Queen’s Collage

Department of Business Administration

An Assessment of tax administration and collection practice

challenge in Addis Ababa: case of Kolfe Keraniyo sub-city
category A and B.

This thesis proposal is presented in partial fulfillment on the

requirement for Master of Degree in Business Administration.

By:

Asfaw Awoke

Advisor:-

Tamirat Hailu

Addis Ababa, Ethiopia

July 19/2021
 CHAPTER ONE

Introduction

1. Background

Tax revenue collection is one significant issue of economic development among others.

Taxation is defined as government revenue to fulfill public necessities. That is for social,

economic and political aspect of the society. Generally tax revenue is an important for the

improvement of the living standard of the general public for a country growth and for

implementing policies and strategies. Taxation is one of the best instruments to boost the

potential for public sector performance, to finance the social insuran0ce program and for the

repayment of public debt (Parameswaran, 2005). Taxation, even if often ignored, is a central

component in the development of both low and middle income nations (Russell, 2010). Taxation

has led to tax structures throughout the developing world that are largely complex, inelastic,

inefficient, inequitable, and quite simply unfair (Khalilzadeh-Shirazi and Shah, 1991).

A country’s revenue generation primarily depends upon its sufficient capacity to tax more in

both economic and administrative term, lack of homogeneity across time and culture, the

existence of gap between the tax payments required by the law and those actually surrendered to

the state because of the inadequacy of the tax authority manpower, institutionally weak and lack

in potential support are not in a position to collect the amounts outstanding (Cheibub, 1998). The

two important components of revenue tax administration and tax system reforms (Brondolo et al.

2008). Indeed corruption functions like a tax itself, and likely a particularly regressive one as are

other governance indicators (weak rule of law, political instability).

The other problem of low revenue generation is political instabilities in developing countries.

One of the important characteristics of the political instability is unstable and shifting behaviors
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of government, which hinders the process of long-term reforms in the system, Gupta, (2007). It

is commonly understood that every government seeks to raise revenue, mainly through taxation,

in order to pay its expenditure on infrastructure development. The revenue of the Ethiopian

government comes from different sources such as tax, public borrowing, sales of public assets,

and transfer payments. The main purpose of generating revenue from these various sources is to

finance government expenditure. These public expenditures are meant for public goods and

services that are very essential for the development and wellbeing of the society.

In Ethiopia the authorized body to collect tax (ERCA) has three taxpayers’ categories). They are:

category of taxpayer A, B and C. Category A tax payers whose annual turnover > 500,000 and

category B tax payers whose annual turnover in between 100,000 – 500,000 have a mandate to

prepare financial statements. Whereas, category C tax payers may not have. But revenue come

from those tax payers are not sufficient to finance the government expenditures because the tax

revenue performance is low in developing countries due to various problems. Therefore,

developing countries receive a very low amount of revenue from taxation because these

countries face a number of problems in the process of revenue generation. The situation of Addis

Ababa, Kolfe keraniyo sub-city found is not different from the above situations (as part of

Ethiopia). The study Addis Ababa, Kolfe keraniyo sub-city is currently facing daunting

challenges in relation to the overall taxation system, tax assessment, collection and service

delivery of tax authorities. Hence, the town may not able to collect tax efficiently which is a

serious problem that has the possibility to result in the failure of providing basic social services

and infrastructure to the community.

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 2. Statement of the problem

A government finances its expenditures through the fund acquired from theservice given by the

government, tax, loan and donation. From all sources offinance, tax is the major source;

however, in most developing countries, it is acommon phenomenon to notice serious problems in

developing adequate taxsystems that permits a government to sufficiently finance its

expenditures.

Tax administration has to secure compliance with the laws by applying an arrayof registration,

assessment and collection procedures. A government can keeptaxpayers from doing these

activities, and thus successfully avoid tax evasiondepends on the nature of economy’s actual tax

base. Tax administration therefore,should aim at improving on laws regarding the registration,

assessment, collectionrevenue, and exploiting fully taxation potential of a country.

Therefore, identifying the problems on tax assessment and collection at each taxoffice and taking

corrective measures need attention since they have adverseeffects on the overall revenue of the

government. And hence, this study tries toidentify the problems on the tax assessment and

collection challenge of the Ethiopian Revenue and collection Authority Addis Ababa, Kolfe

keraniyo sub city revenue office.

3. Research question

By having the above mentioned reasons to do, the following basic research questions were tried
to be answered by the research:

 What are tax payers challenge that causes for poor tax revenue collection?

 What are tax Administration challenge that causes for poor tax revenue collection?

 Do you have taxpayers’ knowledge about taxation? And for what purpose to pay?

 Do you have taxpayers’ knowledge the proclamations of ERCA?

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 4. Objective of the Study

4.1. General Objective

The main objective of the study will be the assessment of tax administration and collection
challenge in Addis Ababa case of Kolfe Keraniyo sub-city small taxpayer’s branch office.

4.2. The specific objectives were:

 To identify the main challenges and their causes in tax assessment faced by the different

parties i.e. taxpayers and tax administrators involved in the tax assessment.

