CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Taxation is one of the techniques in which country raise revenue to finance government needs
of goods and services and it is a financial charge imposed in individual and legal entities by
the government. It is also a compulsory charge imposed by the government from different
sources without any expectation of direct benefit. In other word there is no direct return to the
tax payer (Gebrie, 2006).

When come to different source of tax, business income tax is one source of tax that imposed
on the taxable business income realized from business type activity. The taxable business
income would be determined per tax period on the basis of the profit and loss account which
shall be drawn in line with the Generally Accepted Accounting Standards.

In Ethiopia, business income tax was started dated back in Axumit kingdom. Traditional
taxation provides for taxes crops, livestock and livestock tax and the most important features
of the traditional taxation system continued during the relatively modern administration of
Emperor Haile Selassie I (1942 – 1974). And the element of the tax system of this era
comprise personal income tax, business income tax, agricultural income tax, land tax,
education tax, health tax, road tax, salt tax, tobacco tax, the tithe, Alcohol tax.

The first income tax of Ethiopia was enacted in 1994, during Haile-Selassie regime and these
laws continues by revised and changing this basis during Dreg regime, transitional regime,
and up to know by FDRE (Misrak, 2006)

Now a days, In Ethiopia, Corporate businesses are required to pay 30% of flat rate of
business income tax, and individual businesses the tax rates ranges from 10% - 35% and
these rate of tax is applicable in all over the country. Due to these Debre-Birhan town is one
of administrative town of Amhara regional state in which business income tax is used as a
major source of revenue to the town. So the researchers were interested to understand and
know the assessment of business income tax in case of Debre Birhan town, specifically on
category “A” and provide certain recommendations on problems that face on the assessment
of business income tax. The researchers also interested to know the tax payers feeling on
business income tax and provide enough awareness to the tax payers.

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1.2 Statement of the Problem

Taxation enables the government to provide administrative and compliance cost. As a result
the government must guide the tax laws that enable it to collect its revenue effectively. Taxes
are compulsory payment by every person to the government without expectation of direct
return. Usually “complexity of imposing business income tax consequently various problem
were done raised respected from creating awareness about the rule, regulation, and obligation
of business income tax on business workers”. In other way identifying the duty and
responsibility between business worker and the responsible body that they create comfortable
situation towards some problem that a raise.

In case of Debre Birhan town revenue authority has responsibility to assess and collect
business income tax in order to achieve the goal of the town. As a result “the researchers
needs to know the assessment of business income tax and related problems that faces,
understand and evaluate the fairness of business income tax and, lastly the researchers were
done tried to address the gap that impacts of business income tax and provide possible
conclusion and recommendation” to find the best solution in business income tax of Debre
Birhan town.

1.3 Objective of the Study

In this research the researchers has done to achieve the following general and specific
objectives listed below.

1.3.1 General Objective

The general objective of the study is “examining the assessment of business income tax in
category “A” tax payers in according with established rules and regulations” of Debre Birhan
town revenue authority.

1.3.2 Specific Objective

 To cheek the existence of tax avoidance and tax evasion

 To know the tax payers knowledge and awareness about business income tax

 To check does tax payers maintain books of account

 To understand the perception of tax payers about business income tax policy.

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1.4 Research Question

As a result of this study the following basic questions were expected to be answered:

 What are the problems that face on the assessment of business income tax?

 What is the tax payers’ opinion to towards the assessment of business income tax?

1.5 Significance of the Study

The study has various Significant in order to have “enough understanding about assessment
of business income tax”. The research has an importance to the body in which that makes and
formulates the rule and regulation of the business income tax to guide and evaluate the
effectiveness of rule implementation. And also the studies serve as reference for other
researcher those who are interested to conduct research on the particular area in the
assessment of business income tax.

1.6 Organization of the Study

The research paper is structured in to five chapters that clearly and specifically analyzed the
business income tax and its collection in Debre Birhan town revenue bureau. The first chapter
consist introduction part, background of the study, statement of the problems, objectives of
the study, significance of the study, scope of the study and limitation of the study. The second
chapter deals with related literature review, and the third chapter deals about the methodology
of the study. Lastly Chapter four and five deals with data analysis and conclusion and
recommendations are stated in detail respectively.

1.7 Delimitation of the Study

The overall scope of this study was focused on the extent to which the research objectives are
concerned. The study on the assessment of business income tax is wide and need deep study.
But “the researchers study is restricted only in the assessment of business income tax in
Debre Birhan town revenue authority, specifically the researchers concern was on business
tax payer of category A.
The researchers were also used educated tax payers that can be writing and read to fill the
questions distributed by the researchers”.

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1.8 Limitation of the Study

Many problems face during the research time some of them are:
Difficulty of to distribute questionnaires to tax payers due to their place the
business workers lived and worked and also difficulty of questionnaires
collection that actually distributed and field by business workers in the town.
Insufficiency of secondary and documented data in the university, especially
books that exists in the library is published in international form due to this to
refer books in Ethiopian case are very limited.

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 CHAPTER TWO

LITRETURE REVIEW

2.1 The Review of Taxation

A tax is a compulsory levy payable by an economic unit to the government without any
corresponding entitlement to receive a definite a direct quid pro quo from the government.
Note the word direct here, is not a price paid by the tax-payer for any definite service
rendered or a commodity supplied by the government. The benefits received by tax payers
from the government are not related to or based upon their tax payers. A tax is a generalized
execution, which may be levied on one or more criteria upon individuals, groups of
individuals or other legal entities (BL-Bhatia, 2003, 37).

