Tax assessment and collection problems of category “c” tax

payers :
A case of Arada sub city woreda 5

A RESEARCH PAPER SUBMITTED TO ADDIS ABABA UNIVERSITY, COLLEGE OF BUSINESS

AND ECONOMICS, DEPARTMENT OF ACCOUNTING AND FINANCE IN PARTIAL
FULLFILLMENT OF THE REQUIRMENTS FOR THE DEGREE IN BACHELOR OF ARTS IN
ACCOUNTING AND FINANCE.

BY : GENENE HOBASA
Research advisor: ASAMNEWTECHANE

ADDIS

ABABA

FEBURARY 2024
Table of Contents
1.2. Statement of the Problem.......................................................................................................................4
1.4. Objective of the Study..........................................................................................................................6
1.4.2. Specific Objectives............................................................................................................................6
1.5 Research Methodology :............................................................................................................................6
Population and sampling :......................................................................................................................................7
Data collection methods :......................................................................................................................................7
Data Analysis:........................................................................................................................................................7
Ethical Considerations:...........................................................................................................................................7
1.5.1 Sample Design:......................................................................................................................................7
2. Sampling Frame:............................................................................................................................................7
3. Sampling Method:.........................................................................................................................................7
4. Sample Size:..................................................................................................................................................7
5. Sampling Procedure:......................................................................................................................................7
6. Inclusion Criteria:...........................................................................................................................................8
7. Exclusion Criteria:..........................................................................................................................................8
8. Data Collection:.............................................................................................................................................8
9. Data Analysis:................................................................................................................................................8
10. Ethical Considerations:...............................................................................................................................8
11. Limitations:................................................................................................................................................8
12. Research Timeline:.....................................................................................................................................8
1.5.2 Data Analysis Technique:.......................................................................................................................8
2. Inferential Statistics:.......................................................................................................................................8
3. Regression :...................................................................................................................................................8
4. Qualitative Analysis:......................................................................................................................................9
5. Comparative Analysis:...................................................................................................................................9
6. Data Visualization:.........................................................................................................................................9
7. Correlation Analysis:......................................................................................................................................9
8. Cluster Analysis:.............................................................................................................................................9
1.6 Significance of the study............................................................................................................................9
1. Policy Implications:........................................................................................................................................9
2. Revenue Generation:...................................................................................................................................10
3. Tax Compliance:..........................................................................................................................................10
4. Resource Allocation:....................................................................................................................................10
5. Business Environment:................................................................................................................................10
6. Research Gap:..............................................................................................................................................10
7. Local Development:.....................................................................................................................................10
8. Compliance Monitoring:..............................................................................................................................10
1.7 Scope of the study...................................................................................................................................10
1.8 Limitation of the Study..................................................................................................................................11
Organization of the Study....................................................................................................................................11
CHAPTER ONE

INTRODUCTION

1. Background of the Study

Tax can be defined as an enforced contribution, exacted pursuant to legislative

authority in the

exercise of the taxing power, and imposed and collected for the purpose of
raising revenue to be used for public or governmental purposes (Murphy, 2012).
Public expenditure has been increased extremely. The main reason is that the
functions of governments have been increased diverse. The governments need
income for the performance of their variety of functions and meeting their
expenditure. Public revenue is one of the branches of public finance. It deals with
the various sources from which the state might derive its income. These sources
include incomes from taxes, commercial revenues in the form of prices of goods
and services supplied by public enterprises, administrative revenues in the form of
fees, fines etc. and gifts and grants. The sources of public revenue can be broadly
classified in to two. Tax -source and non
-tax source. Taxes are imposed by the government on the people and it is
compulsory on the part of the citizens to pay taxes, without expecting a return
(Abdul-Kareem, 2011). As stated by Murphy (2012)Taxes are not payments for
some special privilege granted or services rendered and are, therefore,
distinguishable from various other charges imposed for particular purposes
under particular powers or functions of government. In other words, a taxpayer
does not receive a definite and direct quid pro quo from the government (Bhatia,
1976).Developing and transitional governments face financial resource constraints
to expend on basic socio-economic, development, infrastructures. Because of
resource constraints developing countries have not yet delivered basic facilities
such as; education, health, potable water, creation job opportunity, housing,
sustain law and public order and other essential services for their citizens at
desired level. This is because the rapid growing of population needs an equivalent
increase of such service in one hand and their financial resource limited in another
hand create additional burden to these governments. Therefore to tackle such
problems governments seek

