Graduating class of 2024

DAMBI DOLLO UNIVERSITY

COLLEGE OF BUSINESSES AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

RESEARCH PROPOSAL ON:

Factors Affecting Tax Compliance Behaviour of Taxpayers:

The Case of Dambi Dollo Town

By TOFIK YUSUF

ID. No:ssr/954/20

ADVIISOR:MR GADISA

Apr,2024

DABI DOLLO,OROMIYA,ETHIOPIA
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ACKNOWLEDGMENTS
First and foremost, I would like to thank the almighty God for his endless help in giving me
healthy, strength, good spirit and help in all situations for the success of my life, my career and
the accomplishment of this thesis
I wish to express my sincere gratitude to my advisor
I am also deeply thankful for all the respondents who have responded for the questionnaire and
the concerned DambI dollo towntax office staffs who were very helpful to me in any way during
the data collection

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INTRODUCTION.........................................................................................................................................................................5
1.1 Back ground of the study......................................................................................................,.....................................................5

1.2 statement of the problem ..........................,................................................................................6

1.3 Research question .........................................................................................................................7
1.4 Objective of the study..............................................................................................................................7
1.4.1 General objective....................................................................................7
1.4.2 Specific objectives..................................................................................8

1.5 Scope and limitation of the study............................................................................................................8

1.6 Significance of the study.........................................................................................................................8
1.7 Organization of the research....................................................................................................................8
CHAPTER TWO...................................................................................................................................................................................... 9
2. REVIEW OF LITERATURE........................................................................................................................................................... 9
2.1 Theoretical perspectives............................................................................. 9
2.1.1 Economic Based Theories..............................................................................9
2.1.2 Psychology Theories..................................................................................9
2.1.3 The Ability Theory..................................................................................10
2.2 Empirical Literature................................................................................ 10
CHATER THREE.......................................................................................................................................................................................... 12
3. RESEARCH DESIGN AND METHODOLOGY..............................................................................................................................................12
3.1 Research design................................................................................................................................................................12
3.2 Research approach.............,................................................................................................................................................12
3.3 Population of the Study......,..............................................................................................................................................12
3.4 Sampling techniques...........................................................................................................................................................12
3.5 Sample Size......................................................,,.............................................................................................................13
3.6 Data processing and analysis........................................................................................................................................................ 14

Chapter four.............................................,......................................15

4. Time and budget plan...........................................................................15

4..1 Costbudget...............................................,,,,,,,...............................15
REFERENCES................................................................................................................................................................................... 17

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.....

ABSTRACT

The government need to collect an adequate amount of revenue for various purposes, such as social,
economic, and political aspect of the society. One of the most important uses of taxes is to finance public
goods and services.

This study aims to investigate factors affecting tax complianceindambi dollo town. Tax penality, taxpayers’
awareness, tax office capacity and tax automation were considered factors affecting tax compliance in
DambI dollo town.

The study was conducted through a descriptive and infrencial research design. The study focused on the
target population of category A and category B taxpayers of DambI dollo town.

This is because categories A and B are usually having compliant on tax to be paid. The sample size was 150
respondents selected by simple random sample technique. Data gathered from primary sources. To collect
primary data questionnaires were used.

.
INTRODUCTION
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1.1 Background of the Study

Tax payment is a civic duty and an imposed contribution by the government to contribute to the principal
source of revenue to provide public goods and services to its citizenry. The government need to collect an
adequate amount of revenue for various purposes, such as social, economic, and political aspect of the society.
One of the most important uses of taxes is to finance public goods and services. Kanbiro (2018) stated that the
amount of revenue a government can raise from taxation for its spending program depends on the taxpayer‟s
willingness to comply with a country's tax laws. Tax compliance is defined as the ability and willingness of
taxpayers to comply with tax laws, declare the correct income in each year and pays the right amount of taxes
on time (Swarnathilaka and Kevin, 2017). Tax non-compliance on the other hand, may arise due to failure to
file tax returns within stipulated time frame or failure to declare the correct taxes. It is the illegal conduct by
taxpayers done intentionally or unintentionally to evade taxes from tax authority (Bidin & Sinnasamy, 2017).
Tax non-compliance is done through tax avoidance which basically is the legal way of avoiding payment of tax,
by tax planning and it is done through evasion of tax by either under declaration or through smuggling. Tax
non-compliance is an act whereby taxpayers do not abide by laws and regulations governing taxation whether
willingly and unwillingly (Williams and Round, 2009).
Inasius (2018) classified tax compliance determinants into economic factors which includes the tax rates, tax
audits and perception of government spending, Institutional factors which includes the role of tax authority,
simplicity of the tax returns and administration and probability of detection; social factors such as ethics and
attitude, political grouping, changes in government policy and perception of equity and fairness, individual
factors such as personal financial constraints, awareness of offences and penalties factors that affect tax
compliance are namely the cost of complying whereas this may be as a result of the high tax rates, cost of
dealing with the regulatory body, tax fairness, internal costs consumed in completion of tax activities among
others, the perception on tax evasion which may include but not limited to tax avoidance, gains, ethics towards
compliance, perception on fairness of the system and poor social influences. Tax awareness and knowledge on
tax laws which can be determined by the level of education,

Seminars and conferences attended and also slow uptake of online filing which may be caused by the
knowledge of computer applications, costs involved in filing, registration as an online filer and internet
connectivity. Developing countries, particularly Sub-Saharan Africa countries collect much lower proportions
of their GDPs of tax revenue which is less than average of 16% even if they have high capacity to raise tax
revenue to promote their economic development (Kanbiro, 2018). Like other developing countries, Ethiopia is
not collecting an adequate amount of taxes compared with the potential of the country that has to generate tax
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revenues. According to the report released by the Ministry of Finance and Economic Development (MOFED,
2016) for many years there was a variance between the annual national budget and the actual tax revenues
collections. Tax non-compliance affects revenue collection and the ability of the government to achieve its
fiscal and social goals. Improved tax compliance amplifies the revenues available for supporting public
services without increasing the current tax burden on compliant taxpayers (Akalu, 2016). Tax knowledge, tax
morale, tax system, tax fairness, compliance cost, attitudes toward the behavior, subjective norms, perceived
behavioral control, and moral obligation are major factors (Alleyne and Harris, 2017). Tax evasion is a danger
to the community; the countries and international organizations have been making an effort to fight undesirable
phenomena related to taxation, the tax evasion, or tax fraud (Saxunova and Szarkova, 2018). Tax payment is
considered by society as a debt imposed by the government and is considered to increase the wealth of the
government officials. Therefore, the attitude and taxpayers‟ awareness are the tax office‟s major challenges
(Niway and Wondwossen 2017). To the best of the authors‟ knowledge, the extent of the effect of the factors
influencing tax compliance are too many, vary from place to place, and studies have not been carried out in
Dambi Dollo town, Ethiopia. Therefore, this study tries to identify major factors affecting tax compliance,
assess them and intends to describe possible areas of attention for the policy formulators and tax collecting
authorities.
1.2 Statement of the problem
Many developing countries across the world typically suffer from an insufficient supply of internal resources.
Developed countries are collecting more tax compared with developing countries than their GDP rate.
Developing countries are unable to collect sufficient tax revenue as the result they face annual national budget
deficit (World Bank Group, 2018). Ethiopia‟s tax revenues are lower than those of other countries in sub-
Saharan Africa (SSA) and other lower- income countries in 2018. The Government Revenue Dataset (GRD)
shows that Ethiopia lags notably behind most countries in terms of tax revenue mobilisation. Out of a sample
of 36 countries from sub-Saharan Africa with available data in the GRD, Ethiopia ranks 29 in 2018 in terms of
tax-to-GDP ratio. Among lower income countries, it ranks 13 ℎ out of 17 low- income countries with a tax-to-
GDP ratio of 10.7%, which is also significantly below levels seen in advanced economies elsewhere in the

