COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ECONOMICS

ASSESSMENT OF TAXATION AND ITS IMPACT ON SMALL BUSINESS

THE CASE OF AMBO TOWN

A RESEARCH PROPOSAL SUBMITTED FOR PARTIAL FULFILLMENT

ON THE REQUIREMENT FOR BACHILOR ART (BA) IN ECONOMICS

PREPARED BY:
Name ID. No

1. Ashenafi Asefa………………………………………..BEB/0011/12
2. Nagash Hunde…………………….…………………..BEB/0081/12
3. Galane Bekele…………………….…………………..BEB/0044/12
4. Eba Lami……………………………………………...BEB/0036/12
5. Firaol Kasaye…………………………………….…...BEB/0042/12
6. Lensa Haile…………………………………………...TR/BEB/0002/12

Advisor: Yohannis B. (MSc)

October, 2023

AMBO, ETHIOPIA
Acknowledgment

First and for most, We would like to thanks our God for help in the time of ups and
downs and to the accomplishment of this proposal work up to now. Then we would
like to express our special thanks to our Advisor Yohannis B. (MSc) for his
professional guidance and patience because his suggestions, advises and corrections
are very useful for this proposal work. Finally we would like to thanks all our group
members who support to accomplish this proposal paper.

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Acronym and Abbreviation
FDRE: Federal democratic Republic Ethiopia

GTP: growth and transformation plan

IT: Information technology

LG: local government

MOR: Ministry of revenue

TA: tax administration

TIN: tax payer identification number

VAT: Value added tax

WB: World Bank

ii
List of tables
Table 1.Time schedule……………………………………………………….20

iii
List of Figures
Fig 2.1.Research conceptual Frame work………………………………………..16

iv
 Table of content

Contents pag

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Acknowledgment............................................................................................................i

Acronym and Abbreviation............................................................................................ii

List of tables..................................................................................................................iii

List of Figures...............................................................................................................iv

CHAPTER ONE............................................................................................................1

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

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

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

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

1.3.1. General Objective of the Study.....................................................................4

1.3.2. Specific Objective of the Study....................................................................4

1.4. Research question................................................................................................4

1.5. Significance of the Study.....................................................................................5

1.6. Scope of the Study...............................................................................................5

1.8. Organization the Paper........................................................................................5

CHAPTER TWO...........................................................................................................6

LITERATURE REVIEW...............................................................................................6

2.1. Conceptual definition..........................................................................................6

2.2. History of Taxation in Ethiopia...........................................................................7

2.3. Overview Income Taxes......................................................................................9

2.4. Overview of business income tax......................................................................10

2.5. Business Income Tax Rates:..............................................................................10

2.6. Computation of taxable business income/profit:...............................................11

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 2.7. Major Types of Taxes Existing In Ethiopia......................................................12

2.7.1. Category of tax payers................................................................................12

2.7.2. Principles of Taxation.................................................................................13

2.8. Effect of Taxation..............................................................................................13

2.9. Effect of Taxation on Production......................................................................13

2.9.2 Effect of Taxation on Willingness Work, Save and Invest..........................14

2.9.3. Effect of Taxation on the Division of Economic Resources......................14

2.10. Empirical literature review..............................................................................14

CHAPTER THREE......................................................................................................17

3. RESEARCH DESIGN AND METHODOLOGY...................................................17

3.1. Description of the Study Area...........................................................................17

3.2. Research design.................................................................................................17

3.3. Method of data analysis.....................................................................................17

3.4. Sampling Technique..........................................................................................18

3.5. Source of data and types of data........................................................................18

3.5.1. Questionnaire..............................................................................................18

3.5.2. Interview.....................................................................................................18

3.6. Sampling methods and sampling size................................................................18

3.6. Methods of Data Analysis and Presentation.....................................................19

3.6.1. Methods of Data Analysis...........................................................................19

3.6.2. Methods of Data Presentation.....................................................................19

4. TIME SCHEDULE AND BUDGET BREAK DOWN............................................20

4.1 TIME SCHEDULE............................................................................................20

4.2 .BUDGET BREAK DOWN...............................................................................21

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 CHAPTER ONE
INTRODUCTION
1.1. Background of the Study
Taxation is a system raising money to finance governments’ service activities. All
government requires payments of money taxes from people. The government uses the
taxes revenue to build dams and roads to operate schools and hospitals to provide
food and medical care for the poor and hindered of other purpose. Without tax fund
government activities could not exist (Chetty, R. &Singhal, M. 2014).

Taxation is a system of compulsory contributions levied by government on persons,

corporations, and properties, primarily as a source of revenue for government’s
expenses and other public purposes. It is for this reason, in order for the government
to provide the public with the necessary goods and services, revenue must be raised
through taxation (Jensen, A. 2016).
This revenue is generated through direct and indirect forms of taxation. Direct taxes
are paid on income. This effectively means that the more income you earn the greater
your contribution is expected to be to the state. Indirect taxes are levied on
expenditure. This tax is imposed on the basis of the individual consumption the
individual pays only on what he consumes. However, it must be noted that taxation is
used not only to raise revenue but also to regulate consumption and may even be used
to curtail various forms of business activities. For instance, alcoholic beverages and
tobacco may be taxed heavily on the grounds that their use is hazardous to the health
of individuals. Such revenue, often called a “sin tax”, is in fact a penalty paid by the
users of the reference (Besley, T. &Persson, T. 2013)

The regulatory aspects of taxation are more apparent in indirect taxes, such as
customs duties and taxes, than in direct taxes such as income tax. For instance,
government can control private consumption, especially of imported goods, by
increasing customs tariffs. An increase in taxation on personal income on the other
hand, may result in a decrease in private savings without affecting the level of
consumption. The effectiveness of any government depends on the willingness of the
people governed to surrender or exchange a measure of control over their persons and
property, in return for protection and other service. Taxation is one form of this

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exchange. In designing tax systems, governments customarily consider three basic
indicators of taxpayer wealth or ability to pay: what people own, what they spend, and
what they earn. The kinds of taxes raised by government for revenue are numerous.
The most common are: personal income taxes, corporate income taxes, property taxes,
sales taxes, death and gift taxes, and import-export (Sisay Asfew, 2006)