 Identify the problems faced in the tax collection system and to comment on possible

solutions.

5. Scope of the Study

The scope of the study is limited with investigating the Tax collection and Assessment specific

problems in Addis Ababa Kolfe keraniyo sub-city. Though there are many challenges generally

the macroeconomic factors have a huge impact onqualities and performance of loans, the study

will not encompass them. The reasonis that thefactors which the current literature calls forare

already addressed by other researchers, Gadise, 2014; and Anisa, 2015 sufficiently.

6. Limitation of study

The study will limit to examine the tax collection practice of the Addis Ababa Kolfe keraniyo

sub-city. If the student researchers have sufficient time, human resource that cans the required

data over time and the financial amount required to successfully undertake the research this

research will accomplished at larger scope. What is more, the student researcher plan intended to

contact 20 respondents, customers of the office at first and then 15 questionnaires will

distributeto. However due attempt will give to enhance the reliability and validity of the study by

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triangulating the views of employees of Ethiopian revenues and collection authority (ERCA)

Addis Ababa, Kolfe keraniyo sub-city.

7. Significance of the Study

The findings of this study will contribute in enhancing the tax revenue of the selected Addis

Ababa, Kolfe keraniyo sub-city and the government at large by uncovering the core problems on

the tax assessment and collection activities so as to enabling them to put their effort to triumph

over the observed problems. Thus, the government will be able to adopt a comprehensive

strategy, and minimize the observed tax administration problems to increase tax revenue. Similar

approach can be replicated in identifying the problems in tax assessment and collection

procedures of revenue administrations in other sub-city. Besides, it may be also used as an input

for other interested researchers for conducting further study.

8. Organization of the Paper

The study will be organized into five chapters. Chapter one will present the introduction in which

brief introduction of topic, research problem, research questions, objective of study, and scope

and limitations of the study will be addressed. Chapter two will discusses literature review in

which previous theories and empirical findings regarding TAX assessment and collection

challenge are explained. Chapter three will explain the research design and methodology

employed. Chapter four will briefly discuss the results and findings of the study. The final

chapter will explain and present the summary, conclusions and recommendations of the study

based on the findings.

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 CHAPTER TWO

2. Literature Review

This section presents a brief review of existing theoretical and empirical literature of tax

administration. At the end of the review, an attempt is made to summarize the major drawbacks

of the existing empirical studies and to identify the knowledge gap to be filled in by further

investigation.

2.1 Theoretical review of tax and tax administration

Taxes are important source of public revenue. The existence of collective consumption of goods

and services necessitates putting some of our income into government hands. Such public goods

like roads, power, municipal services, and other public infrastructures have favorable results on

many families, business enterprises, industries and the general public. Public goods are normally

supplied by public agencies due to their natures of non-rivalry and non-excludability.

The nature of consumption of public good in such that consumption by one does not reduce

consumption for others. Besides, consumption of public by an agent does not exclude others

form doing same. Such nature of public goods therefore makes them impossible for private

suppliers to avail them at market prices like other commodities.

Government intervention in the supply of public goods is therefore inevitable and can only be

done if the public pays taxes for the production and supply of such goods. Despite the fact that

people need to pay taxes based on rationales of vertical and horizontal equities, it is not always

the case that tax systems are comprehensible and transparent for tax payers especially for less

literate business operators. Tax systems are usually net elaborated after proper consultation with

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the business community. The business owners complain that the tax assessment method is based

on subjective estimation as a result of which they are frequently subjected to over-taxation. Since

the business owners do not have simplified access to and clarification on information of the tax

laws, they lack awareness on tax rules and regulations and this has an impact on the

practicability of the regulations.

Tax is a financial charge or other levy imposed on an individual or a legal entity by a state or a

functional equivalent of a state. Taxes could also be imposed by a sub national entity. Taxes

consist of direct tax or indirect tax, and may be paid in money. A tax may be defined as a

“pecuniary burden laid upon individuals or property to support the government payment exacted

by legislative authority”. “A tax” is not a voluntary payment or donation, but an enforced

contribution, exacted pursuant to legislative authority” and is “any contribution imposed by

government whether under the name of tool, tribute, tangible, duty, custom, excise, subsidy, aid

supply, or other name.

In modern capitalist taxation systems, taxes are levied in money, but in-kind and cove’s taxation

is characteristic of traditional or pre-capitalist states and their functional equivalents. The method

of taxation and the government expenditure of taxes raised are often highly debated in politics

and the government expenditure of taxes raised is often highly debated in politics and

economics. Tax collection is performed by a government agency such as Revenue Canada, the

International Revenue Service (IRS) in the United States, or Her Majesty’s Revenue and

Customs (HMRC) in UK. When taxes are not fully paid, civil penalties (such as fines or

forfeiture) or criminal penalties (such as incarceration) may be imposed on the non-paying entity

or individual. (http://en.Wikipedia. Org/wiki/tax)

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The low revenue yield of taxation can only be attributed to the fact that tax provisions are not

properly enforced either on account of the inability of administration to cope with them or on

account of straight forward collusion between the tax administration and taxpayers.