world (the average tax-to-GDP ratio is estimated at 33.9%) or low-to middle-income countries (LMICs), such
as South Africa with a tax-to-GDP ratio of 29.2% (OECD, 2019).
Emperical studies have been conducted in Ethiopia on determinants of tax compliance focusing on various
factors. Yesegat and Fjeldstad (2016) examine factors that determine business people‟s attitudes towards
paying taxes in Ethiopia using ordered probit model founds a statistically significant relationship between tax-
compliance attitude and factors such as the perception of probability of audit, corruption, satisfaction with the
tax administration, peer influence, gender and education. Taxpayer compliance may be determined based on

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the taxpayer's perception of how strong tax penalties are able to support taxpayer behavior to obey taxes.
Therefore, the taxpayer's view of tax penalties is thought to affect taxpayer compliance (Brata et al, 2017).
According to Kebede et al. (2016), Organizational strength of the tax authority can be taken as one factor
which can affect tax compliance behaviour of taxpayers. The perceptions of small and medium enterprises
operators about tax service quality greatly affect their tax compliance decisions. Bereded (2020) factors
affecting tax collection and tax compliance in Ethiopia the case of Addis Ababa grade “A” tax payers.
Based on the review of the previous studies and by diagnosing the tax collection system in the Dambi Dollo
town administration, the researcher identified the gaps. The prior studies mainly focused on different
macroeconomic determinants and, there is no research result that was able to show which specific factors
influence tax revenue compliance in Dambi Dollo town administration. On the other hand, the previous study
mainly focused on the demographic economic, and social factors. However, this study mainly focused on the
behavioral and other factors that affect tax compliance by focusing on tax penalty, taxpayer‟s awareness, tax
office capacity, and tax automation factors, in order to assist the government to understand the reason for low
compliance among category “A” and “B” taxpayers, to control tax evasion practices, to aware taxpayers, to
modernize the tax administration and collection process, and as a result, create a tax compliance culture in
Dambi Dollo town.
1.3 Research hypotensis

By having the above-mentioned reasons to do, the basic research hypotensis of the study were the following:
Ho1 How does tax penalty affect tax compliance?
Ho2 What is the effect of taxpayer awareness on tax compliance?
Ho3 What is the effect of tax office capacity on tax compliance in DambiDollo?
Ho4 How does automation of tax affect tax compliance?
1.4 Objective of the study
Research objectives have general and specific characteristics. Both are explained separately in the following
paragraphs.

1.4.1 General objective

The general objective of this study was to examine factors that influence tax compliance behaviour in Dambi Dollo town
administration, Oromia Regional State.

1.4.2 Specific objectives

The specific objectives of this study will be;
1. To determine the effect of tax penalty on tax compliance.
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2. To evaluate the effect of taxpayer awareness on tax compliance.

3. To assess the effect of tax office capacity on tax compliance.
4. To analyze the effect of automation of tax on tax compliance.

1.5 Scope and limitation of the study

Category A taxpayers:
• A body or any other person having annual gross income of ETB 1,000,000 or more.
Category B taxpayer:
• A person, other than a body, having an annual gross income of ETB 500,000 or more, but less than ETB
1,000,000. among taxpayers in this category. Hence, the current study is only confined to this category and the
succeeding outputs may not apply for other categories of business owned tax payers in the town or similar
category of tax payers in other town. The study is crucial for those who want to work on and re innovate the
current tax system in the study area. It would also be a good reference for those who would like to pursue
further investigations on the topic for self or academic purpose. Besides, a shortage of time and lack of funds
may have its impact on the qualities of this study output.
1.6 Significance of the study

The study will benefit various personalities as shown below;

For the government:- the recommended possible solution of the problem and the importance

understanding those factors that determines less tax compliance can be used as an input for future policy
formulation as well as for successful utilization voluntary taxpayers compliance for increasing the government
revenue that help the government to finance public security, health, education, and infrastructure. The findings
of this study will also enhance the Authority‟s collection levels as a result of policies put in place by the
government as well as helping in meeting of revenue

targets for the purpose of funding the government expenditure.

1.7 Organization of the research
This study consists five chapters. Chapter one includes background of the study, statement of the problem,
research questions, objective of study, scope, significance of the study, organization of the research and
operational definitions of terms. Chapter two covers the review of literature in which previous theories and
empirical findings regarding factors affecting tax compliance are explained. Chapter three explains the
research design and methodology employed. Results and findings are discussed under chapter four of the
study. Chapter five explains and presents the summary, conclusions, and recommendations of the study
based on the findings.

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CHAPTER TWO
2. REVIEW OF LITERATURE
2.1 Theoretical perspectives
In this chapter, the theoretical and empirical parts of past literature were discussed in detail from the
introduction of taxation to research conducted on the world and Ethiopia related to the determinants of tax
compliance.
The theoretical part of the literature covered topics like Economic based theory, Psychology theories, Ability
theory, Benefit theory, and Proportionate theory.

2.1.1 Economic Based Theories

The economic deterrence theory states that taxpayers‟ behavior is influenced by factors such as the tax rate
determining the benefits of evasion, and the probability of detection and penalties for fraud which determine
the costs (Sandmo, 1972).
Economic factors, which is also referred to as deterrence theory (tax rates, tax audits and perceptions of
government spending) in relation to tax compliance, refer to actions associated with the costs and benefits of
performing the actions (Loo, 2006).
According to Trivedi and Shehata (2005), economic theories suggest that taxpayers “play the audit lottery,” i.e.
they make calculations of the economic consequences of different compliant alternatives, such as whether or
not to evade tax; the probability of detection and consequences thereof, and choose the alternative which
maximizes their expected after tax- return/profit (possibly after adjustment for the desired level of risk).

2.1.2 Psychology Theories

The social/fiscal psychological model focuses on psychological variables, including moral values and the
perception of fairness of the tax system and the tax authorities (Devos, 2014). As Yesegat and Fjeldstad (2016)
noted, unlike the economic deterrence model, the social psychology model pertains to the relationship between
tax compliance and social interactions and conventions. An aspect of this theory says that perceptions and
attitudes towards a tax system and compliance behaviour may be affected by the behaviour of an individual‟s
peer groups. The compliance behaviour of peer groups like friends, neighbour and relatives is expected to
impact the perceptions and compliance decisions of others. More specifically, non compliant decisions by peer
groups may reduce the level of tax compliance by others.
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According to Trivedi and Shehata (2005), Psychology theories of tax compliance assume that psychological
factors including moral and ethical concerns are also important to tax payers and tax payers may comply even
when the risk of audit is low. As noted , their Psychology studies deemphasizes audits and penalities and insteed
foucs on changing individual attitudes towards thethe tax system.