financial resources from foreign and domestic sources (Bhatia, 1976). Those
Foreign financial sources are not consistent and bind with many obligation
governments focus on domestics’ source (taxation). Taxation has always been an
important instrument to
satisfy government expenditure and it is the most important source of
government income. In every country; the government collects a huge income
through taxation. Because tax is a compulsory levy and those who are taxed have
to pay the sums irrespective of any corresponding return of services or goods by
government (Bhatia, 1976).Tax administration refers to the identification of tax
liability based on the existing tax law, the assessment of this liability, and the
collection, prosecution and penalties imposed on recalcitrant taxpayers. Tax
administration, therefore, covers a wide area of study, encompassing aspects such
as registration of taxpayers, assessments, returns processing, collection, and
audits (Kangave,2005). Tax administration therefore, should aim at improving on
laws regarding the registration, assessment, collection revenue, and exploiting fully
taxation potential of a country

(World Bank, 1991).In Ethiopia, tax is administered at federal or central and

regional levels. The constitution of Federal Democratic Republic of Ethiopia
(FRDE) has separated the tax revenue to be collected by federal government,
state or regional government and jointly by the federal and state government
(FDRE HPR, 1995). According to Article 96 of the FDRE Constitution the
revenues of the Federal Government include customs duties, taxes and other
charges levied on the importation and exportation of goods; income tax collected
from employees of the Federal Government and international organizations;
income, profit, sales and excise taxes collected from Federal Government owned
enterprises; taxes collected from national lotteries and other games of chance;
taxes collected from income generated through air, rail, and sea transport
services; taxes collected from rent of houses and Federal Government owned
properties; charges and fees on licenses issued and services rendered by the
Federal Government; taxes on monopolies; and Federal stamp duties. In a similar
manner, Article 97 enumerates the revenue sources of the regional governments
of the country as comprising of income taxes collected from employees of the
States and of private enterprises; fees collected from land usufructuary rights;
taxes collected from the income of private farmers and farmers incorporated in
cooperative associations; profit and sales taxes collected from individual traders
operating within state territories; taxes on income from water transportation
within state territories; taxes collected from rent of houses and State
Government owned properties; profit, sales, excise and income taxes collected
from State owned enterprises; taxes on income, royalties, and land ren
Governments; and royalties for use of forest resources. Apart from these, there are
certain revenue sources which are shared by the Federal and State governments.
The joint revenues are listed in Article 98 of the FDRE Constitution as constituting
profit, sales, excise and income taxes on enterprises jointly established by the
Federal and State governments; profits of companies and dividends of
shareholders; and income and royalties derived from large-scale mining
operations and all petroleum and gas operations. For those powers
of taxation which have not been explicitly stated in the provisions of the FDRE
Constitution, such as value added tax, Article 99 clearly stipulates that the exercise
of such powers is to be determined by a two-third majority vote in a joint session
conducted by the House of Federation and the House of People’s Representatives.
In Ethiopia, Ethiopian Revenue and Customs Authority (ERCA) is the authority
dealing with taxes at federal level and there are different tax administrators at
each sub city, which Arada subcity is the Besides, there are problems in
assessment, and collection of business income tax (like presumptive tax).