In order for a tax system to operate effectively, certain principles must be put in place.
Fairness: the tax must be fair, that is, citizens should be taxed in proportion to their
abilities to pay. Clarity and Certainty: Convenience: the application of a tax should be
clear and certain. If the application is uncertain and arbitrary the public can have no
confidence in the system. Compliance with tax laws may increase if it is easy and
convenient. Efficiency: a good tax system should be structured so that it can be
administered efficiently and economically. Taxes that are difficult or costly to
administer divert resources to nonproductive uses and diminish confidence in both the
levy and the government (Besley, T. &Persson, T. 2013)

In the past taxation was regarded solely as a means to finance the necessary
obligations of a government. The money was used to pay elected officials, maintain
state security, build roads, bridges and public buildings; and pay for such services as
schools, hospitals and fire fighters. In recent times, the purposes of taxation have
expanded considerably, as have the roles of governments in society. Today taxes have
three functions. First and foremost, to provide the money that makes it possible for
government to function. Second, taxes have an economic significance: they are used
to promote goals such as full employment, satisfactory rates of economic growth, and
stability of the money supply. The economic goals of taxation are achieved by raising
or lowering tax rates. The fewer taxes people pay, the more they have for their
personal use. Conversely, the more taxes they pay, the less money they have available
for themselves. Third, taxes are used as a redistribution of wealth. The purpose of
income redistribution is to lessen the inequalities of wealth in society. This is done
through what is called a system of transfer payments. The effect of the system is to
transfer money from those who have a good deal of it to those who have very little.
Two of the most common examples are social security payments and welfare
payments made to people who, for one reason or another, do not work. (W.begond,
2013)

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Oromia Revenue Bureau is one of the Oromia regional state sector Bureaus which has
the responsibility and duties to collect the revenue generated within the region. To
perform this responsibility the bureau structured in 22 zone, 39 city administration
and 300 woreda revenue offices. Ambo town revenue office is one of the town of
Oromia regional states the office organized in three core process and one supporting
processes, namely, Collection and Monitoring Core process, Audit and Enforcement,
and Taxpayers Education and compliance handling core processes and administration
supporting process (Sisay Asfew,2006)

Ambo to have full of infrastructure like; electric power, network, rood, university
school, hospital water supplier but not enough. Because of this, many small business
activities are found in this town. Among the small business activity found in the town
the research focuses his study on taxation its impact on small business such as
recreational center (Restaurant) and shops. Here in the town there were 100 owners
shops and recreation center (Restaurant), among 100 total populations of shops and
recreations center (restaurant) in the town. 68 of them are the owners of shops and 32
of them are the owners of recreational center (Restaurant) (Ambo revenue
administration, 2022).

1.2. Statement of the Problem

According to Podolianchuk, O.A. (2020). taxes are the back bone of any politico-
economic regime. Constrains on a government’s power to tax are constraints on its
power to act. The levying of taxes is, therefore, a central function of government in all
countries of the world and while systems and methods vary widely according to the
political, economic and social characteristics of individual countries the requirement
for a sound tax administration remains broadly the same.
In line with this concept the government of FDRE has made tax reform to modernize
tax administration in order to establish the sustainable domestic base that is needed to
finance the country’s socio political and economic development to alleviate poverty,
to encourage trade, investment and market to ensure fairness; equity and consistency
in tax administration of the Ethiopian tax law (Sisay Asfew, 2006). For effective
implementation of this program the current Ethiopia government power has been
decentralize and empowered the lowest budget administrative levels the woreda to

3
enable local government to raise and utilize their own revenue so as to administer
their budget, finance public expenditure such as health, education, infrastructure and
so on. Based on federal government income tax proclamation No. 286/2002, Oromia
regional state issued income tax proclamation No. 74/2003, as well as TOT
proclamation No. 75/2003.
Ethiopia like other developing countries faces many problems in collecting revenue
from the economy .the local government tax authority also faces different problems in
tax collection. In particular, Aid remits town performs different functions such as
collection of direct and indirect taxes on be originals and federal government,
collection of local taxes and provides goods and services for the societies. However,
Aid -remits encounters similar problems reeled to collection of local, regional and
federal taxes and the town lacks effective tax administration due to different factors.
This in turn has been seen hinder to the development activist of the area (town report,
2022). Taxes are raised by the government generate revenue used to provide service
to the public such as; health centers , telecommunication, road, schools and electricity
and this have helped to improve on the performance of small scale business eateries,
despite the service provided small business enterprise’s performance in Ambo town is
still poor. Therefore, the study is aimed at impact of taxes on performance of small
business enterprise and to forward possible solution in Aid remits town tax
administration at last; this could be due to the increasing tax burden brought about by
tax rates which are revised annually. As tried to describe earlier tax is a blood vessel
of a country. So the problems around this tax collection need a close attention.
Therefore, the study will focus on singling out what exactly these problems are; what
their root causes might be; and how the tax authority is tackling these problems. This
promoted the researcher to investigate more about the impact of taxes on performance
of small business enterprise.

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1.3. Research question
What are the main indicators of income tax collection in Ambo town revenue office?

1. How to determine the role of taxation on small business growth?

2. How evaluate the contribution of taxation on small business to reinvestment
activities of business?
3. How to find the application of ability to pay principle on small business
enterprise?

1.4. Objective of the Study

1.4.1. General Objective of the Study

Assessment of taxation and its impact on small business the case of Ambo town

1.4.2. Specific Objective of the Study

1. To determine the role of taxation on small business growth

2. To evaluate the contribution of taxation on small business to reinvestment
activities of business
3. To find the application of ability to pay principle on small business enterprise

1.5. Significance of the Study

The study basically designed on the impact of taxation on small business. This design
is believed to give advantages for governments as well as owner of small business.
The owners of small business know the impact and advantage of taxation on their
business and to give some feasible solution with the problem on their businesses. The
study also enables other researchers and university students as a reference. It also
enables the researchers to have academic knowledge of conducting project and also to
get partial fulfillment of the requirement for Bachelor of Arts degree in economics.

