CHAPTER ONE

1. Introduction

1.1. Background of the study

Tax is a compulsory contribution levied on individuals, business firm or property which is

designed to transfer sources from private to the public sector, so as to provide merit goods to the
society without contributing price inflation (Auld, 1977).

Tax is the main source of finance for the government to provide infrastructure and all social
services such as education, health, roads etc…it should be organized systematically and
effectively in other words a well-organized tax system could have a great contribution for the
economic development of a country. ( Hereber, 1999).

Business taxation is a process by which the government secures funds to pay for government
expenditure. Business taxes are generally regarded as unpleasant subject. Justice John stated
that the power to tax is the power to destroy represents the historic linkage of tax and taxes, so
taxes are inevitable. But against expression of unpleasantness must be set the statement of
Justice Oliver Wendell how justice stated that “taxes are the price pay for civilization. Tax
contribution to state revenue legally levied on person, property and business” according to (John
O.Wendell)

Ethiopia’s taxpaying heritage has been engulfed with various problems like tax evasion
sometimes these illegal actions are considered as an expression of wisely in the mind of some
people this indicates that although there are various reasons behind like lack of awareness of the
tax payers is one of the main constraints (Auld, 1977),

Therefore, persons involved in taxation should be aware of the role of a tax that plays for
economic development and then work effective and faithfully during tax collection. However,
in our country there are various challenges of business income tax collection. For instance, the
tax payers could not get much information how the government spends the money collected
from tax even, they may not know the financial source for roods, electricity and telephone
services that they are using for their business. Correspondingly by taxes do their duties
effectively and efficiently (Abraham Belay 1998).

The study of taxation in Ethiopia takes back to 1855E.C. It is

verydifficulttogetreliabledocumentaryevidenceastowhenexactlytaxationwasintroduced.But
during the period of Zera yakob the first tax system introduced in Ethiopia and the payment is
made in kind and arbitrary system of agricultural taxes. However, after the fail of Tewodros II
emperor Minilik taken strong change. Such as, the establishment of fixed amount of tax rather
than undefined and arbitrary system of agricultural taxes during the regime of emperor Haile
silassie, there were a number of proclamations legal notices as statutory basis of income tax.
During the Durge regime, the taxes were similar to those imposed during Haile silassie regime
except that wider tax basis and increased tax rates.

But the Durge regime partially alleviates the tax collection problem that exists during the
impartial period by delegating the responsibilities. During the transitional period major changes
took place such as, tax and expenditure assignment of power, tax rate and brackets were
modified and capital gains were introduced tax rate on business income tax as measurement of
tax reform program. The federal democratic republic of Ethiopia also took major changes. All
the tax system currently applies is the result of federal democratic republic of Ethiopia
government. However, in our country payment of tax is considered by society as a debt imposed
by the government to increase the wealth of government officials (Gebrie, 2006).

The kind of traditional tax system continued for several centuries smoothly until it was replaced
th
by the modern taxation system in the mid of 20 century.The central transitional government
and national regional administration start to collect the revenue based on proclamationNo33/92.

Tax levied by the federal governments and state government are classified as direct and indirect
tax. Direct tax includes; employment income tax, business income tax and tax on royalties and
chance of winning. While, indirect tax includes; value added tax, excise tax, and custom duty
taxes. Among the direct taxes income classified in to three major categories with respect to legal
personality and annual turnover.

2
The above issue about tax motivation this study would be investigated that challenges on
business income tax collection in case of Kolfe Keranyo sub-city administration office.

1.2 Statement of the problem

Tax is compulsory payment or contribution without direct and equivalent return for the
contribution. The main objective of the government to impose tax is raising revenue of the
government to finance its activities, to minimize income and wealth inequalities, to insure
economic stability, to discourage the consumption of harmful products, promote private
investments, to enhance capital formation, to reduce regional imbalance, to encourage export, to
minimize unemployment (create employment opportunity) and enhance a living standard of the
society).

The efficiency of tax system is not determined only by appropriate legal regulation but also it
depends on the efficiency and integrity of tax administration. In many countries, especially in
developing countries, especially in developing countries small amount of collected public
revenue can be explained by either in capability of the tax administration in realization of its
duty or with the sum degree of corruption. Regardless of how carefully tax law has been made,
they could eliminate conflict between the tax administration and tax payers (kaldor, 1980).

However, in most developing countries, tax is a common phenomenon that faces many
problems to develop adequate tax system that help the government to finance its expenditure
sufficiently. Particularly in Ethiopia it is difficult to see the potential challenges faced by tax
payer and tax officers in different tax activities such as tax collection.

The major challenges that maketax collection ineffective and inefficient in our countries
general and particularly in Kolfe Keranyo sub-city administration are problem of tax evasion,
Delay in payment, Lack of appropriate record, lack of skilled man power.(Kolfe Keranyo tax
collection office annual report).

However, the question is how to promote good taxation system and bring the sector in the path
of development by solving the above problems effectively and efficientl

3
1.3. Basic research questions

The researchers would be answer the following basic research questions

 What are major challenges of business income tax collection both in side of tax payers
and tax authority?
 What are the cause of tax evasion and avoidance by tax payers?
 What extents of taxpayers are aware the use of business income tax?
 What strategies and techniques are used in the tax collection process of the sub city?

1.4. Objective the study

1.4.1. General objective

The general objective of this study is to investigate the major challenges of business income tax
collection in Kolfe Keranyo sub-City.

1.4.2. Specific objective

Based on the above general objective this study would have been the following specific
objectives
1. To identify the major problem of the business income tax collection both in side of tax payers
and tax authority

2. To identify the cause of tax evasion and avoidance problem by tax payers

3. To identify degree of the taxpayer aware the use of business income tax

4. To identify strategies and techniques that used by tax collector to collect business income tax

4
1.5. Significance of the study
This research paper would be some key significance to the policy makers and tax payers by
forwarding some insights and understanding to both the tax payers and tax collectors.