2.1.3 The Ability Theory

The ability theory is the theory developed by Pigou, (1920). This is the most popular and commonly accepted
principle of equity or justice in taxation, and it states that, citizens of a country should pay taxes to the
government in accordance with their ability to pay. It appears very reasonable and just that taxes should be
levied on the basis of the taxable capacity of an individual. For instance, if the taxable capacity of a person A is
greater than person B, the former should be asked to pay more taxes than the latter.
2.2 Empirical Literature

In this section, the empirical studies focus on prior academic researchers concerning the determinants of tax
compliance. Accordingly, the following studied papers were selected from other countries and from Ethiopia
to show the findings and the recommendations that are related to this study.
According to Ameyaw and Dzaka (2016), awareness about penalties and offences has a positive relation with
compliance. If the taxpayers are aware of the offences they are committing when evading tax and the
consequences of being non-compliant taxpayers, they might reduce their tendency to evade tax. While Tadesse
and Goitom (2014) found that awareness of penalties and Offences were not significantly correlated with tax
compliance. Taxpayer compliance will be determined based on the taxpayer's perception of how strong tax
penalties are able to support taxpayer behavior to obey taxes. Therefore, the taxpayer's view of tax penalties is
thought to affect taxpayer compliance (Brata et al, 2017). However, the study conducted by Tilahun (2016) on
factors influencing tax compliance attitude in Ethiopia in Bahir Dar City Administration indicated that
offences and penalties are not important variables in explaining tax compliance attitude.
Oladipupo and Obazee (2016) investigates the impacts of tax payers‟ knowledge and penalties on tax
compliance amongst small and medium enterprises in Nigeria using a survey research design. The data
obtained from questionnaire were analyzed using the Ordinary Least Square regression method. The results
showed that tax knowledge had a positive significant impact on tax compliance Thus, the study shows that tax
knowledge has a higher tendency to promote tax compliance Small and medium scale business owners should
also seek to advance their tax knowledge and awareness for the mutual benefits of the governments and

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taxpayers. Adimasu & Daare‟s (2017) study of taxpayers‟ awareness of tax rules and attitudes toward the
government and the impact of participatory tax on tax compliance on southern African nations and Ethiopian
nationals confirmed the above findings, showing that engaging taxpayers in the tax assessment and collection
process helps tax authorities to increase tax compliance. However, in most developing countries, the tax
authority initiates, drafts, and implements tax regimes alone, without enough discussion and consultation with
the stakeholders (taxpayers) which, in turn, results in tax non-

complianc

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CHATER THREE
3. RESEARCH DESIGN AND METHODOLOGY
This chapter describes the methodology that will be used in the study, such as the description of the study area,
research design, research approach, the population of the study, sample size, sampling procedure and research
instrument.
3.1 Research design
This study will be conducted through descriptive survey research design with the assumption that it is
appropriate because it helps in obtaining a large variety of data related to the problem under the study.
According to Mugenda and Mugenda (2003), descriptive research is collecting data to answer questions
concerning the current status of the subject in the study. The main advantage of this design is to enable the
researcher to identity the factors and measure their performance. Surveys are used when researchers want to
gather data from many people and when it is impractical to meet them all face (Noor Sharoja, 2014). The
survey strategy allows us to collect quantitative data which we can analyze quantitatively using descriptive and
inferential statistics.
3.2 Research approach

A quantitative approach will be used for its appropriateness to the determination of developing research
questions, and it is suitable for the type of numerical data required in the study (Schweitzer, 2009).
Accordingly, this study will employ a quantitative research approach. To accomplish the purpose of the study
used primary data will be collected from the cross-sectional survey form different category A and B taxpayers.
Ordinary Least Squire (OLS) with multiple variables was used to assess the relationship between dependent
and independent variables. Therefore, in this study regression analyses were applied to test the relationships
between tax penality, taxpayer awareness, tax office capacity and tax automation that are independent
variables and tax compliance a dependent variable.
3.3 Population of the Study

Best (2007) defined a population as a group of individuals sharing one or more characteristics common and
which a researcher has an interest in. The target population for this study will be category,90 “A” and category
150 ,“B” taxpayers of Dambi Dollo town licensed by the registrar of Dambi Dollo town trade office.
3.4 Sampling techniques
In the formation of a sample for the study, it is necessary to use probability sampling. This will ensure
sampling errors and bias and that the sample represent the entire population.
In the formation of a sample, a simple random sampling technique was employed because of its simplicity and
it gives an equal chance to each person to be selected. It offers the participating elements in each of the sector

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equal opportunity of being selected. This ensured less sampling bias and errors.
3.5 Sample Size

This study used a simplified sample size determination formula provided by Yamane (1967) to determine the
required sample size at 95% confidence with the level of precision of 5% (Yamane, Taro, 1967). This sample
size determination method is more applicable when the sampling population is known and finite and it is also
statistically per mutable to commit 0.01 to 0.1 level of bias in the study process and to determine the required
sample size the following Taro Yamane 1967 formula applied in this study.
Therefore, the sample size comprised of 150 respondents determined according to Yamane,

N
n=
[1 + (Ne ²

n= ....240........ =150
1+240(0.05)²

Where n = is the sample size

N = is the population

e = is the error limit (0.05 based on 95% confidence level).

Table 1: Sampling size computation applied to DambI dollo town taxpayer

Category Number % Sample size (n)

CategoryAtaxpayer 90 37.5 56
CategoryBtaxpayer 150 62.5 94
Total 240 62.5 150

Source: (Office report, 2019)

3.6Type and Sources of Data

In order to achieve the objective, both primary and secondary data were used for the study. Primary data were

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collected through the questionnaires to measure the factors affecting tax compliance in Dambi Dollo town. The
survey will undertake using structured and semi-structured questionnaires from category “A” and “B” taxpayers
of the study area. The study uses quantitative approaches where all data were measured to give meaningful
numerical results. This data includes the number of category “A” and “B” taxpayers in each sector and their
business type/sector distribution.
3.7Data Collection Method

This study will be carried out using a semi-structured questionnaire distributed to the selected respondents of
category “A” and “B” taxpayers in the study areas. Questionnaires were designed according to the five point
Likert Scale: “Strongly disagree (1), Disagree (2), Neutral (3), Agree (4), and Strongly agree (5)” to explore
the key variables of factors affecting tax compliance. The questionnaire comprise of closed questions. The
questionnaire were divided into two main sections: The first section, background information of the
respondents was presented. The second section explored questionnaire using close ended items.

3.8 Data processing and analysis

The data collected through questionnaire and document analysis from the study representative sample will be
processed and subjected to a variety of analysis techniques. Descriptive statistics will be employed to analyze
and interpret the data.

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4. RESULTS AND DISCUSSION

This chapter presents the data analysis, presentation and interpretation of findings on the data collected from tax
payers in Haramaya town.

