ODA BULTUM UNIVERSITY

DEPARTMENT OF ACCOUNTING AND FINANCE

ASSESMENT OF BUSINESS INCOME TAX COLLECTION ON CATEGORY "B"

TAX PAYERS IN CASE OF CHIRO TOWN REVENUE OFFICE

A RESEREA CH PROPOSAL SUBMITTED TO THE DEPARTMENT OF

ACCOUNTING AND FINANCE IN PARTIAL FULFILMENT OF THE
REQUIREMENT OF THE BACHELOR OF ART (BA) DEGREE IN ACCOUNTING
AND FINANCE (MBA)

PREPARED BY:

ADISU DEMEREW

ID: 0668/13
ADVISOR: ALMAYOW SALMON

OCT 2024
CHIRO, ETHIOPIA

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ABSTRACT
This study were focused on assessment of business income tax collection on category "B"
taxpayers Chiro Town Revenue office, it is known that the existence of state without tax is
unthinkable because, government raises fund from tax collection. So problems associated
with tax collection and finding appropriate solution may help to contend with development
constraints success fully through detailed investigation, because of this, this study designed
and looked at the problems related with tax collection in Chiro Town.

The data needed for these studies were collected by using both primary and secondary source
of data. Primary data was collected through interview and questionnaire and secondary data
obtained from annual report and documentary analysis of the organization. Finally based on
the discussion and analysis of the study, Conclusion and recommendation were provided by
researcher for future implementation of tax collection system for the organization.

Table content. Page

CHAPTER ONE........................................................................................................................1
INTRODUCTION......................................................................................................................1
1.1 Background of the study......................................................................................................1
1.2 Statement of the problem.....................................................................................................4
1.3 Research questions...............................................................................................................6
1.4 Objective of the study........................................................................................................6
1.4.1 General objective..............................................................................................................6
1.4.2 Specific objectives............................................................................................................6
1.5 Significance of the study....................................................................................................6
1.6 Scope of this study.............................................................................................................7
1.7 Limitation Of the study......................................................................................................7
CHAPTER TWO.......................................................................................................................8
LITERATURE REVIEW...........................................................................................................8
2.1 Introduction to tax..............................................................................................................8
2.1.1 Tax Related Concepts.....................................................................................................8
2.1.2 Objectives of Taxation...................................................................................................9
2.1.3 Characters of Good Tax System................................................................................11
2.1.4 Principles/canons of Taxation.....................................................................................11
2.1.5 Other principles/Canons of Taxation............................................................................14
2.2 purposes of tax.................................................................................................................15
2.3 Classification of Taxes.....................................................................................................15
2.3.1 Direct Tax......................................................................................................................15
2.3.1.1 Merits of Direct Taxes:................................................................................................16
2.3.1.2 Demerits direct tax....................................................................................................16
2.3.2 Indirect Tax..................................................................................................................17
2.4 Definitions of business income tax..................................................................................18
2.4.1 category B business income tax payers..........................................................................18
2.4.2 Why tax businesses at all?.............................................................................................18
2.5 Theoretical review of tax administration.........................................................................19
2.5.1 Challenges of tax administration...................................................................................19
2.5.2 Tax evasion.....................................................................................................................19
2.5.2.1 Techniques of tax evasion............................................................................................20
2.5.2.2 Factors cause tax evasion...........................................................................................20
2.5.2.3 Possible remedies for tax evasion................................................................................20
2.6 Procedures for tax collection...........................................................................................21
2.7 Identification and registration of tax payers....................................................................21
2.7.1 Payment of tax...............................................................................................................21
2.7.2 Audit and examination..................................................................................................21
2.7.3 Tax collection enforcement...........................................................................................21
2.8 Problems of tax assessment..............................................................................................22
CHAPTER THREE..................................................................................................................23
RESEARCH METHODOLOGY.............................................................................................23
3.1 Description of study Area...............................................................................................23
3.2 Research Design...............................................................................................................24
3.3 Type of data......................................................................................................................24
3.4 Source of data..................................................................................................................24
3.5 Method of data collection.................................................................................................25
3.6 Target population.............................................................................................................25
3.7 Sampling technique.........................................................................................................25
3.8 Sample size determination...............................................................................................25
3.9 Methods of Data Analyses and Interpretation.................................................................26
CHAPTER FOUR....................................................................................................................27
Time table and Budget Plan.....................................................................................................27
4.1 Time schedule....................................................................................................................27
4.2 budget plan.........................................................................................................................28
REFERENCES.........................................................................................................................30
APPENDIX..............................................................................................................................31

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CHAPTER ONE

INTRODUCTION

1.1 Background of the study

The word tax comes from Latin word taxare, to estimate, to touch is defined as a compulsory
contribution payable by an economic unit to a government without expectation of direct and
equivalent return from the government for the contribution made (Bhatia,2006)

According to Auld, 1997 tax is a compulsory contribution levied on individuals, business

firm or property which is designed to transfer resources from the private to the public sectors,
so as to provide merit goods to the society without contributing to price inflation.

According to Gebrie, 2006 Tax is a financial charge or other levy imposed on individuals or
legal entity by the government to raise money to finance government expenditures. Taxes are
the primary source of government revenue government uses tax revenue to pay soldieries and
policy, to build dams and roads, to operate schools and hospitals, to provide food to the
poorer and medical care to the elders and for hundreds of other purposes. (Use of tax to fund
its activities, government would cease/ stop / to exist or survive.

According to Gupta, 2001 a tax compulsory levy and those who are taxed have to pay the
sums irrespective of corresponding return of services or goods by the government.