Generally, this study would be the following significances

 It would give base line information for tax payers about benefits of taxation.
 It would provide vital information for the government about tax estimation (under or
over) and its impact on revenue of the government and development activities of small
business in the town and to suggest solution to the problem faced.
 It also important for us to understand how government taxation is imposed on business
and their problems and also improve our studying research.
 Lastly the study served as a reference to other researchers who are going to make farther
study to this area
1.6. Scope (Delimitation) of the study
The scope of this study was delimited in the area related to the challenges of tax collection in
the business sectors. Tax is very vast and crucial issue, standing its nature of the study. The
study related tax collection problems require sufficient and longterm study, so this research
paper was restricted only challenges of business income tax collection in Kolfe Keranyo sub
city.

1.7. Limitation of the study

One must know that limitation is some which is inevitable when researchers conducting study,
but we are minimized its effect in our study.

Hence, the researchers faced the following unavoidable limitation

 Unavailability of relevant and organized data in the areas of the study.

 Lack of goodexperiencetotheconductresearchonthesideofresearchersduetothisnewjob.
 Our expected time and cost also confronted difficult in conducting this study.

5
1.8. Organization of the paper
The paper is organized into five separate chapters. The first chapter includes introduction, which
contain the back ground of the study, statement of the problem, research questions, objective of
the study, significance of the study, scope and limitation of the study and. the second chapter
deals with the literature related to the research, definition and theoretical concepts and
experiences of other country. The methodology and procedures used to gather data for study
are presented in Chapter three. The result of data analysis and findings that came out from the
study contained in chapter four. Finally, the fifth chapter presents the conclusion and
recommendations of collection of business income tax in Kolfe Keranyo sub-city based on my
findings and interpretation.

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 Chapter Two

2. Literature review

2.1. Introduction
Tax is compulsory payment or contribution without direct and equivalent return for the
contribution. The main objective of the government to impose tax are raising revenue by a
government to financial; expenditures its activities, to minimize income and wealth inequalities,
to insure economic stability, to discourage the consumption of harmful products, promote
private investments, to enhance capital formation, to reduce regional imbalance, to encourage
export, to minimize unemployment (create employment opportunity) and enhance a living
standard of the society.

Tax on business means those taxes which are paid by those companies which are not registered
under the companies like partnership firm are called tax on business. On the other hand,
business taxes are those taxes which are paid by a company which is registered under the
company act, 1956. Companies which pay business tax pay unit own behalf rather than behalf
of its properties. Business tax depend on the flow of business according to (Alka Gupta, 2001)

The most difficult problems arise in the effective taxation of business income, whether under a
separate corporation profits tax or as applied to partnership and proprietorship income under the
individual income tax. Where business accounting has not been developed to a level sufficient
to measure profits with reasonable accuracy, other methods have to be applied. Thus, many
countries use a presumptive rather than a direct approach to profit determination, this may take
the form of a presumptive profit margin on, sales with different margins stipulate for various
industries in fact transforms the profits tax into a type of sales tax, this shift occurs since tax
liability is a function of sales and the presumptive rather than actual margin.

Business taxation is a process by which the government secures funds to pay for government
expenditure. Business taxes are generally regarded as unpleasant subject. Justice John stated
that the power to tax is the power to destroy represents the historic linkage of tax and taxes, so
taxes are inevitable. But against expression of unpleasantness must be set the statement of

7
Justice Oliver Wendell how justice stated that “taxes are the price pay for civilization . Tax
contribution to state revenue legally levied on person, property and business” according to (John
O.Wendell)

2.2. Business income tax collection

All civilized countries need to collect taxes for several reasons, such as to finance development
activities, to meet their day to day expenses related to maintenance of a free and fair society to
control the economy through fiscal measures, and to certain extent, to change the economic
behavior of people. This authority of nations in government to collect moneys from tax payers
must recognize a balance between the nation’s authority to tax and tax payer’s rights. Thus, the
real challenge for nations is to ensure that tax payers are treated with fairness, justice, and
equalities. While national government asserts their jurisdiction as taxing authorities. Ideally this
tax collection can be analogized to the extraction of honey from the abode of honey bees where
honey bees are not disturbed and careful extraction of the honey results in a circular process
according to (misrak, 2008).

A sound tax system identifies surpluses in the economy and should tax it in such a fashion as to
cause minimal damage to productive activity. Tax collection should act as a catalyst for
economic growth. Ideally a tax system should be natural with respect to little effect on
economic behavior. In the real world, however it is impossible to achieve neutrality.
Administrative feasibility and practicability are two important constraints on tax policy these
are also matters of convenience to varying degrees. A tax policy is administratively feasible
when its enforcement does not cost too much. At the same time administrative feasibility should
not be an excuse to compromise the original objective (Bruce, 2001).

2.3 Procedures for tax collection

It is expected that peoples tax payments should be in line with their income and they are
required to pay tax in proportion tax their levels of income. On the other part of the tax
collectors, collection of tax should fine conscious and convenient and the cost of collecting the
taxes should not be high discourage business. Alternatively, this means that ideal tax system in
developing countries should raise essential revenue without excessive government borrowing

8
and should do so without discouraging economic activity and without deviating too much from
tax system in other countries (Singh, 2008). According to Singh (2008), the procedures
undertaken by the tax authority to ensure compliance are discussed as follows;

2.3.1 Identification and registration of tax payers

Tax identification number (TIN) is used to identify tax payers. Every tax payerhas a unique
TIN, which he or she is supposed to use in all his or her correspondence with the tax authority,
and no tax payers should have only one TIN number (Singh, 2008).

2.3.2 Filling returns

Tax payers are required to fill returns with in specified months of the end of their tax accounting
year. All documents respecting taxation should be presented to the tax authority office where
the tax payer has their file.