Every person having income as defined in the proclamation shall pay income tax in
accordance with proclamation number 286/1994 E.C (www.2merkato.com, personal income
tax).

Government at all levels, local state and national, requires people and business to pay taxes.
Government use the tax revenue to pay the cost of police and fire protection, health
programs, schools, roads, national defense and many other public services. Tax and taxation
are generally regarded as unpleasant subjects. Justice John stated that “the power to tax is the
power to destroy” represents the historical linkage of tax and taxation so inevitable. The
general level of taxes has varied through the years, depending on the role of the government.

In modern times, many governments as especially in advanced industrial countries have

rapidly expanded their roles add taken on new responsibilities. As a result the need for the tax
revenue has become great. Government can finance their activities by borrowing, creating or
obtaining technical assistance from abroad and donations.

Government also secure resources by profit from public enterprises of from sale of produced
on land. But the major services of revenue to finance public expenditure are taxes that are
compulsory contributions by persons or organization to the government with out expectation
of any direct return. Taxes are burden some these reduce the economic welfare of individuals
and business (public) organization. But activities that are financed from taxes will bring
benefits to individuals or organization (Encyclopedia v 1952).

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2.2 Principles of Taxation

The economic consideration two principals of fairness of to determine whether the burden of
a tax is distributed fairly: the ability to principle and the benefit principle.

2.2.1. Ability to Pay Principle

Its holds that peoples taxes should held be based up on their ability pay, usually as measured
by income or wealth, one implication of this principle equity , which state that people in
equal positions should pay the same amount of tax .If the people pay the tax on the ability of
income (GEBRIE,2006).

2.2.2 Benefit Principle

The benefit principle of taxation states that only the beneficiaries of a particular government
program should have to pay for it. The benefit principle regards public services as a similar
to private goods and regards taxes as the price people must pay for these services , the
practical application of the benefit principle is extremely limited , because most government
service are community as a whole.

2.3 Objectives of Taxation

Initially, government imposed taxes for three basic purpose: to cover the cost of
administration, managing law and order in the poverty and for defiance but now governments
expenditure pattern changed and service to the public more than three basic purpose and it
restore social justice in the society by providing social service such as education, public
health, employment, pension, horsing sanitation and other public service (GEBRIE, 2006).

2.4 Definition of Business Income Tax

According to Article-17 of the proclamation income tax shall be imposed on the taxable
business income realized from entrepreneurial activity. Based on this article business is
defined as any manufacture or purchase and sale of commodity with a view to make profit. It
includes any trade, commerce or manufacture or any other adventure or concern in the nature
of entrepreneurial activity. It is not necessary that there should be a series of transactions in a
business and it should be carried on permanently (business income tax in Ethiopia,
unpublished handout).

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Business income tax to a direct tax levied by various jurisdictions on the profit made by
companies or associations. Taxable income shall mean the amount of income subject to tax
after deduction of expenses and other deductible items allowed under the proclamation
286/2006 and council of ministers income tax regulations 78/2002. The proclamation shall
apply to residents of Ethiopia with respect to their world wide income and to non-residents of
Ethiopia with respect to their Ethiopia source income (GEBRIE, 2008).

According to proclamation number 286/1994 E.C. business income tax is categorized under
schedule “C” as defined in article 2(6) but not including activities cased by the rural land use
fee and agricultural activities income tax proclamation issued by regional state
(www.erca.gov.et).

Person shall mean any individuals, body or association of persons (including a business
representative residing and doing business in Ethiopia on behalf of the principal).A business
organization in article 212 of the commercial code lists six forms of business organization:
ordinary partnership, joint venture, general partnership, limited partnership, Share Company
and private limited company. According to article 210 of the code all business organizations
have legal rights (personality) except joint venture (GEBRIE, 2008).

Tax is a financing charge or other levying imposed on an indicator or legal entity by the
government. Taxation is a system of rising money to finance government expenditure. All
government requires payment of money taxes from people without taxes to fund its activities
a government would case to exist (GEBRIE, 2006).

Gross income: - The total of all income received by a taxpayer before exemption and
deductions allowed by income tax regulations subtracted.

Taxable business income: - is residual amount of income after allowable deductions are
made for gross income. Taxable business income shall be determined per tax period on the
base of profit and loss account or income statement which shall be drawn in compliance with
the generally accepted accounting standards, subject to the provision of this proclamation and
the directives issued by the tax authority (Article-18 of proc. 286, 2002).

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2.5 Accounting for Business Income Tax

This is the tax imposed on the taxable business income (Net profit) realized from
entrepreneurial activity. Taxable business income would be determined per tax period on the
basis of the profit and loss account or income statement, which shall be drawn in compliance
with the generally accepted accounting standard.

Corporate business (bodies) is required to pay 30% flat rate of business income tax, for
incorporated or individual business and the business income tax ranges from 10% - 35% for
un-incorporated or individual businesses.

2.6 Deduction on Business Income Tax

In accordance with income tax proclamation 286/2002 and regulation Article 8 the following
expenses shall be deductible from gross income in calculating taxable income.

