IMPACT OF TAXATION ON SMALL BUSINESS IN AGARO TOWN

Senior Research Project Done

By

1 Mohamed Abdullahi

2 Nasir Hussen

3 Alemi Belachew

College of Agriculture and Veterinary Medicine

Department of Agricultural Economics and Extension

Advisor Tsega Lemma (Msc.)

June, 2016

JIMMA, ETHIOPIA
 IMPACT OF TAXATION ON SMALL BUSINESSES IN AGARO TOWN

Senior Research Paper submitted to Department of Agricultural Economics and Extension

In partial fulfillment of the requirements for B.Sc. Degree in (AGRICULTURAL

ECONOMICS AND EXTENSION)

By

1. Mohamed Abdullahi

2. Nasir Hussen

3. Alemi Belachew

June, 2016

JIMMA, ETHIOPIA

Table of contents page

ACKNOWLEDGEMENT............................................................................................................................................i

LIST OF APPREVIATIONS.......................................................................................................................................ii

LIST OF TABLES.......................................................................................................................................................iii

LIST OF FIGURES.....................................................................................................................................................iv

ABSTRACT....................................................................................................................................................................v

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

1.1. Background of the Study..................................................................................................................................1

1.2. Statement of the Problem.................................................................................................................................3

1.3. Objective of the Study.......................................................................................................................................4

1.3.1 General objective.........................................................................................................................................4

1.3.2 Specific objectives.......................................................................................................................................4

1.3.3. Basic research questions............................................................................................................................4

1.4. Significance of the Study...................................................................................................................................4

1.5. Scope of the Study.............................................................................................................................................5

1.6. Limitation of the Study.....................................................................................................................................5

2. IMPACT OF TAXATION ON SMALL BUSINESSES........................................................................................6

2.1. Theoretical Review............................................................................................................................................6

2.1.1. Definition of Taxation and related concepts............................................................................................6

2.1.2. The Definition of Small Business..............................................................................................................6

2.1.3 Principles of Taxation.................................................................................................................................7

2.1.4. Purpose of Taxation...................................................................................................................................7

2.1.5. General characteristics of tax...................................................................................................................8

2.1.6. Classification of taxes.................................................................................................................................9

2.1.7. Tax system structure................................................................................................................................10

2.1.8. Importance of taxation reform...............................................................................................................10

2.1.9. Approaches of taxation............................................................................................................................11

2.2 Empirical Review..............................................................................................................................................11

2.2.1 Effect of Taxation......................................................................................................................................13

2.2.2 Challenges and Opportunities on Small Scale Businesses.....................................................................13

3. RESEARCH METHODOLOGIES.......................................................................................................................14

3.1. Description of the Study Area........................................................................................................................14

3.2. Research Design...............................................................................................................................................14

3.3 Sampling Technique and Sample Size............................................................................................................14

3.4. Types of Data Required and Data Source.....................................................................................................17

3.5. Method of Data Collection..............................................................................................................................17

3.6. Method of Data Analysis.................................................................................................................................17

4. RESULT AND DISCUSSION...............................................................................................................................18

4.1 Socio-economic factors and demographic characteristics of respondents..................................................18

4.1.1 Age of Respondents...................................................................................................................................18

4.1.2 Sex of Respondents....................................................................................................................................18

4.1.3 Religion and Marital Status of Respondents..........................................................................................19

4.1.4 The Educational Status of Respondents..................................................................................................19

4.1.5 The Distribution of Business Area, Responsibility and Sectors Engagement of Respondents..........20

4.2 Tax payer’s awareness about taxation and capacity to pay tax...................................................................21

4.2.1 Taxpaying and amount of paying based of respondents capacity........................................................22

4.3 The Impact of tax on small scale business in the study area........................................................................23

4.3.1 Household’s Voluntariness to Pay Tax...................................................................................................24

4.4 Challenges and opportunities of small businesses in the town.....................................................................24

4.5 Saving capacity of the household and in which way to save.........................................................................26

4.6 Attitude of tax office employees and assessment process..............................................................................27

4.7 Small business access to credit facility............................................................................................................27

5. CONCLUSION AND RECOMMENDATIONS..................................................................................................29

5.1 Conclusion.........................................................................................................................................................29

5.2. Recommendations............................................................................................................................................31

6. REFERENCE..........................................................................................................................................................33

7. APPENDIX..............................................................................................................................................................35
 ACKNOWLEDGEMENT

First of all Alhamdulillah, (thank for Allah) for giving us spiritual support. In this world life is
just like a ladder once come up the other comes down. We have challenged strong resistance
when we prepare this senior research project most of the time when we meet a difficult, but we
again thank for Allah. Second our deepest gratitude goes to our family for their unflagging love
and support both morally and financially throughout our life; this research project is simply
impossible without them. Third our heartfelt appreciation goes to our advisor Mr.Tsega
Lemma, for valuable comment and suggestion on the paper and encouraged to us work in a
better way. Our thanks also go to our coordinator of the research course Mr. Ermias Melaku,
who teach us this course, gave us encouragement, guidance and support from the initial to the
final level enabled us to develop an understanding of the subject. Lastly our thanks also extend to
department of Agriculture Economics and Extension program which facilitate the course of
research method and helps to have good knowledge to do this study and JUCAVM for their
service assistance in the preparation of this research project.
 LIST OF APPREVIATIONS

CSA Central Statistics Agency

JUCAVM Jimma University Collage of Agricultural and Veterinary Medicine
PHCE Population and Housing Census for Ethiopia
SMEs Small and Medium-sized Enterprises
SPSS Statistical package for social science
SSA Sub-Saharan Africa
VAT Value Added Tax
 LIST OF TABLES

Tables Page

Table 1. Sex of respondents...........................................................................................................18

Table 2: The religion and marital status of respondents................................................................19
Table 3.The educational status of respondents..............................................................................20
Table4. Business area, responsibility and sectors engagement of respondents.............................20
Table 5. Awareness and Information about Taxation....................................................................21
Table 6. The capacity to pay tax....................................................................................................22
Table 7. Impact on tax on small business......................................................................................23
Table 8. Voluntariness of paying tax.............................................................................................24
Table 9. Challenges of small business...........................................................................................25
Table10. Opportunities of small scale business.............................................................................25
Table 11. Saving capacity..............................................................................................................26
Table 12. Employees attitude and assessment process..................................................................27
Table 13. Access to credit facility.................................................................................................27
 LIST OF FIGURES

Figures Page

Figure 1: Design of sampling technique and sample size..............................................................16

Figure 2. The age distribution of respondents...............................................................................18
 ABSTRACT

The prevalence of poverty in developing countries like Ethiopia demands improvising

internal revenue generating policies particularly good and fair taxation system to reduce
dependence on foreign aid and borrowing are needed to be prepared. Taxation can have
important effects on many parts of the economy, including impacts on firm creation and on the
development of small and medium-sized enterprises (SMEs). To provide the public service like
policy and administration costs all government gets its revenue from taxation. Imposition of high
tax reduces by income and saving. Ability to work depends on the health and efficiency possessed
by the people. The goal of this study is to assess impact of taxation on small business in Agaro
town. To achieve this objective, the researchers used interview (questionnaire) schedule with
respondents. It has also employed deep interview with tax officers in Agaro town tax revenue
authority. In this study it has mentioned principle and purpose of tax, types of taxes and tax
system structure. It has designed interview and questionnaire in research design, and used
purposive sampling method. It was used collection of both qualitative and quantitative from
primary and secondary source and analyzed using statistical package for social science.
Descriptive analysis method was employed. The data analyzed were use to put in result and
discussion part using frequency, percentages and tables. Then the given percentage and
tabulation quantities are changed in to their implication in statement form. Finally it is
summarized in conclusion and then gave recommendation.