2.3.3 Return processing

Up on receiving a tax payer’s return, the tax authority officers’ examine the economy of the
return by determine whether the return is properly completed, and whether there are any penalty
payments to be made by the tax payers. The officers then allocate an assessment number to the
return and issue the tax payer with a bank payment advice form, starting the taxes payable.

2.3.4 Payment of tax

Taxes are due on the due date of the submission of the self-assessment returns. It should be paid
to authorized bank by using the bank payment advice form.

2.3.5 Audit and examination

The role of tax audits and examination is to chalk aqua racy of the information that tax payers
provide to tax authority. The audit branches from simplified and desk audits to comprehensive
audits.

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2.4. Challenge of business income tax collection
Challenges are obstacles that business income taxes are facing during the collection and this are
the above challenges.

2.4.1 Administration problem

Under developed countries all suffer from a serve shortage at trained person for administrative
work for an ends including come test audit. To the extent to which these very scarce personnel
are used for income tax administrative, it is not available for other purpose. Other than in the
top income and ware corn or group standards of literacy and record keeping are such that
accurate determination of income is virtually impossible collection of business income tax to the
subsistence of business income is particularly difficult, because of the problem of determining
the amount and value of this income. According to (John F. Ours 1970)

2.4.2 Problem of tax evasion and Avoidance

Tax avoidance and evasion constitute a problem in all most all of the countries of the world.
Tax avoidance is different from tax evasion, while evasion is against the law; avoidance is
within the ambit of the law (Parameswarn, 2005).

2.4.2.1 Tax avoidance

Tax avoidance refers that legal exploitation of the tax law to once on advantage to attempt to
reduce, the amount of tax that is payable by means that are within the tax law whilst making full
disclosure of the material information to the tax authority. Tax avoidance may be considered as
either the moral dodging of once duties to societies or the right of every one citizen to find out
all the legal way to avoid paying too much tax (Parameswarn, 2005).

According to parameswarn (2005) the following are definition of tax avoidance;

“It is a means that tax payer resort to advice within the ambit of the law to divert the economy
before it occurs or arises to him or her.” Or

“Tax avoidance has to be recognizing that the person whether poor or wealthy has the legal
right to dispose of this income so as to attract the least amount of tax.”

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“Tax avoidance can be defined as escaping from the tax liability by using avoidable loop-holes
of the tax law.”

N.B. in general tax avoidance means “legal minimization of tax burden by the tax payer.”

2.4.2.2 Tax evasion

Tax evasion is a general term for efforts by individual, firms, trust and other entities to evade
the payment of tax by breaking the law. Tax evasion usually entails tax payer deliberately
misrepresenting or cancelling the true state of the affairs to the tax authorities for reducing their
tax liability and includes in particular, dishonest tax reporting (such under decline income,
profit or gain or over stating deductions (Parameswarn, 2005).

According to parameawarn (2005), the following are definition of tax evasion;

Tax evasion means fraudulent action on the part of the tax payer with a view to violate civil and
criminal provisions of the taxation law. It can be defined as tax evasion implies the activities
involving an element of deceit, misrepresentation of facts, and falsification of accounts
including downright fraud.

It is a crime in almost all countries and subjects the guilty party to fines or even imprisonment.
In general tax evasion means tax avoidance by illegal means i.e. tax evasion is against the law,
and is unsocial act.

2.4.2.3. Causes of tax evasion

According to parameswarn (2005), there are many possible causes of tax evasion. But the
following are the most important causes of tax evasion. These are;

1. Multiplicity of tax law: a number of laws are enacted for the recovery variety of taxes leads
to wide spread tax evasion.

2. Complicated tax laws: these are another reason for tax evasion the tax laws contain a number
of exemptions, deductions rebates, relief, and such charges and so on.

11
3. High rate of taxation: high rate taxation causes wide spread tax evasion, because of the
greater the risk under taken for the purpose of tax evasions, the greater is the reward.

4. In adequate information: lack of adequate information as the source of revenues also

contributes to tax evasion. In Ethiopia, small businesses men and farmers rarely maintain any
accounts of their income.

5. Investment in real property: investment in real property both moveable immoveable, and
concealment of its true owner ship have also been major causes for tax evasion. All these
facilitate the chance listing of black money into profitable ways.

6. Ineffective tax enforcement: lack of proper training and efficiency for authorities enforcing
the tax laws is also major causes for tax evasion.

7. Deterioration of moral standards: there is deterioration in standards of moral behavior of the

people since independence. The values which formed the bases of society are shown a little
respect. In this modern competitive world that deterioration of moral standard among the people
leads to falsification accounts misrepresentation of facts and fraudulent behavior.

2.5. Effects of business taxation

Now a day, revenue rising is not the only purpose of taxation. In welfare state taxation has also
been used as a tool monetary policy to achieve social economic objectives. It is used promote
economic growth by controlling the effects of trade cycles and regulation the production and
consumption. It has also been used to reduce the inequalities of income and wealth (Bhatia
2003).

2.5.1. Effects on the ability to work, save and invest

Taxation transfers the money income from the public to the government and thereby reducing
their purchasing power. The reduction in purchasing Power reduces their ability to obtain
necessaries and the luxuries life.

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Thus, the levy of taxes on people reduces the consumption of necessaries and comforts, which
lower the standard of living. When the standard of living is affected their efficiency and ability
to work will also be adversely affected. This effect is strongly felt by the poor people. But the
efficiency and ability to work of rich people is not so much affected by taxation.

The savings of the people depends upon their income. When income is reduced by taxation,
saving will also be reduced. The ability of the people to invest largely depends upon their
saving. When their savings are reduced by taxation, their ability to invest is also automatically
reduced by taxation (Bhatia 2003).

2.5.2. Effects of taxation on willingness to work, save and invest

Taxation Affects the desire of the people to work save and invest, if the willingness of the
people to work, and invest is effected by taxation; the production will automatically be affected.
It is universally recognized that direct taxes have more adverse effect on the willingness of the
people to work, save and invest.