1.2. Statement of the Problem

In many under developed countries like Ethiopia, the low revenue yield of taxation
can only be attributed to the fact that the tax provision are not properly enforced,
either on account of the inability of the administration to cope with them, or on
account of straight forward corruption. The government made several times
periodic revision of the existing tax rules and regulation. Still Ethiopia’s tax
revenue against its Gross Domestic product remained lower as empirical
evidence shows. Such low level of tax revenue is certainly the outcome of the
prevailing poor tax revenue mobilization mechanisms be it in policy or
administration (Fantahun, 2005). Similarly Yohannes and Zerihun (2013) stated
that many developing countries have weaknesses in their tax administration that
make it difficult to levy effective taxes. Especially those in the category “C‟, have
been facing various problems related to the taxation system (tax administration).
On their study they have found that most of the surveyed tax payers stated that
what they are paying is beyond their ability to pay and that they neither have
trust in the employees of the authority nor in the overall tax estimation,
assessment and collection procedures. In light of these facts, the study concluded
that the tax authority of the city administration is not being effective or is being
reluctant in making the tax procedures objective, transparent and understandable to
tax payers. The existing system of presumptive income taxation of Ethiopia had
several disadvantages like: -The amount of taxes does not depend on actual
outcomes of individual entrepreneurs’ performance. As a result, there may be
disincentives to earn income in the sense that the presumptive income taxation is an
entrbarrier. It may deter people from starting a business when they think that the
tax is so high that they had little chance to make a profit at all. For the same
reason it may have forced people out of business who make too little profit. And the
presumption based on the standard assessment method treated equally all
individual entrepreneurs within a given category, regardless of their actual
income. As a result, it can be regressive by imposing equal tax on individual
entrepreneurs in the same category with different income. This leads to violation
of the principle of tax equity (Aloysuis.B, 2009). Similarly (Lemessa, 2007) found
that Category ‘C’ is the most problematic category of
taxpayers and it is considered as hard to tax group. He stated the reasons for the
problem that, category” C” tax payers pay taxes on the income estimated by the
income tax authority rather than declaring their income by themselves. Their daily
income is estimated by assessment committee and the taxpayers have little room to
address their view so that frequent friction is observed in this area. A presumptive
taxation scheme also has other problem like increasing the discretionary power of
tax officials and in a worst case scenario increase corrupt practices. According to
study conducted by Yohannes and Zerihun (2013) Nontransparent, non-
participatory of standard assessment, Lack of fairness or equity of taxation among
similar businesses of category ”C” are the reason for tax payers luck of trust in the
employees of the authority and in the overall tax estimation, assessment and
collection procedures. Presumptive taxation mechanism also gives a chance for tax
payers to hide their daily income. According to (World Bank, 2002) Presumptive
taxation is not always effective because governments do not have sound tax
administration systems in place at the federal, state or local levels to implement
schemes as envisioned by policymakers. Countries in early stages of economic
development tend to employ crude methods of estimating income because they lack
sufficiently qualified resources to analyze the profitability of various economic
activities and to define the indexes for effectively calculating presumptive incomes.
As a result, small businesses in particular are routinely taxed unfairly and
inefficiently. The primary goal of most governments that introduce presumptive
taxation schemes is to broaden the country's tax base by preparing citizens and
businesses in the informal sector to enter the formal tax net. However, presumptive
taxation has proven to undermine this goal as taxpayers remain in presumptive
taxation regimes indefinitely or regress from formal taxation programs to
presumptive taxation schemes. This phenomenon tends to occur because of
sophisticated taxpayers earn above average income and recognize that standard
assessments levy a lower tax burden. The result is that they either under report
income or simply pretend not to keep accurate records of income in order to remain
in the presumptive regime and enjoy its benefits
1.3. Basic Research Questions

1. What are the main challenges and obstacles in the assessment and collection
of presumptive taxes from category c, tax payers in the Arada sub city woreda
5?

2. Does the revenue office has unambiguous tax rules and regulations to assess
and collect presumptive tax ?

3. DO presumptive tax assessment and collection procedure affect tax payers

compliance?

4. What where the challenges encountered during the assessment and collection of
presumptive tax (category “C”) ?
5. What are the perceptions and experiences of category “C “ tax payers
regarding the presumptive tax collection process in Arada sub city woreda 5 ?

1.4. Objective of the Study

1.4.1. General Objective

The general objective of this study is to identify problems on category “C”

business income tax assessment and collection in the case of tax payers’ in Arada
Subcity sub city woreda 5 micro tax payers’ office.

1.4.2. Specific Objectives

1. To identify whether the revenue office has unambiguous tax rules and regulation
to assess and collect presumptive tax.

2. To determine whether tax assessment procedure affect tax payers’ compliance

with tax rules and regulation.

3. To evaluate whether revenue office has competent employees to discharge its

responsibility.

4. To identify the major challenges encountered during the assessment, and

collection of presumptive tax (category “C”) tax

5. To investigate the perceptions and experiences of category C tax payers

regarding the presumptive tax collection process in Arada subcity woreda 5

1.5 Research Methodology :

Research Design:
The study will utilize a mixed-methods approach, incorporating both quantitative and
qualitative research methods to comprehensively address the research objectives. This will
involve a combination of both qualitative and quantitative methods.
Population and sampling :
The population of interest will be category C taxpayers in Arada Subcity Woreda 5. A
stratified random sampling technique will be employed to select a representative sample of
category C taxpayers for the survey and interviews. The sample size will be determined based on
statistical considerations to ensure the reliability and validity of the findings.