Key words: Taxation, Small Business, VAT.

 1. INTRODUCTION

1.1. Background of the Study

Low-income countries in Sub-Saharan Africa (SSA) like Ethiopia are well aware of the positive
role that small and medium-sized enterprises (SMEs) can play in their development. SMEs can
innovate, adopt new technology and know-how, create jobs, broaden the tax base, and diversify
risk. Its slowly declining share of the state sector in industrial output, low private job creation,
and high unemployment make it akin to an early-stage transition economy. At the same time,
Ethiopia is one of the poorest countries in the world, with: (1) a large and dualistic informal
sector; (2) high and almost constant share of agriculture in output; (3) labor market frictions,
including imperfect information; (4) business environment with heavy regulations; and (5) slow
adoption of new technologies (Brixiova, Li, and Yousef (2009).

Taxation can have important effects on many parts of the economy, including impacts on firm
creation and on the development of small and medium-sized enterprises (SMEs). Thus one of the
mechanism in which countries raise revenues to finance government spending on the good and
services that most of us demand is taxation. As compared to the developing countries, there have
been able to generate substantial revenue through imposing of taxes one of reasons for this has
been the efficient tax system operating in the developing economies which are characterized by
weak monetary and low development of the formal sectors. Value added tax (VAT) is a new
system introduced in Ethiopia. Beginning with the adoption of tax sure, lavaliere adopted by
France in 1954 it was gradually been adoption by other countries (purhat, 2000,).

Taxation is a major tool in regulating the economy by the government; hence the government
achieves many objectives through taxation which include provision of government revenues,
wealth and income distribution, acceleration of economic growth and savings. Therefore,
taxation if well administered leads to the good performance of the economy (Mulooki
&Mugisha, 2012:12).

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History of Ethiopian’s tax system date back to ancient’s time. For example, in the Axumite
kingdom was traditional taxation system. The traditional taxation provides for taxes, on crops,
livestock and livestock products such as wool, butter, and milk. In the period of Haile-SelassieI
regime (1942-74), the most important feature of the traditional taxation system continued during
the relatively modern administration of Emperor Haile Selassie I. The element of the tax system
in this period comprises personal income tax, land tax, cattle tax, and salt tax. Taxes during the
dreg regime (1975-1991), in this period the political upheavals of 1975 bought about the
abolition of the feudal tenure system and the revoke of land taxes. During this period there was
an increase in the coverage of tax base and taxes owing to the need to raise more revenue to
support the government (Gebria, 2006).

In the period of transitional government of Ethiopia (1991-1995), during this period to

implement of the right of nations, nationalities and peoples to administer their affair the
transitional government of Ethiopia issued proclamation number 7/1992/ providing for the
establishment of regional government. Accordingly, regional government have legislative,
executive and judicial power in respect of all maters within their geographical area except such
matters as defense, foreign affairs and economic policy conferring of citizenship declaration of
states of emergency and printing of currency. Therefore, taxes in this period were designed in the
right of fiscal federalism in order to stimulate economic inefficiencies, inequity and all
distortions in the economy in line with the market based economic orientation. According to the
federal democratic republic of Ethiopia (current), adopted in 1994, the federal republic of
Ethiopia could comprise a federal state and member of states in which both organs shall have
their respective legislative, executive and judicial power. Federal and regional government all
collects taxes. The sharing of revenue between the central and national/regional government was
set with proclamation number 33/1992(Gebria Worku, 2006).

The main purpose of generating revenue from various sources is to finance public expenditures.
The government generates revenue from tax and other non taxable sources. Tax is the only
suitable source of government revenue. Tax can be direct tax on employer income, business
income and other incomes. However, limiting the collection of tax only from direct incomes
narrows the tax revenue of the government. As a result of these taxes are collected from indirect

2
taxes such as Value Added Tax (VAT), to increase the revenue of the government (Gebria,
2006).

1.2. Statement of the Problem

One of the financing sources of government expenditure is taxes. On recent year almost all
governments in the world funding their needs from revenue generated from taxes. The revenue
funded for payment of defense and social security’s, construction of infrastructures facilities,
provision for food aid, shelter, medical care and etc of different tax type, VAT is the main in
generating revenue to government. To collect this main tax (VAT) problems arise from
administration and activities of business enterprise (Hancock, 1998, p. 196).

To provide the public service like policy and administration costs all government gets its revenue
from taxation. Imposition of high tax reduces by income and saving. Ability to work depends on
the health and efficiency possessed by the people. A health is related to the level of consumption
which is determined by the money-income of assessing imposition of higher tax reduces the
purchasing power of tax payers and his/her ability to obtain the necessaries, comforts, and
luxuries. Based on the above points the study concentrates on determining weather or no cause
and effect relationship between taxation and socio-economic problem of small business in Agaro
town, and the problem that lower number of worker and low skill of knowledge in Agaro town
(Misrak, 2008).

Therefore if the tax structure is not adequately designed to the specific environmental conditions,
it may create a greater burden to the tax-paying organizations and eventually affecting the final
consumer due to the shifter ability of tax. So the majority of small businesses were less likely to
attain or maintain the growing profitability Mnewa and Maliti, (2008)

Thus the existence of high taxation conditions continues to rise in such situation; and also
continue charging high price owning to higher cost of production to remain in the market
(Misrak, 2008). Balunywa et al. (2010) identified management skills but more importantly
entrepreneurship, leadership and financial skills as the major constraints that hinder business

3
growth in Ethiopia; lack of market, poor recordkeeping, lack of professional tax advice, limited
understanding of the tax laws, limited access of finance, limited managerial skills. Such
problems emanate from government policies like the unfair rates, which are aggressive on
income taxation of small businesses. This unfair taxation has even forced some of the
entrepreneurs to move out of the operation. It should be noted that high taxes and poor taxation
policies largely affect small business and entrepreneurial enterprises. Therefore taxation has an
indirect relationship towards small businesses. Therefore the rationality of here after assessing
various studies including those conducted in Ethiopia is to aim getting the importance of
business, to know how tax corporate with business performance, and best policy incentive of
business owners and problem and progresses encountered by small business performers after tax
collection periods.

1.3. Objective of the Study

1.3.1 General objective

The main objective of this study is to assess the impact of taxation on small businesses in Agaro
town.

1.3.2 Specific objectives

1. To assess tax payer awareness about taxation and capacity to pay;
2. To assess the impact of tax on small scale businesses in the study area and
3. To identify challenges and opportunities for small businesses’ in the town.

1.3.3. Basic research questions

1. What proportions of tax payers have awareness about taxation?
2. What impacts does taxation impose on small scale businesses in the study area?
3. What are the challenges and opportunities for small businesses’ in the town?

1.4. Significance of the Study

The study focused on the assessment of impact of taxation on small businesses. So it may serve
as tipping stone for the other who want to make detail investigation in this sector. This study may

4
also help to the administration of economic and development bureau to understand and solve the
problem of tax collection and tax payers’ capacity to pay. Since this problem is not only limited
in the administration of economic and development bureau. But also it greatly helps the
development of country by dealing government revenue and fairness and equality of equal
distribution of income.

1.5. Scope of the Study

The study focused on assessing the impact of taxation on small business in Agaro town. The
study is limited its geographical coverage restricted to Agaro town because of the limited of time
and budget (resources).So this research paper focused only in Ethiopia particularly Agaro town,
Jimma zone of tax payer on small business.