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1.6. Scope of the Study

Delimitation of the study means its ranges of action or area of influencing of the study
.in this case study would give bounded (emphasis) on taxation and its impact on small
business in case study of shop recreational center (Restaurant) in Ambo town .This
study was performed on some shop and recreational center found in the town those
selected by the researcher for the study purpose in the area where shop. And
recreation center were density population in the town.

1.8. Organization the Paper

The research paper incorporates five chapters .The first chapter is introduction, back
ground of the study statement of problem, objective of study, significance of study,
scope of study, limitation of study and organization of the paper. In the second
chapter literature review, third chapter methodology, data type, method of data
collection, method of sampling and population size, in chapter four deals with data
analysis and presentation, the last chapter presents conclusion and recommendation
part of the study .

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 CHAPTER TWO
LITERATURE REVIEW
2.1. Conceptual definition
The first account of taxation is from the bible. In Genesis, chapter 47, verse 24 says,
“but when the crop comes in, give a fifth of it to pharaoh. The other four-fifths you
may keep as seed for the fields and as food for yourselves and your households and
your children.” This is Joseph telling the people of Egypt what to do on how to
purchase their food during the famine. This tax was of crops, not of money.
However, it is the same idea. For as long as governments have existed, they have had
to come up with way to finance their activities and tax is one means of financing.
Most literatures categorize history of taxation into three periods: ancient times
medieval times and modern period (Besley, T &Persson, T. 2013).

In the ancient civilizations of Palestine, Egypt, Assyria, and Babylon. Individual

property rights did not exist. The king was the sole owner of everything in his
domain, including the bodies of his subjects. Thus, instead of taxing individuals to
support the government, the king could simply force them to work for him. Ancient
kinds earned income in the form of food from their lands and precious metals from
their mines. If this income did not meet the king’s demands, he might lead his armies
into neighboring countries to confiscate their property. The conquered peoples might
also be required to make payments (known as tribute) to the conqueror in
acknowledgement of their submission to his power. If kings were not very wealthy or
not very good at stealing from other countries, they would resort to taxing their own
people. In societies that operated without money, the ruler taxed farmers by requiring
what they turn over some proportion of their crops to the state. Poll taxes were a
major source of revenue in this time (Chetty, R.&Singhal, M. 2014).

During the middle ages, from about the 5 th century AD to the 15th century, taxation
varied from region to region. People were subject to many forms of taxation,
including land taxes, poll taxes, inheritance taxes, tolls (payments for the use of
bridges, roads, or seaports), and miscellaneous fees and fines. Many people paid taxes
in the form of money or crops directly to the local lord whose land they farmed.

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Under the system of feudalism, kings, nobles and church rulers all collect taxes. Kings
derived income from their lands, from import and export duties, and from the various
feudal dues and services owed by their vassals. For the most part, church officials and
nobles were granted exemption from royal taxes, so the burden of taxation fell heavily
on the peasantry (Chetty, R. &Singhal, M. 2014).

Over a period of time, feudalism faded and strong centralized states emerged in
Europe. During the 16th and 17th centuries, these states relied heavily on revenues
generated by the king’s own estates and by taxes on land. In England, the power of
parliament grew steadily because the kings and queens had to convene it frequently to
obtain money. In 1689 the English bill of rights guaranteed that the king could not
levy tax without parliament’s consent. By the 18th century, England started imposing
various taxes on transactions. Taxes on imported goods (tariffs) assumed great
importance, as did taxes on a wide verity of commodities, including sugar, meat,
chocolate, alcohol, coffee, candles, and soap (Besley, T. &Persson, T. 2013).

As time passed people because dissatisfied with this system of public finance for
several reasons. In the late 19th and early 20th centuries, concerns about both fairness
and the ability of tax system to generate sufficient revenue led governments to enact
income taxes. In 1799 Britain enacted the first national income tax. The first
progressive income tax-which imposed a greater tax burden on people with higher
incomes – was introduced in Prussia in 1853. Other countries introduced progressive
income taxation in subsequent decades including Britain in 1907, the United States in
1913, France in 1917 and Ethiopia in 1944. Although income taxes generated little
revenue at first today they play a major role in all modern tax systems. In modern
taxation, the following factors are considered as elements of taxations: It is a
compulsory contribution, only government imposes taxes ,in payment of tax an
element of sacrifice is involved ,taxation is aimed at welfare of the community ,The
benefit may not be proportional to tax paid and Tax is a legal collection(Sisay
Asfew,2006).

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2.2. Theoretical Review
Though it is very difficult to get reliable documentary evidence as to when taxation
was introduced in Ethiopia. But as it was gauged, it was started during the reign of
emperor ZereaYakob in the 15th century it is believed that the introduction of taxation
in Ethiopia is associated with government formulation. In the earlier periods, people
used to make some sort of contributions to the governor of their state in terms of cattle
and agricultural products. Such a traditional method of taxation existed for centuries
smoothly until it was replaced by the modern tax system in the mid +20 th
century .beginning from the early 19 th century to the regime of Emperor Menelik II
central government ( state ) began to take shape. Following the formation of central
government, tax was paid either in kind or in labor service gradually took the shape of
modern taxation. Accordingly during the regime of Emperor Menelik II a
proclamation that ordered peasants to pay a one tenth of their produce (the tithe) as
tax in kind for military wage was declared. This was a new era, for the rise of modern
tax system in the country. The traditional taxation system continued during the
relatively modern administration of Emperor Haileselassie I following the five year
Italian occupation ,an income tax proclamation was issued for the first time since then
the personal and business tax law no. 62 of 1944was enacted on 10 th September
1944 .thereafter, other proclamations that amended the above were also issued
consequently.( Sisay Asfew,2006)

During the Derg Regime (1975-1991) there was an increase in tax bases and some
changes with tax rates owing to the need to raise more revenue to finance the civil war
together with the ever growing public sector taxes that were in effect during that
regime were income tax, urban land rant tax and urban house rent tax, rural land use
fee, excise tax, transaction tax, sales tax, and custom duty and stamp duty. Major
changes took place in the tax policy of the country during the transitional government
of Ethiopia 1991-195 with the establish of regional governments which were
established pursuant to proclamation no 7/192. Tax brackets and tax. Rates were
modified and new tax bases such as taxes on mining activities and capital gains were
introduced (Khishchenko, A.M. 2022).