 Direct cost of producing the income such as direct cost of manufacturing, purchasing,
importations, selling;

 General and administrative expense connected with the business activity;

 Premiums payable on insurance directly connected with business activity;

 Expenses incurred on promotion inside and outside the country;

 Commissions paid for services rendered to business provided;

 Deductible interest on payable on loan of interest tax;

 Conditions for deducting gifts and donations;

 Depreciation allowance;

 Special reserves for finance conditions;

Further more in Article-20 of the proclamation, in the determination of business income

subject to tax in Ethiopia, deductions shall be allowed for expenses incurred for the purpose
of earning, securing, and maintaining that business income to the extent that the expenses can
be proven by the tax payer and subject to the limitations specified by this proclamation.

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2.7 Non-Deductible Expense on Business Tax

According to article – 21 of the proclamation, the following are non-deductible expenses in

business taxable income;

 The cost of acquisition, improvement, renewal and reconstruction of business assets that
are depreciated pursuant to article 23 of this proclamation;

 An increase of the share of capital of a company or the basic capital of a register

partnership;

 Voluntary pension or provident fund contributions over and above 15% of the monthly
income;

 Declared dividend and paid out profit shares;

 Interest in excess of rate used between National Bank of Ethiopia and commercial banks
increased by two (2) percentage points;

 Damages covered by insurance policy;

 The creation or the increase of reserves, provisions and other special purpose funds unless
otherwise allowed by this proclamation;

 Income tax paid on schedule C income and recoverable value added tax;

 Representation expense over and above 10% of the salary of the employee;

 Personal consumptions expenses

 Expenditure exceeding the limits set forth by this proclamation or regulation issued
hereunder;

 Entertainment expenses and etc… (Gebrie, 2006)

2.8 Exemptions of Business Income Tax

According to Article – 30 of the proclamation, the following categories of income shall be

exempt from payment of business income tax hereunder:

1. Awards for adopted or suggested innovations and cost saving measures;

2. Public awards for outstanding performance tax any field;

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3. Income specifically exempted from income tax by the law in force in Ethiopia, by
international treaty or by an agreement made or approved by the minister.

4. The revenue obtained by:

 The federal, regional and local governments of Ethiopia

 The national bank of Ethiopia from activities that are incidental to their operation
shall be exempt from tax.

2.9 Categories of Tax Payers

Based on proclamation number 286/1994 0f Ethiopia, tax payers can categorized in to three
main groups.

Category “A”:- which shall include the following persons and bodies:

 Any company incorporated under the laws of Ethiopia or in a foreign country, for
example private limited companies and share companies and;

 Any other business having an annual turnover of birr 500,000 (five hundred thousand)
or more and pay tax after the budgetary years four months. They are obligated to keep
books of account and present balance sheet and profit and loss statement to the tax
office. In the case of Debre Birhan town there are about 473 tax payers that are
categorized as category “A” tax payers in the town.

Category “B”:- unless already classified in category “A”, any business having an annual
turnover of over birr 100,000 and below birr 500,000. And maintain records on books of
daily revenue and expenditure and should declare and pay tax after the budgetary years of
carry on know months.

Categories “C”:- unless already classified in category “A” and “B”, Tax payers whose
annual turnover is estimated by the tax authority as being up to birr 100,000 (one hundred
thousand birr) and keep recodes and present it for assessment. It is highly appreciated by the
tax offices and pay tax after the budgetary year of one month (Gebrie 2006).

2.10 Maintenance of Account

Categories “A” taxpayer shall maintain at the end of the tax year submit to the tax authority a
balance sheet and profit and loss statement and the detail of:

 Gross profit and the manner in which it is computed;

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  General and administrative expense:

 Depreciation; and

 Provision and reserves.

All entries in the records and account referred to in sub article – 1 and 2here of shall be
supported by appropriate vouchers.

2.11 Vouchers (I.E. Invoices, Receipts)

1. Tax payers who have the obligation to maintain books of account shall have to
register with the tax authority the type and quantity of vouchers they use before
having such vouchers printed.

2. Any printing press before printing vouchers of tax payers shall insure that the type
and quantity of such vouchers is registered with the tax authority.

Tax Year

a. Unless otherwise provided the tax period for tax assessment (tax year) shall be the
fiscal year that is the one – year period from the 1st Hamile to 30th Sene.

b. The tax year of the person is:

 In the case of an individual or an association of individual is the fiscal year

 In the case of a body is, the accounting year of the body (www.erca.gov.et)

2.12 Declaration of Income

1. The tax authority may on the base of declaration submitted by category “A”, “B” and “C”
tax payers and on the base of other information and surrounding circumstance determine
whether the tax payers shall continue in the same category or this category be changed for
the following tax year based on:

 His annual turnover

 The amount derived from a source other than his regular operations.

 The types of business carried on are charged.

2. If a non-resident person operates his business activities through on agent/s the non-
resident person and the agent/s shall be jointly responsible for submitting the declaration
of income and payment of the tax thereon.

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2.13 Time of Declaration of Income and Payment of Tax

1. Category “A” tax payers with in four months from the end of the tax payer’s tax year. For
example (as is the case usually) if the tax payers follow the fiscal year, the one-year
period from the 1st Hamile to 30th of Sene (8th July to 7th of June), the income has to be
declared and paid till 30th of Tikimit (that is (9th of November and 10th of November
during a leap year according to the Ethiopian calendar) (Ethiopian income tax, Proc. 286,
2002).