1.6. Limitation of the Study

The study encountered on different problems. From these some of them includes:-shortage of
time, budget constraint, limited experience, distance and limited facilities. The impact of taxation
(particularly in under developing country has so many impact of living standard and economy
but due to the above constraints and difficulty to get all information about some of these impact,
the study tied to assess some of them. Also respondents are not willing to give answer for each
question because of their afraiding for their future influence, higher government officials may
not get at exact times. but finally after making many times of giving respondents an introduction
of who we are, where we from, our aim and their role, we get our objective towards collecting
the data.

5
 2. IMPACT OF TAXATION ON SMALL BUSINESSES

2.1. Theoretical Review

2.1.1. Definition of Taxation and related concepts

Tax is contribution to state revenue legally levied on person property and business. Different
authors have defined tax differently .According to professor selling man tax is a compulsory
payment contribution from the person to the government to defray the expensive incurred in the
common interest of all without ton special benefit. The means of taxation and the use to which
the funds raised through taxation should be put are a matter of hot dispute in politics and
economics. A good tax system should not affect the ability and willingness of the people to
work, save and invest. If not, it will affect the development of trade and industry and the
economy as a whole. Thus a sound tax system should contribute on the economic development
of a country (Misrak, 2008).

Tax is also defined as a compulsory or required payment to government associated with a certain
activities. The revenue collected through taxation is used to purchase the inputs necessary to
produce government supplier’s goods and services to redistributed purchasing power among
citizens and too many other operations. Tax is a financial change or levy imposed on individual
or legal entity by government .Taxation is a system of raising money finance government tax
from people. Government use tax revenue to pay soldiers and police to build domes and roads, to
operate school and hospital, to provide food to poor and medical care the elderly and for many
other purposes. Throughout history ,people have debated in the amount and kind of taxes that
government should impose ,as well as on how it should distribute the burden of those tax across
society un popular taxes have caused public protests, riots, and even revolution. For instance in
Ethiopia there was the Gojjam rebellion was the introduction of any agricultural income tax,
which peasants opposed (Gebria 2006)

6
2.1.2. The Definition of Small Business
Specifying any size standard to define small businesses is necessarily arbitrary. Because people
who adapt to different standard for different purposes. For example most people would classify
independently owned gasoline stations, neighborhood restaurants and locally retail shops as
small business. Similarly most would agree that the major automobile manufacturers are big
business and firms of in between sizes would classify as large or small on the basis of individual
view point. There are two approaches to define small businesses. They are:-By some measure of
size and Using an economic control definition. Small businesses would include individuals and
firms managing a business enterprise established mainly for the purpose of providing any service
other than professional (Hutchinson, P. 1991).

2.1.3 Principles of Taxation

Ddumba-Ssentamu (2004:396) identifies four principles of taxation: convenience, certainty,
economy and equality or equity. According to Omagor & Mubiru (2008: 119) principles of
taxation are rules and regulations which should be observed in tax assessment collection and
administration, the principles of good tax system include:-

Fairness: It should be fair to the tax payer. The tax payers should pay according to the ability
and the tax burden should be matched with the benefits that tax payers receive;
Convenient: The time and manner of paying taxes should be convenient to the tax payers. This
means that every tax ought to be levied at a time or in the manner in which it is most likely to be
convenient;
Economic growth: A good tax system should serve as an instrumental towards economic
growth with the capacity of increasing savings and investments in order to create economic
development;
Economical: It should be economical so that the work of collection is done as cheaply as
possible. It should not hamper the development of trade and industry;
Certainty: The tax which the tax payer is meant to pay should be certain and clear where the
time of payment and the amount to be paid ought to be clear and known; and
Equity: The tax liability should match with the tax payers income and expenditure levels.

7
2.1.4. Purpose of Taxation
According to Omagor & Mubiru (2008: 119) suggests that governments impose taxes for reasons
as explained below;
Collecting Revenue: It is a source of government income for financing public activities;
Promote domestic industries: Taxes can be used to protect domestic industries from
competition of dumped cheap commodities from other countries;
Correcting Externalities: Taxes are levied to address negative externalities;
Controlling monopoly power: Government can impose taxes of either lump sum type or
specific type to reduce on the profit levels of a monopolist;
Checking income inflation: This is done by imposing high taxation on people’s income so as to
reduce disposable income and reduce on the aggregate demand:
Checking income inequality: this means the transfer of wealthy from the rich to the poor. It is
widely accepted in the most economies, although the extent to which this should happen is
always controversial;
Balance of payment position: This is through imposing high taxes on imports so as to control
the importation of commodities and reduce foreign exchange outflow; and
Savings: It also encourages the public to develop the savings culture although it remains a
challenge.

2.1.5. General characteristics of tax

Tax is a compulsory contribution by tax payer to the government. The people whom the tax is
levied cannot refuse to pay tax. Once it is levied they have to pay it. For the payment of tax,
there is no expect any return in benefit for the amount of tax paid by them because there is no
relation between the amount of tax paid by the people and the service rendered by the
government to the tax payer. Tax impose is a personal obligation on the tax payer when a person
becomes liable to pay the tax is the duties of him to pay it and no way can be escape from it. The
amount of tax received from the people is used for general and common benefit of the people as
a whole. Tax is the legal collection. It can be levied by the government both central and regional
state. The payment of tax is regular and periodical in nature. It is levied for a fixed period usually
a year or a month. Tax is levied on all peoples without any discrimination of caste, creed etc, but
according to their ability to pay (Sisay ayalaw, 1995).

8
2.1.6. Classification of taxes
Taxes can be classified according to the administrative arrangements for its collection, the tax
base or behavior of the tax rates. Thus they can be classified as direct or indirect, progressive,
regressive and proportional (Omagor & Mubiru, 2008:20). Direct taxes are those that affect the
individual or firm directly through deduction from earnings (Omagor & Mubiru, 2008:20).

According to Ddumba-Ssentamu, (2004:401) direct taxes are normally paid with variations in the
tax payer’s status while Indirect taxes are those levied on the activities of an individual; they
include export duties, exercise taxes, and import duties (Omagor & Mubiru, 2008:20).
A proportional tax is one with a constant tax liability as income increase, progressive tax is one
whose tax liability increases as income increases while a regressive tax is one whose tax rate
falls with an increase in incomes (Omagor & Mubiru, 2008:20; Ddumba-Ssentamu, 2004:402).

Taxes have been classified by various economists in various ways from different angles they
classify taxes according to whose pays them who bears the ultimate burden of them, the extent to
which the burden can be shifted and various other criteria. The following are the common
dimension to classify taxes. Based on impact and incidence of tax, based on tax base, Based on
tax determination, based on number of tax and. based on source of tax. On the basis of impact
(immediate burden) and incidence (ultimate burden of tax) taxes are classified in to two broad
categories.

2.1.6.1. Direct taxes

Direct tax revenue in Ethiopia consists of tax on income from employment, business profit tax,
rental income tax, Tax on Interest Income on Deposits, Dividend Income Tax, Tax on Income
from Royalties, Tax on Income from Games of Chance, Tax on Gains of Transfer of Certain
Investment Property, Rendering of Technical Services outside Ethiopia and Agricultural Income
Tax are discussed in detail (Tilahun A. 2014).

2.1.6.2. Indirect taxes

Indirect taxes are those taxes whose impact and incidence fall on different persons. That is the
impact of the taxes fall on the person who pay it to the government in the first instance but the
incidence of tax falls on the import duty on vehicles is paid in the first instance by the importer

9
of cars but ultimately the importer transfer the burden of these duty (tax) to the purchaser of the
vehicle in the form of price (Gebria, 2006).