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2.2.1 Overview Income Taxes
Income from employment: the first birr 150 per month of employment income is
excluded from taxable income. The minimum range of income tax is 5% and the
maximum is 35%.
Income from rental of building: the first birr 1,800 per year of rental income is
excluded from taxable income. The minimum range of income tax is 10% and the
maximum is 35%.
Income from business profit: for unincorporated entities the first birr 1,800 per year of
business profit income is excluded from taxable income. The minimum range of
income tax is 10% and the maximum is 35%. The tax rate for incorporated ones is
30%.
Income from agricultural activities: agricultural activities income tax is paid based on
proclamations issued by regional states.
Income from royalties: royalties shall be liable to tax at a flat rate of 5%.
Income paid for services rendered outside of Ethiopia: all payments made in
consideration of any kind of technical services rendered outside Ethiopia to resident
persons in any form shall be liable to tax a flat rate of 10% which shall be withheld
and paid to the tax authority by the payer (service recipient).
Income from games of chances: every person acquiring income from winning at
games of chance (for example, lotteries, tombola’s, and other similar activities) shall
be subject to tax at the rate of 15%, except for winnings of less than birr
100.Dividends: every person deriving income from dividends from a share company
or withdrawals of profits from a private limited company shall be subject to tax at the
rate of 10%.
Income from casual rental of property: every person deriving income from the casual
rental of property (including any land, building, or moveable asset) not related to a
business activity taxable under article 17 shall pay tax on annual gross income at the
rate of 15%. This tax is a final tax in line of a net income tax. Interest income: every
person deriving income from interest on deposit shall pay tax at the rate of 5%.
Gains on transfer of certain investment property: income tax shall be payable on gains
obtained from the transfer (sale or gift) of property: -
A) Building held for business, factory, office 15%
B) Shares of companies 30%

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2.2.2. Overview of business income tax
The word business is very wide term and it includes all industrial, commercial,
professional, vocational, trading, insurance, banking, mining, rendering services
carried on by any person for profit motive. Business profit or income known as
schedule C income refers to any income/profit which is derived essentially from
business activity or any activity recognized as trade in commercial code in Ethiopia.
Taxable business income shall be determined per tax period on the basis of profit and
loss A/C or income statement, which shall be drawn in compliance with the generally
accepted accounting principles (GAPP), subject to the provisions of income tax
proclamations, and directives issued by the tax authority. The Ethiopian government
uses both proportional and progressive tax rate structures. The annual taxable incomes
of bodies are taxed at proportional rate of 30% and that of other business income
taxpayers are taxed at progressive rate. Gordon, R., & Li, W. (2009).

2.2.3. Business Income Tax Rates:

For bodies: annual taxable rental income of bodies is chargeable to rental income tax
at the flat or proportional rate of 30%.
For other than bodies: annual taxable rental income is chargeable to rental income tax
at the progressive tax rates by dividing the total income in to seven slabs.
Schedule C
Business income in Additional layer of Marginal tax rate Deduction/
birr (per year) income (profit) % adjustment (in
Birr)
0-1800 1800 Exempted 0
1801-7800 6000 10 180.00
7801-1680 9000 15 570.00
16801-28200 11400 20 1410.00
28201-42600 14400 25 2820.00
42601-60000 17400 30 4950.00
Over 60000 ….. 35 7950.00

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2.2.4. Computation of taxable business income/profit:

Taxable business income = gross business revenue – exemptions – deductible

expenses
Gross business revenue: it includes all revenue receipts arising from the course of the
business whether they are recurring or non-recurring. It should be part of
consideration for goods and services. Following may be regarded as the business
revenue items:
Revenue from sales of goods by merchandizing or manufacturing businesses;
Income from provision of services by service business Income from the business of
lease; Gain or sale of Interest income from investment on debt securities or from
deposits; Dividend income from investment on equity securities;
All net gain or losses arising from any foreign currency exchange;
Unclaimed deposits received from customers;
Brokerage and underwriting commission by underwriters;
Penalty realized from suppliers for not supplying the agreed quantity or quality of
goods.

2.2.5. Major Types of Taxes Existing In Ethiopia

According to the Ethiopia context taxes are classified in to major types

a. Direct taxes
A fee charged levied by a government on a product income of activity if tax is levied
directly on personal or corporate income there it is a direct tax. Examples of direct tax
are every person income from employment is liable to pay tax employment income
shall include any payments or gains in cash on in kind received from employment by
an individual .This is tax imposed on the taxable business income or net profit
realized from entrepreneurial activity and every person deriving income from divided
from share company or withdraws of profit from private limited company shall be
subject to tax (Gebric Worku,2006 P.62).
b. Indirect taxes
Indirect taxes are those taxes that are paid to government by an intermediary and then
passed on to the final user including the tax in the final price. Examples include;

12
export and import duties, excise and local production, value added tax (VAT) and
others. (Gebre Worku.2006) .

2.2.6. Category of tax payers

The federal revenue authority categorized tax payers into categories as follows.

1. Category “A” Tax Payers

Category “A” tax payers are any company, registered partnership, entity formed under
foreign law resembling a company or registered partnership or any public enterprise
or public financial agency. And other business having an annual town over of birr
500,000 or more sold declare and tax pay offer the budge tar year of four month
(Until tikimat 30) ( GebricWorku, 2006,p 63).

2. Category “B” tax payers

Category “B” tax payers are under the threshold annual town over income between
100,000 to 500,000 for any person or body should declare and pay tax after the
budgetary year of carry on two months later (until pegume 5 or 6) (Gabereiewerku,
2006).

3. Category “C” tax payers

When the expected person or body has an annual turnover income up to 100,000 birr
according to proclamation 286/2002 article 66 should pay tax after budgetary year of
one month (Podolianchuk, O.A. 2020).

2.2.7. Principles of Taxation

A system that is the set of all taxes for achieving certain objectives choose and
address to certain principle which are termed its objects and characteristics . A good
system is there for it is one w/c is designed on the bases of an appropriate set of
principles such as quality and certainty. Mostly however, objective of taxation
conflict with each other and compromise is needed. Therefore, usually economists
select some tax system should adhere to. The first set to such principles will emanate
Adam smith, (Which he called canons of taxation).