4.1 Descriptive Statistics

4.1.1 Response Rate
.
4.1.3 Reliability satistics
Reliability refers to the extent to which data collection techniques yielded consistent findings, similar observations,
would be made or conclusions reached by other researchers or there is transparency in how sense was made from the
raw data. The index that indicates the degree of internal consistency is called Cronbach‟s alpha coefficient
(Katamba & Nsubuga, 2014). If a variable has the value of Cronbach alpha (ɑ) > 0.70, it can be said that the variable
is reliable.
Table 4: Reliability Statistics
Variable Cronbach‟s alpha Explanation
Tax Compliance 0.728 Reliable
Tax Penality 0.744 Reliable
Taxpayer Awareness 0.744 Reliable
Tax Office Capacity 0.723 Reliable
Tax Automation 0.747 Reliable
Table 4 describes that the value of Cronbach‟s Alpha for five variables is higher than 0.70, thus, all the questions
were appropriate and reliable.
4.1.4 Tax Compliance
The study sought to determine from the respondents their perspectives regarding tax compliance levels in order to
establish the timeliness of filing their tax returns, the declaration of the correct income, and payment of the right
amount of taxes and whether they filed their tax returns online. Table 5: Respondent's response on question of tax
compliance
Item Statements Response Frequency Parcent
Strongly disagree 79 53.4
Disagree 35 23.6
1 Neutral 1 .7
Filing uf returns done within set dedlines
Agree 26 17.6
Strongly agree 7 4.7
Total 148 100.0
The business pays the business income tax Strongly disagree 22 14.9
based on the estimation geven by tax office Disagree 38 25.7
2 Neutral 26 17.5
Agree 49 33.1
Strongly agree 13 8.8
Total 148 100.0
The business report the correct income based Strongly disagree 46 31.1
on book of account Disagree 41 27.7
3 Neutral 12 8.1
Agree 42 28.4
Strongly agree 7 4.7

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Total 148 100.0

The business files tax returns online Strongly disagree 103 69.6
Disagree 3 2.1
Neutral 4 2.7
4 Agree 31 20.9
Strongly agree 7 4.7
Total 148 100.0

From the findings in Table 5, 77% of the respondents were disagreed, 6.4% were agreed and 18.4% were neutral
whether they do not filed their tax returns on time. From the findings, it was clear that although majority of the
taxpayers in Haramaya town do not filed their tax returns on time due to poor understanding about tax
proclamations and as a result tax penality imposed on taxpayers who do not file their tax return on time.
Respondents were asked on the statement about whether they pay the amount of tax by the estimation geven by tax
office. The study showed that 40.6% of respondents were agreed, 41.9% of respondents were disagree on the
statement and 17.5% respondents were neutral that they pay the right amount of taxes. The results showed that most
of the taxpayers pays their business income tax through estimation method of tax calculation due to luck of
knowledge of taxpayers to keep proper book of account.
In addition, the findings showed that 58.8% of the respondents were disagreed, 33.1% agreed and 8.1% were neutral
about whether they report the correct income to the tax authority based on book of account. The results showed that
majority of category A and category B taxpayers did not report the exact amount of income due to lack of clear
understanding on that they are required to declare all income and how to declare actual income received from all
sources to the tax authority.
Furthermore, Respondents were asked on the statement that they file tax returns online. The study findings showed
that 71.7% of the respondents were disagreed, 25.6% were agreed and 2.7% were neutral about the filing of tax
returns online. From the findings, it was clear that because of lack of technology majority of the taxpayers in
Haramaya town did not file their tax returns on time, declare the correct income.
As such, there are gaps noted with regard to the collection and filing of revenue among the taxpayers in Haramaya
town.
4.1.5 Tax Penality
Tax penalties related to control beliefs, which is one factor of the theory of planned behavior. Taxpayer compliance
will be determined based on the taxpayer's perception of how strong tax penalties are able to support taxpayer
behavior to obey taxes. Tax penalties is guarantee that the provisions of legislation such as tax norms will be obeyed
by taxpayers, in other word tax penalties is a deterrent so that taxpayers do not violate the taxation norms
(Mardiasmo, 2009 cited in Rahayu, 2017).

Table 6: Respondent's response on question of tax penality

Item Statements Response Frequency Parcent
Strongly disagree 11 7.4
Disagree 39 26.4
1 The penalty rates are very low and I can afford Neutral 6 4.1
to pay the penalty
Agree 83 56.1
Strongly agree 9 6.1
Total 148 100.0
Strongly disagree 6 4.1
The probability of being detected by the tax Disagree 25 16.9

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2 office for not declaring the exact income is too Neutral 9 6.1
low Agree 89 60.1
Strongly agree 19 12.8
Total 148 100.0
Strongly disagree 11 7.4
Disagree 25 16.9
3 I believe that the tax authority is tolerant
Neutral 7 4.7
towards my offence and most probably it
Agree 96 64.9
will escape without any punishment.
Strongly agree 9 6.1
Total 148 100.0
Strongly disagree 12 8.1
Disagree 35 23.6
Neutral 5 3.4
4 I always prepare book of account and reported
Agree 90 60.8
my business transactions honestly
Strongly agree 6 4.1
Total 148 100.0
Strongly disagree 18 12.2
Disagree 61 41.2
Tax authority has adequate man power to audit Neutral 1 .7
5 all cases Agree 58 39.2
Strongly agree 10 6.8
Total 148 100.0
Source: Survey result and researcher‟s computation
In table 6 of item 1, respondents were asked on the statement that the penalty rates are very low and I can afford to
pay the penalty. Accordingly, 62.2% of respondents were agreed, 33.8% of respondents were disagree on the
statement and 4.1% respondents were neutral. The results showed that almost all of the respondents perceived that
the penalty rates are very low thus, they do not report all of their income to tax authority due to no or low penalty
rates, lower government performance, less attitude on tax payment and related issues. Hence, from this finding high
penalty adversely affects tax payer‟s voluntary compliance. This gives a direction for the tax authority that the
severity of penalty imposed on any tax evasion has negative impact on the level of voluntary tax compliance.
In table 6 of item 2, respondents were asked about the probability of being detected by the tax office for not
declaring the exact income is too low. Accordingly, 72.9% of the respondents were agreed and strongly agree on the
statement, 21% of the respondents were disagreed and strongly disagree and 6.1% of the respondents were neutral.
This indicates that most of the respondents not willing to comply the tax law, If the taxpayers are aware of the
offenses and the consequences of being non-compliant taxpayers, they might reduce their tendency to evade tax.
As it is indicted in item 3 of table 6, 71% of the participants agreed on the statement that the tax authority is
tolerant towards my offence and most probably it will escape without any punishment to tax offences, Whereas
21.3% of respondents were disagree on the statement and 4.7% respondents were neutral. This implies that majority
of the taxpayers were not report all of their income and this is the factor of low tax compliance.
In item 4 of table 6, respondents were asked on the item that they always prepare book of account and reported my
business transactions honestly. Accordingly, 64.9% of respondents agreed, 31.7% of the participants disagree and
3.4% respondents were neutral. There are probability of under reporting income that comply with the tax law. Some
taxpayers add or include different expenses for reducing income so that easily they are able to reduce the taxable
income and understate the income in different mechanisms, this finding show that the tax evasion is the major factor
of less tax revenues collection in the tax centers. In this case customers will lose confidence and reliability of the
service tax officers give.
In item 5 of table 6, respondents were were asked on the item that tax authority has inadequate manpower to audit
all cases. Accordingly, 46% of respondents agreed, 53.4% of the participants disagree and 0.7% respondents were
neutral. This shows the tax authority has not adequate manpower to audit all cases which is the main constraint that
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affect their intention to pay tax on time and honestly and could result in tax compliance.