Tax administration refers to the identification of tax liability based on the existing tax law, the

assessment of this liability, and the collection, prosecution and penalties imposed on recalcitrant

taxpayers. Tax administration, therefore, covers a wide area of study, encompassing aspects such

as registration of taxpayers, assessments, returns processing, collection, and audits (Kangave,

2005). The low revenue yield of taxation can only be attributed to the fact that tax provisions are

not properly enforced either on account of the inability of administration to cope with them or on

account of straight forward collusion between the tax administration and taxpayers.

Since taxes are an involuntary payment for government services, taxpayers have a strong

inventive to minimize their tax liabilities either through avoidance (legal) or through evasion

(illegal). Tax administration has to secure compliance with the laws by applying an array of

registration, assessment and collection procedures. A government can keep taxpayers from doing

these activities, and thus successfully avid tax evasion depends on the nature of economy’s

actual tax base. Tax administration therefore, should aim at improving on laws regarding the

registration, assessment, collection revenue, and exploiting fully taxation potential of a country

(World Bank, 1999).

2.1.1 Legal structure for effective tax administration

The legal rules required for effective tax administration might be categorized under four broad

headings:

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

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  Rulesestablishing a system of appeals from the initial assessment of tax;

 Rules for the collection of taxes that have been established to be owing; and

 Rules relating to tax offences and their punishment.

The importance of a sound legal structure for effective tax administration and the importance of

incorporating principles that will further tax compliance in the design of that legal structure.

Since each stage of the administrative process is dependent upon the other, to achieve a

significant improvement in the overall effectiveness of the tax administration each element of the

legal structure needs to be designed for maximum effectiveness (Asian Development Bank,

2001).

In addition to the legal structure for tax administration, obviously, the organizational structure of

the tax administration is also of crucial importance. According to the Asian Development Bank,

2001, the range of issues that must be resolved, in this regard, include

 Agreement of autonomy from the executive branch

 Accountability to legislative assembly

 Relationship to the Ministry responsible for the tax legislation

 Type of organization structure in relation to taxes administered

 Decentralization

 Personnelpolicy

 Policiesfor internal audits

 Missionstatement and strategic plan

2.1.2 Importance of tax administration

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 According to Asian Development Bank, 2001, tax administration dictates tax policy. Indeed,

tax administration and compliance issues determine the broad evolution of tax systems. The shift

in industrialized countries over a century ago from reliance on excise, customs and property

taxes to corporate income and progressive income taxes can be explained, in large part, by the

relative decline in the rural sector, the concentration of employment in large corporations and the

growing literacy of the population. In recent years, the shift away from these taxes - corporate

income and progressive individual income tax - and toward tax systems that rely more on broad-

based consumption taxes such as the value-added tax, flatter rate structures, and the adoption of

“dual income taxes,” in which a progressive tax on labor income is accompanied with a low flat-

rate tax on capital income, as adopted in certain Scandinavian countries, can be explained, in

large part, by the forces of globalization and developments in financial innovation and the

inability of tax administrators to develop technologies to cope with these forces and

developments (Asian Development Bank, 2001). In tax reforms there is a close correlation

between successful tax policy and efficient tax administration. In other words, there is no good

tax policy without efficient tax administration (Jenkins, 1994).

Over the past century, changes in the size of governments themselves, and differences in the

relative size of governments around the world, can be explained by changes and differences in

the environment, resources and technologies available to the country’s tax administrators (Asian

Development Bank, 2001).Aside from the role of tax compliance and administrative issues on

the evolution and general features of the tax system, there is no question that administrative

considerations influence, and often impose decisive limits, on particular tax laws. Most

obviously, the failure to tax all sources of economic power, such as the imputed rental value of

homes or accruing capital gains, are often justified by reference to practical concerns of

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administerability. It is futile to design a complex and sophisticated response to a tax policy

problem if the rules to implement the regime cannot be administered (Asian Development Bank,

2001). Ensuring that taxes are collected from those who owed them has always been an elusive

challenge for tax departments. It has never been easy to collect taxes from lawyers who take cash

for a Saturday office visit; waiters who receive most of their income as tips; landlords who

collect rent in cash; small business people who skim part of their profits or hire people off the

books; cash-only window cleaners, roofers and painters; or large corporations that contract out to

sweatshops. It has been even more difficult to collect taxes from crack cocaine dealers,

smugglers, hit men and hit-women, and those who make their living defrauding and extorting

their clients. The underground economy has always been diverse and even vaster than these

examples suggest (Asian Development Bank, 2001). However, as if these traditional forms of tax

evasion were not challenge enough, the combined effects of information technology and

globalization is now alleged to allow those who have been able to hide in the shadow economy

to evade paying their fair share of tax to disappear altogether. Many individuals are no longer

tied to one national jurisdiction; those that are increasingly receive payments from work and

investment abroad; anyone can have access to an over sea’s bank; anyone with access to a

computer can transact business anywhere in the world; property is becoming increasingly

intangible and consumption difficult to locate; and, capital is becoming increasingly fungible and

can be shifted relatively easily between jurisdictions. These and other developments are said to

call into question governments’ continued ability to levy taxes in a world in which companies,

assets and people are infinitely mobile (Asian Development Bank, 2001).