13
Adam smith interested in the ways in the ways by which an economy can be increase
to productive capacity and there achieve a higher rate of growth. Further, he will of
the firm view that private sector is more efficient than the public one therefore, the
primary responsibility of economic growth should be rest is the private sector.
Economic growth necessitate large scale saving and investment.

2.8. Effect of Taxation

Now a day revenue rising is not only purpose of taxation, in a welfare safe taxation
has also been used as a tool of monitory policy to achieve socio-economic objective.
It is used to promote economic growth by controlling the effect of trade cycles and
regulating the production and consumption (pareswaran, 2005).

2.3. Effect of Taxation on Production

All tax must evidently come from the produce of land labor, since there is no other
source of wealth than union of human exertion with the material and forces of nature.
But the manner in w/c equal amounts of taxation may imposed may vary differently
effect the production of wealth.

2.3.1. Effect on Ability to Work, Save and Invest

Taxation transfers the money income from the public to government and thereby
reducing their purchasing power. The reduction in purchasing power reduces their
ability to obtain necessaries and luxuries of life. Thus the levy of taxes on people
reduces their consumption of necessaries and comforts which lower the standard of
living when the standard of living affected, their efficiency and ability to work will
also adversely affected (Sisay Asfew,2006).

Saving of people depend on their income. When income is reduced by taxation saving
will be reduced the ability to invest will depend on saving when their saving will be
reduced by taxation their ability to invest is also automatically be affected.

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2.3.2 Effect of Taxation on Willingness Work, Save and Invest

Taxation affects the desire of the people to work, lave and invest if the willingness of
the people to work, save and invest is affected by taxation the production will
automatically be affected.

2.3.3. Effect of Taxation on the Division of Economic Resources

While the volume of production of a country depends up on the ability and willing to
work, save and invest. The pattern of production depends up on the allocation of
economic resources between different industries and regions. Taxation can be used in
the diversion of economic resource among the industries and region. Thus, taxation
can influence not only the size of production but also the pattern of production. If the
products of certain industries are taxed, their prices would rise and there for, the
demand for their product would reduce and there profit is also reduced.

2.4. Empirical literature review

There are many factors which is influencing the tax mobilization activities; especially
in Ethiopia the tax mobilization performance indicates weak, because of weak tax
administration, lack of awareness by taxpayers.
Therefore, the government tries to reduce the factors affecting tax mobilization
through creating awareness for tax payers and tax collectors, by giving incentives for
tax collectors and levy fair tax, and reduce corruption.
A. Level of education of tax payer : as education of an individual increase
their level of income also increase then they pay high tax for government
which in turn increase revenue mobilization.
B. Lack of awareness by taxpayers
Awareness of the local tax payers is very low. Local tax payers lack sufficient
knowledge on what type of products/businesses are subject to local taxes and the
overall administration of the taxes concerned. In some cases, local tax payers do not
aware about the payment procedures, timing for payment, and even the amount to be
paid.

15
 C. Corruption

Corruption employees’ expert pressures when they will not accept that someone in the
group should behave properly while others are engaging in corruption practices. The
presence of large informal sector renders it difficult for governments to efficiently
work out and program and development plans. It is believed that economies with large
informal sector have lower capital return and growth rates because the contribution of
public services to productivity decreases with informality.

2.5. CONCEPTUAL FRAMEWORK

Taxation of income has existed since the birth of early civilization and has been
supported by the wholly script (Holly Bible) of Genesis. There is no single universally
operational definition for the term income. Nevertheless, an income is chargeable to
income tax based on the income tax law in force in a nation or state. This chapter
examines the framework of the income tax law (statute) that govern taxation of
income, income for the purpose of charge of income tax, context of the federal
government of Ethiopia (FDRE). The FDRE constitution divides the power of
taxation into four categories, namely, federal power of taxation, state power of
taxation, concurrent power of taxation and undersigned power of taxation.

Fig 2.1Research conceptual Frame work

Tax service
quality

Tax
Public
government Noncompliance
quality behavior

Structure

-Tax rate

-Penalties
Perspective

16
 CHAPTER THREE

3. RESEARCH DESIGN AND METHODOLOGY

3.1. Description of the Study Area
This study was intended to be carried out, at Ambo town which is one of the towns in
Oromia National Regional State. It is located at 114km to West from the capital town
of the country, Addis Ababa, along the main road that passes through Holeta cross
Ginchi and reach Ambo. Based on figures from the central statistical Agency in 2012
Ambo had an estimate total population was around 94,342.Ambo town found in
Ambo district. Consisting of six localities so called, 01, 02, 03,04,05,06. The district
was known by two types climate condition which means Dega 90%, woynadega10%.
The town is roughly located with coordination of:8°59'N 37°51'E/8.983°N 37.850°E,
Elevated 2,101m (6,893ft)

3.2. Research design

The research design was plan in such a way to provide for proper performance of the
research. It helps for analyzing the data which was collected through various methods
of collecting data. Based on the data which were relevant for the study, the research
design used for the study was descriptive study method because to describe the
characteristics of objects, peoples, group, organizations or environments. The
researcher will be selected descriptive study because it is appropriate for researcher in
consuming less time and helps to answer the research questions which were factual in
nature and helps to go further and draw conclusion from the data. Luttmer, E.,
&Singhal, M. (2014).Tax Morale.

3.3. Method of data analysis

The data analysis method was employed both quantitative and qualitative data. The
quantitative data employs to analyze the data in descriptive statistics and parameter.
The data that was organized was due by transferred data in to table, graph, and
percentage was used to analyze and interpreted the descriptive method. In addition,
the descriptive analyzed utilizes the element of quantitative and qualitative research
methodologies. These studies was used quantitative method of data analysis for
questionnaires presented in table by the use of frequency and percentages.

17
3.4. Sampling Technique
In this study, we were use a simple random sampling technique type of probability
sampling. The reason why this sampling techniques was use is due to simple random
sampling was the simplest and easiest method, less complicate to collect the data, less
expensive, less time consuming, unbiased and enables us to get the require data only
from concern bodies. In addition to those, each element of the population had an equal
chance of being selected into the sample.