It is argued on the grounds of psychological reactions of the people. That is when the higher
progressive taxation is livid; the government takes the major portion of their additional earnings
back. This may create a tendency in the minds of the people not to take risk to work hard to earn
such a major income. However, reasonable taxation may not have any such bad effect on the
desire to work hard, save and invest (Bhatia 2003).

2.5.3. Effects of taxation on diversion of economic resources

While the volume of production of country depends up on the ability and willingness to work,
save and invest, the pattern of production depends upon the allocation of economic resources
among the industries and region. Thus, taxation can influence not only the size of production,
but also the patter of production.

If the productions of certain industries are taxed, their price would rise. And therefore, the
demand for their product would is reduced. And thereby the profits are also reduced. This may
result in the diversion of resources from these industries to some other industries whose
products are subjected to no tax or low tax rate. This diversion of resources may change the

13
composition and pattern of output of industries. The diversion of resource takes place from
taxed industries to non-taxed industries will depend upon the elasticity of demand and supply of
products to such industries.

The diversion may be beneficial diversion or harmful diversion. Taxation on the commodities
that are injurious to the health like cigarettes and liquors may discourage their consumption,
which in turn affects their production. The factors of production engaged in these industries
may be diverted to some other industries producing goods of common consumption etc. This is
a Beneficial Diversion”.

The taxation on the goods of common consumption will increase their price. Hence the
consumption of such goods may be reduced. This will affect the production of these
commodities, and the resources used in their production may be diverted to the production of
some other commodities which may be in the nature of luxury or harmful to health. Thus, such
a diversion of resources in harmful and is socially not desirable. It is known as “Harmful
Diversion” (Bhatia 2003).

2.5.4. Effects on the size of industries

When taxes are imposed without any discrimination on the commodities produced by both
small and large scale industries, the production of small scale industries will be highly affected.
This is because there cannot be any economies of large scale operation. Thus the cost of
production of their industries will normally be high. If taxes are levied on par with the large
scale industries, the total selling price of small sized industrious will increase further. This will
affect the competitive efficiency of small scale industries, which in turn affect the production
and survival of these industries. Hence, tax concession should be given to encourage the
production of these industries (Bhatia 2003).

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2.6. Function of business income tax collection
Taxes may be regulatory in either a microcosmic as a macroeconomic sense. In the
microeconomic context they may influence the consumption of particular good or the utilization
of production resource. A regulatory tax designed to discourage the consumption of a
particulars item such as alcoholic beverage or tobacco products. A macroeconomic fiscal policy
is directed toward achievement of the established goals of the society (B.P Herbier, 1999).

2.6.1. Stabilization function

Stabilization function of a tax goes with budget allocation and fiscal policy of the government.
The increase or decrease of income has an income on the supply of goods and services as
increment or decrement of unemployment value of goods and services or a saving investment.

 Collection revenue and using it for different economic and social sectors is given
priority and the country’s expenditure should correspond with its revenue to reduce the
risk of instability. The goal of stabilization includes the full employment of labor and
capital resources in order to combat the undesirable condition of recession or
depression stabilization may also be applied in the pursuit of price stability in order to
prevent inflation. It may be directed toward the promotion of economic growth and
improvement in the nation’s balance of international payment.(B.P herbier,1999)

2.6.2. Income redistribution

A government levy tax not to cover public expenditure, on police, low and justice, country
security for other partial public services such as education and health and for constructing for
income infrastructures but government also levies tax income redistribution, is made on the
patterns in which aggregate income or wealth is divided among the people which the public
sector budget play (B.P herbier, 1999).

An important role in the distribution of income, one unique approach to income (or wealth)
distribution is to view it as a pull (social) good. The individual economic characteristics are
normally applied in reference to the ability to pay principle of equity in the distribution of tax
burdens. That is the statutory tax rate increase as the tax base grows larger. This can be done by

15
including large part of non-wage income such as capital income, income from self-employment
and income in kind (B.P herbier, 1999)

2.6.3 Resources allocation

Tax revenue also used to allocate the limited supply of productive resources to be available to
the society. The unlimited scope of aggregate human wants along with limited resources which
produce the economic goods capable of satisfying these wants, make it necessary to allocate
resources (B.P Herbier, 1999).

2.7. Major challenges of business income tax collection

Abraham Belay (1998) concludes that the following are major challenges of business income
tax

 Eligible companies were to register fully

 Lack of modernize technology

 Delay in payment

 Lack of appropriate record

 lack of skilled man power

 Unable to register eligible companies: - if all eligible companies not register the registered
companies will not be competitive. And due to this government revenue from business
income tax will decrease. So this is also another server problem on the system.

 Lock of modernize technology: - the technology in which Revenue office used is not
modern most of recording and registration activity is performed manually. Networking
branches are not yet finished. In U S A registration for is post business incense tax sable on
internet. The tax authority loads the form on the compute then taxpayers will fill it. It will
save tax payers time.

 Lock of skilled manpower: -Revenue office does not have enough and competent
employees as the researcher try to show in this study.

16
 Delay in payment: - some business people do not pay on the given time

 Lack of appropriate record: - most business people have no clear, fair and true records. This
will have created problem in detecting the right amount of business income tax collected.

 Lack of facilities: - as facilities were not fulfilled, like timely accommodation of tax payer,
enough parking lot etc. even the Kolfe Keranyo sub-city revenue office are not enough and
distribute fairly (Abraha Belay 1998)

2.8 Empirical literature review

The study by Eshetu compared tax collectivity from the pre evolution with the post revolution
periods of Ethiopia and find out that there was certain improvement in the tax collection in the
post revolution.

The study made by Wogen (1983) show that for the period 1975-81 tax reform has enabled an
increase in tax collection due to employed constant a rate of adjustment method to estimate
elasticity of the tax system.