Tax administrators face a formidable number of challenges in every country. According to Asian

Development Bank, (2001), in many developing countries tax administration reforms are needed

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simply to achieve macroeconomic stability. In countries with economies in transition there is a

need to establish a tax administration that can respond to the demands of a growing market

economy and the resulting increase in the number of taxpayers. Moreover, there is the need to

establish the legitimacy of tax collection. In all countries tax administrators face the challenge of

modernizing the tax administration so that it can operate effectively in an increasingly global

economy. In spite of these challenges, several countries’ recent experiences in improving the

effectiveness of their tax administration have shown that fundamental reform is possible. In

recent years, there has been a considerable amount of study on the steps that should be taken to

improve tax administration and reform. Of fundamental importance to all reform efforts, to

improve the effectiveness of tax administration significantly, the government must be politically

committed to reform, the major obstacles to an effective tax administration have to be identified,

and there has to be well-designed strategies for addressing them (Asian Development Bank,

2001). As a preliminary step to developing a successful strategy for the reform of a revenue

agency, the “Tax Policy and Administration Thematic Group” of the World Bank has developed

a useful diagnostic framework for revenue administration. It includes a description of

quantitative indicators and indicators of effectiveness and efficiency that might be used to get a

general idea of the physical dimensions of the revenue administration and how effectively and

efficiently it is currently performing its functions and where performance problems might be

acute. It also provides a framework and checklist of questions relating to all aspects of revenue

departments operations, environment, resources, history, organization and management functions

and informal culture that can be used to assess its operations and diagnose its failings (Asian

Development Bank, 2001).

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A reform strategy to increase compliance requires a concerted, long-term, coordinated and

comprehensive plan. It is vital that tax administrators ensure that every compliance policy

instrument at their disposal is being used as effectively as possible. The uses of these instruments

complement one another.

2.1.3. Tax Administration Challenge

The efficiency of a tax system is not determined only by appropriate legalregulation but also by

the efficiency and integrity of the tax administration. Inmany countries, especially in developing

countries, small amounts of collectedpublic revenue can be explained by either incapability of

the tax administration inrealization of its duty, or with some degree of corruption. Regardless of

howcarefully tax laws have been made, they could not eliminate conflict between

taxadministration and tax payers. Tax administration with a skilled and responsiblestaff is almost

the most important precondition for realization of “tax potential” ofthe state. It is generally

known that tax laws and tax policy are as good as the taxadministration (Kaldor, 1980).

Tax administrators face a formidable number of challenges in every country. Inmany developing

countries tax administration reforms are needed simply toachieve macroeconomic stability. In

countries with economies in transition there isa need to establish a tax administration that can

respond to the demands of agrowing market economy and the resulting increase in the number of

taxpayers.

Human resource is essential in tax administration. Trained personnel are whatactually most

developing countries lack and this forced them, for instance, toorganize their activities under the

existing tax administration structure.

2.1.4. Efficiency of tax administration

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The key precondition for efficient tax administration is tax structure withminimizing distortions,

strictly tax exemptions and elimination of the differencesin tax treatment of particular parts of

economy. This will mean extending theVAT to all but a few goods and services (notably export,

which should be zero-rated,and banking and insurance services, where it may be difficult to

determinethe amount of value added to taxed) (Hesse, 1993).

Badly conceived or unnecessarily complicated tax structure greatly complicatesthe operating

function of the tax administration, while simple and transparent taxstructure could affect it in the

opposite way. So, the increase of efficiency of thetax administration could be attributed mainly

to the simplification of the taxsystem. Tax administration cannot change legislation as a means

forimprovement of tax structure, but could propose necessary changes in laws thatcan improve

tax structure and/or could aid in application of the law (Mansfield,1990).

2.1.5. Improve tax Administration

In reform of tax administration the importance of tax structure is clearlyreflected, because tax

administration and tax structure are interconnected andthey have to be improved simultaneously

in the tax reforms (The World Bank,1991).

Reaping revenues from tax rate changes (whether up or down) requires effectivetax

administration. Raising revenues through base expansion requires even betteradministration.

New taxpayers must be identified and brought into the tax netand new collection techniques

developed. Such changes take time to implement.The best tax policy in the world is worth little if

it cannot be implementedeffectively. What can be done to a considerable extent inevitably

determineswhat is done. One cannot assume that whatever policy designers can think up canbe

implemented or that any administrative problems encountered can be easilyand quickly

remedied. How a tax system is administered affects its yield, itsincidence, and its efficiency.

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The tax administration should provide impartial and professional courteousservice and must keep

private and confidential information regarding theindividual taxpayers. It should also offer clear,

understandable and current taxinformation and will make this information available to tax payer

throughvarious media and provide timely, accurate written information that one can relyon to

questions and requests for tax information (Asian Development Bank,2001).