2.1.7. Tax system structure

Virtually all tax structures are compromised of two basic parts:-The tax base and the tax rate.
The tax base is the amount to which the tax rate is applied to determine the tax liability. Taxable
income, the value of property, the value of supply etc are examples of tax base. The tax rate is
merely the percentage rate applied to the base .On the base of degree of progression or
distribution of tax burden on the tax payers there are four commonly used tax rate structures.
Namely proportional, progressive, regressive, and digressive tax structures (Bekure, 2004).

In Proportional tax structure every tax payer (higher, middle or lower groups) with the same flat
rate. This implies that the tax rate remain constant as the tax base (income) increases. In this
system, all income is taxed at a single uniform related it does not matter if the tax payer income
is higher or low. Pay roll taxes and most customer duties are also lived on proportional rate. In
progressive tax structure taxes lived from the higher income group (rich) more amount of tax.
From the middle income group lower amount of tax and the lower income group (poor) are
exempted. This implies that the effective tax rate increases as the value of the tax base increases.
If the income of the tax payer increases the rate of tax also increased and vice versa. In
developed countries they use progressive income tax, for example the USA income tax is the
most progressive tax (Bekure .2004).

In regressive tax structure the highest income groups pay more amount of tax. This implies that
the effective tax rate declines as the value of tax base increases. It is the opposite of progressive
tax structure because the rate of tax diminishes as the tax base increases. Digressive tax structure
is similar to progressive tax structure, but in digressive tax the rate of progression is not in the
same proportion as the income. In digressive tax system the marginal tax rate declines with each
incremental tax base. I.e. the tax rate increases but at decreasing rate (Bekure, 2004).

2.1.8. Importance of taxation reform

The dominate motivation of taxation in developing countries is to finance public administration
and the public provision of economic and social services. Secondary motivation is the

10
redistribution. Although some correction of market imperfections is necessary to achieve, the
goals station and indirect costs associated with misallocation of resources and with consequence
for the distribution of income. According to World Bank the rational for tax reform is twofold.
First as a part of structural adjustment tax reform is designed to reduce sever distortions in
economic and the resulting inefficiencies and inequalities in the allocation of resources. Second
as part of efforts to stabilize the economy, tax reform in transform with costs in public
expenditure , may be needed to generate public revenue in a reasonable, non distorting, equitable
and sustainable manner(National commission,1996).

2.1.9. Approaches of taxation

It is also called theories of taxation. It deals with the justification for imposing tax as duty in a
given country. These justifications are broadly classified in three. The cost of survive approach
States that the basis for taxation should be the cost incurred by a government to provide services
for the individual tax payers. The main limitation of this approach is it is unrealistic because it is
difficult to measure the cost of service incurred by the government to each individual tax payer.
In the benefit received approach the burden of taxation should be divided among the people in
proportion to the benefits recovered from the government. Ability to pay approach is the most
realistic and generally accepted theory. It state that tax payer should be taxed based on their
ability to pay every legislative and every authority is pressurized by taxation policy in certain
direction, every group tries to change that goes against its interest. The authority in many cases,
have to adopt a certain policies simply because there are pressures to that effect and have many
times ( Misrak, 2008).

2.2 Empirical Review

According to Dos Santos an ideal VAT should be applied to the sales of all goods and services.
Exemptions should be kept to a minimum to broaden the tax base and to facilitate compliance by
tax payer and control by the tax administration. There should be only one positive rate. Multiple
rates make more complicated and encourage evasion. Arguments used against the introduction of
VAT (Value Added Tax) are: - Weakness of the tax administration; absence of “culture” of
issuing invoices by businesses and low adult literacy rate. This later factor can certainly

11
complicated the introduction of taxes such as VAT. VAT is a transaction – based tax and
consequently should be reported and controlled on regular bases. Many countries (of which
Ethiopia is one) require monthly filling and payment. However, this results in large number of
returns and payments, which the tax administration may struggle to processes and which involve
significant work for tax payers. Thus, some tax administrations have adopted a system of
quarterly returns and payment for most tax payers (Dos Santos, 2002).

(Dos Santos, 2002) argue that although VAT is consumption, in practice some of the cost is
likely to fall directly on businesses. It is a tax purely on consumption only when businesses are
able to shift the tax fully on to the final consumers in the price of their products. If businesses are
unable to do this, it reduces their profit margins and in consequence, this may hinder the growth
of the private sector. Recently, however some (Desai and Hines, 2004) have suggested that VAT
may actually contribute to deferring rather than facilitating trade in developing and transition
economies.

Indeed, one study by Hines (2002) concludes that increasing consumption taxes definitely fosters
the expansion of the hidden economy if (seems plausible) the labor intensity of production in that
sector is greater than the formal sector. Yet another study suggests that even governments aware
of such problems may have nonetheless chosen to impose higher taxes including VAT, one the
formal sector of the economy because with their relatively weak tax administrations the best way
for them to raise revenue may be to increase barriers to entry to the formal sector. Thus creating,
“rents” that may then be taxed (Auriol and Walters, 2003).

Aborat (2011) investigated the fairness perceptions of Addis Ababa City business profit
taxpayers and its impacts in their perceptions. The survey used self-developed questioner and in-
depth interview to collect both qualitative and quantitative data. The survey found that Addis
Ababa City business profit taxpayers did not perceive positively in respect of general, vertical,
personal, exchange, and administration fairness except horizontal fairness on the prevailing
business profit tax system. With regard to tax knowledge and complexity, the finding of this
survey shows that the taxpayers did not have sufficient knowledge and there were no easily
understandable and vague procedures of the business profit tax system. Finally, the survey
suggests that a series of measures should be taken by government in general, and tax authorities

12
in particular; to improving policy and administration issues, educating the taxpayers and
conducting awareness creation, and maintaining the tax system fair and equitable.

2.2.1 Effect of Taxation

Now a day revenue rising is not the only purpose of taxation. In a welfare state, taxation has also
been used as a tool of monetary policy to achieve socio-Economic objectives. It uses to promote
economic growth by controlling the effects of trade cycles and regulation, the production
inequalities income and wealth (National commission, 1996).

2.2.2 Challenges and Opportunities on Small Scale Businesses

2.2.2.1 Challenges of Small Scale Business

In the global world for the performance of small business have been facing many obstacles. Thus
this section outlines five major challenges that small business owners will face in the coming
years. These are (1) strengthening the overall economy, (2) taxes and regulation, (3) the cost and
availability of health insurance, (4) attracting and retaining a quality workforce, and (5) global
competition. Considering the main problems of the enterprises in different sectors this researcher
reveals that, startup capital, high interest rates, skilled personnel, production place, unaffordable
tax and /or rent, inadequate support from Government/NGO, working capital or lack of credit
facilities, lack of access for training were among the major impediments for operator/manager at
The grass root level of MSEs Activities Ephrem (2010).

2.2.2.2 Opportunities of Small Scale Business

In the performance of any activity having an obstacle alternatively it has also opportunity in the
other hand. Therefore this section outlines five opportunities that small businesses will hopefully
pursue in the next decade. These are (1) increasing investments in technology and innovation, (2)
grooming local entrepreneurs for growth (“economic gardening”), (3) pursuing new markets
overseas, (4) promoting entrepreneurship among women, minorities, veterans, and immigrants,
and (5) advancing education and training (Uzor 2014).

13
 3. RESEARCH METHODOLOGIES

3.1. Description of the Study Area

Geographical location: Agaro is town in south western part of Ethiopia in Oromia region and
one of the 13 towns of Jimma zones. It is administrative center of Gomma wareda and has 5
kebeles. This town located 390 km from Addis Ababa and 50 km from Jimma town. It lies
between 7o 51’N and 36o 35’E, with altitudinal ranges from 1387 to 2870 m above sea level.