Kangave (2005) discussed tax administration in Uganda context he discussed Uganda tax
structure, problem faced in administrating tax, and it gives possible solution to the problem the
author identified in his research. The author, in this research, identified corruption, tax evasion,
inadequate resource for tax administration, poor quality of audits and inadequate support from
tax administration are the challenges of tax administration that weakened the ability to achieve
desired revenue targets. The study the overall tax collection system from the period 1968-83
and found out that the tax collection procedures is not effective due to the system was unstable
and inflexible (Teame, 1983).

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 CHAPTER THREE

3. Research methodology

3.1 Research Design

To attain the objectives of this study, the researchers used descriptive research design in which
researchers presented the result of the study in the form of tables, percentages and other
descriptive techniques, because it is deemed that this design is the most appropriate way to
identify and describe the major challenges related to the collection of business income tax.

3.2Source and Types of data

The data used in the study were collected from different source. This data comprises of both
primary and secondary source which is called mixed. The primary data for the study were
obtained from employees of tax the office and Owner of business agency, whereas the
secondary data collected from documents or manuals, books of tax office organization.

3.3Data Collection Instruments

The primary data were collected through questionnaires and interview from selected tax payers
and staff member in the organization and the secondary data were collected from documents,
books, manual, and tax proclamation of different magazine written by Kolfe Keranyo
administration revenue office and internet service.

3.4 Target population

The target populations of study were used both 214business tax payers and 16 employees of
Kolfe Keranyo sub city custom and revenue administration office to acquire the necessary
information and to make clear investigation for the current problem related with tax collection.

3.5Sample size

From the data that obtained from Ethiopian custom and revenue authority office 214 of business
tax payers among that researchers select 44 the business tax payers and select all 16 employees

18
Of business tax officer’s department as a sample size of the study and then distributed
questionnaires to both of them and interview to the employees the business tax officer
departments.

We determined sample size for the tax payers by using this formula

N
n=
1+ N ( e)2

Where n =sample size

N=number of population

e=standard error used (0.1) or 90% confidence interval.

214
n= =4
1+214 ( 0.1 )2

3.6 Sampling techniques.

The target population of this study was very large. So, it was difficult to collect the data from
the whole. To achieve our objective, we used the simple random sampling techniques. Because,
this technique is very useful:

 To gives equal chances for each item being selected as a sample and free bias.

 To saves the time and get the respondent.

3.7 method of data analysis

The researchers were used both quantitative and qualitative research techniques which means
mixed techniques in which we analyzed the data gathered from deferent source by using such as
tables, percentages. The researchers had been presented the main findings of the study and the
possible solutions and recommendations.

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 CHAPTER FOUR

4. Data Analysis and Interpretation

This chapter mainly deals with the analysis primarily the necessary data that has been conducted
based on questionnaire distributed both employees of the organization and business tax payers
and structured interview to employees of the organization of the revenue administration office.
The researchers were taken 60 total respondents as sampling from total population. Researcher
was take 16 respondents from employees within the organization and 44 respondents from the
total tax payers. The main objective of data collection is to investigate challenges of business
income tax assessment and collection within revenue administration office.

4.1 primary data analysis

This analysis is composed of both questionnaires from tax payer and employees of revenue
administration the office and structured interview from the employees Kolfe Keranyo sub-city
revenue administration office.

4.1.1Response of tax payer and employment

The following table (table 4.1.1), show numbers of respondents from both tax payers and
employees of the organization that the researchers have been conducted in this research.

Respondent characteristics
No Number Percentage
Sex Male 36 60%
1 Female 24 40%
20-30 15 25%
2 Age 30-40 27 27%
40-50 28 30%
S Master 15 15%
3 Educational Degree 30 30%
Level Diploma 9 9%

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 Certificate 6 6%
Service year 1-5 12 20%
4 5-10 21 35%
10-15 27 45%

Source: Primary data

As it shown from table generally the respondents’ background is classified by sex, age,
educational level and service year.

Regarding to sex, out of sixty respondents60% is male and the rest 40% are females.

Regarding to age the respondent with in age range 20-30, 30-40, 40-50 respectively is 25%,
30%, 27%, this indicate that majority of respondents have older which is very important to the
organization since this age is important to made a wise decision regarding to tax implementation
and important to get wide conception about the organization.

Regarding to educational level master, degree, diploma, certificate they are respectively 25%,
50%, 15%, 10%, this indicate that degree holder are more than the other respondent and which
is very important for to get an appropriate answer for this research.

Regarding to service year 1-5yr,5-10yr, and 10-15 is 20%,35%, and 45% from this we can
understand that long time service experience of employees has a high percentage this indicate
more practiced individual which is very important to organization long term decision, and it
important to conduct our research. Because the most experienced persons know how the work is
running in the organization.

4.1.2 Primary data analysis for tax payers

Table 4.1.2; willingness of tax payers to pay their liability

21
 Item Frequency Percentage (%

1 Do you have willingness to pay business income tax?

Yes 18 41%

No 26 59%

Total 44 100%

N0 ITEM Frequency Percentage (%)

2 If your answers is “No” in question No one, why?

 Lack of awareness 7 27%

 Carelessness 13 50%

 Lack of ability to pay

4 15.3%
 If other, please specifies it……... 2 7.7%

TOTAL 26 100%

Source: primary data

Even though tax payer were pay their tax liability based on the level of income, there is a
disparity in determine the level of income amount of tax liability for each tax payer. But the
researcher thinks that people’s tax payment should be in line with their income and they should
pay their tax proportional to their levy.

For the question asked for the reason not willing to pay their liability 7 (27%), 13 (50%),
4(15.3%) of the respondent replies that due to lack of awareness, carelessness, lack of ability to
pay respectively. And the remaining 2(7.7%) respond that due to weak and tedious tax
collection system. This shows that majority of tax payers were not willing to pay their tax

22
liability due to lack of awareness towards the existing tax system. So, the tax office expected to
create awareness for tax payers regarding to uses of tax.