Education and information programs on specific tax issues should be arrangedwith taxpayers to

enhance their awareness and taxpayers should be allowed tovoluntarily disclose their tax

situation without incurring a penalty or beingprosecuted for tax violations under certain

conditions (Asian Development Bank,2001)

2.1.6 Service commitments of tax administration

The tax administration should provide impartial and professional courteous service and must

keep private and confidential information regarding the individual taxpayers. It should also offer

clear, understandable and current tax information and will make this information available to tax

payer through various media and provide timely, accurate written information that one can rely

on to questions and requests for tax information (Asian Development Bank, 2001).

Education and information programs on specific tax issues should be arranged with taxpayers to

enhance their awareness and taxpayers should be allowed to voluntarily disclose their tax

situation without incurring a penalty or being prosecuted for tax violations under certain

conditions (Asian Development Bank, 2001).

2.1.7. Tax Assessment

A tax assessor is responsible for preparing and maintaining the assessment roll,the tax roll and

collecting the tax levies in accordance with the quality standards.The core service responsibilities

include:

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  Preparing annual market value assessments for all properties

 Preparing the business assessment valuations for all business premises

 Maintaining accurate property information and ownership on all realty accounts

 Maintaining accurate business information and ownership on all businessaccounts

 Defending assessments before municipal and provincial assessment tribunals

 Responding to inquiries and requests for information related to assessmentand taxation

 Producing and mailing annual assessment and tax notices to tax prayers

 Reporting assessment rolls and meeting annual audits

2.1.8. Procedures for tax collection.

It is expected that people’s tax payments should be in line with their income andthey are required

to pay a tax in proportion to their level of income. On the otherpart of the tax collectors,

collection of tax should be time conscious andconvenient and the cost of collecting the taxes

should not be high to discouragebusiness. Alternatively, this means that the ideal tax system in

developingcountries should raise essential revenue without excessive government borrowingand

should do so without discouraging economic activity and without deviating toomuch from tax

system in other countries (Tanzi, 2001). The procedures undertakenby tax authority to ensure

compliance are discussed as follows.

2.1.8.1. Identification and Registration of taxpayers

Tax Identification Number (TIN) is used to identify taxpayers. Every taxpayer hasa unique TIN,

which he/she is supposed to use in all his or her correspondencewith the tax authority, and no

taxpayer should have more than one TIN. Incountries like Uganda, they issue TIN free of charge

upon the taxpayer completinga TIN application form (Kangave, 2005).

2.1.8.2. Filing Returns

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Taxpayers are required to file returns within specified months of the end of theirtax accounting

year. The return should be filed in quadruplicate and should containall the particulars of the

taxpayer. All documents respecting taxation should bepresented to the tax authority office where

the taxpayer has their file.

2.1.8.3. Returns processing

Upon receiving a taxpayer’s return, the tax authority officers examine the accuracyof the return

by determining whether the return is properly completed, whether taxhas been properly

computed, and whether there are any penalty payments to bemade by the taxpayer. The officer

then allocates an assessment number to thereturn and issues the taxpayer with a Bank Payment

Advice Form, stating the taxpayable.

2.1.8.4. Payment of taxes

Taxes are due on the due date of the submission of the self-assessment returns. Taxshould be

paid to an authorized bank, using the Bank Payment Advice Form.

2.1.8.5. Audit and Examination

The role of tax audits and examinations is to check the accuracy of the information that taxpayers

provide to tax authorities. The audits range from simple field and desk audits to comprehensive

audits.

2.1.8.6. Collection and Enforcement

When the taxpayer has not made payment on the due date, and does not object tothe tax assessed,

tax authority can enforce payment in a number of ways. TheCommissioner may bring a suit

against the taxpayer or request a person owing orholding money for the taxpayer to pay the

money on a specified date or institutedistress proceedings against the taxpayer’s moveable

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property. In a wider context,the issue of enforcement includes offences committed by the

taxpayer, and thepenalties for these offences.

2.2. Overview of the history of Tax Administration in Ethiopia

There were studies on tax components and tax systems for different periods indifferent regimes

in Ethiopia. Wogene (1983) tried to examine the contribution oftaxation. He argued that taxation

and system was used as a tool for establishing thematerial basis of socialism. He estimated the

buoyancy and built-in elasticity of thetotal tax revenue and examined the difference between the

two measures to reflectthe impact of the tax reforms on tax revenue for the period 1975-1981. He

used theconstant rate structure method to separate the revenue impact of discretionary tax

measure. His result indicated that the tax reforms have significantly contributed toincreasing tax

revenue in the country.

A study by Teshome (1979) also tried to see tax elasticity in Ethiopia. The authorused built-in

elasticity method to examine the revenue effectiveness of theEthiopia’s coffee export taxes. His

empirical finding shows that revenue elasticitywith respect to change in volume and value of

exports is unity i.e. the revenue wasprice inelastic. He thus concluded that the present coffee tax

formula requiresconstant revisions of tax laws whenever significant changes in the price and/or

volume of coffee exports occur.