3.5. Source of data and types of data

1. Both primary and secondary data type was use for the study. Primary data was
collected from small business owner’s view and opinion used interview by
translating English to Afan Oromo Language for respondent. The secondary data
was collected from reports & written documents from Ambo town revenue office.

3.5.1. Questionnaire
The questionnaire was have both open-ended and closed-ended questions that were
prepare in English language, to collect data that was relevant to the study. The
questionnaire was distributed among the residents of Ambo town and we were
analyze the result accordingly.

3.5.2. Interview
We were preparing semi-structured interview. The interview schedule was prepared
to collect data, which is relevant to the study in addition to questionnaire. We through
face-to-face contact collect the data through interview with key informants. These key
informants include. Ambo town tax administration and certain production about taxes
some needed articles, policy and procedures of taxes that that provided by revenue
authorities were also used
3.6. Sampling methods and sampling size

The sampling methods was collected data from the payer’s was probability sampling.
When data collect from payer of shops and recreational center (restaurant) research
were types of probability sampling techniques to identify target population.

It first researcher was use stratified sampling methods to make strata between the
owners of shops and recreational center (restaurant ) by using this sampling methods

18
Researcher stratified the 100 total population of shops and recreational center
(restaurant) in to 68 the owners shops and 32 owner of recreational center (restaurant).
Second after making strata between the owners of shops and recreation center
collected data only 20 target population. Among 20 target population of tax payers we
use 14 owners shops representative, 6 owner of recreational center (restaurant) by
using simple random sampling method.

3.6. Methods of Data Analysis and Presentation

3.6.1. Methods of Data Analysis
The primary and secondary data gathered from different sources was analyzed by
used different data analyzed techniques. Quantitative data was analyze descriptively
by using classified and count them, and insert to Microsoft Excel to construct
different statistical tools like percentage, average and ratio, while a qualitative data
would be discussed and analysis qualitatively in a way it presents the information
appropriately.

3.6.2. Methods of Data Presentation

After the data was gathering and analyze, it was presented used different data
presentation tool, such as tables, figures, chart, graphs and photographs accompanied
by textual discuss qualitatively and quantitatively. Analyze quantitative data or
quantifiable data as well as the respondents’ response on the given variable was
presented in the form of sums, percentage and ratio by using tables, figures, charts
and pictures accompanied by textual discussion, while the analyzed qualitative data
was presented textually in descriptive form.

19
 CHAPTER FOUR

4. Data Analysis Presentation and Interpretation

The analysis and interpretation of this paper is based on primary data by using
stratified sampling method to identify the number of shops and recreational center
(restaurants) from the total population of 100 shops and recreational center in Ambo
town.

4.1.1. Financial Problem Because Of High Taxes Rate to Pay on

Time

A response of the business owners financial problem is there to pay to on limit time
has impact on their business growth or not.

Table 4.1.Financial problems to pay tax on time

Response Shop Restaurant

No of In present (%) No of In present (%)
Respondent Respondent
Yes 11 73.3% 3 60%

No 4 26.7% 2 40%
Total 15 100% 5 100%

This table 4.1.Indicates that above 11(73.3%) of the shop had financial problems to
pay tax on time b/c of high tax rate. Whereas 4(26.7%) of the respondents from the
interview replied there is no financial problem to pay tax on time b/c of high tax rate.
And when observed recreational center (restaurant ) side 3(60%) of total sample size
replied there is financial problem to pay tax on time and 2(40%)total sample size
replied there is no financial problem to pay tax on time b/c of high tax rate. So that
the business owners of shops and recreational center (Restaurant) Reponses that there
is financial problems to pay tax on time b/c high tax rate.

20
 4.1.2. The Impact of Current Tax on the Business

The Reponses of the business owners of shops and restaurant about taxation have
impact not on their business.

Table 4.2.Impact of current tax on business growth

Response Shop Restaurant

No of In present (%) No of In present (%)
Respondent Respondent
Yes 12 80% 4 80%

No 3 20% 1 200%
Total 15 100% 5 100%

As the table 4.2.Indicates 12(80%) and 4(80%) had a negative impact on owners of
shops and restaurant respectively. Whereas 3(20%) and 1(20%) had positive impact
on operation of their business growth .There for the majority of business owners said
the current tax system have negative impact on their business.

4.2. Problems Related With Ability to Pay Principles

Under this topic researcher asked the business owners of shops and restaurant five
questions about tax paid according to their ability to pay principles.

4.2.1. Currently Tax Paid Is Ability To Pay?

Response of business owners about tax as ability to pay or not as ability to pay

Table 4.3. Tax ability to pay principle

Response Shop Restaurant

No of In present (%) No of In present (%)
Respondent Respondent
Yes 4 26.7% 1 20%

No 11 73.3% 4 80%
Total 15 100% 5 100%

21
As the table 4.3 indicates that 4(26.7%) and 1(20%) of the interviews repose shows
respectively owners of shops and restaurant that the tax pay system is ability to pay.
Whereas 11(73.3%) and 4(80%) respondents replied tax pay is not as ability to pay
principles.

Therefore a majority of business owners of shops and restaurant response show that
currently tax paid is not as ability to pay principle.

4.2.2. Average Amount of Tax Paid Per Year

Table 4.4. Average amount of tax paid year

Average of paid Shop Restaurant

per year No of In No of In present (%)
Respondent present( %) Respondent
Below birr 50 - - -
Birr 501-1500 1 6.7% -
Birr1501-3000 2 13.3% -
Birr3001-6000 1 6.7% 1 20%
Birr6001-12000 4 26.6% 1 20%
Above 12000 7 46.7% 3 60%
Total 15 100% 5 100%

As shown on table 4.4 above the amount of tax paid per year of the business 1(6.7%)
owners of shops pay tax year of birr 501-1500 and 2(13.3%) , 1(6.7%), 4(26.6%) and
7(46.7%) of them are pay tax of birr 1501-3000, birr 3001-6000, birr 6001-12000&
above 12000 respectively. Also from the respondent of the respond owners shown
1(20%), pay taxes birr 3001-6000, 1(20%) pay tax birr 6001-12000 and 3(60%) of
them are pay tax birr above 12000 birr respectively.

According to data collected, a business owner of shop and restaurant in town pay tax
per year is inadequately. That means the above table is explained the average amount
tax paid per year at high amount tax rate (above 12000) for these reason has negative
impact on small business.