Tax is compulsory contribution imposed by a puplic authority irrespective of the exact

amount of services rendered to the tax payer in the return,(Dalton,1954). Typically taxes are
the primary source of government revenue.The levying and collection of taxes are therefore
the central function of government in all countries. The levying and collecting systems and
methods obviously vary widely according to the political, economic and social characteristic
of individual (Misrak, 2011).

According to Gebrie, 2006 taxation is an important tool for maintaining the stability of the
country`s economy. This is because taxation can redistribute and specifies wealth by
imposing a heavy tax burden on one group in order to fund service to another.

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Business income, or business profit, includes any income which is derived essentially from
business activity or activity recognized as trade. Business profit tax is the tax imposed on the
taxable business income / net profit realized from entrepreneurial activity. Taxable business
income would be determined per tax period based on the profit and loss account or income
statement, which shall be drawn in compliance with the generally accepted accounting
standards. Corporate businesses are required to pay 30% flat rate of business income tax. For
unincorporated or individual businesses, the business income tax ranges from 10% - 35%
According to Ethiopian chamber of commerce and Ethiopian business development service
network (ECC and EBDSN, 2005).

Tax levied by the federal government and state government are classified as direct and
indirect tax (Gebrie, 2006:7). The researcher paper is concern in direct tax. The direct tax
includes employment income tax, tax on loyalty, business income tax, tax on winning, while
indirect tax includes value Added tax (VAT), excise tax and custom duty tax. Among the
direct tax business income tax can be classified in to three major categories with respect to
legal personality and annual turnover, this category is A, B, C. From this business income tax
the proposal tattle is on category "B" business income tax payers in Chiro town because of
that the Tax payers are not willing to record their income and expense by their self-
assessment books and submitted to the tax revenue agency within three months (Chiro town
revenue agency's manager, 2013).

In relation to the above the tax payers buy and use cash register machine to show the fairness
of their financial records. But, most of category "B’ income tax payers perform their
business activities in traditional ways. At this time revenue committees determine their
income based on estimated assessment formula and category” B “income Tax payers
deliberately doesn't fulfilled their responsibilities. By this reason they are problematic and
this problem decrease the government revenue collected from Tax assessment. By
empathizing the above problem the Researcher attempts to analyze category "B" income tax
payers problem in Chiro Town in order to increase revenue collected from Tax and to analyze
the most determinant factors that affect category B business income tax payers (Chiro town
revenue manager, 2013).

Business income tax payers of category "B" whose annual turnover is between birr 500,000
and birr 1,000,000 (Ministry of Finance and Economic Cooperation (MOFEC), and Ethiopian
Revenue and Custom Authority (ERCA), category "B" tax payer must submit profit and loss

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statement at the end of the year (council of minister regulation No 78/2008: article 18 sub
articl2

The revenue of Ethiopian government comes from different source such as tax, public
borrowing, sales of public asset and transfer payment. The main purpose of generating
revenue from these various source is to finance government expenditure. This public
expenditure is meant for public goods and services that are essential for the development and
wellbeing of the society. Among the various source of revenue like public borrowing, sales of
public asset and transfer payments, tax is the primary and principal source of revenue
(shirras, 2005).

According to tax office manager in Chiro town category "B" tax payers, there are tax evasion
and fraud at the time of profit and loss submit to revenue agency through under reporting of
income, over estimation of expense by reporting personal expense as business expense,
omission of sales transaction from receipt or invoice, omission to report taxable revenue in
tax return, non-recording of sales and others, filing false tax return that omit income.
Additionally, there is lack of awareness of some new and old tax payer and tax officer about
rule and regulation when the rule where modified, lack of creation of awareness through
education and training. In relation to this the tax payers are not wanting to or can afford
paying tax this results delay in payment of tax liability.

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1.2 Statement of the problem

The running of our country to be one of the world’s middle-income level countries is the
ultimate goal of the federal government of Ethiopia. Without sufficient funds the government
cannot possibly meet its core objectives. In order to implement the countries major programs
and the various mega and mini projects in it, governments should look for a consistent and
reliable source of incomes. As mentioned above one of the major sources is the tax revenue
collected from the people.

The government uses this tax revenue to construct roads, build dams, open schools and
hospitals that provide food and medical care for the poor. Hence, tax is the blood vessel of a
country for development. However, the tax collection and assessment practice has different
problems that hinder the proper tax administration of the authority. These problems are
taxpayer’s poor awareness about tax, taxpayers’ unethical practice, being resistance to
register for VAT, and others.

The problems are from both the weakness of the assessment and collection system and
various challenges exerted by the taxpayers as well. Investments opportunities created by the
federal government encourage vast number of new individuals to be emerged in the business
continuously. Yet the activity of tax authority in terms of increasing staff numbers,
expansion, and training facility is not that much promising to handle the increasing number of
the firms. 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.
In most developing countries, tax is a common phenomenon that faces many problems to
develop adequate tax system that helps the government in order to finance its expenditure
sufficiently. Particularly in Ethiopia it is difficult to see the potential challenges faced by the
tax payers and officers in different tax collection activities (Asamanaw, 2009).

According to Brautigam et al, 2008 taxation is new frontier for those concerned with state
building in developing countries. But revenue come from tax are not sufficient to finance the
government expenditures because the tax revenue performance is low in developing countries
including Ethiopia due to various factors.

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As Emerta, 2010 stated tax evasion is one of the basic factors which are the source of a
potentially serious loss of revenue to governments, resulting in the possible underfunding of
public service and an ‘unfair’ burden on frank taxpayers.