Table4.1.4; reason for paying business income tax

No Item Frequency Percentage (%)

3 Why do you pay business income tax?

 In the anticipation of public service 8 18.2%

 There is no opportunity to evade 6 13.6%

 To avoid the penalty 4 9.1%

26
 It is an obligation towards the government 59.1%

Total 44 100%

Source: Primary data

In the above table the response of the respondents showed that 8(18.2%) of them were pay taxes
because in the anticipation of public services, 6(13.6%) of the respondents pay tax because of
there is no opportunity to evade and 4(9.1%) were to escape penalty and majority of respondent
which is 26(59.1%) were pay tax because of it is an obligation toward the government. This
shows that majority of the tax payer were paying tax because of it is an obligation towards the
government rather in the anticipation of public services.

Table4.1.5 payment of tax has advantage for you

No Item Frequency Percentage (%)

Do you have advantage for payment tax?

23
 4
Yes 20 45.5%%
No 24 54.5%
Total 44 100%

Source: primary data

The above table indicates that 20(45.5%) respondent response that taxes have advantage for
them, whereas 24(54.5%) respondent response that taxes have no advantage to them. But from
the table we can understand that payment of tax has no important to them. Since most tax payers
whenever they got risk of disaster like fire, flood, and other problem they don’t get any benefit
or support from government they are paying tax so, this generally made most tax payers
probably to see paying tax doesn’t have any response to them.

Regarding to our suggestion it is not fair to say tax has advantage. Since, if government is
paying all risk beyond the problems that is happening, tax payers may cause intentional disaster
when they are facing loss of business. And in other case how the government will operate his
work if they are paying all this risk beyond tax payers. So we should have patriotic feeling
toward our country because we are paying tax to our country which means to us.
Table 4.1.6 Tax payers feeling about taxation

No Item Frequency Percentage (%)

5 How do you feel about taxation?
Good 16 36.4%
Bad 20 45.5%
Worst 8 18.1%
Total 44 100%
The above table indicates that 16(36.4%) respondent response that there feeling toward tax is
good, 20(45.5%) respondent response indicates there feeling toward tax is bad and finally
8(18.1%) respondent response is worst feeling toward tax. From the above table fact respondent

24
response is bad. Even though most of the respondents are saying tax has advantage for them, but
some of them saying tax is our responsibility to pay in order to get it back indirect way.

Table 4.1.7 when tax payers declared and pays their liability

No Item No of respondent Percentage (%)

7 When do you declared and pays tax liability?

On due date 35 79.5%

Before due date

After due date 9 20.5%

Total 44 100%

Source: primary data

From the above table 35 (79.5%) respondent response is that they are paying tax on due date
and19% respondent response is they are paying after due date. From the given source most tax
payers paid their tax liability on due date since in addition to the amount declared if they pay
late their tax liability they will also pay penalty and interest charge. Probably most tax payers
fear to fall in to this risk so, they pay their tax liability on due date.

Table 2.1.8 responses on how tax payers are evaded tax revenue

NO Item Frequency Percentage (%)

25
8 As tax payer believe tax payers tries to
evade tax revenue?
 Yes 25 56.8%
19 43.2%
 No
TOTAL 44 100%

9
If your answer is “Yes” in question No.

 High rate of taxation 12 48%

4 16%
 Ineffective tax enforcement
5 20%
 Complication of tax law 16%
 Multiplicity of tax law 4

Total
25 100%

In the table above 4.1.8 to know whether the tax payers were tries to evade tax revenue or not,
the result show that out of 44 respondents 25 (56.8%) of them replays that tax payers were
evade tax revenue and the remaining 19(43.2%) responds that tax payers were not evade tax
revenue. Item number (9) of the same table above was offered to the reason that tax payers were
tries to evade tax revenue because of high rate of taxation, ineffective tax enforcement
complication of tax laws and multiplicity of tax law with degree of responsiveness 12(48%),
4(16%), 5(20%) and 4 (16%) respectively. This indicates that the main causes that leads tax
payers to evade tax revenue is high rate of taxation.

 The following will try to explain the result of the questions that the tax payers were
asked on five point Liker scale to express their degree of disagreement or agreement to
the questions that fills the explanatory variables 1 represents strongly agree, 2 represents
agree, 3 represents not certain, 4 represents disagree, 5 represents strongly disagree.

Table 4.1.9; the amount of tax liability is determined with certainly by the tax officer

26
 S
Rating scale Frequency Percentage (%)
o u
Strongly agree 7 15.9%
r c
Agree 10 22.7%
e:
Not Certain 0
Disagree 16 36.4%
Strongly disagree 11 25%
Total 44 100%
primary data

This table indicates that 7(15.9%) and 10(22.7%) of the respondents replies that they are
strongly agree and agree in relation to determination of tax liability certainly and majority of the
respondents i.e. 16(36.4%) and119(25%) were disagree and strongly disagree respectively
regarding to determination of tax liability certainly. This reveals that tax officers did not
determine the tax liability of each tax payer fairly i.e. there is a disparity in determination of tax
liability or they determine without a real evidence.

Table 4.1.10; the tax collection period is convenient to tax payers.

Rating scale Frequency Percentage (%)

Strongly agree 15 34.1%
Agree 7 15.9%
Not Certain 4 9.1%
Disagree 6 13.6%
Strongly disagree 12 27.3%% 27
Total 44 100%
Source: Primary data

This question highly emphasized on whether the tax collection period is convenient to tax payer
or not. Accordingly, the survey result shows that 12(33.3%),6(16.7%), 3(8.7%), 5(13.9%) and
10(27.8%) of the respondents replies that strongly agree, agree, not certain, disagree and
strongly disagree respectively regarding too convenient of tax collection period.

 This indicates that if the tax collection period continues in this way the revenue office
did not collect the expect amount of tax that are estimated by the tax revenue.

Table 4.1.11: high rate of taxation is the main causes for tax evasion.