22
 4.2.3. Tax vs. Income

Responses of tax payers for the above current tax proportion has on income or not is
answered as follows.

Table 4.5. Current tax proportional with income or not.

Response Shop Restaurant

No of In present (%) No of In present (%)
Respondent Respondent
Yes 5 33.3% 2 40%

No 10 66.67% 3 60%
Total 15 100% 5 100%

As shown on the above table 4.5 from the interviews of the researcher to the shops
owners the respond as follows from the total population of shops owner 5(33.33%) of
them were responded to the researcher as currently they pay tax proportion to their
income when they compared to the last year and 10(66.67%) of them are responded
currently the amount paid was not proportion to the income. In case of restaurant
owner, the respond the researcher 2(40%) of restaurant owner are currently paid tax
proportion to their income and 3(60%) of the respondents answered that tax system
are still not proportion to their income. So that the most business owners responded to
the researcher as current tax paid was not proportion so their income.

4.2.4. Currently Pay Tax as Property

Response of tax payers for the above current pay tax as property or not is discuses as
follows.

Table 4.6.currently pay tax as property

Response Shop Restaurant

23
 No of In present (%) No of In present (%)
Respondent Respondent
Yes 5 33.3% 2 40%

No 10 66.67% 3 60%
Total 15 100% 5 100%

Table 4.6 indicates that 5(33.33%) of respondents’ said current tax pay is our
property. whereas 10(66.67%) of replied currently pay tax we pay is not as our
property. In case of restaurant owners the respond to researcher 2(40%) currently pay
tax as they property and 3(60%) are not as property.

So that the most owner of business respond to the researcher current tax they paid as
not as or according to their property.

4.2.5. Average of Daily Income

The average of daily income of business owners mentioned as follows

Table 4.7.Daily average income of small business

Average Daily Shop Restaurant

Income No of In present No of In present (%)
Respondent Respondent
( %)
Below birr 100 5 33.33% 2 40
Birr 101-500 6 40% 2 40
Birr501-1000 4 26.67% 1 20
Birr1001-1500 - - - -
Birr1501-2000 - - - -
Above 2000 - - - -
Total 15 100% 5 100%

Table 4.7 the amount of daily income of business owners 5(33.33%) of shops owners
daily income of birr below 100&6(40%), 4(26.67%) average daily income 101-500,
501-1000 are respectively .Also respondent from restaurant owners 2(40%) of

24
restaurant owners daily income of birr below 100 birr, 2(40%) of birr 101-500 and
1(20%) birr 501-1000 respectively.

Generally the majority of respondent have low average daily income because of low
daily income current tax system has negative impact on small business owners.

4.3. Problems Relates With Reinvestment

This topic researcher asked the business owners of shops and restaurant three
questions about impact of tax on reinvestment. This question is interpreted and
analyses as follows.

4.3.1. Impact of Tax on Reinvestment

Responses of the small business owners about taxation have impact on reinvestment
or not.

This shown on the following table.

Table 4.8.impact of tax on reinvestment

Response Shop Restaurant

No of In present (%) No of In present (%)
Respondent Respondent
Yes 12 80% 4 80%
No 3 20% 1 20%
Total 15 100% 5 100%

As shown on the above table 4.8 indicates that about 12(80%) of shops had negative
impact on the activity of their business reinvestment, whereas 3(20%) of the
respondents from the in-services realized positive impact on the operation of their
reinvestment and incase of restaurant owners 4(80%) of the total sample size shows
that the current tax system have negative impact on their reinvestment and 1(20%) of
the total sample size replied for the interview as a positive impact- either business
reinvestments and carry out their operation .

25
In this research case researcher get the idea from data collected. The majority of small
business owners have a great problem on reinvestment b/c of their pay high amount of
tax rate.

4.3.2. Impact Current Tax on Business Expansion

Responses of small business owners about taxation have impact on business

expansion or not are listed below table

Table 4.9.Impact of current tax on business expansion.

Response Shop Restaurant

No of In present (%) No of In present (%)
Respondent Respondent
Yes 13 86.67% 5 100%

No 2 13.33% - -
Total 15 100% 5 100%

As shown on the above table 4.9 dictates that about 13(86.67%) of shops hold a
negative impact on the business expansion. Whereas 2(13.33%) of the respondent
from the interview replied positive impact on the business expansion and when
observed in the restaurant side,5(100%) of total sample size replied for interview the
current tax system have negative impact .on business expansion .In general current
tax system has negative on small business to expand their business.

4.3.3. Future aim of to operate business

Respondent where asked about future aim to operate business, continuous as its,
continues with expansion and discontinues the table below illustrates the response.

Table 4.10 future aim of operate business

26
Response Shop Restaurant
No of In present (%) No of In present (%)
Respondent Respondent
Continuous as 1 6.67% 1 20%
its
Continuous with - - 4 -
expansion
Discontinuous 14 93.33% 5 80%
Total 15 100% 100%

According to table 4.10 among the future aim of business operation 1(6.67%) of shop
owners continues as it is there business, no shop of owner continues with expansion
of business & 14(93.67%) was discontinues to operate their business. Also in case of
restaurant 1(20%) of restaurant owners are continues their business has it is & 4(80%)
respondents answered discontinuous/closed their business operation.

From the study, has a whole small business 85% them discontinues their business as
operation because of impact high tax rate & 15% business owners continuous as it is

4.4. Interview for Manager of Ambo Revenue Authority

In addition to the question for the owners of shop restaurant while collecting data,
researcher asked interview question for the manager of tax authority of the town. The
response of manager was analyzed as follows.

1. Researcher asked the manager how they evaluate the knowledge of small
business owners. Also he answered to the research the knowledge of tax
payers of shops and restaurant be evaluate in different ways many times we
have a meeting with a tax payers at that time one who have knowledge about
taxation was rise negative ideas. So the knowledge of tax payers can be
evaluated by idea they rise. On the other hand the knowledge to tax payers can
be evaluated by paying their tax liability on time. If the owners of small
business have full knowledge about taxation always they are voluntary to pay
their liability on time. But if they have small knowledge they not voluntary to
pay their liability on time.