According to Chiro town tax office manager report in 2009- 2012 the town have several
factors that are challenges for the taxpayers and tax officers in Chiro town category "B" tax
payers, such as, there is lack of awareness of some new and old tax payers due to lack of
creation of awareness through education and training by tax officers about rule and regulation
when the rule was modified, not wanting to or can afford paying tax and delay in the payment
of tax liability at the time of profit and loss submitted to revenue agency due to the burden of
penalties is low. In addition to these Chiro town revenue officer has not always follows
formal method of revenue or tax collection and the office should not make ready its
employees to serve the customer (taxpayers) with a short service delivery time and also it
inability to use third party tax collection system like post office.

Furthermore, Chiro town revenue office should not prepare research and development in a
near gap year by teaching staff employees to identify factors affecting tax collection and to
take an influential measure on such factors that affecting the tax collection. So that those
listed problems affected the town and the country economy in adverse way because the town
cannot benefited as much expected and planned for instance those revenue is not generated
the expected profit from this and as well as it not benefit at a country level.

The tax payers evade tax revenue, delay to pay on time, by increasing their expense and by
reducing their income, So the government and all responsible bodies should consider these
factors' and must be give quick appropriate response for those factor's, unless it simple to
predict the town and the country overall growth dominated by few people and the rest one is
leave out of the market.

Consequently, the government should give high attention and should have quick solution for
these challenges the study focus does the business income tax payers creating awareness
about rules and regulations they must fulfill that describe on
proclamationsNo.286/2002(yearly manual 2009-2012).

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The above problem is not studied, the problem continue as it is and leads to borrowing and
this borrowing leads to under development of countries revenue that collected from category"
B" income tax payers and, external debt trap and also further researchers unable to get any
information that initiates to study. The policy makers does not get valuable input for their
policy making decision. so the researcher attempts to identify the problems that affect
business income tax payers by answering the following questions.

1.3 Research questions.

1, what are the major challenges in the Chiro Town revenue office regarding business income
tax collection from category “B” tax payers?
2, what are the reasons that tax payers evade tax obligations?
3, what are the major factors that affect tax payers to pay their tax obligations on time?

1.4 Objective of the study

These studies have both general and specific objectives.

1.4.1 General objective

The main objective of this study is to evaluate Business Income tax collection Problem in
category “B” taxpayers in Chiro town revenues office

1.4.2 Specific objectives

The Specific objectives of this study include the following:

To evaluate the major challenges in the Chiro town revenue office regarding business
income tax collection from category “B” tax payers.
To assess the reasons that taxpayers evade tax obligations.
To examine the major factors that affect taxpayers to pay their obligations on time.

1.5 Significance of the study

This study may enable to the society to know the benefits of tax revenue for social services
like schools, hospitals, roads and other infrastructure. It may also provide positive insight to
increase the revenue of government and creating awareness to the taxpayers for the purpose

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of collection tax obligations by the revenue agency committees. On the other hand, this study
may relevant for the government to narrow the gap between the actual and budgeted tax
revenue. For policy makers enables as how to design different strategies to increase tax
revenue. For further researchers, by starting of this outcome to assess all category of business
taxpayers. Generally, to identify the major problems of category" taxpayers.

1.6 Scope of this study

Even it is very necessary to study in all tax category in business profit tax payers of ” A””
B” and “C” in Chiro Town revenue office. But, because of financial and time constrains
this study will focus on only category “B” tax payers. The reason for the selection of
category “B” tax payer is that, there is large amount of the tax revenue in ChiroTown that is
collected from category “B” tax payers. This study encompasses only a detailed evaluation
of business income tax collection problem in category “B” tax payers found in ChiroTown
revenue office from 2009-2012.

1.7 Limitation Of the study

In conducting this study the proposal may face several problems which have negative impact on this
paper.

 Lack of sufficient time to collect data.

 Absence materials equipment and supplies that have to be provided by the universities.

CHAPTER TWO

LITERATURE REVIEW
This chapter covers theoretical and empirical literature review related to the study. In order to
provide suitable theories and empirical evidence on the topic under investigation, the
researcher is reviewed a number of existing literatures; these are helps to explain some key

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terms, which are relevant to the study and the researcher is also reviewed other researcher’s
discussion related to the study area

2.1 Introduction to tax

Tax is financial charge, other levy imposed on individual or legal entity by government, or it
is a system of raising money to finance government expenditures. All government requires
payments of money taxes from people. Government uses tax revenue to pay soldiers and
policies to building dams and roads to operate schools and hospitals to provide food and
medical care to the elders and for hundreds of purposes Government may raise or lower tax to
achieve social and economic objectives, or to achieve political popularity with a certain
group. Some economist considers taxation is an important tool for maintain the stability of
the country economy. This because taxation can redistribute a society wealthy by imposing a
heavier tax burden on one group in order to fund services for another. In general, without
taxes to fund its activities, a government would cease or stop to exist (Gebrie 2006)

Tax is compulsory charge imposed by the government without any expectations of direct
return in benefits, in other words a tax is compulsory payment or contribution by the people
to the government for which there is no direct return to the tax payers. The tax imposed a
personal obligation on the people to pay the tax if they are liable to pay it. The general public
should be taxed according to their tax liability to pay and the people in the same financial
position should be taxed in the same way without any discrimination (paramewarm, 2005).

2.1.1 Tax Related Concepts

According to Gebrie (2008:16), tax system that includes the following two types of tax
system in the world

> Global Tax System: is a tax system in which tax is computed on aggregate of all income
and losses that the taxpayer derived from different sources in the world. The loss incurred in
a certain business is offset by income on another business and tax is computed on the final
balance.