Data collection methods :

- Survey Questionnaires: Structured questionnaires will be distributed to category C
taxpayers to gather quantitative data on their experiences, challenges, and perceptions related
to presumptive tax collection.
- Interviews: In-depth interviews with tax officials, policymakers, and representatives from the
business community will be conducted to obtain qualitative insights into the presumptive tax
collection process.
- Document Analysis: Relevant documents such as tax records, reports, and regulations will
be reviewed to supplement the primary data.
Data Analysis:
- Quantitative Data: Statistical analysis techniques such as descriptive statistics will be used
to analyse the survey data and identify patterns and trends.
- Qualitative Data: will be employed to identify recurring themes and patterns in the
interview data, providing a deeper understanding of the challenges and impact of presumptive
tax collection.
Ethical Considerations:
The research will adhere to ethical guidelines, ensuring informed consent, confidentiality, and
anonymity of participants. The study will also seek approval from relevant authorities before
conducting data collection.

1.5.1 Sample Design:

1. Population:
The population of interest for the study will be all category C taxpayers in Arada Subcity
Woreda 5.
2. Sampling Frame:
The sampling frame will be obtained from the tax authority's records, which contain a list of
all category ‘C’ taxpayers registered in Arada Subcity Woreda 5.
3. Sampling Method:
Stratified Random Sampling will be employed to ensure representation from different
segments of category C taxpayers. The strata may include different business types, sizes, and
geographical locations within the sub city.
4. Sample Size:
The sample size will be determined using statistical considerations to ensure a representative
sample. The sample size calculation will consider the population size, desired level of confidence,
and margin of error.

Answer: sample size is a market research term used for defining the number of individuals
included in conducting research. Researchers choose their sample based on demographics, such
as, age, gender questions or physical location.
 Answer: probability and non-probability sampling.
Probability sampling also known as random sampling

Non-probability sampling is a method selecting units from a population using a subjective (i.e non-
random)

5.Sampling Procedure:
Within each stratum, a random sample of category C taxpayers will be selected to participate in
the study. This will involve using a random number generator or systematic sampling method to
select participants from each stratum.
6.Inclusion Criteria:
Category ‘C’ taxpayers who have been operating their businesses in Arada Subcity Woreda 5
for a specified period (e.g., one year or more) will be included in the sample.

7.Exclusion Criteria:
Category ‘C’ taxpayers who are not actively operating their businesses or who have
incomplete tax records will be excluded from the sample.

8. Data Collection:
The selected category ‘C’ taxpayers will be contacted to participate in the survey and
interviews. Efforts will be made to ensure a high response rate to minimize non-response bias.

9.Data Analysis:
After data collection, appropriate statistical and qualitative analysis techniques will be
applied to the collected data to address the research objectives and identify patterns and trends
related to presumptive tax collection problems.

10. Ethical Considerations:

Informed consent will be obtained from all participants, and their privacy and
confidentiality will be strictly maintained throughout the study. Any personal or sensitive
information will be handled with the utmost care and in compliance with ethical guidelines.
11. Limitations:
The study may face limitations such as potential non-response bias if selected participants
decline to participate, as well as constraints in accessing accurate and up-to-date tax records
for all category ‘C’ taxpayers.

12. Research Timeline:

A detailed timeline will be developed to ensure efficient completion of the sampling process
within a specified timeframe, considering factors such as data collection, analysis, and
reporting. By following this sample design, the study can obtain a representative sample of
category C taxpayers in Arada Subcity Woreda 5 and effectively assess presumptive tax
collection problems within this specific context.
1.5.2 Data Analysis Technique:
1. Descriptive Statistics:
- Descriptive statistics will be used to summarize the characteristics of category C taxpayers
in Arada Subcity Woreda 5. This will include measures such as mean, median, mode, range,
standard deviation, and frequency distributions of variables such as business size, type, and
location.
2. Inferential Statistics:
- Inferential statistics, such as hypothesis testing and confidence interval estimation, will be
employed to make inferences about the population of category C taxpayers based on the
sample data. This will help identify any significant differences or relationships related to
presumptive tax collection problems.
3. Regression :
 - Regression analysis can be used to explore the relationships between presumptive tax
collection problems and various independent variables, such as business size, type, and
location. Multiple regression analysis may be used to identify the combined impact of multiple
factors on tax collection issues.
4. Qualitative Analysis:
- Qualitative analysis techniques, such as analysis of interview responses and open-ended
survey questions, will be utilized to identify common themes, patterns, and qualitative insights
related to presumptive tax collection problems among category C taxpayers.
5. Comparative Analysis:
- Comparative analysis will be conducted to compare the presumptive tax collection
problems between different strata of category C taxpayers, such as by business type or
geographical location within Arada Subcity Woreda 5. This will help identify any disparities or
variations in tax collection issues.
6. Data Visualization:
- Data visualization techniques, including chart, graphs, and maps, will be used to visually
represent the distribution and patterns of presumptive tax collection problems among category
C taxpayers. This will aid in presenting the findings in a clear and accessible manner.
7. Correlation Analysis:
- Correlation analysis will be performed to examine the strength and direction of relationships
between presumptive tax collection problems and other relevant variables. This will help
identify potential factors associated with tax collection issues.
8. Cluster Analysis:
- Cluster analysis may be applied to identify distinct groups or clusters of category C
taxpayers with similar patterns of presumptive tax collection problems. This can provide
insights into different tax compliance behaviours and challenges within the sub-city.
By applying these data analysis techniques, the study can gain a comprehensive understanding
of presumptive tax collection problems among category C taxpayers in Arada Subcity Woreda 5
and derive actionable insights to address these issues effectively.