Climate Agaro has 5 main rainy months in a year, extends from June to October and 2 small
rainy month from March to April. The average rainfall is 1524mm and mean monthly
temperature varies from 12.670c – 270c. Agro-ecologically Agaro town is classified as 96% wet
weinadega and 4% kola.

Population Based on the 2007 national census conducted by the Central Statistical Agency of
Ethiopia (CSA), reported a total population for this woreda of 25,458, of whom 12,946 were men
and 12,512 were women. The majority of the inhabitants were Muslim, with 60.7% of the
population reporting they observed this belief, while 33.76% of the population said they
practiced Ethiopian Orthodox Christianity, and 5.04% were Protestant PHCE(2007).

3.2. Research Design

The data for this study/research was collected and analyzed through interview and questionnaire
from small business in Agaro town on the impacts of taxation on small businesses. All
respondents were asked the same questions. Questions were framed in a way that is easy to
understand. Difficult technical terms was avoided. So this qualitative and quantitative data were
conducted through cross sectional research design.

3.3 Sampling Technique and Sample Size

For the achievement of the objective of this research purposive sampling techniques was used to
select Jimma zone from Oromia region and Agaro town (five kebeles) from Jimma zone in order
to assess the impact of taxation on small businesses and also two kebeles (kebele 02, (Beke) and

14
kebele 04 (Beke Agela)) are selected by purposively because of conveniences. Accordingly, 95
respondents from the total of 1887 household group are selected by using slovin’s formula;
which is
n  N / 1  ( N * e2) Where, N=Number of target population
n= sample size
e=margin of error occurrence in social science, its value is 10%.
The number of household in the two kebeles i.e. kebele-02 and kebele-04 are 1246 and 641
respectively, which totally yields 1887 household groups of Agaro town. So by using the above
Slovin’s formula sample size is obtained as follows:
n = 1887/1 + (1887 * (0.1)2) = 95
Thus, the sample size of the respondents from kebele -02 and kebele -04 can be computed as:
Sample size from kebele - 02 = 1246 * 95/1887 = 63 And

Sample size from kebele - 04 = 641 * 95/ 1887 = 32

So, the total sample size of the respondents from the two kebeles is, 63+32=95. And PPS from
out of the total kebeles found in Agaro town. 63 and 32 household respondents were select from
kebele 02 and kebele 04 respectively based on the proportion of tax payers in each kebele. Since
the sample size of any respondents are greater than 60 and less than 120, and we got 95 but due
to of the limitation of time and cost deliberately we have taken only 65 respondents from both
kebeles. But the proportion of each kebele we find by using the sample size of each kebele by
taking 65 instead of 95 and we got as follows.
Sample size from kebele - 02 = 1246 * 65/1887 = 43 And

Sample size from kebele - 04 = 641 * 65/ 1887 = 22

Therefore the total sample size of the two kebeles become 43+22=65 as shown in the figure
below.

15
 Oromia Region

Purposive

Jimma Zone

Agaro Town

Kebele 02 Kebele 04

43 22

PPS
65 Respondents

Figure 1: Design of sampling technique and sample size

16
3.4. Types of Data Required and Data Source

There are different kinds of data gathering instrument. But the researchers were conducted both
qualitative and quantitative from primary and secondary sources. The source of primary data was
collected from sample respondents, personal observation, Group participants and key informants.
The secondary data was collected from different materials including books and journals, small
business office and taxation office.

3.5. Method of Data Collection

Informal survey was first undertaken to collect the background information of tax impact on
business and to pretest the questionnaire. Formal survey was also conducted using interview, key
informants discussion with the shopkeepers, traders and hotel/restaurant besides semi structured
survey.

3.6. Method of Data Analysis

After the necessary data’s are collected and organized the next step is analyzing the data. Data
collected from the sources were entered in to Stastical Package for Social Science (SPSS) and
made ready for analysis. Descriptive analysis (frequency distribution, and percent) of main data
was analyzed by using SPSS Version (V.16.0). The collected data is analyzed interims of tables
and the number is also changed in to percentage. Then the given percentage and tabulation
quantities are changed in to their implication in statement form. Qualitative data obtained
through focused group and key informants discussion was summarized and interpreted.

17
 4. RESULT AND DISCUSSION

4.1 Socio-economic factors and demographic characteristics of respondents

4.1.1 Age of Respondents

Figure2. Age distribution of respondents

Object 1

Source: Own Survey result 2016 G.C

As indicated in the figure above the respondents of 6(9.2%), 22(33.8%), 29(44.6%), 8(12.3%)
are in the age interval Below 24, 24-34, 35-45, and 46-56 respectively. This indicates that most
respondents are matured age interval 35-45, which implies that the people which participate in
small scale business are matured, Next to the age’s interval 24-34 (Adolescence).

18
4.1.2 Sex of Respondents

Table1. Sex of respondents

Items Frequency Percentage

Male 47 72.3%
Female 18 27.7%
Total 65 100.00
Source: Own Survey result 2016 G.C

The date in the table above shows that the respondents of 47(72.3%) and 18 (27.7%) are Male
and Female respondents. This specifies that most of the participants in small business are males.

4.1.3 Religion and Marital Status of Respondents

Table 1: The religion and marital status of respondents

Religion Frequency Percentage %

Orthodox 15 23.1%
Muslim 41 63.1%
Protestant 9 13.8%
Total 65 100.00
Marital Status Frequency Percentage %
Married 42 64.6%
Divorced 9 13.8%
Single 13 20.0%
Widowed 1 1.5%
Total 65 100.00
Source: Own Survey result 2016 G.C

As indicated in the table above among the respondents 15(23.1%) are Orthodox, 41(63.1%) are
Muslims and 9(13.8%) are Protestant. This indicates that most of the respondents are Muslims
because more than half of dwellers in Agaro town are Muslims. The data in table 2 also
demonstrates that 42(64.6%) are Married, 9(13.8%) are Divorced, 13(20.0%) are Single and
finally 1(1.5%) are widowed. This indicates that most of the respondents that participate in small
business activities are married peoples.

19
4.1.4 The Educational Status of Respondents

Table 2.The educational status of respondents

Educational status Frequency Percentage %

Literate 63 96.9%
Illiterate 2 3.1 %
Total 65 100.00
If literate Frequency Percentage %
Elementary 10 15.4%
Secondary 10 15.4%
Certificate 26 40.0%
Diploma 13 20.0%
1st Degree & above 4 6.2%
Total 63 96.9
Source: Own Survey result 2016 G.C

The data in table3 shows that 63(96.9%), and 2(3.1%) respondents are literate and illiterate in
that order (respectively). Among the literate respondents 10(15.4%), 10(15.4%), 26(40.0%),
13(20.0%), and 4(6.2%) are in Elementary, Secondary, Certificate, Diploma and 1 st degree level
respectively. This indicates that most of small business owners are literate and if the level of
education increases the number of small business increases. Because of that they are literate they
use their knowledge in the business activity and easy to perform their activities. This finally
point out this small business increase generates government revenue in terms of taxation.

20
4.1.5 The Distribution of Business Area, Responsibility and Sectors Engagement of
Respondents.

Table4. Business area, their responsibility and sectors engagement of respondents.