The study by Wegene (1983) showed that for the period 1975-81 tax reforms hadenabled an

increase in tax collection. This study employed the constant rate ofadjustment method to estimate

elasticity of the tax system. Likewise, the study byEshetu compared tax productivity in the pre

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revolution, post revolution periods ofEthiopia, and found out that there was certain improvement

in tax collection of thegovernment in post revolution Ethiopia.

The study by Teshome, (1979) showed that coffee export tax in Ethiopia wasinelastic while

study of agricultural tax share in capital formation by Kifle showedthat tax collected from this

category was very small.

Teame (1985); studied the overall productivity of the tax system for the period1968-83 and

found out that the system had a buoyancy greater than unity but anelasticity which is than one

from which the conclusion was that the tax system wasunstable and inflexible. This study

employed the CRS and DV techniques ofestimating tax elasticity.

Zelalem (1999) studied the productivity of the Ethiopian tax system for the period1961-1998. He

estimated the buoyancy and elasticity of the overall and majorindividual tax categories by using

the method of division index. The results of thisstudy showed that the Ethiopian system was

inefficient for most of the coefficientswere found to be less than one. The explanation given for

the low productivity ofthe tax system was that the system suffered from the problems of

weakadministration and extensive tax evasion.

2.3. Tax Administration

2.3.1. Tax Administration Organization

An organizational issue that has received recent attention is the creation of semiautonomous

revenue agencies. Tax administration autonomy and revenue boards.These appear to have

worked well been created- with mixed success- in severaldeveloped and developing countries to

in increasing to increasing administrationefficiency and effectiveness. The same objective forms

the background to efforts toimprove the cooperation between tax and customs organizations,

which can like inDenmark and Canada, result in the complete merger of tax and customs. Even

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whenthe revenue administration is not set up as an autonomous agency its relationship tothe

Ministry of Finance needs to be determined. While in some countries it is part ofthe ministry,

other countries prefer a separate structure for tax and customsadministration. Another issue in

some countries has been the creation of a separateTax Policy, partly following the example of

Guardia diFinanza in Italy. In the internalstructure of the organization, an issue of key

importance is the organizational model,which can be based on tax administration functions, on

type of taxes, or on type oftaxpayers. In practice, although all tax administrations choose one

model as the basicmodel, to a certain extent mix different organizational approaches. Typical

example ofsuch a mix is the creation of a Large Taxpayer Unit in tax administrations organized

along functional lines. The second principal issue is the regional structure of theorganization, the

determination of the number, role and responsibilities of regional andlocal offices, and their

supervision through the headquarters of the organization. Anissue which has created serious

problems in a number of countries is the interferenceof local governments in the work of

regional and local tax offices in cases where theseoffices are responsible for the collection of

national and local taxes thoughdeterminants of their success-and their failure in some cases-have

not beensystematically explored. Finally, Internal accounting conventions for tax administration,

though a part of the broaderarea of government accounting, are important as they affect the

accuracy with whichadministrative costs are determined and allocated to different administrative

units, andalso for measured effectiveness, for example through conventions for recognizing tax

collection arrears.

2.3.2. Tax Administration management and Functions

The main functions of a tax administration, in dealing with taxpayers, aside fromactual tax

collection or sanctioning non-compliance, largely involve gathering orprocessing information.

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The first information related function is Identification oftaxpayers followed by their Registration

as taxpayers and, for most major taxes, theassignment of assigning taxpayer identification

numbers. Other information functioninclude, at the preliminary stage collection of information

from third party sourcesincluding, importantly, tax with holders, accessing asset ownership

information (suchas cadastral records), engaging in tax payer education and providing taxpayer

servicesto keep their compliance burden low. Verification of the correctness of tax paymentstarts

with return filing control followed by assessment of tax liability of the taxpayer.Among the

major types of assessment activities are Valuation and Tax Audit the latteractivity typically

being the most important function of tax administrations from theperspective of resource use. In

some countries a substantial part of valuation and TaxAudit the latter activity typically being the

most important function of taxadministrations from the perspective of resource use. To establish

tax evasion or tofacilitate identification of non-filers Investigation and inspection are also

necessary. Ifprima facie non-compliance is established, then penalties and prosecution of tax

offenders may be required. Actual Tax collection is divided into two functions,mechanical

collection of taxes from those who pay voluntarily on time and collectionof delinquent taxes. In

some countries a substantial part of the capacity of taxadministration is absorbed by the

execution of non-tax related functions, such as thecollection of user charges and fees for other

government agencies. Those kinds ofresponsibilities should be critically reviewed to allow the

tax administration toconcentrate on its main function. In several countries, Amnesties are

declared fordifferent reasons. Amnesties, of course, must be administered and not just enacted.

The final function of tax administrations covered here, again largely informationrelated and

becoming increasingly important, is International tax cooperation withother administrations.

2.3. Empirical literature review

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Kangave (2005) discussed tax administration in Uganda’s context. It then discussed Uganda’s

tax structure, the problems faced in administering taxes, and it gave possible solutions to the

problems the author identified in his research. The author, in his research, identified corruption,

tax evasion, and inadequate resources for tax administration poor quality of audits and

inadequate support for tax administration as problems or challenges of tax administration that

have weakened the ability to achieve desired revenue targets. The author did not purport to

address all of the problems. Neither does it set out to address in detail the causes of these

problems. Instead, it points out the problems.