1.6 Significance of the study

Presumptive tax is a taxation system that aims to improve tax compliance among small and
informal businesses. This system is widely used in developing countries, including Ethiopia. The
Ethiopian Revenue and Customs Authority (ERCA) introduced presumptive tax in 2003, and it
has been implemented in different categories, including Category ‘C’. The purpose of this
research proposal is to examine the significance of the study of presumptive tax Category ‘C’ at
Addis Ababa City.

1. Policy Implications:
- The findings of the study can inform policymakers and tax authorities about the specific
challenges and barriers faced by category C taxpayers in meeting their presumptive tax
obligations. This can lead to the development of targeted policies and interventions to
improve
tax compliance and collection.
2. Revenue Generation:
- Understanding the factors contributing to presumptive tax collection problems can help
enhance revenue generation for the local government. By addressing these issues, the sub
city can potentially increase its tax base and improve overall revenue collection.
3. Tax Compliance:
- The study can provide insights into the factors influencing tax compliance behavior among
category C taxpayers, which can be used to design strategies to encourage voluntary
compliance and deter tax evasion.
4. Resource Allocation:
- The findings can guide the allocation of resources and efforts towards areas with the
highest prevalence of presumptive tax collection problems, thereby optimizing the effectiveness
of tax administration and enforcement activities.
5. Business Environment:
- Identifying the challenges faced by category C taxpayers can shed light on broader issues
affecting the business environment in Arada Subcity Woreda 5. Addressing these challenges can
contribute to creating a more conducive and supportive environment for small businesses.
6. Research Gap:
- The study can contribute to filling a gap in the existing literature regarding presumptive tax
collection problems among category C taxpayers, especially within the context of Arada Subcity
Woreda 5. It can serve as a valuable reference for future research in this area.
7. Local Development:
- Improving tax collection from category C taxpayers can have a positive impact on local
development initiatives, as increased revenue can be channeled into infrastructure
development, public services, and community welfare programs.
8. Compliance Monitoring:
- The study can inform the design of monitoring mechanisms to track compliance with
presumptive tax obligations among category C taxpayers, enabling more effective oversight
and enforcement.
In summary, the assessment of presumptive tax collection problems among category C taxpayers
in Arada Subcity Woreda 5 holds significant implications for policy formulation, revenue
generation, tax compliance, resource allocation, business environment improvement, research
advancement, local development, and compliance monitoring. Addressing these issues can
contribute to fostering a more robust and equitable tax system while supporting the growth and
sustainability of small businesses in the sub city

1.7 Scope of the study

Presumptive tax is a simplified taxation system that aims to improve tax compliance among
small and medium businesses. This system has been implemented in different categories,
including Category ‘C’, in Addis Ababa City. The purpose of his research proposal is to
examine the scope of the study presumptive tax category ‘C’ at Addis Ababa City.
 1.8 Limitation of the Study
It is focused only in one words of Arada sub city tax assessment and tax collection of the
category ‘C’, tax payers. It is difficult to generalize about the overall tax assessment and tax
collection. Arada sub city shows presumptive tax payers do not believe that the tax system is not
simple to understand.
Lack experience and shortage of related literature.
The gap in the literature are missing pieces or insufficient information in
the published research on a topic.
By looking for the limitations, controversies, or contradiction in the literature.

Organization of the Study

The study is organized in four chapters. The first chapter introduces the introduction of
the research. The second chapter focuses on review of related literatures. The third
chapter and fourth chapters includes research methodology and conclusion of the study.