> Schedule Tax System: is a tax system in which tax is computed on separate schedule. The
loss incurred in a certain business is not offset with income on another business and tax is

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computed on each type of schedule. Most countries including Ethiopia use schedule tax
system.

2.1.2 Objectives of Taxation

Initially governments imposed taxes for three basic purposes: to cover the cost of
administration, maintaining law and order in the country and for defense. But now
government’s expenditure pattern changed and gives service to public more than these three
basic purposes and it restore social justice in the society by providing social services such as
education, public health, employment, pension, housing, sanitation and other public services.
Therefore, government need much amount of revenue than before. To generate more revenue
a government imposes taxes of various types. According to misrak( 2008:16) objectives of
taxation are:

> Raising revenue: to render various economic and social activities, government needs large
amount of revenue and to meet this government imposes various types of taxes

> Minimize income and wealth inequality: to narrow the gap between the rich and the poor
most government adopt progressive taxation system. In such system the higher income group
pays more amount of tax, the middle income group pay low or lower amount of tax and lower
income groups are exempted from tax. Then the tax collected from the higher and the middle
groups are used by the government to subsidize the lower income groups and unemployed.

> Ensuring economic stability/Stabilize Economy: taxation affects the general level of
consumption and production. Hence, it can be used as an effective tool for achieving
economic stability. Governments use taxation to control inflation and defilation.

> Governments use taxation to control inflation and defilation pressure during inflation
period governments may increase the existing tax rates or impose additional taxes to reduce
the abnormal (excess) demand. During defilation period governments may reduce the existing
tax rates or remove certain taxes to increase demand and encourage business activities. Thus
taxation has role in economic stabilization.

> To discourage the consumption of harmful products: by imposing high heavy tax on
harmful products that worsen peoples’ health such as tobacco and alcoholic products ,
governments can reduce the consumption of such products for instance, in Ethiopia case
tobacco products are subject to 20% - 75% excise tax. Alcoholic products are also subject to

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50% - 100% excise tax imposing heavy taxes on such product. Increase their price and the
majority of society may be discouraged to buy this products and to reduce regional
imbalances: To reduce regional imbalances with in a country, governments may give tax
exemption or recession to those investors who want to invest in relatively less /under
developed regions for instance the Ethiopian government gives additional years tax
exemption to those investors who are interested to invest in reality less developed region of
the country such as Gambella, Somalia and Afar region.

> Capital accumulation: Tax concession or tax rebates given for savings or investment in
provident funds, life insurance, investment in shares and debentures lead to large amount of
capital accumulation. This is essential for the promotion of industrial development.

>Creation of employment opportunities: Governments might minimize unemployment in

the country by giving tax concession or exemption to small entrepreneurs and labor-intensive
industries.

> To promote private investment: Through the provision of tax exemption, tax recession
(reduction) and tax holiday, governments promote private investment in their countries in
Ethiopia the government grants exemption on business profit tax and customs duty associated
with investments on an approved manufacturing and agro industry from 2-8 years, depending
up on. the location in which the investments are under taken

> To enhancement of standard of living: By way of giving various tax concessions to

certain essential goods such as medical equipment’s, governments may enhancement of
standard of living of people.

> Encouragement of exports: Governments enhance foreign exchange requirement through

export oriented strategy. These provide a certain tax exemption for those exporters and
encourage them with arranging a free trade zones and by making a bilateral and multilateral
agreement.

2.1.3 Characters of Good Tax System

Tax is compulsory contribution:-it is a compulsory payment from the person to the
government without expectation of any direct returns from it.

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Taxes are levied by the government:-no one has the right to imposes taxes except the
government. Only the government has the right to impose taxes and collect tax proceeds from
the people.
Common benefit to all:- the tax collected by the government is spend for the common
benefits of all people.
No direct benefit:- the government compulsorily collects all types of taxes and does not give
any direct benefits to the tax payers for the taxes paid and the tax payers cannot demand any
direct benefits against the payment of taxes.
Certain taxes levied for specific objectives:- though taxes are imposed for collecting revenue
for the government to meet its expenditure on social wants and merit wants for example
heavy taxes are levied on luxury goods to reduce their consumption.
Attitude of the taxpayers:- the attitude of the tax payers is an important variable determining
the contents of good tax system.
Good tax system should be in harmony with national objectives:- a good tax system should
run in the same direction with important national objectives.
Tax system recognizes basic report of tax payers:-a good tax system recognizes the basic
rights of tax payers. The tax payer is exacted to pay the tax but not undergo the harassment.
(Tax system manual by Addis chamber 2004)

2.1.4 Principles/canons of Taxation

According to Misrak (2008:23), the principles/Canons of taxation include the following
points. Principles of taxation refer to the appropriate criteria to be employed in developing
(devising) and evaluating a good tax structure/system of a country. Tax authority must follow
certain code of conduct in the form of principles of taxation while determining the type and
amount of tax.