27
 2. The researcher asked the manager of the organization as owners of shops and
restaurants their tax liability on time. He answered to the researchers the tax
payers of many owners of shop and restaurants were paying their tax liability
on time. But same times late to pay their tax liability on time when this was
happen the employee of the organization call them and teach about taxation, if
another time they late to pay give warning to the small business owners.

Thirdly the manager was asked by the researcher the feelings of the employees of
organization to teach tax payers about tax. He responds to the researchers the
employees of the organization has positive attitude to teach about taxation to tax
payers and give awareness to tax payers lastly the researcher asked manager of tax
authority have impact on small business. He respond to the researcher taxation is one
of the sources of finance for the government of the country to construct infrastructure
like hospital, school, road, water utility for the society.

The owner of the small business was one part of the society .so, they pay tax to
construct their environment indirectly by paying the tax to the government. In general,
paying tax to the government is the responsibility of every person in the society to
develop the economy of the country. So that taxation has no impact on small business
rather they play their role for the development of their country.

CHAPTER FIVE

5. SUMMARY OF FINDINGS, CONCLUSION AND

RECOMMENDATION

This chapter presents a summary of findings, conclusions and recommendation of

finding as customer service and retention are constructed.

28
 5.1. Summary of Finding

This aimed at determining the taxation and its impact on small business in Ambo
town .the results leveled that the impact of taxation on small business is quite negative
impact on small business. The study for their released that taxes mainly affects the
small business through for business growth, business reinvestment and expansion and
pay high amount of tax rate.

Over all business of owners shop and restaurant imposed by Ambo town tax revenue
authority on small business that default on their tax obligation.

5.2. Conclusion

The researcher concluded that a tax has the major limitations on the business
growth .expansion and reinvestment of small business in Ambo town. Those major
limitation on small business owners is financial problem to pay tax paid is not as
ability to pay principle and not proportion with the income of business owners of
shops and restaurant are not well developed because of different limitation such as
lack of knowledge financial problems tax and others .from that limitation tax is the
major one . The estimated amount of presumptive tax and the activity of businesses
are in balance. The taxation in current year was relatively higher as compared with in
the previous year’s majority of tax payers respond to the researcher. The assessment
of tax for the small business in done tax presumptive by the specified committee full
authority is given to the committee to impose the amount of tax each business to pay.
The tax paid by the small business is many times not proportional with their income
and business owners stopped to pay tax for the government .Generally currently tax
paid has negative impact on small business of shop and restaurant owners

5.3. Recommendation

The researcher made the following recommendation as a way of reeducating the

burden of taxes on small business as well as to increase the revenue of the Ambo
town. As explained in the earlier sections the recommendations are given below.

29
  Presumptive taxation on small business organization amount of pay is not
good because many times the committee imposed randomly to small business
owners without knowing their ability to pay. So it is better if it consider the
ability to pay of small business owners when imposed.
 The amount of taxation that payers pay to the government is not proportional
to their income. The government should impose the right amount of tax which
is proportional to the income.
 The owners of the small business found in the town and manager of the
revenue authority of the town have different ideas on the impact of taxation on
small business .employees of revenue authority in Ambo town have to teach
tax payers about taxation system since many of them respond to the researcher
as taxation affect their business and manager respond as taxation have no
impact on small business.
 Large number of the owners of shops, and restaurant are not pay tax are their
property .for the government that means a person who have large volume of
property of property pay law tax and have low amount of property pay high
tax. In researcher opinion this variance should be implementing by employees
of Ambo revenue authority.

Reference
Auriol, E., &Warlters, M. (2005).Taxation base in developing countries. Journal of
Public Economics, 89(4), 625–646.
Besley, T. J., &Persson, T. (2013).Taxation and development. Handbook of Economic
Development.

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Chetty, R., Mobarak M., &Singhal, M. (2014).‘Increasing Tax Compliance through
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Gebrie Worku,2006, fax accounting in Ethiopia contacts 1st edition 2006 AAU
Gordon, R., & Li, W. (2009). Tax structures in developing countries: Many puzzles
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market paper.
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Problems and prospects of business development in Ukraine: materials of the
II International scientific and practical conference of young scientists and
students. Lviv: LTEU. Р. 163-164.

Luttmer, E., &Singhal, M. (2014).Tax Morale

Nesterenko, Yu.O. Organization of farm accounting. (2017). Economic sciences. No.
31. P. 219-229.

Podolianchuk, O.A. (2017). Organization of accounting by small business entities.

Efficient economy. No. 4. URL: http://www.economy.nayka.com.ua/?
op=1&z=5536 (access date: 05/27/2022).

Podolianchuk, O.A. (2020). Accounting support for value added tax calculations.
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APPENDIX

AMBO UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ECONOMICS

31
I . Questionnaire for business properties

This interview and questionnaire was developed to collect information concerning the
taxation and intended to fulfill the partial requirement of BA degree in economics .so
you are kindly requested to sacrifice some of your time to fill this interview question.

Thank you for your cooperation in advance.

A. Problems related with activities of business growth

1. Do you think that the current taxation systems have an impact for your
business growth?

Yes No

2. Dou you have financial problems because of high tax to pay on time?

Yes No

B. Problems with ability to pay principle

3. Is the amount of the tax currently paid is according to your ability to pay?

Yes No

4. What is the average amount of tax you’re paid per year?

Below 1000 1000-5000 5001-10,000 1001-5000

10,001-15,000 above 15,000

5. Do you currently pay tax proportional to your income? Yes No

6. Do you currently pay tax according to your property Yes No
7. How much the average daily income of your business?

Below 100 101-500 501-1000

1001-1500 1501-2000 above 2000

C. Problems related with reinvestment.

32
 8. Do you think that the current taxation you paid is impact on your
reinvestment?

Yes No

9. Does taxation have an effect on the level of your business expansion?

Yes No

10. What is your future aim to operate your business?

Continuo as it is continue with expansion discontinuous

II. Interview Question

1. For how many years your served in this organization?

2. Are you owners of shops and cafeteria pay their tax ability on time?
3. How you evaluate the knowledge of small business owners about tax?
4. What is the feeling of the employee of the organization to teach about tax?
5. Do you think that taxation have impact on small business?

33