2.14 Tax Administration

Since taxes are an involuntary payment for governmental services tax payers have a strong
inventive to minimize their tax liability either through avoidance (legal) or though evasion
(illegal). Tax administration has to secure compliance with the laws by applying an array of
registration. The ability to tax payers to keep form doing this procedure and thus successfully
avoid evading taxation determines the sizes and the nature of economy’s actual effective tax
base. Both evasion and avoidance’s seriously compromise the demonstration of the tax
system, producing a system that departs scientifically in its operation from the one that is
described on the tax legislation (Misrak p. 453).

2.15 Effects of Taxes

Effect of tax can be both beneficial and harmful, harmful effect of tax will be reformed to as
the burden of the tax. Such a burden will have dimensions, money burden and the real
burden. Money burden refers as to the reduction in the disposal income of tax payers; the
harmful effect of tax such as interims of increasing unemployment reduced production will
be called its real burden. A real burden itself may be deeded in to two parts namely direct or
indirect real burden. Direct burden of tax will be the sacrifice of the welfare, which a tax
itself imposes up on tax payers. It however is not of the benefit, if any of the tax furthermore,
it would be noted that the final incidence of a tax is equal to the amount of the tax collected
by the treasure and the formal incidence of tax.

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 CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Research Design

To achieve objective of the study descriptive method was used to observe assessment of
business income tax. Why because this type of research needs detail description of existing
pneumonia. The researchers were used both qualitative and quantitative approach. The
qualitative approach was used to collect data from interview and the quantitative approach
was used to collet data from documents and from numerical information.

3.2 Population & Sample Size

The data were collected from both tax collectors and business tax payers that work in Debre
Birhan town. In order to collect the desired data from the group, the sampling technique were
used stratified sampling of technique.

Debre Birhan town revenue authority office has about 473 business tax payers on category A
and 71 employees of the organization. So the study has a total population of 544 tax payers
and collectors. The researchers used the minimum number of sample size I.e. n=30.

Nx
By using proportionate method we can calculate the sample as: Px=
N

N1 N2
n= + + … = 30
N N

N=544

406
P1 = × 30 = 22 from sole proprietorship
544

67
P2 = × 30 = 3.69 ≅ 4 from partnership
544

71
P3 = × 30 = 3.91 ≅ 4 from Ethiopian revenue and custom authority
544
in Debre Birhan town.

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 Where;

Px = proportion of population included in stratum x

Nx = total size of strata Nx

N = total population of the target group

n = total sample size selected (C.R. Kothari, 2008 p. 63)

3.3 Sampling Design

In this research the business man’s and tax administration were the main sources of data. As a
result the researchers used stratified random sampling technique. This technique was applied
because the study contains heterogeneous sub population relative to the homogenous sub
population of the whole population.

3.4 Data Source

In this research two sources of data were actually used; Primary and secondary data. Primary
source was the main source of data for the study and collected from both tax payers and tax
collectors by using interview and questionnaires. Secondary data were collected by using
survey and reviews books, journals available.

3.5 Data Collection Techniques

The data collection methods are:

 Primary sources were obtained by using questionnaires and interview

 Secondary sources are collected by using journals, annual reports, magazines & other
written materials that is available.

3.6 Data Analysis Techniques

On this research, the collected data was processed, classified and gathered, then analyzed by
using both tabulation method and percentage description method.

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 CHAPTER FOUR

DATA ANALYSIS AND DISCUSSION

4.1 Introduction

The data was analyzed based on their nature. So the results of secondary and primary data
were presented below in a precise form by using table and description. And the objective of
this chapter is to show the assessment of business income tax under category “A” tax payers
specifically.

Analysis was made by collecting information from revenue authority office employees and
tax payers. Due to these the method of data collection was carried out through questionnaires
and interview. The researchers were taken 30 respondents as sampling from total population.
From the total sample, researchers had taken 4 respondents from employees with in the
organization and 26 respondents from the total tax payers in category “A”.

The main objective of data collection is to examine assessment of business income tax in
Debre Birhan town revenue authority of category “A” tax payers and the problem related
with tax payer and to identify the responsible bodies to collect tax in Debre Birhan town
revenue authority to evaluate the tax payer’s awareness and knowledge about taxation.

In connected with collection, the paper tries to measure the tax payer’s willingness to pay tax
to the tax collector of government body with in Debre Birhan town. Another objective of this
study is to asses’ weather the standard assessment is in accordance with the ability of the tax
payers.

4.2 General Characteristics of the Respondent

The general characteristics of the respondents in these study contains; sex, age, educational
level, type of business for tax payers and years of service for revenue bureau employees in
Debre Birhan branch.

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Table 4.1 General Information of the Respondent

No Description of the Tax Percent Tax collector Percent

respondent payer

1 Sex Male 15 57.7 3 75

Female 11 42.3 1 25

Total 26 100 4 100

2 Age 18 – 20 4 15.4 - -

21 – 25 8 30.8 - -

26 – 30 5 19.2 1 25

31 – 41 4 15.4 0 -

Above 41 5 19.2 3 75

Total 26 100 4 100

3 Educational level

Grade 1-10 4 15.4 - -

Grade 11-12 9 34.6 - -

Certificate 4 15.4 - -

Diploma 7 26.9 1 25

Degree 2 7.7 3 75

Above degree - - - -

Total 26 100 4 100

Source Own Survey, 2007

According to table 4.1, from the total population of tax payers (15), 57.7% of them were male
respondents, and (11), 42.3% were female in the business. And from the tax collectors (3),
75% were male respondents and the remaining (1), 25% were female in the organization.
This shows that both in tax payers and tax collectors the participation of females is less as
Page 16 of 33
compared to males. Especially in the revenue bureau only 25% are female workers and this
indicates that the educational backgrounds of females are under male and the organization
tries to narrow this gap by participating female employees.