S
Rating scale Frequency Percentage (%)
o u
Strongly agree 24 54.5%
r c
Agree 16 36.4%
e:
Not Certain 0 0%
Disagree 4 9.1%
Strongly disagree 0 0%%
Total 44 100%
Primary data

This question is highly emphasis on the causes that leads the tax payers to evade tax revenue.
Based on the response of the respondents 24(54.5%) of them were strongly agree that the cause
for evading tax revenue is high rate of taxation, 16(36.4%) of the respondents are agree that the
main causes for evading of tax revenue is high rate of taxation and the remaining 4(9.1%) of the
respondents were disagree with the cause of evading tax revenue is high rate of taxation. From
this table the researcher understands that if the rate of taxation continues in this way the number
of tax payers that evade tax revenue is increase from time to time.

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Table 4.1.12; the procedure of tax collection is complex

S
Rating scale Frequency Percentage (%)
o u
r c
Strongly agree 12 27.2%
e:

Agree 23 52.3%

Not Certain 1 2.3%

Disagree 5 11.4%
Strongly disagree 3 6.8%%

Total 44 100%

Primary data

Based on the tax payer respond 12(27.2%), 23(52.3%), 1(2.3%), 5(11.4%) and 3(6.8%) of the
tax respond that they are strongly agree, agree, not certain, disagree and strongly disagree
respectively for the complex of tax collection procedure. Whereas majority of the respondents
i.e. 52.3% responds that they agree by the complexity of tax collection procedure.

4.2Primary analyses for employees of Kolfe Keranyo City ERCA office.

This analysis is concerned only employee of ERCA response from questioner and interview.

Table 4.2.1 Problem of business income tax assessment and collection

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The following table (table 4.1.3.1) shows that whether there is problem of business income tax
assessment and collection in the organization.

Types of response No of respondent Percentage

Yes 12 75%

No 4 25%

Total 16 100%

Source: primary data

From the above table12 (75%) respondent response is that there is a problem business income
tax assessment and collection and 4(25%) respondent response implies that there is problem up
on tax assessment and collection. In general, from the above source the organization have a
problem of business tax assessment and collection. Since, there are many reasons are written in
the opened ended question for this but we can see the major reason this are the organization
doesn’t have a strict control or force over the collection process and the organization has also a
problem up on tax payers means they don’t know how much this tax payer will be assessed,
they used mostly judgmental approach which is very risky.

Table 4.2.2 Standard assessment is in accordance with the capacity of tax payers.

The following table (table 4.1.3.2) shows that the standard assessment is in accordance with the
capacity of tax payers.

Item Frequency Percentage

30
 Yes 7 43.7%

No 9 56.3%

Total 16 100%

Source: primary data.

From the above table 7 (43.7%) respondent response is saying standard assessment is in
accordance with the ability of tax payers and 9 (56.3%) respondent response is that there is a
problem in the capacity of tax payers. So from this table we can understand that the standard
assessment has effect on the capacity of tax payers.

Table 4.2.3theformal method of organization’s revenue collection.

The following table (table 4.1.3.3)shows that the organization has formal method of revenue
collection from different source.

Types of response No of respondent Percentage

Yes 11 68.8%

No 5 31.2%

Total 16 100%

Source: primary data.

From the above the table 11(68.8%)respondent’s response is saying the organization have
formal method of revenue collection and 5(31.2) % respondent response are saying the
organization haven’t formal method of collection. From this we can understand that the
organization have formal method of collection. In the open ended question, they say that we
collect tax from different areas like vat collection, excise tax collection, business income tax

31
collection and so on the organization also has a modern network and electronic1 way of
collection and recording from different source. So this made from other organization different.

Regarding to my suggestion every organization has its own formality to control the working
process. And this organization is one of the holders of this formality because this organization
holds properties of citizens and foreigner so; it should have a formal way to control them.

Table 4.2.4 Factors that affect business income tax is corruption

The following table (table 4.1.3.4) shows that the major factor that affects business income tax
is corruption.

Item Frequency Percentage

Yes 8 50%

No 8 50%

Total 16 100%

Source: primary data.

From the above table 8(50%) of respondent response is saying there is corruption in the
organization and 8(50%) respondent response are saying there is no corruption in the
organization from this two equal number of response we can’t conclude our justification but we
can reason out them.

The respondents which are saying there is corruption are mentioned hire is tax payers pay to the
employee of the organization in order to made reduction the amount of tax assessed. This is the
major corruption which is done.

The respondents which are saying there is no corruption are mentioned hire is that the control
system of the tax office is very strength and have moderate things. If anyone wants to made
fraud, it’s easily gated by his or her password so it’s risky to make this kinds of corruption.

4.3 Interview analysis the respondents of tax officers

32
To conduct the study, the researchers, prepare personal interview to the tax officers to support
the data collected by using questionnaires.

As the information gathered from the tax officers through interview, there are many challenges
that faced them to collect business income tax. In the tax office there is no fully sufficient,
skillful and self-initiated officers to do the intended work and effectively.

In Kolfe Keranyo sub city revenue office there is an evasion of tax revenue by tax payers. The
cause for evading of tax revenue was high rate of taxation, lack of efficient tax system and
collection procedure, lack of awareness about tax law and use of tax, over assessment of
business tax payer’s income and lack of understanding in the idea of “tax is a value of paid for
development and civilization” are the main causes that leads tax payers to evade tax revenue.

Tax payers use different techniques to evade tax revenue, but as a response of the respondents
mostly tax payers used the following techniques. These are failure to report income timely,
adding false expenses, shifting income from one period to another period, and intentional
omission of some incomes from the report.

In order to reduce the evasion of tax revenue in the office, the tax officers take different
remedies. Such as giving training to tax payers regarding to the tax law and declaration, create
awareness for tax payers regarding to guiltiness of evasion and book of accounts by educated
personnel are some of the remedies taken by the tax office.