Adam Smith, who was perhaps the first writer to attempt a general statement of the principle
of taxation and most rather economists believe that a tax system should be based on the
following principles of taxation to be the good tax system.
> Equity/Fairness principle: states that similarly situated tax payers should be tax similarly.
This principle takes two forms: horizontal equity and vertical equity.
Horizontal equity states that tax payers in equal position or with equal ability to pay the same
amount of tax. For instance, if two persons both have income of, say, Br. 2,000 each, then

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horizontal equity requires the two persons to pay the same amount of tax regardless of their
position. On the other hand, vertical equity implies that tax payers with greater ability to pay
more amount of tax. This in other words means tax payers in unlike circumstances should be
treated differently. For instance, there is no ground to levy the same amount of Br. 2,000 and
the other person earning Br. 3,000. This is the essence of vertical equity. The progressive tax
rate structure is founded on the vertical equity. The progressive tax rate structure is founded
on the vertical equity premise.
Certainty Principle: states that taxes should not be arbitrary and based on relationship rather
it should be based on statutory bases. Therefore, taxes not to be arbitrary and not to be based
on relationship, a tax law should specify,
■ How the amount of tax that due is determined,
■ How tax is to be paid (the method of payment), and
■ When the tax is to be paid (period of payment).
A certain tax ensures a stable source of government tax revenue through tax planning.
Simplicity principle: states that as complex tax system may result in error (due to failure to
understand the tax laws), tax evasion (violation of tax laws) and disrespect for the system, tax
laws should be simple and clear to understand by the tax payers and they should not be
confronted with accounting, administrative or other difficulties.
Convenience Principle: also called convenient for payment principle, states that taxes should
be due at a time and in a manner, which is most likely convenient for taxpayers. In other
words, the period of taxpayers (not in such a manner). For, instance, the government of
Ethiopia collects employment income tax from taxpayers (employees) at source, i.e., when
they receive salaries from their employers. Similarly, the best time for the collection of land
tax should be the time of harvest.
Efficiency/economy of collection principle: states that the costs to collect taxes should be
kept as minimum as possible for both the government and tax payers. Governments incur
administrative costs such as for hiring tax collectors to gather tax revenues, data entry clerks
to process tax returns, auditors to respect questionable returns, lawyers to handle disputes,
and accountants to truck the flow of money. Tax payers also incur cost of taxation to comply
with the tax system such as costs to workers (accountants, tax lawyers and tax preparers),s for
record keeping, and non-compliance appeal. Therefore, efficiency theory implies that
government administrative costs and taxpayers cost of taxation should be as low as possible.
Neutrality principle: states that a tax system should be free from bias. A tax system to be
free from bias,
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 ■ Incomes of tax payers from different sources should be taxed without bias
■ The decisions of tax payers to undertake transactions should not significantly be
affected by the tax system;
■ The tax system should not create any inflationary or deflationary effects in the
economy (or taxation should not create distortion on economy), and
■ The government should not collect too much tax just to finance its operations or
should not collect too little tax just to favor tax payers.
Economic growth/Buoyancy Principle: states that a tax system should not impede or reduce
the productive capacity of an economy by overtaxing. For instance, a tax system should not
significantly affect international competitiveness, investment, and production like labor
supply. Viewing the concept from the other angle, a tax system should be in line with the
economic growth policy of a country and should have an inherent tendency against the
economy goals and policies of the government. Economic growth principle highly reflects the
theory of neutrality.
Transparency and Visibility Principle: This implies that taxpayers should know that a tax
exists why tax exists, and how tax is imposed on them. When taxpayers are aware of a tax
and the change in their liabilities that result from specific transaction or events, they can
compute the true cost of the transaction and identify who ultimately pays the tax. In addition,
it is the responsibility of the government to let perform its essential services, and one means
to acquire those resources is through the collection of tax revenue.
Appropriate government revenue Principle: implies that taxes should be predictable by
government, meaning, a tax system should enable a government to predict (determine) how
much tax revenues will likely be collected and when to undertake its budgeting and
appropriation process accurately.
Minimum Tax gap Principle: A tax system should be structured to minimize tax gap/non-
compliance. Tax gap exists if the actual tax owed (tax imposed) is not the same as the tax
voluntarily paid by taxpayers. Mathematically, it is expressed as follows:
Tax Gap = Tax actually owed (Imposed) - Tax voluntarily paid (Or)
Tax Gap = Tax that should have been paid - Tax already paid Tax gap may occur due to, i)
Intentional errors such as overstatement of expenses, understatement of taxable revenues,
omission of taxable transactions, not declaring total taxable revenues, etc. ii) Unintentional
error such as mathematical mistakes, failure to understand tax laws (rules and
regulation),error in tax assessment, etc. In order to avoid or at least minimize tax gap, a tax

13
system should certain, simple, neutral and transparent; clear penalties (refund) should be set
in the tax laws if tax gap exists.

2.1.5 Other principles/Canons of Taxation

In addition to the aforementioned ideal principles of taxation, the following principles of
taxation have also been developed by various economists

Elasticity/Fiscal adequacy principle: a tax system should be able to yield enough revenue for
the government and at the same time should not discourage productivity in the short as well
as in the long run.

Diversity/Varity Principle: state that a government should not depend on very low tax sources
and also a tax system should not consists of too many tax sources. It is risky for a government
to depend up on too few sources of public revenue since such a system is bound to breed a lot
of uncertainty and the treasury. Too much multiplicity of taxes also should be avoided since it
leads to unnecessary burden on the society in the form of additional administrative expenses.
It also isolates the principle of economy of collection.

Co-ordination Principle: says that if taxes are levied by both the federal and regional
governments, there should be co-ordination between those authority as to what type of taxes
are imposed and collected by the federal (central) government, by regional (state)
governments and by both the federal and regional governments.

Expediency Principle: in accordance with this canon, tax should be based on certain well
founded principles so that it may need no justification from the side of the government, and
tax payers should have no doubt about its desirability. In other words, taxes should be levied
after considering all favorable and unfavorable factors from different angles such as
economical, political and social factors.