When come to age, out of the total respondents of tax payer (4), 15.4% are with in 18 – 20
years, (8), 30.7% are within 21 – 25 years, (5), 19.2% are within 26 – 30, (4),15.4% are
within 31 – 40 years , and the remaining (5), 19.2% are above 41 years category. As a result
researchers conclude that majority of the respondents, i.e. 17 (65.3%) are within the active
and productive age group. From the total respondents of tax collectors 25% are within 26 –
30 years, and the remaining 75% are above year of 40. So researchers can conclude that the
employees of the organization are relatively older workers as compared to tax payers
recommended that the organization includes employees from the active group of workers.

With regarded to educational level, from the total population of tax payers, (4), 15.4% are
attained grade 1 – 10, (9), 34.6% are attained grade 11 – 12, (4) 15.4% have certificate, (7)
26.6 have diploma, and the remaining (2) 7.7% have degree holders respectively. As a result
researchers conclude that most of the business workers are educated from grade 1 up to
degree program, so tax payers can read and write at least. From the total population of the
organization employees (1) 25% have diploma and the remaining (3) 75% have degree
holders. In other word most of the organization employees are educated in degree program.
So researchers conclude that the organization consist highly educated man power and this
leads the organization is successful by its employees and enables to achieve this goals and
objectives.

Table 4.2 Type of Business for Tax Payers

Business type Tax payer Percent

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 Hotel & café 4 15.4

Food production 2 7.7

Shoe super market 7 26.9

Service 2 7.7

Construction material provider 2 7.7

Stationary 1 3.8

Butick 2 7.7

Butcher men 2 7.7

Grain house 2 7.7

Total 26 100

Source Own Survey, 2007

Regarding the type of business that tax payers engaged in are, from the total business workers
(4) 15.4% involved in hotel and café, (7) 26.9% involved in shoe super market, (1) 3.8%
involved in providing and distributing of construction materials and the remaining (14)
53.8% are involved by sharing of 7.7% (2) in drag stores, stationary, butick, butcher men and
grain house respectively. In general, researchers conclude that most of business workers are
engaged in providing services to customer in the form of give – get relation.

Table 4.3 Years of Service for Tax Collectors

Years of service Tax collector Percent

Source Own
1 year - -
Survey, 2007
2 year - -

3 – 5 year 1 25
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Above 5 year 3 75

Total 4 100
Lastly, when come to the tax collectors years of service, majority of the organization
employees i.e. (3) 75% have more than five years of service and the remaining (1) 25% have
3 – 5 years service in the organization. So researchers conclude that the organization contains
experienced workers. Due to these, the organization takes advantage of experienced workers
and minimizes the cost that incurs to train its employees and also it is simple to train new
employees due to the existence of experienced workers.

4.3 Questions of tax payers

Table 4.4 Tax Payers Feeling and Date of Tax Payment

No. Question Option Tax payers Percent

1. How do you As obligation 7 26.9 %
feel about As debt -- --
taxation? As useful 19 73.1 %
Total 26 100 %
2. When do you When I receive assessment 14 53.8%
pay tax notification
liability? Before due date 11 42.4%
After due date 1 3.8%

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 Total 26 100%
Source Own Survey, 2007

As Indicated in table 4.4, most of tax payers feel taxation as useful, by considering the
service reordering from the government for the command benefit of public majority of tax
payers pays their tax liability when they receive assessment notification.

As indicate above in table 4.4, 73.1% of respondents were feeling the taxation as useful.
These show that majority of tax payers are considering taxation as useful.

Further understand from those, most of tax payer has knowledge and awareness about
taxation and they understand a government provides different goods and service for general
benefit to the society as whole. And the remaining 26.9% respondents was feeling the
taxation as obligation and supports their idea as tax is an obligation for income earners’, but
no one of respondents was feeling the taxation as debt.

When came to payment of tax liability, in table 4.4 further indicate that 53.8% of respondents
pay their expected tax liability when they receive assessment notification, related with this
majority of tax payers want to pay when they receive assessment notification. From these
researchers understand that, most of tax payers are loyal to pay tax collection body of
government. And 42.4% of respondent pay their tax liability before due date and also 3.8% of
respondents pay their tax liability after due date. From these researchers can understand that
those tax payer are not loyal to pay their tax liability and related with these lack of understand
about taxation.

Table 4.5 Awareness of Tax Payers about Present Taxation System and Amount
of Tax Liability

No. Question Option Tax payers Percent

1. How do you see the Very Good 5 19.2 %

present taxation Good 12 46.2
system?
Medium 9 34.6 %

Total 26 100 %

2. Is your annual tax Yes 14 53.8 %

liability based on No 12 46.2 %

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 your income? Total 70 100 %

Source Own Survey, 2007

According to table 4.5 show 19.2% & 46.2% of respondents look the presentation of taxation
system as a very good and Good respectively. This show that tax collection system was
considers ability of tax payers. Further understand from these each tax payers pay their tax
liability based on their ability and has positive understand and awareness about taxation. And
also the remaining 34.2% of respondents are considering the present taxation system as
medium. From this researchers understand that tax payers shows slightly good understand
about taxation.