4.1.6 Taxpayer’s Awareness

Taxpayer awareness refers to the understanding about tax and acting or responding for tax obligation. To evaluate
the impact of taxpayers‟ awareness on the tax revenue collection and assess the awareness of taxpayers of Haramaya
town different questions were asked by interview, dichotomous questions and five point Likert scale employed.
.
4.1.7 Tax Office Capacity
Tax authority capacity is the capacity of tax administration to collect and process data for investigating and
ultimately taxing those people and companies who usually have opportunities to scape their tax obligations. To
gather information regarding to whether the tax office has capacity to serve taxpayers or not, interview and
questionnaire used.
Table 8: Tax office capacity's respondent‟s response
Items Statements Response Frequency Parcent
1 Tax Authority is able to detect people not Strongly disagree 22 14.9
paying the right amount of tax Disagree 86 58.1
Neutral 2 1.4
Agree 35 23.6
Strongly agree 3 2.0
Total 148 100.0
2 Tax collection officers are skilled enough Strongly disagree 8 5.4
to assess and collect taxes Disagree 109 73.6
Neutral 6 4.1
Agree 23 15.5
Strongly agree 2 1.4
Total 148 100.0
3 Tax authority has limited capacity to Strongly disagree 7 4.7
investigate all income reported Disagree 33 22.3
Neutral 2 1.4
Agree 96 64.9
Strongly agree 10 6.8
Total 148 100.0
4 Tax authorities enforcement actions in the Strongly disagree 10 6.8
town are effective Disagree 110 74.3
Neutral 2 1.4
Agree 25 16.9
Strongly agree 1 .7
Total 148 100.0
Source: Survey result and researcher‟s computation

Respondents were asked their opinion in relation to the statement that tax authority is able to detect people not
paying the right amount of tax. Accordingly, 73% strongly disagree that the tax office has not capacity to detect
taxpayers‟ not paying the right amount of tax properly. Whereas
25.6% of them disagree. And only 1.4% of them were neural. This indicates that Haramaya tax office has not
capacity to detect taxpayers‟ not paying the right amount of tax properly.
In item 2 of table 8, 79% respondents were disagreed that tax collection officers are skilled enough to assess and
collect taxes. 4.1% of them were neutral and only 16.9% agree that tax officers are skilled enough. From this one
can infer that the respondents believe that the officers were not skilled enough to asses and collect taxes. Thus
whenever the taxpayers have this understanding about the tax officials, then it is likely it will affect their intention to

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pay tax on time and honestly and could result in tax evasion. This indicates that tax compliance could be affected by
the ability of tax officials, system and technology used, so this would be one of the factor that can affect tax
collection. In addition to these because of lack of technology, most taxpayers did not declare the right amount of tax.
Wanjiru (2014), in his study stated that the services rendered by tax office should be advanced and information
technology systems.
As indicated in item 3 of table 8, 71.7% of the participants agreed that tax authority has limited capacity to
investigate all whereas 27% of the respondents disareed that tax authority has limited capacity. And only 1.4%
participants were neutral. This indicates that tax collection could be affected by types of service rendered by the tax
office. This was supported by the study conducted by John and Enahoro (2012) who stated that, if the tax services
not effective and efficient may lead tax payers to not complie.
With regard to item 4 of table 8, respondents were asked about the tax authorities‟ enforcement actions in the town
was effective or not. Accordingly, 17.6% tax payers confirmed that tax authorities‟ enforcement actions in the town
is effective and oppositely more than half of the study participants that is 81.1%, confirmed that tax authorities‟
enforcement actions in the town is not effective and not welcomed by the tax payers. 1.4% study participants
underlined that, they are neutral with the current tax authorities‟ enforcement actions in the town. From this we can
understand that the tax authority usually takes aggressive effort instead of teaching in various ways to implement its
sophisticated taxation system.
4.1.8 Tax Automation
Automation refers to the technique, method, or system of operating or controlling a process by use of electronic
devices.

Table 9: Effect of automation of tax on revenue collection

Items Statements Response Frequency Parcent
1 I have used cash register machine and filed Strongly disagree 27 18.2
my tax returns through E-tax Disagree 95 64.2
Neutral 2 1.4
Agree 23 15.5
Strongly agree 1 .7
Total 148 100.0
2 All transactions are processed using Strongly disagree 10 6.8
automated system by the uses of quality Disagree 111 75.0
system and technology Neutral 8 6
Agree 14 9.5
Strongly agree 4 2.7
Total 148 100.7
3 I believe non-compliance cases decreased as a Strongly disagree 1 6.1
result of E- tax system Disagree 91 61.5
Neutral 11 7.4
Agree 35 23.6
Strongly agree 2 1.4
Total 148 100.0
4 I am aware of online filing of returns Strongly disagree 27 18.2
Disagree 94 63.5
Neutral 5 3.4
Agree 20 13.5
Strongly agree 2 1.4
Total 148 100.0
Source: Survey result and researcher‟s computation

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With regard to automation of tax revenue collection respondents were asked their opinion in relation to the statement
that taxpayers are using cash register machine and filed their tax returns through E-tax. 82.4% respondents were
disagreed, 16.2% respondents were agreed and 1.4% neutral. The result showed that the taxpayers were not using
cash register machine and filed their tax return through manual system. This indicates that the tax automation affect
tax compliance. Because of the listed factors the tax office can‟t collect the intended amount.
Respondents were asked their opinion in regarding whether all transactions are processed using automated system
by the uses of technology or not. Accordingly, 81.8% respondents were disagreed, 12.2% respondents were agreed
and 6% neutral. This shows that having ineffective and inefficient computerized system wastes their valuable time
and gives them burden. This indicates that tax compliance affected by the automated system and technology used, so
this would be one of the factors of less tax collection.
Respondents were asked their opinion in relation to the statement that non-compliance cases decreased as a result of
E- tax system. 67.6% respondents were disagreed, 25% respondents were agreed and 7.4% neutral. This indicates
that tax compliance would be affected by types of service rendered by the tax office.
Respondents were asked their opinion in relation to the statement that taxpayers are aware of online. Accordingly,
81.7% of respondents were disagreed, 14.9% of respondents were agreed and 3.4% were neutral. This indicates that
Haramaya taxpayers have not knoledge of using automated system to handle files properly.

