Taxes and tax system are essential in nation building.

They are required for state capacity

building for meaningful economic development (Bautigam, Fjeldstad, O.H. and Moore 2005).
The fundamental goal of any revenue authority is to collect taxes and duties payable according to
the law. However, taxpayers are not always willing and ready to comply when it comes with the
obligations imposed on them by law. Tax compliance is the ability and willingness of taxpayers
to comply with tax laws, declare the correct incomes in each year and pay the right amount of
taxes on time. (Internal Revenues Services, 2009)
The issue of tax compliance towards tax system has evoked great attention among many revenue
authorities in the World. However, it is debatable on what has done towards the study of
taxpayers’ behavior towards tax system in developing countries. as they concentrate more in
studies which would increase their budgets “bottom-line” in terms of huge revenue collection
and enforcement efforts at the expense of studies on taxpayers behavior which would make
increase in this tax revenue to be realized and enforcement efforts work (Marti et al, 2010).
Perhaps the less developed countries are not to blame as they run on “budget deficits” hence,
scarce resources to see through such studies that are perceive as adding no direct value to
revenue collection.

Compliance of taxpayers is one of the concerns related to raising public finances. An important
issue for any government and revenue collecting authority is to obtain knowledge and
understanding of the reasons for taxpayer non-compliance in order to maximize voluntary
compliance in a self-assessment environment. However, measurement of the magnitude of
intentional and unintentional non- compliance can be difficult as it involves estimating levels of
uncollected tax (OECD, 2004). Government needs financial resources to act as a government and
play a role that is expect from it by the public (Bhatia, 1976; James, 2000). Therefore, what the
government gives it must first take away.

Tax compliance is a complex term to define. According to Brown and Mazur (2003) cited in
Marti, et al (2010) tax compliance is multi-faceted measure and theoretically, it can be defined
by considering three distinct types of compliance such as payment compliance, filing
compliance, and reporting compliance. Organization for Economic Cooperation and
Development (2001) advocates that dividing compliance into categories in considering
definitions of tax compliance. These categories are administrative compliance and technical
compliance where the former refers to complying with administrative rules of lodging and
paying otherwise referred to as reporting compliance, procedural compliance or regulatory
compliance and the latter refer to complying with technical requirements of the tax laws in
calculating taxes or provisions of the tax laws in paying the share of the tax.

In explaining taxpayers’ compliance behavior, that is, the reasons why taxpayers comply and do
not comply, there are broadly two classes of theories – economic deterrence theory, and the
social-psychological theories. Economic theories of tax compliance are also referred to as
deterrence theory. According to Trivedi and Shehata (2005), economic theories suggest that
taxpayers “play the audit lottery,” i.e. they make calculations of the economic consequences of
different compliant alternative, such as whether or not to evade tax; the probability of detection
and consequences thereof, and choose the alternative which maximizes their expected after tax-
return/profit (possibly after adjustment for the desired level of risk). The theories suggest that
taxpayers are a moral utility maximizes hence; economic theories emphasize increased audits
and penalties as a solution to compliance problems. Economic based studies suggest that
taxpayers’ behavior is influenced by economic motives such as profit maximization and
probability of detection (Trivedi & Shehata, 2005), underreporting (Erard & Ho, 2002; Cobham,
2005 cited in Marti, et al (2010). On the other hand, Social psychology theories of tax
compliance are pertains to the relationship between tax compliance and social interactions and
conventions. An aspect of this theory says that perceptions and attitudes towards a tax system
and compliance behavior may be affected by the behavior of an individual’s peer groups. The
compliance behavior of peer groups like friends, neighbors and relatives is expected to impact on
the perceptions and compliance decisions of others. More specifically, noncompliant decisions
by peer groups may reduce the level of tax compliance by others. According to Trivedi and
Shehata (2005) concluded that some taxpayers’ behavior may follow economic theories while
others may follow the psychological theories and a mixture of the two is also possible.
Tax has a long history in Ethiopia, but the modern tax system began in early 1940s.
Beginning with the establishment of a separate tax administration body in 1995, successive
reforms were undertaken in the organization of tax administration and establishment of the
Ethiopian Revenues and Customs Authority (ERCA) in 2008. Tax is collected by federal, state or
regional governments. In Ethiopia, the tax revenue covers over 70% of the total government
expenditure (Yesegat and Fjeldstad, 2016).
Despite all the tax reform measures taken, the behavioral aspects of tax compliance decision
making issues of income tax payers has not improved quite considerably over the last decade.
For example, the share of direct taxes has declined from about 40% in the period 1979–80 to
1991–92 to about 34% during 1992/93-2007/08 and continuing to decline (Abay 2010 cited in
Tigist, 2017).
Furthermore, the tax-to-GDP ratio (11%) is lower than the average for developed countries like
Ethiopia, tax systems (25-35%), developing countries (18-25%) and even of the Sub-Saharan
average tax system (16%) (Abay, 2010 cited in Tigist, 2017). Here it should be noted that, even
if tax to GDP ratios are not completely comparable because of differences among countries with
respect to the definition of tax base and rates, administrative capabilities and level of taxpayers'
awareness, such a comparison can be made in practice and used as indicative although not
conclusive (Yesgat,2009). Accordingly, assessing the tax burden of the Ethiopian government in
comparison with the Sub-Saharan African average indicates that the tax revenue performance of
the Ethiopian government is low. The existence of high-level noncompliance assumed to be
caused by the application of excessive enforcement mechanisms and ignoring the behavioral
aspects of tax compliance decision making issues of income taxpayers such as tax fairness is
described as the main reason for the low level of tax income, especially the business income tax,
(Belay and Viswanadha, 2016).
Oromia Regional Government is one of the 13 regional states consisting of the federal state of
Ethiopia. Oromia Regional State is not an exception when it comes to the tax administration and
tax compliance situation. Empirical evidence on the ground shows there has been hostility
between the taxpayers and tax collectors on issue relating to tax compliance. For instance the
lower number of tax compliances in the Oromia region became the major reason for higher tax
evasion and low growth rate of tax revenue. According to the survey conducted by Oromia
Region Revenue Authority (2016) cited in Teshome (2016) that out of 4,701 business people,
only 514 business people were using receipts for their business transaction. That means only 11
percent of the tax payer respect the regional tax law in terms of issuing sale receipts. The
numbers of business people that do not use any sale receipt were 3,548. It is 75 percent of
surveyed business people are avoiding tax.
Further the tax audit conducted on 12,928 business people in 2009 collected additional Birr 1.6 Billion.
The higher tax non compliances indicate the unfair and inefficient tax system in the region. And also in
the region outward resistance from taxpayers, for example, the recent protest by tax payers over
implementation of daily income tax assessment in category ‘C’ business tax payers. (The Reporter, 8 July
2017)