When come to amount of tax liability and income level, table 4.5 further indicates that 53.8%
of respondent said that their annual tax liability are based on their annual income. But the
remaining 46.2% of respondents says annual tax liability not relate with their annual income
and supports their answer as the tax liability is not calculated in accordance with the level of
income. Instead tax is imposed by expectations of the organization employees.

Table 4.6 Knowledge of Tax Payer for Payment of Tax

Question Option Tat Payers Percent

Do you know why you Yes 26 100

pay tax? No - -

Total 26 100

Source Own Survey, 2007

As one can see in table 4.6, 26(100%) all tax payers are know and have awareness about why
you pay tax. One can understand that all tax payers pay their tax liability by knowing the
advantage of tax and supports their answer as tax is used as source of fund to the government
and used for various activities worked on the side of the government to the society like for
water, education, health, light, road and the like services to the community.

Table 4.7 Tax Payers Face Problems When Goes to Pay Tax

Question Response Tax payer Percent

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 Do you face any problem Yes 12 46.2 %
when you got to pay tax No 14 53.8 %
liability?
Total 26 100 %

Source own Survey, 2007

According to table 4.7, 53.8% of respondent says there is not faced problem related with tax
payment when they go to pay their expected tax liability.

From these one can understand that Debre Birhan town revenue authority as provided
standard assessment to collect taxation from tax payers. But the remaining 46.2% of
respondents said that, as minor problem they would have faced when they go to pay their
expected tax liability and explains the problem as follows; absence of employees (tax
collector) in the office, inconsistency of power of light, and wait of long time to pay tax.

4.4 Questions to Revenue Bureau Employees

Table 4.8 Responsibility of Tax Collection

Question Option Tat Collector Percent

Who is more Tax payers 1 25%

responsible for tax Any governmental body - -
collection and
Tax office 3 75%
assessment?
Total 4 100%

Source Own Survey, 2007

In the table 4.8 of the given data, 1(25%) of tax collectors says that tax payers are more
responsible for tax collection and assessment and the remaining 3(75%) of tax collectors
concluded that tax office are more responsible for tax collection and assessment than tax
payers in the town.

Table 4.9 Tax payers paid Tax on Time

Question Option Tat Collectors Percent

Do tax payers pay tax Yes 2 50%

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 liability on time? No 2 50%

Total 4 100%

Source Own Survey, 2007

In the table 4.9, one can analysis that 2(50%) of the organization employees said that tax
payers pay their tax liability on time and the remaining 2(50%) of them evaluate that tax
payers not pay their tax liability on time. That means half of the employees agreed that tax
payers pay tax liability after the payment period is passed.

Table 4.10 Organization Evaluation and Measurement Action

No. Question Option Tat Collectors Percent

1. How do you evaluate the High -- --

knowledge of tax payers about Medium 4 100%
taxation?
Low -- --

Total 4 100%

2. Does the organization take Yes 4 100%

action to aware tax payers No - -
about advantage of paying
Total 4 100%
tax?

Source Own Survey, 2007

As indicated in table 4.10, all tax collectors evaluate the knowledge of tax payers is medium.
This shows that all tax payers have awareness about the payment of tax, advantage of paying
tax. As a result tax collectors concluded most tax payers paid their tax liability by knowing its
advantage.

In the above table of the given data 4(100%) of tax collectors conclude that the organization
take action to aware tax payers about advantage of paying tax though oral advise, by giving
proclamation, by radio programs and the like.

4.4 Common Questions to Tax Payer and Tax Collectors

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In the common question the researchers used abbreviations to save space and to make the
written words visible.

Respondents of tax payers = RTP, Respondents of tax collector = RTC and lastly we use
percentage as = %

Table 4.11 Tax Payment Period

Question Option RTP % RTC %

Is the tax payment Yes 21 80.8 4 100%

period enough? No 5 19.2 - -

Total 26 100 4 100%

Question Option RTP (%) RTC (%)

Does the tax payer hold Yes 26 100 3 75%

book of account? No - - 1 25%

Total 26 100 4 100%

The table 4.12, reveals that all of the tax payers i.e. 100% (26) hold books of account and
from the employees of the organization (3) 75% also says tax payers hold books of account.
But (1) 25% of employee said that tax payers do not hold book of account and explain the
case as there is no excess tax auditor and the trade relation between producer of products and
retailers is not legal and due to this it is difficult to say tax payers hold books of account.

Table 4.13 Tax Evasion and Avoidance

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 Question Option RTP % RTC %

Do tax payers try to Yes - - 3 75%

evade and avoid tax? No 26 100 1 25%

Total 26 100 4 100

Source Own Survey, 2007

As the data in table 4.13, all tax payers said I am not trying to evade and avoid tax of the
government. But from employees of the organization majority of them (75%) said that tax
payers are tried to evade and avoid tax of the government and (25%) of employees said that
tax payers are not evade and avoid tax.