Equality of benefit/Equality Principle: According to this principle, every taxpayer should

contribute towards the support of the government, as nearly as possible, in proportion to their
respective abilities; this is, in proportion to the revenue, which they respectively enjoy under
the protection of the government. In other words, this principles state that the burden of
taxation should fall on the people according to the benefit received by them form the
government. Viewing it from the other angle, the principle implies the desirability of
imposing taxes on the individual according to the benefit, which they enjoy from the

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government action. The principle naturally proclaims the justice of “do not take more than
you give.” (parameswarn,2005).

2.2 purposes of tax

According to Ethiopian chamber of commerce 2005, taxation in Ethiopia has many purposes.
Among the purposes, some of are listed below;

 Promotion of capital investment and trade

 Ensuring equity, fairness, and consistency in administration of tax laws.
 Raising as much revenue possible to finance the country`s social and economic
development programs and to alleviate penalty.
 Encouraging certain industries, which are held important to the long run development of
the country? Discourage others industries which are likewise not important to the long
run development of the country.

2.3 Classification of Taxes

A government imposes many types of taxes. In most developed countries individuals pay
income taxes when they earn money, consumption taxes when they own a home or land, and
in some cases estate taxes when they die. In general, in terms of the relationship between the
nature of taxes and the reason for payment, taxes classified as direct tax and indirect tax
(Gebrie, 2008:18).

2.3.1 Direct Tax

According to Dalton, Direct taxes are those which are paid entirely by those persons on
whom they are imposed. Direct taxes are those taxes which can’t be shifted to others
(Gebrie, 2008:28). Direct tax may be through of as a tax an individual or business and direct
taxes as taxes on transaction involving goods and services. Under this classification approach
direct tax include 14 taxes on personal and company income as well as a payroll taxes, social
security taxes and property and wealth
The direct taxes include:
>Employment income tax, > Business income tax, > Rental income tax, and > Taxes on other
incomes include: Tax on income from rental of property, Tax on dividend income, Tax on
income from games of chance, Tax on interest income on deposit, Tax on income on royalty,

15
Tax on gain on transfer of certain investment property/ capital gain, Tax on income from
rendering of technical service S Agricultural income tax, and Land use tax

2.3.1.1 Merits of Direct Taxes:

According to Gebrie (2008:29) the following are merits of direct taxes.

1. Equitable: direct taxes such as income tax are equitable because it is based on the principle
of progression.

2. Certainty: Direct taxes satisfy the canon of certainty. The taxpayer is certain as to how
much he/she is expected to pay, and similarly the tax collector is certain how much it receive.
3. Reduce inequalities: Direct taxes are progressive in nature and therefore, rich people are
subject to higher rates of taxation, while poor people are exempted from direct tax obligation.

4. Elasticity: Elasticity in direct taxes implies that the government collects more revenues
simply by raising the rate of taxation.

2.3.1.2 Demerits direct tax

1. Inconvenience: Tax payers should submit the statement of total income along with the
source of income from which it is derived. Thus, it is additional task to tax payers.
2. Evasion: Direct taxes are certain and taxpayers know the rate of tax they have to pay,
therefore, awareness of tax liability tempts the taxpayers to evade tax. It is a fact that people
in higher income groups do not reveal their full income.
3. Arbitrary: Direct taxes are found to be arbitrary because there is no logical or scientific
principle to determine the degree of progression in determining tax brackets. Tax rates are
determined on opinion of tax authority. They are likely to underestimate or overestimate
taxable capacity of taxpayers.

2.3.2 Indirect Tax

Indirect tax is a tax in which the burden may not necessarily be swallowed by assesses, which
means indirect taxes can be shifted on to other person. Generally, the tax incidence of indirect
tax is on ultimate consumer; however, sometimes seller might absorb such indirect tax to be
competitive in market. This action reduces its profit. Indirect taxes are taxes that are lived up

16
on commodities before they reach the customer who ultimately pay the tax as a part of the
market price of commodity. Indirect taxes included domestic taxes such as excise tax and
taxes on international trade, such as import duties and export taxes (Gebrie, 2008:28).

Indirect taxes as explained by Misrak (2008:20) are classified as follows: > Value added tax
(VAT). > Turnover tax > Excises tax. > Custom duties. > Sur-tax. Note:- Stump duty is
neither direct nor indirect tax in Ethiopia.

According to Gebrie (2008:29) the following are Merits of indirect taxes.

1. Convenient: Indirect taxes are convenient to pay. They are paid in small amounts instead
of in one lump sum so that the burden of these taxes is not felt very much by the taxpayer.
2. No Evasion: Indirect taxes are generally difficult to by evaded, as they are included in the
price of a commodity. One can avoid an indirect tax only if he/she decides into purchase such
commodity.

3. Elastic: Government may increase revenue if the tax is imposing on commodities that are
elastic.

4. Broad coverage: In indirect tax every member of the community can be taxed so that
everyone may contribute something to finance public utilities

. 5. It can be progressive: Indirect taxes can be made progressive by imposing heavy taxes on
luxuries and exemptions of those commonly consumed products.

2.4.2 Demerits of Indirect Tax

According to Gebrie (2008:29) the following are demerits of indirect taxes.
1. Regressive: In direct taxes are regressive in nature, as they fall more heavily upon the poor
than the rich.
2. Administrative cost: The administrative cost of indirect tax is generally heavy as they have
to be collected from large number of people in small amounts. The government hires number
of inspectors to check records of sellers.
3. Discourage saving: Indirect tax discourage savings because they are included in the price
of a commodity and people have to spend more on essential commodities.
4. Uncertainty: It is uncertain because the tax authority cannot certainly estimate the total
yield from different taxes.

17
5. Creation of inflation: prices of taxed goods keep on rising without any reduction in the
purchasing power in the economy, thus indirect tax may create inflation.

