA employees
Production of audit and accounting manuals
Education for tax payer
The present tax reforms are aimed at over having the tax legislation and improving the tax
administration. Thus, the new system improves tax revenues and changes capital investment by
insuring equity and fairness in the tax system. (Income Tax Fundamental, 7th Edition)
The tax laws of United States are administrated by the internal revenue service’s (IRS) in
administrating the tax law, the IRS has responsibility for determining assessing and collecting
internal revenue tax and enforcing other provision of the tax law. The IRS is a division of the
treasury department, which intern is part of the administrative branch of the federal government.
The constitution of federal democratic republic of Ethiopia (FDRE) states that the federal
government and the states all collect taxes and shall share revenue considering the federal
arrangement. In exercising their taxing power, states and federal government shall insure that
any tax is relative to the source of revenue taxed and that is determined flowing proper
consideration. They shall insures that the tax does not adversely affect the relationship and that
the rate and amount of tax shall be common with services the taxes help deliver neither state nor
federal government shall levy and collect taxes on each other’s unless it is profit making
enterprise.
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An important contributing factor to week tax administration is the excessive complicity of tax
law makes. It both more difficult for tax payer to comply with the law if the wish to comply and
cashier for them to evade if it if they wish to evade complex tax laws and procedures make it
difficult to assess and collect tax as well as to follow up on compliance through audit.
Category “A” taxpayers are required to submit to the tax authority, at the end of year, a balance
sheet profit and loss statement and the following details:
In addition, these taxpayers should register with the tax authority the type and quantity of
vouchers they use before having such vouchers printed.
Any printing press before printing vouchers of tax payers shall insure that the type and quantity
of such vouchers is registered with the tax authority.
These categories of taxpayers should submit to the tax authority profit and loss statement at the
end of year.
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3. Category “C” tax payer
Unless classified in categories “A” and “B” those businesses who is annual for turnover is
estimated Birr 100,000 are classified under this category of taxpayers. (Www.bds-forum.net)
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Chapter Three
In this chapter there researcher made an attempt to analysis the data collection from the
respondent and present finding. Because of the information gathered from Adwa office of
finance and economic development employee and those who paid tax in the town analysis is
done.
From the total respondent 60% of them are males and the remain 40% are females. In the above
table no 2 show that the education level of the respondents. Most of the respondents are degree
with 80% of respondents, and the remain 20% of the respondents are diploma. So this indicates
that the institution is advantageous being all of the respondents are diploma and degree, mean
that all respondents are experienced in terms of the activity they performed.
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3.3 Assessment of factor to be considered in laving tax
Table 2 Which type of problem do you face when you pay your tax liability
respondent responses
From the information gathered through questioner, around 45% of taxpayers face problem of
inefficiency tax collector and the other 10% of face a problem absence of tax collector. The main
reason for inefficiency and absence of tax collector are lack of experience, knowledge, absence
of computerized conducting their jobs, absence of good management coordination and lack of
required labor.
respondent responses
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Concerning on the payment period of tax liability around 45% of the respondents pay their tax
liability when they receive assessment notification after due date where as the remaining 55%
pay their liability before dues date. This happened because of the following reasons:
Absence of willingness and poor understanding about the tax by the taxpayer
The amount they pay may be beyond their paying ability
The bureaucracy of the office
They do not know the type of tax they pay and also the time when they pay
According to Ethiopian constitution, both regional and federal government has the power to
asses and collects tax from the society. Thus, Adwa town administrations have the power to
asses and collect tax all income from employment, profit tax, excise tax and turn over tax from
individual business trading in the town
respondent
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From the above table-5, 70% of the respondents know annual income of their business. But most
of them have not accounting records. Thus, the office imposes tax liability based on authoritative
judgment. The reasons why they do not have accounting records are:
respondent responses
From the information gathered in the above table 7, 60% of the respondent states that the tax
payment period is not enough. The main reason for this problem is
respondent responses
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From the abov24e table 8, 80% of the respondent said that they know their purpose of tax
revenue where as 20% of respondent do know the purpose of tax revenue. This due to
absence of awareness creation campaign in the office, lack of knowledge about tax
purpose in the taxpayers, etc.
Table 7 How do you consider the present tax levying and collecting system
Based on information gathered through questioner and personal discussion with tax
assessment and collection office employee around 80% of the re4spondent said the office
that in the office there is insufficient man power where as the other 20% of the
respondents said that it is not organized.
The main reason for this problem is lack of required capital to hire new employee, low
scale of salary and motivation for the existing employee in the assessment.