4.2. Classical Assumptions

Classical assumption test consisted of Heteroscedastic test, Autocorrelation test, normality test and multi collinearity
tests. Classical assumptions were used to determine whether the data to be used in the research is free from classical
assumption or not.
4.3.1 Heteroscedastic Test
When heteroscedasticity is present, the cases with larger disturbances have more “pull” than other observations. A
more serious problem associated with heteroscedasticity is the fact that the standard errors are biased. Many
statistical programs provide an option of robust standard errors to correct this bias. Weighted least squares
regression also addresses this concern but requires a number of additional assumptions. In this study, the Glejser test
was used to test for heteroscedasticity across the range of explanatory variables.
If the value Sig. < 0.05, then there is a problem of hetroscsdacity. Also if the value Sig.> 0.05, then there is no
problem of heteroscedasticity.
Table 11: Heteroscedastic Test
(Constant) 0.159
Tax Penality 0.692
1 Taxpayer Awareness 0.479
Tax Office Capacity 0.002
Tax Automation 0.364
Dependent Variable: Tax compliance
Based on the output coefficients the obtained p value is 0.159, 0.692, 0.479, 0.002 and 0.364 which indicates that
most of p value greater than the 0.05 and it can be concluded that there is no hetroscedasticity problem.
4.3.2 Autocorrelation Test
The second important test which is performed in this research is the autocorrelation test. This assumption of OLS
theoretically expressed by the numbers of scholars among that Brooks (2008) and Verbeek (2004) founded. They
expressed as; cov (ui, uj) = 0, this is another assumption that is made of the CLRM‟s disturbance terms is that the
covariance between the error terms over time is zero. In other words, it is assumed that the errors are uncorrelated
with one another. If the errors are not uncorrelated with one another, it would be stated that they are
“auto correlated” or that they are “serially correlated”. The most common test of this assumption is by using the
Durbin–Watson test and the Breusch-Godfrey test (Brooks, 2008, p. 144).
As far as concerning this paper the researcher used the Durbin–Watson test and detected the problem of
autocorrelation. It can easily check using the Durbin-Watson statistic, which is a simple test to run using SPSS
Statistics. The value of Durbin-Watson test statistic, d, varies between 0 and 4. Closer to 0 means positive auto-
correlation while closer to 4 means a negative autocorrelation. A d = 2, indicates no auto-correlation. A soft
cushion exists around d = 2 where autocorrelation exists, but its intensity is not severe enough to call for some
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remedial measures. So all d values within 1.5 to 2.3 intervals may be taken as an indicator of either no or ignorable
autocorrelation.
Table 12: Autocorrelation Test using the Durbin-Watson statistics
Mode l R R Square Adjusted R Square Std. Error of the Durbin-Watson
Estimate
1
.731a .535 .522 .894 1.560

a. Dependent Variable: Tax compliance

b. Predictors: Tax penality, Tax payers awerness, Tax offic capacity, Tax automation

From the regression output Durbin–Watson test result shows that there is no autocorrelation, because its value is
within 1.5 to 2.3 interval.
4.3.3 Normality Test
Normality is one of the classical liner regression assumptions, which is the residual terms, mean is zero. If the error
terms mean is not zero, the inferences we make about the coefficient estimates could be wrong, There are standard
measurements for normality assumptions this are its skewness and kurtosis and histogram. Skewness measures the
extent to which a distribution is not symmetric about its mean value and kurtosis measures how far the tails of the
distribution area. A normal distribution not skewed and defined to have a coefficient of kurtosis of three. For the
context of this study, normality test was carried using skewness and kurtosis.
If the values of stastic under skewness and kurtosis is less than the absolute value of 2 it is said to be normal
distribution. Accordingly, all the stastic values under skewness and kurtosis were less than the absolute value of 2
thus, it can be concluded that the residuals are normally distributed. Consequently, the results of the multiple
regression analysis adopted by the study are therefore valid.
Table 13: Normality test using skewness and kurtosis
N Mean Std. Skewness Kurtosis
Deviation
Statistic Statistic Statistic Statistic Std. Statistic Std.
Error Error
TPE 148 2.78 1.171 -.071 .199 -1.293 .396
TPA 148 2.32 1.240 .589 .199 -.930 .396
TOC 148 1.77 1.268 1.336 .199 .175 .396
TAU 148 2.39 .966 .860 .199 -.381 .396
Valid N 148

4.3.4 Multicolinearity Test

Multicolinearity in the regression model suggests substantial correlations among independent variables. This
phenomenon introduces a problem because the estimates of the sample parameters become inefficient and entail
large standard errors, which makes the coefficient values and signs unreliable. In addition, multiple independent
variables with high correlation add no additional information to the model. It also conceals the real impact of each
variable on the dependent variable (Gujarati, 2004). Therefore, checking multicolinearity problem with the
assumption of tolerance and VIF (Variance Inflation Factor) statistics is important before regressing. (Andy, 2006)
suggested that a tolerance value less than 0.1 almost certainly indicates a serious colinearity problem. (Liu, 2010)
also suggested that for a VIF value greater than 10, there is also serious colinearity problem.
Table 14: Multicolinearity test using Tolerance and VIF
Model Unstandardized Standardized T Sig. Collinearity Statistics
Coefficients Coefficients

Tolerane VIF
B Std. Error Beta

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(Constant) .967 .280 3.452 .001

TPE -.051 .070 -.046 -.731 .466 .808 1.238

1 TPA .172 .067 .165 2.579 .011 .796 1.256

TOC .667 .069 .654 9.679 .000 .713 1.402

TAU -.164 .077 -.122 -2.130 .035 .990 1.010

a. Dependent Variable: Tax Compliance
b. Predictors: Tax penality, Tax payers awareness, Tax offic capacity, Tax automation
Table 14 showed that VIF value for all independent variables that consisted of tax penality, taxpayer awareness, tax
knowledge, tax penalty, tax payers awareness, tax offic capacity, tand ax automation had tolerance value more than

0.10 while VIF value was below 10. Thus, the regression model proposed in this research was found to have no
symptoms of Multi collinearity.

4.4 Regression Result

In this study, a multiple linear regression analysis was conducted to test the influence among predictor variables.
The study used SPSS to code, enter and compute the measurements of the multiple regressions. Table 15: Model
Summary
Mode l R R Square Adjusted R Square Std. Error of the Estimate

1 .731a .535 .522 .894

a. Dependent Variable: Tax compliance
b. Predictors: Tax penality, Tax payers awerness, Tax offic capacity, Tax automation
Table 15 shows that the R value depicts a relatively strong relation between predictor variables and the response
variable (tax compliance). This is because the R value is positive 0.731. The R square which is the coefficient of
determination describes how tax compliance varied with the independent variables namely tax penality, taxpayer
awareness, tax office capacity, and tax automation. The four independent variables studied explain 52.2% of the
factors that affect tax compliance, the remaining 47.8% describes other factors not studied in this research. With R
Square greater than 50%, it is deemed that the model fits the data.

4.4.1 Analysis of Variance

Analysis of Variance was used to determine the mean differences between two independent variables. The study
shows how the researcher has conducted inferential statistics with p-value sig‟ for significance influence on the
criterion variable. The p-values less than 5% are generally considered significant.
Table 16: ANOVA
Model Sum of Squares Df Mean Square F Sig.
Regression 131.602 4 32.900 41.136 .000b

Residual 114.371 143 .800

Total 245.973 147

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a. Dependent Variable: Tax compliance

b. Predictors: Tax penality, Tax payers awerness, Tax offic capacity, Tax automation

F-test measures the joint significant effect of independent variable with dependent variable. The significant level of
the research is 5% and its confidence level is 95%. The regression result shows that all independent variables are
jointly significant even at 1% significant level. Therefore, all independent variables of this study have a joint
significant effect on the explained variable.
Table 17: Regression coefficients of the four predictive variable
Model Unstandardized Coefficients Standardized T Sig.
Coefficients

B Std. Error Beta

(Constant) .967 .280 3.452 .001

Tax Penality -.051 .070 -.046 -.731 .466

1 Taxpayer Awareness
.172 .067 .165 2.579 .011
Tax Office Capacity
.667 .069 .654 9.679 .000

Tax Automation -.164 .077 -.122 2.130 .035

a. Dependent Variable: Tax compliance

4.4.2 Model specification

The most crucial issues in all of the regression analysis is model specification, It refers to the determination of which
variables should be included in or excluded from a regression equation. Based on the above regression coefficients
result, the following regression equation was obtained.
Estimated Equation:

Y = α+β1TPE+ β2TPA+ β3TOC+ β4TAU+u Substituted Coefficients:

TC = 0.967 – 0.051TPE + 0.172TPA + 0.667TOC – 0.164TAU + u

WHERE:

TC = Tax compliance

TPE = Tax penality

TPA = Tax payers‟ awareness

TOC = Tax office capacity TAU = Tax automation α = is a constant, represents the tax collections when

every independent variables are zero.