2.4 Definitions of business income tax

According to proclamations numbers 173/1961 imperial government business income tax is a
tax imposed on the business income (net profit) realized from entrepreneurial activities.
Taxable business income would be determined per tax period on the basis of the profit and
loss account or income statement which shall be drawn in compliance with the general
accepted accounting principles (Misirak 2007).

2.4.1 Category B business income tax payers

Category B business income tax payers includes unless and already classified in large size
(category A) business income tax payers with no legal personality and whose annual gross
turnover is more than 500000 and less than 1000000. This category taxpayer required to
maintain proper book of account and other supporting documents. They also used type and
quantity of vouchers registered and approved by the concerned tax authority. Category B
business income tax payers declare their net income within two months after the end of the
tax year. Unlikely category A, category B business income tax payers doesn't require
preparing balance sheet statement (Misirak, 2008).

2.4.2 Why tax businesses at all?

Although business can pay tax, all the tax burdens are ultimately borne by the people.
Because business is simply an organization structures not a natural person that the many
flows in to business comes from people, mainly the customers who buy its products and is
eventually paid out to the people in the form of wages and salaries to employees and
managements, bonuses to executives, interest to firms creditors, or dividends to shareholders.
Tax is paid the business is simply a divert of the money flowing through the firm into the
waiting hands of the tax collector. The main reason for taxing business at all is the following;

 Business is convenient place where the government can collect taxes and enforce the tax
rules
 Taxes on businesses are sometimes needed to be preventing tax evasion

18
 Taxes on business are an important way in which the government can influence the
production sector of the economy.

 Business tax may be levied in exchange for benefits received by the firm from legal and
economics systems supported by the government. due to this government taxes business
at all (Bruce, 2001)

2.5 Theoretical review of tax administration

Tax administration refers to the identification of tax liability based on their existing tax laws.
The assessment of this liability and the collection procedure and penalties imposed on
calculated taxpayers. Tax administration reform covers wider area of studies, encompassing
aspect such as registration of taxpayers, assessment return process, collection and audit
(kangove, 2005).

2.5.1 Challenges of tax administration

The efficiency of tax system is not determined only by appropriate legal regulations but also
by the efficiency and integrity of the tax administration in many country especially, in
developing countries small amount of public revenue can be explained by either in capability
of the tax administration in realization of its duties or with some degree of corruption
regardless of how carefully tax have been made. Important precondition for realization of tax
penalties of the states is generally known that tax laws and tax policies are good in the tax
administration that can be responds to the number of taxpayers. Human resources are
essential in tax administration (Robert, 2003).

2.5.2 Tax evasion

Tax evasion is a method of saving the true tax liability of a taxpayer but by dishonest and
fraudulent means (actions like omission of income) subject to tax, inflating deductible
expense and claiming tax deduction in fictitious transactions. It is an effort by tax payers to
avoid or escape a payment of his legal tax obligations by directly breaking the technical
requirement and legislative intent of tax laws. It usually entails a taxpayers deliberately
misrepresenting and canceling the true status of his taxable financial affair (parameswarm,
2000)

19
2.5.2.1 Techniques of tax evasion
The following are frequent and practical technique to avoid and minimize legal tax liability
by directly breaking the tax laws.

 Omission of sales transactions from receipts and invoice.

 Under invoicing sales transactions.
 Claiming tax deduction in fictitious transactions.
 Omission to report taxable revenue in tax return.
 Reporting personal expense as business expense for the tax purposes.
 Keeping multiple set of books of account to record business transactions.
(Asmanw,2000).

2.5.2.2 Factors cause tax evasion

According to parames warren (2005),there are many possible causes of tax evasion.
The following are factors that the tax payer leads to tax evasion;
 High rate of tax.
 Complexity of tax laws.
 Multiplicity of tax laws.
 Shortage of experienced personal.
 Deterioration of moral standard.

2.5.2.3 Possible remedies for tax evasion

The following measures may be recharged as possible remedies to prevent or at least to
minimize the tax evasion;
 Reduction in tax rate: is the first and foremost reason for tax evasion hence, the rate of
tax should be reduced at reasonable levels.
 Through changing of tax laws: redraft the tax laws which have loopholes or weak
points.
 Through tightening of tax enforcement: that the penalties for violation of tax laws are
strictly enforced.
 Maintenance of proper account: proper maintenance of books and accounts by the tax
payers.(H.I bahita,2008).

20
2.6 Procedures for tax collection
It is expected that people’s tax payment should be in line with their income and they are
required to pay tax in proportion with the levels of income. On the other part of the tax
collectors, collection of tax should fine conscious and the cost of collecting the taxes should
not be high discourage businesses? Alternatively, this means that the ideal tax system in
developing countries. Should raise essential revenue without excessive government
borrowing and should do so without discouraging economic activity and without deviating
too much from tax system in other countries (Singh,2008)

According to singh (2008) the procedures undertaken by the tax authority to ensure
compliance are discussed as follows:

2.7 Identification and registration of tax payers

Tax identification number (TIN) is used to identify taxpayers. Every taxpayer has a unique
TIN. Which she or he is supposed to use in all his or her correspondence with the tax
authority and one-tax payers should have only one TIN number.

2.7.1 Payment of tax

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

2.7.2 Audit and examination

The role of tax audits and examination is to check accuracy of the information that tax payers
provide to tax authority. The audit ranges from simplified and desk audits to comprehensive
audits.