Do you own the business area Frequency Percent%

Yes 56 86.2%
No 9 13.8%
Total 65 100.00
Do the Business Area Good For Business Activity Frequency Percent%
Yes 59 90.8%
No 6 9.2%
Total 65 100.00
What is your Responsibility In The Business Frequency Percent%
Auditor 2 3.1%
Owner 51 78.5%
Manager 8 12.3%
Public Relation Officer 4 6.2%
Total 65 100.00
Which Business Sectors do you Engaged Frequency Percent%
Manufacturer 4 6.5%
Wholesaler 16 24.6%
Retailer 37 56.9%
Service Provider 8 12.3%
Total 65 100.00
Source: Own Survey result 2016 G.C

According to the table 4 above illustrates that out of 65 respondents 56 (86.2%) were answered
yes, and 9 (13.8%) where responded no, this shows those who have responded yes have own the
business area while the others aren’t own. This implies most of small business participants
access their business by their own area, which motivates their business activity. Again this table
farther tells us that 59(90.8%), 6(9.2%) are responded yes and no respectively, which means
those said yes have a good area of accessing business activity while others aren’t. this brings
about to have more customers and earning high income which in turn increases government
revenue in terms of tax. At the same time for the household’s responsibility in the business were
distributes as flows 2(3.1%), 51(78.5%), 8(12.3%), 4(6.2%) of respondents were answered that
they are Auditor, Owner, Manager, and Public Relation Officer in that order. That implies most
participants on small scale business are owners of the business. Finally the business sector
engaged by the household are out of 65 respondents 4(6.5%), 16(24.6%), 37(56.9%), 8(12.3%)

21
have answered that they are Manufacturer, Wholesaler, Retailer, and Service Provider
respectively. This illustrates most participant of small business are Retailer.

4.2 Tax payer’s awareness about taxation and capacity to pay tax

Table5. Awareness and Information about Taxation

HH Awareness about taxation Frequency Percentage %

Yes 62 95.4%
No 3 4.6%
Total 65 100.00
HH Information about taxation Frequency Percentage %
Yes 61 93.8%
No 4 6.2%
Total 65 100.00
If Yes From Where You Get? Frequency Percentage %
From tax office 26 40.0%
From town administration 7 10.8%
From Small Business Office 8 12.3%
From My Friends and my family 20 30.8%
Total 61 93.8%
Source: Own Survey result 2016 G.C

According to the table above out of 65 respondents 62(95.4%), and 3(4.6%) have answered yes
(we have awareness) and no (we don’t have) respectively. This shows most participant on small
business have awareness about taxation. This in turn facilitates its paying activity. Again the
table tells us that 61(93.8%), 4(6.2%) are responded yes (we get information) and no (we don’t
get) respectively. This shows most participants get information about taxation, which makes
strong the capacity of awareness. And from those said yes (we get information) out of 61
participants 26(40.0%), 7(10.8%), 8(12.3%), and 20(30.8%) get information from tax office,
from town administration, from small business office and from my friends and my family
respectively. This implies most small scale participants get information about taxation on tax
office of the town. This in turn tell us having more awareness and information about tax creates
high willing to pay tax and consume less time of orientation about taxation.

22
4.2.1 Taxpaying and amount of paying based of respondents capacity.
Table6. The capacity to pay tax

Do you pay tax? Frequency Percent%

Yes 63 96.9%
No 2 3.1%
Total 65 100.00
If yes how much per month? Frequency Percent%
< 100 11 16.9
100-200 14 21.5%
200-400 16 24.6%
> 400 22 33.8 %
Total 63 96.9%
Are happy amount of currently paying? Frequency Percent%
Yes 50 76.9%
No 13 20.0%
Total 63 96.9%
Do you believe importance of paying tax? Frequency Percent%
Yes 62 95.4%
No 3 4.6%
Total 65 100.00
Source: Own Survey result 2016 G.C

According to the table 6 above here shows that out of 65 respondents 63(96.9%) have responded
yes (we pay tax), while 2(3.1%) have responded no (we don’t pat tax). This implies most
respondents participate and pay tax. Among this 11(16.9%) pay <100, 14(21.5%) pay 100-200,
16(24.6%) pay 200-400, and 22(33.8%) pay >400. Which indicate most tax payers paid above
400 birr 22(33.8%). Again with this portion 50(76.9%) answered yes (we are happy the amount
we are currently paying), and 13(20.0%) said no (we are not happy with this current paying).
This tell out of 63 respondents who pay tax, the majority of them are happy with the amount they
are currently paying 50(76.9%). Finally for the concept of paying tax out of 65 respondents
62(95.4%) answered yes (we believe the importance of paying tax), and 3(4.6%) said no (we
don’t believe it). In generally this table illustrates in large part of the respondents are paying tax,
with above 400 birr, are happy with their offering and believe the importance of paying it.

23
4.3 The Impact of tax on small scale business in the study area

Table7. Impact on tax on small business

Does tax has impact on your business Frequency Percent%

Yes 60 92.3%
No 5 7.7%
Total 65 100.00
If yes, what is the impact Frequency Percent%
It reduces my income 38 58.5%
It reduces my saving power 17 26.2%
It reduces my purchasing power of 5 7.7%
goods
Total 60 92.3
Source: Own Survey result 2016 G.C

According to the data in table7, 60(92.3%) of small business owners are responded that taxation
have impact on their small business and 5(7.7%) are responded that it has no impact on small
business. This indicates that, taxation have an impact on the small business. Because most of the
respondents react that it has impact. The impact is that, 38(58.5%) are responded that it reduces
my income, 17(26.2%) are responded that it reduces my saving power, 5(7.7%) responded that it
reduces my purchasing power of goods. Generally, this indicates that taxation have an impact on
the activities of small business owners.

4.3.1 Household’s Voluntariness to Pay Tax

Table8. Voluntariness of paying tax

Voluntariness to tell income Frequency Percent%

Yes 5 7.7%
No 60 92.3%
Total 65 100.00
Voluntariness to pay tax liability Frequency Percent%
Yes 43 66.2%
No 22 33.8%
Total 65 100.00
Tax liability based on income Frequency Percent%
Yes 46 70.8%
No 19 29.2%
Total 65 100.00
Source: Own Survey result 2016 G.C

24
According to the table above demonstrates that less participants of small scale business are
volunteer to tell their income 5 (7.7%) said yes, while the majority are not willing to tell their
income voluntarily, 60(92.3%) are responded no. this shows large part of participant in small
business are keeping secret or not willing to bring out their real income, which impedes amount
of tax to be paid. Also it exemplifies these participants majority of them are volunteer to pay
their tax liability 43(66.2%) have answered yes, while 22(33.8%) have said no. this implies
mainly respondents are volunteer to pay tax liability, which generates government revenue in
terms of tax and enhances economic development of the country. Finally those registered and
those volunteer to pay tax out of 65 participants 46(70.8%) answered yes (tax liability is based
on our income), while 19(29.2%) said no liability is not based on our income. This typifies most
participants on small scale business by paying their tax liabilities are based on by their income.

4.4 Challenges and opportunities of small businesses in the town

4.4.1 Challenges of small businesses

Table9. Challenges of small business

Do you face any challenge by paying tax Frequency Percent%

Yes 61 93.8%
No 4 6.2%
Total 65 100.00
What is the challenge Frequency Percent%
Bureaucratic procedures 29 44.6%
It wastes my time( Working Time) 20 30.8%
The time we are required to pay our tax obligation is not the 12 18.5%
right time
Total 61 93.8
Who responsible to tackle this challenge Frequency Percent%
Tax Revenue Office 47 72.3%
We Business Men 14 21.5%
Total 61 93.8
Source: Own Survey result 2016 G.C

As the table above indicates 65 respondents 61(93.8%), 4(6.2%) have responded yes (we face
challenge) and no (we don’t face) respectively. Among these 61 respondents said 29(44.6%),
20(30.8%), 12(18.5%) face challenge from Bureaucratic procedures, wastes working time, and

25
the time required to pay tax obligation is not the right time respectively. And they have claimed
that 47(72.3%), 14(21.5%) of respondents agreed that tax revenue office and we business men
are responsible to tackle these challenges respectively. This implies majority of small business
participant encounter challenge from bureaucratic procedure and believe that tax revenue office
is accountable for undertaking this challenge.