U = is the error.

This regression equation can be used to predict the value of the dependent variable based on a set of values for the
independent variables. Thus, given this study constituted one dependent variable influenced by four regressors, the
researcher found it obvious of using this model.
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As the t-test shows taxpayers‟ awareness, tax office capacity and tax automation have independently significant
effect on tax compliance. However, tax penality is insignificant independently but significant jointly with TC.
Tax penality (TPE) had negative regression coefficient (B) value of – 0.051. It means that tax penality (TPE)
decrease at one point and other independent variables were constant. Thus, tax compliance (TC) would increase to
0.051 and the relationship is statistically significant at 5% significant level.

Taxpayer awareness (TPA) had positive regression coefficient or slope (B) value of 0.172. It means that taxpayer
awareness (TPA) increase at one point and other independent variables were constant. Thus, tax compliance (TC)
would increase to 0.172 and the relationship is statistically significant at 5% significant level.
Tax office capacity (TOC) had positive regression coefficient or slope (B) value of 0.667. It means that the tax
office capacity (TOC) increase at one point and other independent variables were constant. Thus, that tax
compliance (TC) would increase at 0.667 increased by one unit TRC increased by 0.667 and this relationship is
statistically significant at 5% significant level.
Tax automation (TAU) had negative regression coefficient or slope (B) value of – 0.164. It means that tax
automation (TAU) decrease at one point and other independent variables were constant. Thus, tax compliance (TC)
would increase at 0.164 and the relationship is statistically significant at 5% significant level.

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5. SUMMARY, CONCLUSION AND RECOMMENDATION

5.1 Summary
Tax payment is a civic duty and an imposed contribution by the government to contribute to the principal source of
revenue to provide public goods and services to its citizenry. Taxes are fundamental to the existence of
governments, for the tax revenues help to finance the bulk of services that governments provide including education,
welfare, public safety, infrastructure and other basic public services. Haramaya town tax office is one of the tax
office branches, which found in Eastern Hararghe zone of Oromia regional state. In this tax office the budgeted
amount was not collected efficiently for many years, rather the budget and the actual collection shows fluctuation.
The general objective of this study was to examine the determinants of tax compliance in the case of Haramaya
town. The specific objectives are to examine the effects of tax penality on tax compliance; to evaluate the impact of
taxpayers‟ awareness on tax compliance; to investigate the impact of tax offices capacity on tax compliance and to
ascertain the impact of tax automation on tax compliance. To attain the objective of the research, four variables were
examined. From taxpayers‟ points of view, tax penality, taxpayer‟s awareness, tax office capacity and tax
automation. For the purpose of this study, a descriptive survey method was employed to disclose the understanding
of respondents on the issue under study. Both primary and secondary sources of data were used. Data were gathered
via questionnaire and document analysis. The collected data were analyzed by descriptive statistics such as
frequency count and percentage.
The first specific question was to evaluate the relationship between tax penality and tax compliance. Tax penality is
explanatory variable which was examined and tested by the researcher and it‟s also found that one of the major
factor for less tax compliance. The study concludes that tax penality negatively and significantly affects tax
compliance in Haramaya. In the regression analysis also shown that tax penalty has negative influence on the
taxpayer‟s compliance. It means that tax penalty had no influence on taxpayer compliance. This stated that tax
penalty imposed did not increase taxpayer‟s compliance in paying the tax. Tax compliance was decreasing because
there were still many taxpayers who did not aware and care to pay the tax and also because tax penalties imposed on
the taxpayer‟s which are still low. Thus, taxpayer‟s are not compliant with their obligations to pay taxes
The finding showed that, taxpayers awareness is another factor of less tax compliance, as the survey result shown
that most of the taxpayers have challenges related with tax rules and regulation. Tax rules and regulation is the main
important element for tax compliance and also many taxpayers don‟t know how to compute tax, this is also the
reason of non-compliance in the town. The tax office offer training to enhance taxpayers awareness; however much
more left with the addressability of training to all taxpayers and also taxpayers or owner of the business assign other
person to attained on the training as this result many tax payer not being aware by the training program. On the other
hand, in the regression analysis shown that taxpayer awareness was one of the explanatory variables which was
tested with 5% significant level and the result shown that the taxpayer awareness has strong positive relationship
with tax compliance. In general in the tax office taxpayer‟s awareness is the core factor that affects tax compliance.
The finding showed that, the tax office capacity was found that the other factor for less tax compliance, less tax
office capacity manifested in different ways most of the respondents disagree with the tax office have enough
capacity to serve the tax payers some of the respondents said that the system interrupt, many times the file handling
system is weak and information also not easily accessed from the tax office. The regression analysis result also
shown that even if the t test show TOC (tax office capacity) in significant at 5% significant level.
The paper also examined tax automation is also another factor for less tax compliance in the town, the assessment
rules and regulations not understandable to tax payers in addition to this the respondents believe that the tax office
has not automated or digitalized system, many taxpayer‟s attitude towards tax payment is not right and time of tax
payment also another non-compliance factor and many respondents are not happy with the length of time to declare
tax.

5.2 Conclusion
Tax payment is a civic duty and an imposed contribution by the government to contribute to the principal source of
revenue to provide public goods and services to its citizenry. Ethiopia, like other developing countries, is not
collecting an adequate amount of taxes comparing with the potential of the country that has to generate tax revenues.