Besides, the author recommendations for solving the tax administration problems were adopted

from the Canadian tax administration system. The researcher do not believe that the tax

Canadian tax administration system should not be taken as standard for measuring the

performance of tax administration system. In addition to this, the author used interview with the

tax officials and relied on secondary sources. However, author could have also gathered

responses from the target taxpayers to get additional information for his research. James (1999)

examined issues affecting the formulation of tax policy through the development of actual

proposals by tax policy-makers. This was done taking account of the possibility that too narrow

an approach to this process can produce misleading conclusions and that proposals for tax reform

may be inappropriate when the wider context of the tax system as a whole and the environment

in which it has to operate are considered. Two issues ware used to illustrate the situation – tax

compliance and tax simplification. The paper concluded that in developing tax policy it is

important to ensure that the wider context is taken into account and it also outlines a practical

approach to achieve this aim. Jenkins (1991) emphasized that the tax system can never work

better than its tax administration, but even the best tax administration would certainly fail to turn

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a bad tax system into a well-operating one. The researcher also warned that many ambitious tax

reforms failed because of the inefficient tax administration. Without the permanent

reorganization of the tax administration and almost daily improvements in methods of its

management, it is impossible to expect that tax reforms could be realized successfully. The

removal of exemptions, loopholes, and concessions can simplify administration and reduce

evasion. Taking a systematic view of the tax system, rationalization, simplification, and the

removal of anomalies should have the effect of reducing the administrative costs of

identification, assessment, auditing and enforcement. The administrative simplicity of "tax

handles", however, while influencing tax policy, should not be allowed to dictate it.

Concentrating on just a few handles can lead to highly distortion structures (Burges and Stern,

1993). Sahota (1961) undertook a study on the tax performance of the tax system of India for the

period 1948-1958 using the proportional adjustment method and found that the tax system was

inelastic even though the country had a highly progressive income tax at that time. The reason

was due to a defective tax structure and rate schedule, wide spread tax evasion and income

distribution in favor of the "non-income tax payers group" or in favor of the low-income brackets

within the tax-paying group. Sahota (1931), on his part, studied the performance of the Indian tax

system for the period 1948-58. This study used the proportional adjustment method to estimate

elasticity of the system. Results of the study showed that the Indian tax system was inelastic, the

causes of which were found to be a defective tax structure and wide spread tax evasion. Kussi

(1994) tried to show the effect of tax reforms of 1983 on the revenue productivity of the tax

system in Ghana. To this end, two separate regressions for the pre-reform period (1970-82) and

the reform period (1983-1993) were fitted for some major tax types.

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It was found out that there was a progress of both buoyancy and elasticity for personal income

tax, company income tax, sales tax and import tax. The study attributed the improvements to

growth in GDP and general improvement of the tax administration. This study on the other hand

showed that there was a fall in buoyancy and elasticity for excise duty whose cause was stated to

be abolition of all excise duties on products other than beverages and tobacco in 1987 and the

successive reduction in the duty rates of the affected goods. The following part will be

discussing the empirical review specific to Ethiopia related to tax administration in the country.

There were studies on tax components and tax systems for different periods in different regimes

in Ethiopia. Wogene (1983) tried to examine the contribution of taxation. He argued that taxation

and tax system was used as a tool for establishing the material basis of socialism. He estimated

the buoyancy and built-in elasticity of the total tax revenue and examined the difference between

the two measures to reflect the impact of the tax reforms on tax revenue for the period 1975-

1981. He used the constant rate structure method to separate the revenue impact of discretionary

tax measure. His result indicated that the tax reforms have significantly contributed to increasing

tax revenue in the country.

A study by Teshome (1979) also tried to see tax elasticity in Ethiopia. The author used built-in

elasticity method to examine the revenue effectiveness of the Ethiopia's coffee export taxes. His

empirical finding shows that revenue elasticity with respect to change in volume and value of

exports is unity i.e. the revenue was price inelastic. He thus concluded that the present coffee tax

formula requires constant revisions of tax laws whenever significant changes in the price and /or

volume of coffee exports occur.

The study by Wegene (1083) showed that for the period 1975-81 tax reforms had enabled an

increase in tax collection. This study employed the constant rate of adjustment method to

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estimate elasticity of the tax system. Likewise, the study by Eshetu compared tax productivity in

the pre revolution, post revolution periods of Ethiopia, and found out that there was certain

improvement in the tax collection of the government in post revolution Ethiopia. The study by

Teshome, (1979) showed that coffee export tax in Ethiopia was inelastic while study of

agricultural tax share in capital formation by Kifie showed that tax collected from this category

was very small. Teame (1985); studied the overall productivity of the tax system for the period

1968-83 and found out that the system had a buoyancy greater than unity but an elasticity which

is less than one from which the conclusion was that the tax system was unstable and inflexible.

This study employed the CRS and DV techniques of estimating tax elasticity.