4.4.2 Opportunities of small scale business

Table10. Opportunities of small scale business

Market opportunities from government incentives Frequency Percent%

Yes 57 87.7%
No 8 12.3%
Total 65 100.00
What opportunities are there for you to expand the Frequency Percent%
business
Credit Access 11 16.9%
Reduction in tax rates 21 32.3%
Access to training on business 12 18.5%
Access to new markets 13 20.0%
Total 57 87.7
Source: Own Survey result 2016 G.C

As table10 shows the participants of small scale business have opportunities after they pay their
tax obligation, therefore out of 65 participants 57(87.7%) have responded yes (we have market
opportunity from government incentives) and only 8(12.3%) said no we do not have market
opportunity respectively. From those participants said yes 11(16.9%), 21(32.3%), 12(18.5%),
and 13(20.0%) have answered that they have the opportunity of credit access, reduction in tax
rates, access to training on business, and access to new markets respectively. This implies most
participants have market opportunity among this 21(32.3%) would like to have reduction in tax
rates. This indicates having high opportunity in the market creates high income which increases
capacity of paying tax. So small scale opportunity corresponds commitment of paying tax.

26
4.5 Saving capacity of the household and in which way to save.

Table11. Saving capacity

Do you save your money Frequency Percent%

Yes 65 100.00
Total 65 100.00
In which way you save Frequency Percent%
In cash 48 73.8%
In kind 17 26.2%
Total 65 100.00
Source: Own Survey result 2016 G.C

This table 11 shows us household’s saving and ways they use to save their money, 65 out of 65
respondents have responded that they save their money. Among this participants 48(73.8%),
17(26.2%) save their money in cash and in kind respectively. This implies as there is saving
there is investment, as there is investment there is infrastructure, as there is infrastructure there is
development, as there is development small scale business grows up. Finally there is tax from
business to the government. So saving mechanism is one of the facilities for the growing up of
small business and raising tax to the business.

4.6 Attitude of tax office employees and assessment process

Table12. Employee’s attitude and assessment process

Lack of positive attitude on part of employees of Frequency Percent%

agro tax revenue office
Yes 21 32.3%
No 44 67.7%
Total 65 100.00
Delayed tax assessment process Frequency Percent%
Yes 37 56.9%
No 28 43.1%
Total 65 100.00
Source: Own Survey result 2016 G.C

As the table above demonstrates 21(32.3%) of respondents answered yes, that means there is
lack of positive attitude on the part of employees, and 44(67.7%) have responded no, which
means there is no lack of positive attitude on employees of the Agaro tax revenue office. This
indicates that majority of the respondents have agreed that there is positive attitude. Again out of

27
65 respondents 37(56.9%) said yes, there is delayed tax assessment process, while 28(43.1%)
have said no, there is no delayed tax assessment process. This shows us there is delayed tax
assessment procedure, this in turn affect small scale business owners by wasting their working
hours.

4.7 Small business access to credit facility

Table13. Access to credit facility

Do you access credit facility? Frequency Percent%

Yes 48 73.8%
No 17 26.2%
Total 65 100.00
Does credit help you? Frequency Percent%
Yes 35 53.8%
No 13 20.0%
Total 48 73.8
Why credits not help you? Frequency Percent%
Inadequate loan amount 7 10.8%
Huge interest rate required 6 9.2%
Total 13 20.0
Source: Own Survey result 2016 G.C

As table above sketched show us 48(73.8%), 17(26.2%) respondents are responded yes (we
access credit facility) and no (we don’t access credit facility) respectively. Out of 48 respondents
who access credit 35(53.8%), 13(20.0%) have answered yes (credit helped our business succeed)
and no, (credit didn’t help our business succeed) respectively. Also out of 13(20.0%) who said
credit do not help us have responded 7(10.8%) said because of inadequate loan amount credit
don’t help our business succeed, and 6(9.2%) have said due to huge interest rate required credit
don’t help our business succeed in that order. This indicates most participants get access credit
and majority of them credit assisted for the growth of their business, which in turn imposes them
to pay tax.

28
 5. CONCLUSION AND RECOMMENDATIONS.

5.1 Conclusion

Low-income countries in Sub-Saharan Africa (SSA) like Ethiopia are well aware of the positive
role that small and medium-sized enterprises (SMEs) can play in their development. SMEs can
innovate, adopt new technology and know-how, create jobs, broaden the tax base, and diversify
risk. In addition to this Ethiopia is one of the poorest countries in the world, with: (1) a large and
dualistic informal sector; (2) high and almost constant share of agriculture in output; (3) labor
market frictions, including imperfect information; (4) business environment with heavy
regulations; and (5) slow adoption of new technologies.

To solve this constraints government have to come up ways to finance the different activities.
Generally there are four ways of financing government can report. These are namely, sales of
goods or services, borrowing, printing of paper money and taxation. Among these four sources,
taxation is the major source of rising of necessary funds for incurring expenditure. Taxation is
the most common method of financing government activities. The basic distinction between tax
and other source of government revenue is the compulsory element involved. The individual has
no choice in the matter if he is eligible for payment on the basis of the standard established.

Taxation is a major tool in regulating the economy by the government; hence the government
achieves many objectives through taxation which include provision of government revenues,
wealth and income distribution, acceleration of economic growth and savings. The Ethiopian tax
structure is composed of two types of taxes, direct tax and indirect taxes such as Value Added
Tax (VAT). Therefore this source of financing in the other hand has important effect on many
parts of the economy, including impacts on firm creation and on the development of small and
medium-sized enterprises.

To achieve this all government officers flow the principle and use to give orientation about
taxation on the citizens of a given country. It has been identified four principles of taxation:
convenience, certainty, economy and equality or equity. Further more government impose taxes

29
for reasons of: - Collecting Revenue, Promote domestic industries, Correcting Externalities,
Controlling monopoly power, Checking income inflation, Checking income inequality, Balance
of payment position, Savings. Thus all tax structure compromised of two basic parts:-The tax
base and the tax rate. There are four commonly used tax rate structures namely proportional,
progressive, regressive, and digressive tax structures.

Thus the empirical data indicates that an ideal VAT should be applied to the sales of all goods
and services. Exemptions should be kept to a minimum to broaden the tax base and to facilitate
compliance by tax payer and control by the tax administration. There should be only one positive
rate. Multiple rates make more complicated and encourage evasion. Arguments used against the
introduction of VAT (Value Added Tax) are: - Weakness of the tax administration; absence of
“culture” of issuing invoices by businesses and low adult literacy rate. Business profit taxpayers
did not perceive positively in respect of general, vertical, personal, exchange, and administration
fairness except horizontal fairness on the prevailing business profit tax system. With regard to
tax knowledge and complexity, the finding of this survey shows that the taxpayers did not have
sufficient knowledge and there were no easily understandable and vague procedures of the
business profit tax system.

In general, in the global world the performance of small business have been facing both
opportunities and constraints, according to this the major obstacles are These are (a)
strengthening the overall economy, (b) taxes and regulation, (c) the cost and availability of
health insurance, (d) attracting and retaining a quality workforce, and (e) global competition. In
the performance of any activity having an obstacle alternatively it has also opportunity in the
other hand. Therefore this section outlines five opportunities that small businesses will hopefully
pursue in the next decade. These are (a) increasing investments in technology and innovation, (b)
grooming local entrepreneurs for growth (“economic gardening”), (c) pursuing new markets
overseas, (d) promoting entrepreneurship among women, minorities, veterans, and immigrants,
and (e) advancing education and training.