The tax collectors that says tax payers are tried to evade and avoid tax are support the idea by
explaining the methods of avoiding and evading of tax and give the reason as follows that tax
payer uses:

 Tax payers not give cash receipt to the customer and evade the annual revenue information
from the organization employees
 By exaggerating expenses of the business and these reduces revenue of the tax payer and etc.

Table 4.14 Financial Statement

Question Option RTP % RTC %

Does tax payers Yes 14 53.8% 2 50%

prepare financial No 12 46.2% 2 50%
statement
Total 26 100% 4 100%

Source Own Survey, 2007

In the table 4.14 of the given data 53.8% of tax payers prepare financial statement and the
remaining 46.2% are not prepared financial statement. On the other hand 50% of tax
collectors know that tax payers are prepared the financial statement but other 50% of tax
collectors said tax payers are not prepare financial statement. From the total tax payers that is
prepare financial statement, the statement is prepared at the end of the budget year and same
of them prepare semi-annually and the remaining a few prepare the financial statement
monthly. And also tax collectors give the answer as tax payers prepare financial statement: in
four months between Hamile 1 up to Hidare 30.
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Table 4.15 Categorization of Tax Payers

Question Option RTP % RT %

C

In what way When their capital is enough 11 42.4% 3 75%

tax payers When earn more income 1 3.8% 4 100%
categorize as
By willingness 9 34.6% 3 75%
category “A”
tax payer? By force of law 5 19.2% 3 75%

Total 26 100 4 100

Source Own Survey, 2007

In the table 4.15 of the given data, 11(42.4%) of tax payers are categorized as category A tax
payer when their capital is enough, 1(3.8%) when earn more income, 9(34.6%) by their
willingness and the remaining 5(19.2%) are categorized as category A tax payer by force of
law. On the other hand employees of the organization, 4(100%) when tax payer earn more
income and 3(75%) are agreed tax payers are categorized as category “A” tax payer by the
case of, when their capital is enough, by willingness of tax payer and by force of law
categorized as category “A” tax payer. And also all tax collectors agreed that tax payers are
categorized as “A” tax payer in the above four cases.

CHAPTER FIVE

FINDING AND CONCLUSION

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5.1. Summary of Finding

The study was designed to assess business income tax in category “A” tax payers in Debre
Birhan town. It is also intended to suggest possible solutions to the problem identified on the
basis of the data collected from information that obtained from respondents; the study has
come up with the following findings presented under this chapter.

As shown in the data analysis and discussion section, in Debre Birhan town tax payers and
employees are the main participant in the assessment of business income tax in the town. As
a result taxation is the main sources of revenue to the town revenue authority. In the town
most of tax payers feel taxation as useful and their understanding about taxation is good and
has positive awareness to taxation.

Most of tax payers were agreed with the present taxation system. These shows that in the
town tax office followed equity taxation principles. Due to this in town tax payers paid their
expected liability based on their own capital amount or based on their annual income.
Majority of tax payers satisfied from service received through government based on tax paid.
And also in this study the researchers enables to understand the tax payers over all awareness
about; payment period of tax, amount of tax paid by tax payers, book keeping of tax payers
and preparation of financial statements plus evading and avoiding of tax by tax payers and
the researchers know the tax payers knowledge and evaluates as the tax payers have good
understanding to the above phrases. But with regard to holding of books of account and
preparation of financial statement tax payers are not fully prepare the financial statement and
some of tax collectors said holding of books of account is not practically applicable in all tax
payers instead tax payers hold books of account as symbol.

Lastly the organization has its drawbacks, when tax payers come to pay tax at the time of tax
years and this limitation is arise due to unwillingness of some employees of the organization
to enter in office on time and this cases waiting of long time to pay tax liability.

5.2 Conclusion

As far as government has existed and performed various activities it should come up with
means of financing its activities. There are different methods of financing. From these
different sources, taxation is the main source to rise necessary fund for payment of
expenditures which incurred by the government. Taxation is the most common way of
financing government activities. Those activities are provided to the community without

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charge and necessary funds are collected by requiring person to make payment to the
government in accordance with some established rule.

As the tax payers under the study, majority of them feel taxation as useful. This indicates that
most of tax payers have positive and good understand about the concept of taxation in
general.

Even though, tax imposes a personal obligation on the tax payer the amount of tax received
from the people is issued for the general and common benefit of the people as a whole. Even
if, present taxation system was not fully, good, majority of tax payers’ evaluate taxation as
useful. Therefore, most of tax payers satisfied with the service which rendered from
government return to their tax paid. As a result majority of tax payers can finish payment of
their tax liability with in given time frame and their payment of tax is by knowing the
advantage of paying tax to the government. This shows that the obligation of paying and
collecting tax to the government is both the obligation of tax payers and tax collectors in the
organization. However there are some problems in holding of books of account and
preparation of financial statement by tax payers and also there is problem in the revenue
bureau. The problem of the revenue bureau is unable to reach in office on time and some
times tax liability of tax payers are imposed by some employees with out proper calculation.
And also tax collectors said there are some tax payers that try to evade tax in the town.

Lastly researchers concluded that the assessment of business income tax in Debre Birhan
town of category A tax payers are evaluated as good in their assessment and most tax payers
are followed the prescribed rule and regulation of tax in all over the country and in Debre
Birhan except the problems listed above.