Zelalem (1999) studied the productivity of the Ethiopian tax system for the period 1961

-1998.Thtimated the buoyancy and elasticity of the overall and major individual tax categories p

using the method of division index. The results of this study showed that the Ethiopian system

was inefficient for most of the coefficients were found to be less than one. The exrlirrion given

for the low productivity of the tax system was that the system suffered from the problems of

weak administration and extensive tax evasion.

Generally, one can see that the empirical studies undertaken thus far for developing countries,

particularly for Ethiopia, bothered little or no to see the potential challenges faced by taxpayers

and the tax authorities in administering different tax activities such as tax assessment and

collection. The performance of the tax administration will have a bearing on the capacity to raise

revenue for a country since it includes primarily the assessment and collection activities.

Therefore, this research will not only identify the problems of the Batu town tax administration

and tax payers, but also the cause of these problems. Because the researcher believes that

identifying the root cause of the problems is the best ground to provide appropriate solutions.

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 CHAPTER THREE

Research Methodology

3.1. Research Design

In order to meet our objective we have use a descriptive research design. This is so because

descriptive research involves gathering data that describe events and then organizes, tabulates

and describes the data collection. Thus it often uses descriptive statistics to aid the reader in

understanding the data distribution. Khothari (2007) states that descriptive research studies will

be those studies concerned with describing the characteristics of particular individual, group or

phenomena under study. Thus studies concern with specific prediction, with narration of facts

and characteristics concerning individual, group or situation will be all examples of descriptive

research studies. Hence this study employed on using such a design since it is typical of such

description.

3.2. Population and Sampling Techniques

The Kolfe keraniyo sub-citywill select by using purposive sampling because many customers can

be accessed and the responsible managers are found at the Kolfe keraniyo sub-city tax

administration office. The target populations of the study were managers and customers of Kolfe

keraniyo sub-city. The selection of the customer respondents is carried out by using non

probability sampling technique. Among the variousnon- probability sampling techniques

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accidental or convenience sampling have used to contact customers. According to Anol, (2012:

70) convenience sampling also called accidental or opportunity sampling, is a technique in which

a sample is drawn from that part of the population that is close to hand, readily available, or

convenient. In this case the researchers have customers who visit the branch which is easily

accessible as they use the services of the branch and is provide the questionnaire to fill out and

return. In order to determine the sample size the student researcher have used the model proved

by Malhotera, (2006:339). The researcher will took sample of 20 peoples who are ordinary

customers who do not have a listed name and specific identification code. The researchers will

be there for two days at a row and distributed 15 questionnaire customers while they come to use

the service at theAddis Ababa, Kolfe keraniyo sub-city. Managers and supervisors who contacted

for an interview will select by taking 5% of the employee in Kolfe keraniyo sub-city. The sample

size 25 will determine as most of the respondents will homogeneous and it was recommend that

in interviews it is better to accommodate smaller samples.

3.3. Type of Data Collection

Primary and secondary data will use for the study. The primary data will obtain from the

Manager and customers, whereas, secondary data will gather from organization profile, research

works, books and web pages.

3.4. Methods of Data Collection

Both primary and secondary data will be used for data collection. The primary data will obtain

through personal interviews with the managers and questionnaire was distributed to the

customers. Secondary data was collected from books, journal articles, research works and web

3.5. Method of Data Analysis

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The collected data will analyze and interpreted by using both qualitative and quantitative data

analysis techniques. The data collection will use from open ended and interview responses will

analyze qualitatively. Data that will gather from close end questions will analyze quantitatively

specifically by using tables and percentages.

4 .Time and Budget Schedule

4.1. Tentative Time Schedule

This research will expect to finalize from April – September, 2019 according to the following

time schedule.

Description of Time Frame

main activities April May June July August September

ProposalPreparation
and defense

Reviewing of related
literature

Distribution and
collection of
questionnaire

Data analysis and

interpretation

Preparing Summary,
Conclusion and
Recommendation

Writing up the final

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 paper

Preparing for
defense

4.2. Cost Budget

To prepare the research in efficient and effective manner the researcher has to prepare the cost
budget.

No Materials/Activities Unit Quantity Unit cost Total cost

1 Working paper Rim 2 1200.00 2,400.00

2 Pencils Pcs 10 5.00 50.00

3 Pen Pcs 10 5.00 50.00

4 Flash Pcs 1 280.00 280.00

5 Erases Pcs 3 30.00 90.00

6 Down load Mint - 0.30 600.00

7 Photo copy Page 500 2.00 1,000.00

8 Transport - - - 1,000.00

9 Mobile card &Tel. Month 6 125.00 750.00

10 Binding Pcs 10 10.00 100.00

11 Entertainment Month 6 500.00 3,000.00

12 Adviser payment Birr 1 7,800.00 10,000.00

13 Contingent 15% - - 2,890.00

Total Birr 22,210.00

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4.3. Source of Budget
As the research will be done for academic purpose the source of budget will be covered by the

researcher and some equipment used for the research like Laptop Computer are owned by the

researcher and not included in the Budget.

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