30
In most cases ,As the empirical data in this finding shows that the increase of income, credit
facility, level of education and training have positive relationship with number and development
of small businesses and taxation have negative relationship.

Finally, even if the study has the above shortcoming it is important for further studies in related
topics. This is true as it lays a ground works describing the fact and important issue of the topic
in relation to what is really percent. If tax system it is simple and clear, its cost may be low,
while very complicated and complex tax laws and systems necessities substantial administration
costs both from tax payer and tax collector.

5.2. Recommendations

This study was focused on identifying impact of taxes on small businesses which is generally
helpful in having some images about the problem of the current taxation system. Here, an
attempt is made to give recommendation that help to have an efficient and powerful assessment
and collection with prevalence of clear and transparent rule and regulation and alleviate
problems associate with tax assessment and collection procedure.

Recommendation regarding problem and weakness of tax payers, assessment and collection are
given below;

 Man power is the most important resource, so it will be better if it has given special
attention. The man power structure of revenue agency and sub-city should be occupied by
competent personnel. In case of shortage of competent personnel/lack of employee with
required qualification and experience /the tax office may assign some employees who do
not pass the requirements. Therefore, to enhance their capability and improve their
effectiveness, the employee should get short or long term training.

 It would be best if the government gives special care for tax payers, so as to motive the
business owner like organizing credit institutions and the government should impose the
right amount of tax which is proportional based on their income statement.

31
 Effective and good tax assessment and collection measure should be taken to revise and
update the existing tax law. To correct such crucial policy failures, government should
adopt a serious of tax reform measures, focusing on removing undesired taxes, improving
and modernizing the revenue collecting institutions, the tax assessment system which
means the present tax assessment system assigned the assessment group.

 To create fairness in the imposition of tax the government officials should get
information about the exact income of the small business from the owners before the
imposition of tax and should get information about the current market condition.

 It would be nice if the taxation office prepare a batter producer and distribute tax payers
to receive clear, concise and up-to-date information on describing what is to be taxable,
how to calculate tax liabilities and procedure for calculating paying taxes ,who and where
they pay taxes. Forms and procedures for calculating and paying taxes should be a simple
and possible.

32
 6. REFERENCE

Aborat, W., 2011, ‘Taxpayers’ Perception towards Fairness: Personal Business Profit Taxpayers
in Addis Ababa’, Msc thesis, Addis Ababa University.
Auriol and Walters, 2003, as quoted in Richard M.Bird (2005), Value Added tax in developing
countries.
Balunywa, W., Namatovu, R., Kyejjusa, S. &Dawa, S. (2010). Global Entrepreneurship Monitor
(GEM) Uganda
BekureHerouy, 2004, The VAT regime under Ethiopian law with special emphasis on tax
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 7. APPENDIX

Wolkite University

Collage of Agriculture and Natural Resource

Department of Agricultural Economics

DEAR Respondent:

We are students from Wolkite University and we are here to collect data for our research
purpose. The purpose of this questionnaire is to collect information about impact of taxation on
small scale businesses for research purpose and hence the questionnaire is prepared to secure
relevant data which is believed to come up with valuable recommendation for problems
observed. The information you provide will be used for academic research purpose any and all
your response will be secret. Therefore you are kindly requested to give response this
questionnaire, that is given each question. We thank you for your kind cooperation in advance!!

Part one –Back ground information

1) Age of HH in year
A. below 24 B. 24-34 C. 35-45 D. 46-56 E. 57-67 F. 68-78

2) Kebele of HH_______
3) Sex: 1) Male 2) Female
4) Religion: 1) Orthodox 2) Muslim 3) Protestant
5) Marital status: 1) Married 2) Divorced 3) Single 4) widowed
6) Education status: 1) Literate 2) Illiterate

7) If Literate, at what level

A. Elementary B. Secondary C. Certificate D. Diploma E. 1st Degree & above

35
Part two-Questions concerning to taxation.
8) The business area is it your own?

1) Yes B) No
9) If question number 8 is no specify_______________________________________________
10) Is your business area good for business activity?
1) Yes 2) No
11) What responsibility you have in the business?

1. Auditor 2. Owner 3. Manager 4. Public relation officer 5. Other

12) In which Business sector you engaged?

1). Manufacturer 2) Wholesaler 3) Retailer 4) Service provider 5) Other

13) Do you have awareness about taxation?

1) Yes 2) No
14) Do you get information about taxation?
1) Yes 2) No
15) If you say yes for question 14 from where?
1) From tax office 3) From small business office
2) From town administration 4) From my friends and my family

16) Do you pay tax?

1) Yes 2) No
17) If no what is the reason? ______________________________________________________
18) If you say yes for question number 16 how much birr you pay in month?
1) <100 birr 2) 100-200 birr 3) 200-400 birr 4)>400 birr
19) Are you happy with the amount you are currently paying? 1) Yes 2) No
20) If no to question 19, what is your reason?
1. I don’t want to pay at all
2. The amount is beyond my paying capacity
3. The amount I am currently paying does not much with the income I am earning

36
 4. Other reason (specify)
___________________________________________________
21) Do you believe in the importance of paying tax? 1) Yes 2) No
22) If your answer for question 21 is yes, how is it important?
________________________________________________________________________
________________________________________________________________________
23) Do you think that taxation have impact on your business? 1) Yes 2) No
24) If your answer is yes for question 23 what is the impact on your business?
1) It reduces my income 2) It reduces my saving power
3) It reduces my purchasing power of goods 4) Others (specify) _____________________
__________________________________________________________________
_____
25) Are you volunteer to tell your income?
1) Yes 2) No
26) If yes to question 25, how much is your monthly income from the business? __________Birr
27) Are you volunteer to pay your tax liability?
1) Yes 2) No
28)If no to #28, why not? ________________________________________________________
29) Is your tax liability based on your income?
1) Yes 2) No
30) If yes what benefits you get by paying tax volunteer? _______________________________
__________________________________________________________________
______
31) Do you save your money?
1) Yes 2) No
32) If you say yes for question 31 in what way?
1) In cash 2) In kind
33) Do you face any challenges in paying tax?
1) Yes 2) No
34) If yes to #33, what challenges do you face?
1) Beurocratic procedures

37
 2) It wastes my time (working time)
3) The time we are required to pay our tax obligation is not at the right time
4) Others (specify) ________________________________________________________
________________________________________________________________________
35) Who do you think is responsible to tackle these challenges?

1) Tax revenue office

2) We the business men

3) Others (specify)
_______________________________________________________

36) Is there lack of positive attitude on the part of the employees of the Agaro tax revenue
office? A. Yes B. No

37) Is there delayed tax assessment process by the authority? A. Yes B. No

38) Did you get a credit facility?

1) Yes 2) No
39) If your answer for question 38 is yes, does this helped you succeed in your business?
A. Yes B. No
40) If your answer for question 38 is No, why?
1) I don’t need credit 2) Inadequate loan amount 3) There is no credit provider
4) huge interest rate required 5) other ________________
41) Do have market opportunities from the government incentives after you pay tax?

1) Yes 2) No
42) What is the consequence you face if you don’t pay tax?
________________________________________________________________________
_______________________________________________________________________
43) What do you expect from the government offices in relation to tax?
________________________________________________________________________
_______________________________________________________________________

44) What opportunities are there for you to expand your business in the future?

38
1) Credit access 2) Reduction in tax rates 3) access to training on business
4) access to new markets 5) others (specify) ________________________________

Thank you very much for your precious time and honest responses!!

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