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This study aims to investigate the factors affecting tax compliance among category A and B taxpayers in Haramaya
town. In doing this tax compliance taken as a dependent variable and tax penality, taxpayer awareness, tax office
capacity and tax automation are taken as independent variables. Based on the findings and analyzed data in this
study, the following conclusions were made:
Haramaya town has faced different financial, operational and administrative problems. Tax payers have inadequate
knowledge on the technical aspects of the income tax. Furthermore, the tax office does not offer sustainable training
to create tax awareness for taxpayers. Most of them do not know the rules and regulations of taxes they pay. Due to
this, negligence, delay in tax payment and evasion are taken by taxpayers as solution to escape from payment of
taxes. Moreover, the tax collectors did not have adequate skills and the authorities enforcement actions in the town
are ineffective. Lack of clarity in tax law, Little or no attention is paid to skills, techniques, procedures, customer
relations training are the major problems. Besides, there are problems in relation to treating each and every taxpayer
equally and fairly and bringing non registerd taxpayers to tax system. Taxpayers continuously complain on
challenges existing in the tax office. The major causes for the aforementioned factors affecting tax compliance are
poor understanding about tax proclamations, rules and regulations by taxpayers, complexity of tax laws and
proclamation, delayed tax assessment process by the authority due to lack of sufficient assessors, lack of skilled and
inefficiency and ineffective computerized system, and luck of automation in tax administration. Generally, the
results of the survey study showed that tax penality, taxpayer‟s awareness, tax office capacity and tax automation
are the main factors for less tax compliance in Haramaya town tax office.
Test results for OLS assumptions are Heteroscedastic by Gleiser test. Interpretation of test result output Glejser
based on the output coefficients obtained in value of Sig (p-value). From the result the study concluded that, the p-
values are considerably in excess of 0.05 at 95% confidence interval. The second important diagnostic test which
was performed in this research was the autocorrelation test by using the Durbin–Watson test from the regression.
Autocorrelation test using the Durbin-Watson can be applied the result is 1.560. The conclusion from the test shows
there is no problem of auto correlation. Another third important test that was conducted in this paper was the
normality assumption by Skewness and Kurtosis. The result depicts the it can be concluded that the residuals are
normally distributed.
Fourth test which is conducted in this study is the multicolinearity test, this help to determine whether there is
similarity between independent variable and to avoid double effect of independents variable from the model. Test of
multicollinearty as a basis on VIF value using SPSS. As indicated on the correlation matrix output collinearly mean
value of VIF obtained between 1 to 10, it can be concluded that there is no multicollinearty symptom.
According to the analysis conducted to the conclusion that the increasing tax compliance is directly related to the tax
penality, taxpayers awareness, tax office capacity and with tax automation. The explanatory power of the tax
revenue was 0.731 which shows, that there is a linear relationship between tax compliance and tax penality,
taxpayer‟s awareness, tax office capacity and tax automation with all these factors affect tax compliance. The four
independent variables studied explain 52.2% of the factors that affect tax compliance, the remaining 47.8 % could
be due to other factors not included in this study.
As expected, the study observed differences in the coefficients and the significance of the variables affecting tax
compliance. From the output tax penality p or Sig value of 0.466 with negative sign of the coefficient, taxpayers
awareness p value of 0.011 with positive sign of the coefficient, tax office capacity p value of 0.000 with positive
sign of the coefficient and tax automation p value of 0.035 with negative sign of the coefficient.
Tax penality from regression result shows that negative impact on tax compliance and significant at 95% confidence
interval, taxpayers awareness regression result shows positive significant effect on tax revenue, tax office capacity
regression equation is positive and significant in affecting tax revenue. Finally tax automation from regression has
the negative sign and statistically significant to increase the tax compliance in Dambi Dollo town.

5.3 Research Limitations

Based on the result, this research has limitations as follows:
• In this research, there were only four independent variables and all variables have an influence on tax
compliance as much as 52.2% and the rest 47.8% is influenced by other variables outside the research
model.

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• Among the four independent variables used in the research, tax penalty, taxpayer awareness, tax office
capacity, and tax automation variable had an effect meanwhile tax penalty, had no effect.

• The respondents in this research were only category “A” and category “B” taxpayers. The objects in this
research only limited to one area, namely category “A” and “B” taxpayer in Haramaya town. Thus, the
results of the study cannot be generalized to a wider sample.

5.4 Recommendation
The researcher put the following remakes for the findings,

Since, the tax non-compliance is done through tax avoidance which basically is the legal way of avoiding payment
of tax, and through evasion of tax by either under declaration or through smuggling and illegal activity which has
adverse effects on government revenue generation, it must not continue. Therefore, the government should embark
on massive public enlightenment campaign and adequate utilization of tax revenues on public goods to discourage
tax evasion. The government should make efforts at sensitizing the society on the seriousness of tax evasion and the
penalties attached to tax violators. The tax system should be computerized to ensure efficiency and quality delivery,
and also, tax agents or collectors must be rotated in order to avoid corrupt practices.
The tax office should strengthen the awareness creation programs. The tax office should give trainings to taxpayers
in order to create awareness on to taxpayers to create awareness that tax is an obligation payment to the country. The
tax office also should trained taxpayers how computing tax. The office should make training and different awareness
creation materials addressable to taxpayers.
The office should work with regard to creating enough awareness through different mechanisms since awareness of
the people is very important to eliminate the tax evasion and can enhance the efficiency of the authority. This can be
achievable if the office give training to tax payers as well as tax officers‟ and can also create awareness by news
papers, pamphlets, with attractive radio and television programs. In addition to that strong audit follow up is very
important element to enhance tax income and to reduce tax evasions.
The tax office should capacitate itself by hire more work forces, so that the tax office will be enable controlling
taxpayer‟s business activities and make auditing at list once a year as this result the tax office can reduces tax
evasion and noncompliance, unless otherwise taxpayers likely to evade tax to the extent they feel that the tax office
is weak not auditing as per the right time and unable to enforce the law.
The tax office should capacitate itself by technology and also train employee with serving of tax payers, handling of
tax payers‟ file, as this result the tax office can avoid long services waiting time and enhance file handling systems.
This action leads the tax office to reduce tax payer displeasure relating with long waiting time and displace or
mishandling file.
The tax office should make clear the rules and regulations towards tax compliance and make the tax compliance
format easily understandable, make the collection and assessment of tax procedure easily understandable so that the
non-compliance can be reduced.
The tax office should make appropriate time of tax payment and also make fast collection procedure and easily
enable the tax payer to get related services as this result tax payers can declare without fire of spending much time in
the tax office sub step-by-step the noncompliance can be reduced from the tax office.
The authority should advance the information technology (IT), system like filling, payment system, recording
system, registration and others related issues to improve revenue collection, accounting for taxes paid, monitoring of
taxpayers, service delivery to taxpayers and compliance, and also to reduce the administration cost. The tax system
should be computerized to ensure efficiency and quality delivery, and also, tax agents or collectors must be rotated
in order to avoid corrupt practices. Furthermore, tax authority is better to design good and fast systems that can
reduce the time of users of cash register machine to make corrections for their errors without wasting time and
additional cost.
Technology in tax administration means helps individuals to integrate with the officials at the comfort of the home
and work place without necessarily moving to the government offices. This increases and eases the time used to
carry out obligations. This can be enhanced by having accessible websites and easy inputs with descriptions user
guide for different functionalities.
The tax office should applied strong punishment on the tax evader so that the other tax payers can be learned from
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the penalized tax payers as this result the tax evasion activities can be reduced and eradicate in the tax office.
Finally the thesis suggests a series of measures, which could be taken by the government in
general, and tax authorities in particular; improving thoroughness of audit, educating the
taxpayers and conducting awareness creation and providing all necessary social services to
the public will enhance compliance level. Awareness creation should go beyond simply
giving tax education to taxpayers it should extended to having consultative sessions. There
should be more preventative education for the public and increased awareness of tax
responsibilities in schools. In addition further studies and investigations on this topic will
help to analyze significant factors from different perspectives and increases compliance
level by exploring the factors that

REFERENCES

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 Graduating class of 2024

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Voluntary Tax Compliance Decision: Evidence from Individual Tax Payers in SNNPR, Ethiopia.
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Aizenman, J., & Jinjarak, Y. (2008). The collection efficiency of the Value Added Tax: Theory and
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Alesina, A., & Passalacqua, A. (2016). The political economy of government debt. In Handbook of
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Ayenew, W. (2016). Determinants of tax revenue in Ethiopia (Johansen co-integration

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Ayyele, B. Z. (2015). Determinants of Tax Revenue Performance: Ethiopian Federal Government. A

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Azzimonti, M. (2011). Barriers to investment in polarized societies. American Economic

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Bahiigwa, G., Ellis, F., Fjeldstad, O. H., & Iversen, V. (2004). Rural taxation in Uganda: Implications
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Barro, R. J. (1991). Economic growth in a cross section of countries. The quarterly journal of
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