5.3 Recommendation

In the data presented above, researchers can understood in Debre Birhan town revenue bureau
and tax payers has all almost have good business tax assessment. However in the assessment
of tax there is some weakness and problem are observed. Both the strength and problem in
both office and tax payers, are mentioned in conclusion part as indicated above. Here
attempts are made to give recommendations that help the organization and tax payers to
strength more their good performance and to minimize those problems that faces.

 The revenue authority should be occupied by competent personnel. Therefore to

enhance their capacity and improve their effectiveness, the employees should get

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 training with regarding to loyalty to this work and about time value to minimize the
waiting of tax payers when come to pay their tax liability.

 For effective and proper tax assessment and collection, measure should be taken to
revise and update the existing tax laws.

 Tax payers must receive clear, concise and up- to -date information a describing what
is to be taxable, how to calculate their tax liabilities and procedure for calculating pay
taxes when tax collectors come to calculate their tax liability to minimize errors at
time of tax calculation.

 To improve the tax assessment and collection activities, the existence an active
participation of adequate, qualified and committed personnel is important. To make
the tax assessment and collection process effective and efficient, the office are
expected to initiate tax payers to keep book of account income on time. This protects
the office from unfair tax assessment and helping to prevent tax evading and
avoidance.

 To generalized, based on the existing problems; recommendations has been made to

minimize the weakness business income tax assessment of Debre Birhan town, so the
head the office as well as personnel’s of each department should discharge their
responsibility well to get success in tax administration and to achieve the policy of
government.

 Finally the researchers would like to recommend that the government should make
possible ways of offering information to the tax payers through different ways, like
preparing books which have information about tax magazines, and other mechanisms.
This will help to create more awareness on the public understanding about taxes.

Reference

 Gebrie Worku (MSc) 2006, tax accounting in Ethiopia context 1st edition
Page 29 of 33
 Gebrie worku 2008, tax accounting in Ethiopia context 2nd edition.
 Misrak Tesfaye, 2003, 1st edition. Ethiopia tax administration.
 C.R. Kothari, 2008, research methodology, methods and techniques 2nd edition.
 Ethiopian tax proclamation number 286/2002
 www.erca.gov.et/www.2merkato.com, of revised proclamation about business income
tax.

 World, book, encyclopedia, vap 1952.

Appendix
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 Debre Birhan University

College of Business and Economic

Department of Accounting and Finance

Dear respondents first of all we would like to thanks for your permission to devote your time
to fill the question and the purpose of this questionnaire is to collect data on business income
tax assessment and collection problem in Debre Birhan town. Regarding confidentiality it is
required only for academic purpose and your respective response will be kept in
confidentiality.

General information

Put tick mark  in the appropriate box for each question.

1. Sex: Male  Female 

2. Age:

18–20  26 – 30  39-45 

20–25  31 – 38  > 45 

3. Education level:

Grade 1st – 10th  Grade 11th – 12th  Certificate 

Diploma  Degree  Above degree 

4. In what type of business you are engaged............................................

Questions to the tax payers

1. How do you feel about taxation?

As an obligation,  as debt  as useful 

2. Do you know why you pay tax?

Yes  No 

3. If the answer for question number “2” is “YES” what is your

reason…………………………………………...........................................................................
...........................................................................................................

4. When do you pay your tax liability?

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 When I receive assessment notification, before due date  after due date 

5. How do you see the present taxation system?

Very Good  Good  slightly good  bad 

6. Is your annual tax liability based on your income?

Yes  No 

7. Is the tax payment period enough?

Yes  No 

8. Do you face any problem when you got to pay tax liability?

Yes  No 

9. If your answer is “YES” for question “9” above what type of problem you
faces……………………………………………………………………………………………
………………………………………………

10. Do you hold book of account?

Yes  No 

11. If your answer is “NO” for question number “11” in what way do you know your tax
liability.......................................................................................................................................
………………………………………………………………………….

12. Have you ever tried to evade and avoid tax from the government?

Yes  No 

13. If your answer for question “13” is “YES” what is your reason to do
these……………………………………………………………………………………………
………………………………………………………………………………………

14. Do you prepare financial statement for your business activity?

Yes  NO 

15. If your answer is “YES” for question number “15” when and when do you prepare the
financial statement………………………………………………………………………….
……………………………………………………………………….

16. In what way do you categorized as category “A” tax payers

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 A. when your capital is enough 

B. when you earn more income 

C. based on your willingness to be categorized as category “A” tax payer 

D. by force of law 

E. other please specify__________________

17. How much do you satisfied from service you receive in return to pay tax?

Satisfied more,  satisfied,  slightly satisfied  dissatisfied

Questions to the tax collector (employees)

1. Years of services

1-Year  3-5 year 

2-year  > 5 year 

2. Do most tax payers pay their tax liability on time?

Yes  No

3. How do you evaluate the knowledge of tax payers about taxation?

High  Medium Low

4. Who is more responsible for tax collection and assessment?

Tax payers  Any Governmental body Tax office 

5. Does the organization take action to aware the tax payer about advantage of paying tax?

Yes  No 

6. If your answer is “YES” for question number “8”, in what way the organization tries to
aware the tax payers ……………………………………………………………………………
…………………………………………………….

7. What are the major criteria that the organization is used to categorize tax payers as
category A, B & C.? .............................................................................................................
…………………………………………………………………………………….

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