Based on the information gathered from the tax officers, there are many problems exist in Kolfe
Keranyo sub city revenue office. Such as increasing the number of illegal traders, book of
accounts is not prepared by educated personnel, tax payers were not paid their tax liability
timely, some exchanges or business activity were performed handedly, absence of suitable
environment for implementing in the tax system, absence of support from the concerned bodies
and increasing the number of requests by the tax payers regarding to increasing amount of tax
liability are some of the problems exist in the revenue office.

In addition to the above problem tax payers were also not willing to pay their tax liability due to
lack of awareness, ability to pay, and incorrect administration of their tax liability by the tax

33
officer. Accordingly, the above listed problems that existed in the revenue office, the researcher
classifies the problems that exist in the revenue office in collection of business income tax in
two sides. These are:

1) Major problems that exist in the business income tax payers, and
2) Major problems that exist in the side of Kolfe Keranyo sub-city revenue officers.
 Major problems that existing the side of business income tax payers;
1. Poor awareness of tax payers towards taxation and tax payment.
2. Not willing to pay their tax liability.
3. Doing some business activity in hidden way to reduce tax liability.
4. Poor habit of maintaining book of account.
5. Low participation during the session.
6. Negligence of tax payers towards the existing tax system.
7. Increase in the number of tax payers who are not able to pay their tax
liability.
 Major problems that exist in the side of Kolfe Keranyo sub-city revenue officers;
 Estimated the amount of tax expected to be collected, annual income of tax
payers and amount of tax liability without any evidence.
 Lack of skilled and trained man power.
 Follow weak and tedious business profit tax collection system.
 Poor record keeping and documentation system.
 Most assessment was done manually, so it lacks accuracy, efficiency and
effectiveness in their operations are some of the problems that exist in the
side ofKolfe Keranyo sub-City revenue office.

CHAPTER FIVE

5. Conclusion and Recommendation

5.1 Introduction
This study presented important information, justifications, and findings concerning the
challenges in business income tax collection inKolfe Keranyo sub-city revenue administration

34
office. This study is designed to identify the major challenges that exist in both sides of the tax
payers and the tax officer found in Kolfe Keranyo sub-city and providing possible corrective
actions for these problems in the way of achieving the revenue office designed objectives and
goal.

5.2 Conclusion

Taxation is the most common method of financing government activates. The service
themselves are provided to the community without charge, and the necessary funds are collected
by requiring personal to make compulsory payment to the government in accordance with some
established criterion, such as properly owned or income received.

Based on the result of the analysis and findings the following conclusion was made by the
researchers:

 The result of the study shows that implementing business income tax collection system
at the required level is difficult due to its complexity, absence of suitable environment to
implement the tax system, communication gap between tax officers and tax payers,
follow weak and tedious tax collection procedures, lack of computerized operation and
due to absence of competent and motivated tax officers.
 Even though the tax officer prepared sufficient training session to tax payers, the
participation of the tax payers in the training session is very low. This affects the
operation of the tax officer in achieving the designed objectives and goals of the revenue
cycle.
 Due to the absence of computerized operation in the tax office, most assessment done
manually. So, the office faces lack accuracy, efficiency and effectiveness of operation.
 Tax officers do not follow continuous law based tax collection procedure. This create
suitable environment to illegal traders to do their business in hidden way, increase the
number of tax payers that evade tax revenue and difficulty for tax officers to connect
these traders into the tax net.
 There is a disparity in determination of the level of income and amount of tax liability,
tax payer was not asked based on their level of income and there is also an over

35
 assessment of tax payers annual income due to this majority of the respondents are not
willing to pay business income tax.
 High rate of taxation is the main causes that leads tax payers to evade tax revenue and
the reason behind that tax payers paid their tax liability because of it is an obligation to
wards the government.
 Most of the tax payers were not agree what expected from them regarding their business
tax obligation. From this the researcher thinks that if tax payers were not knowing what
expected from them regarding business profit tax obligation, the government will not get
enough revenue in order to fill public infrastructures such as education, road, hospital
and different electric power station.
 Majority of the respondents responds that, they were strongly disagree regarding to
convenience of tax collection period to tax payers and determination of the amount of
tax liability of each tax payers. This influence tax payer fails to pay their tax liability at
the specified period of time.

5.3 Recommendation

Based on the analysis, finding and conclusions the researchers provide the following
recommendation:

 The tax office is better to prepare adequate training session and create awareness
towards taxation and tax payment and increasing the number of tax payers that
participate in the training session.

36
 To improve the accuracy, efficiency and effectiveness of the tax office operation, the
revenue office should do the assessments by using computerized technology and
better to strength their relationship with tax payers.
 Further, more to avoid evasion and illegal activities the office shall create awareness
for those evading persons regarding to guiltiness of evasion of tax revenue and use
of tax.
 To bring tax payers to pay their tax liability in willingness base, the researcher
recommended that the tax office is determine the annual income and liability based
on real evidence and should ask their tax liability based on the level of income.
 High rate of taxation the main cause for evading tax revenue. So to avoid this guilty
activity, the revenue office should wider the tax base and reduce tax rates.
 To collect the expected amount of tax revenue, the revenue office must provide
adequate training to tax payers and tax officers regarding to what expected from
them in business income tax obligation, the office should determine the amount of
each tax payer’s tax liability certainly and make convenient the tax collection period
to tax payers.

 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 where and when they pay taxes.
 The tax payers should develop positive attitude towards taxation as it is crucial for
country development.

 To implement the business income tax collection system successfully the tax office
is better to convert the tax law in simple and understand language to tax payers,
create suitable environment, improve the relationship or communication between the
tax payers and tax officers, avoid weak and tedious tax collection system, motivate
and trained employees of the organization through providing different incentives,
should be good habit of maintain books of accounts in the side of tax payers and
good record keeping and documentation system in the side of the tax office.

37
Generally, Kolfe Keranyo sub-city revenue office is better to strength the relationship
commitment between the tax payers and tax office as well as the office must take sustainable
follow up to their business income tax collection procedure so as to avoid these problems and to
achieve the designed objective of the revenue office

38
40