Table 8 Is there any computerized way of the tax levying and collection system in the
organization
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Question Total number of respondents Percentage of respondents
From the above table 14, 80% of the respondents started that there is no computerized way of the
tax levying and collection system in the office where as the remaining 20% said that there is a
computerized way of tax levying and collection system, from this point the researcher can say
that there is no computerized system in the office. This is due to
According to the information gathered 60% of the respondents said that tax officials is the
responsible body for effectiveness of tax assessment and collection where as the other 40% said
that the tax office, the policy and taxpayers are respondents said that the tax office is responsible:
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Question Total number of Percentage of
respondent responses
Needs reform----------------40%
Even though around 60% of the respondents accept the present taxation system 40% of
the other respondents are not agreed on the structure. 40% of the respondent stated that it
needs reforms. The reform for the system is done when the system is not participatory;
there is discrimination in practice, the structure is not followed the stated principles, rules
and regulations.
respondent responses
As useful---------------60%
Responses of taxpayers in the above table 1, around 40% of the respondent understand taxation
as an obligation. This is due to poor understood and lack of awareness about the purpose and
concept of taxation.
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Question Total number of respondents Percentage of respondents
As indicated in the above table 15, most of the respondents 60% said that the taxpayers do not
pay their liability on time. The main reasons for this:
Employee of the office do not have the knowledge how the office collect tax due to
lack of experience
Absence of computerized system of doing their tax
Lack of awareness in their taxpayers when they pay tax
Table 13 Does the office makes any structure adjustment to make their tax more effectives
From the above table 16, 80% of respondents said that the office does not make any structure
adjustment where as the remaining 20% said that the office makes any structure adjustment to
make the tax efficient. This Due to:
3.5. To identify the main source (areas) for the tax revenue of Adwa town
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Question Gender Total number Percentage of respondents
of
respondents
From the above table 11 around 80% of employee said that when levying tax they analyze the
financial statement of taxpayers.
Whereas 20% of respondent said that using authoritative judgment. However, they provide their
comment in the space provided most of time use authoritative judgment. These problem results
from the taxpayer are not willing to prepare the financial statement.
As shown in table 12 above, 60% of the respondents states that the co-ordination of the offices
with other employee are very good , 20% it is good but 20 %is excellent.
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Table 16 Do you think that the present tax structure initiate the people to save, worth and
investment
respondent responses
Based on information gathered through questionnaires in the above table 60% tax payers
agree on the present tax structure initiates people to save, work and investment. But the other
40% do not agree with this idea. This due to
The office does not consider the new taxpayers ability to pay tax
The office does not give any supporting things for the new commerce in the business
like tax cancelation
Table 17 Do you believe that you annual tax liability is based on your income
respondent responses
From the information gathered through ‘Yes’ or ‘No’ question, around 40% of the respondents
believe the amount of their tax liability is not based on their ability to pay tax. The reasons for
such problem are:
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Their daily save is estimated over and above their income
The taxpayers do not have accounting records
The limitation of the business
They have low attitude towards tax by taxpayers
The office does not properly analyze the ability of taxpayers or office may have a corrupt
official that judge the amount of tax and payment.
CHAPTER FOUR
4.1 CONCLUSION
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A government a large no of social activities to the society and finance these social activity
expenditure using different source of revenue. Generally
Distribution function
Resource allocation
Stabilization function
Income redistribution
Discourage consumer’s from consuming non essential goods
Nowadays, Ethiopia’s tax structure composed of two types of taxes such as direct and indirect
taxes. The current tax law and regulation divide taxpayers in to three categories; category “A”,
category “B” and category “C” based on values of sales and from of business organization.
Excessive tax rate, poor quality of tax administration, frequent change of policy, and lack of
update information and absence of computerized ways of conducting works leads to negative
economic changes. In addition to this the above mentioned weakness open an opportunity from
corruption and any taxes tend to discouraging investment and discourage working environment
of the sociality.
This research survey tried to see know Adwa office of finance and economic development
system of tax levying and collecting. On the analysis part of this study, a number of problems
arise in tax assessment and collection system.
Based on the data gathered, there is inadequate worker’s in tax office. The numbers of
employees available in the office are not through to provide the service as compared to the
number of taxpayers, absence of computerized ways of doing their jobs make their works more
complicated, poor management coordination and lack of capacity building program.
As per the data gathered, the taxpayers due to poor understanding about tax most of them do not
know why they are paying taxes, what type of taxes are affected from them, when they pay their
tax liability, they are not willing to prepare financial statement and luck of awareness about the
rule and regulation of tax.
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For all problems mentioned above any efficient and proper tax, administration is required.
Beside to those tax office should be equipped with a new technology, should have adequate
skilled human resource and awareness creation campaign.
4.2. Recommendation
For better improvement of tax assessment and collection, system or responsible body should
work hand in hand together. To enhance the tax levying and collecting system in Adwa town the
researcher made an attempt to give recommendation that help to have an efficient and proper
ta assessment and collection with prevalence of clear rule and regulation and solve problem
associated with tax assessment collection performance
Therefore, the office must establish good tax administration, and taxpayers must receive clear,
concise and up to date information that describing what is to be taxable, how to calculate their
tax liability. In addition, forms and procedures for calculating paying taxes should be as simple
as possible.
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