2.7.3 Tax collection enforcement

When the taxpayer has not made payment on the due dates and does not object to the tax
assessed, tax authority can enforce payment in a number of ways. The commissioner may
bring a suit against the tax payer or request a person owing or holding money for the tax

21
payer to pay the money on the specific Date or institute distress proceedings against the
taxpayer`s movable property in any wider context the issue of enforcement includes offences
committed by the tax payers and penalty for these offences.(kangave,2005).

2.8 Problems of tax assessment

An assessment is basically a review by tax officials of the tax declaration and information
provided by taxpayers and verification of the arithmetical and financial accuracy of the
declared tax liability.
The legal round for tax assessment in ERCA is proclamation No.173/1996.
According to this proclamation tax assessment is classified into two categories, tax assessed
on the bases of book of accounts and tax assessed by estimation.
According to the ERCA information, assessment of business profit tax is on estimation and
book of accounts, as it is required by proclamation. The authority sometimes does not accept
the books of accounts kept by business men(Asmanw,2000).

22
 CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Description of study Area

Chiro town revenue and custom Authority is located at eastern part of Ethiopia, Oromia
region western Hararghe zone which 475 km far away from Finefine the capital city of
Ethiopia. The study focused on the problem associated with tax collection problem in Chiro
Town.

A. Economic activities.

In Chiro the major economic activities are mainly tertiary such as trade and shopping goods
which are displayed at market, hotel, restaurant and bar; selling and buying agricultural
products, retail trade of consumable goods like Chat and coffee and products of small scale
industry like wood and metal works.

B, Social services

Education: In the town currently, there are 10 elementary schools, 0ne TTC college, 2
high school, and one preparatory school, two Universities, one technical and vocational
training college and.

Health: Concerning health situation of the town, there are 8 private clinics, 15 pharmacies
that are owned privately, one family Health Guidance clinic and one health post, and one
hospital. The total health coverage of the town is 81%. This increment is from 69% in
2004/05 to 81%in 2007/08.

Housing: generally, the housing condition of the town is in poor condition except some
private residential houses.

23
Road: Generally speaking, the network of the road in the town is poor before four years.
However, after the town is reformed efforts have been made to construct roads. Hence
currently 12 km of gravel and 3km cobble stone road is constructed and 5 km of road become
asphalted. This is one way or another contributes to socio economic development to the town
(Chiro Town Local Government, 2017)

3.2 Research Design

Research design refers the study were planned and conducted the procedures and techniques
employee to answered the problems. This study carried out through descriptive survey.
Descriptive research is appropriate to this study
A research design is a conceptual structure that shows how all the major parts of the research
project come together. Research designs are to provide for the blueprint for the collection,
measurement and analysis of data. In this paper in order to get the target of the specified
objective, the study used the observational study. It means the researcher stand apart from
events taking place or simply observed and recorded. From the observational method the
researcher used descriptive design method which considers both quantitative and qualitative
study ( kothari, 2004:31).

3.3 Type of data

The researcher used mixed approach to examine business income tax problems on category
B” income tax payers in Chiro town. The qualitative data collected in the form of interviews.
On the other hand, quantitative data’s are collected through questionnaires and archival.
Archival means a collection of Historical document or records.

3.4 Source of data

The data’s will be collected by using both primary and secondary data. The primary data is
collected by using questionnaires and interviews from the taxpayers and tax officials while
secondary dates collected from Chiro town Revenue office annual reports.

24
3.5 Method of data collection
The primary data will collected through interviews and questionnaires, which includes both
close and open-ended question for the business income tax payers as well as tax branch
officials. The close-ended questions have yes /no alternatives.

3.6 Target population

The data’s were collected from difference groups such as employees that have long term
experience in engaged in tax authority of revenue in Chiro town and Business income tax
payers in category B". Currently Chiro town revenue office has 113 category B". Business
Income taxpayers and 32 employees.

3.7 Sampling technique

It is difficult to interview and prepare questionnaires for all populations of this study due to
time, financial constraints and other related problems. The researcher will be used sample for
taxpayers while he use census for tax officer. The researcher will be used simple random
sampling method for taxpayers.

3.8 Sample size determination

The target population of the study is category "B" business income tax payers who are
subjected for business income tax payers. In this study, there are 113 business income tax
payers and 32 employees in Chiro Town. In this regard by taking the available resources,
time, budget and geographic distance the researcher selected 85 respondents that 53 are from
taxpayers while 32 are from tax officials those are directly involved in collection of tax
revenue. The tax payers are selected by using 90% confidence level by the following formula.

n=N/1+N (e) ^2

n=113/1+113(0.1) ^2

n =113/2.13

=53.05

Where n= the Sample size

e= level of error
25
 N=Total population (1967)

3.9 Methods of Data Analyses and Interpretation

It is easy to work and available, data processed and analyzed procedures are undertaken by
computer using Microsoft excel program. It helps to minimize errors that occur during data
processing. In data processing categorizing variables was done manually. Describing data
was processed and analyzed through listing the answers for a particular question. To interpret
the data

26
27
CHAPTER FOUR

Time table and Budget Plan

4.1 Time schedule

The proposal will take five month to complete. It will be conduct of the including preparation
of studying proposal, writing literature review, questioners design, collect data, data analysis
and interpretation rule and preparation of final reports of the following table forms

Dec Jan
No Activity Septembe October Nov
r
Time

1 Selecting 

Title

2 Serving 

Literature

3 Writing 

Proposal

4 Proposal 
submissio
n


5 Data 

Collection

28
6 Data 
analysis

And
interpretat
ion


7 Write

Research


8 Submissio
n

Final
research


9 Presentati
on

Of final
research

4.2 budget plan

Throughout the investigation each activities as and shop will be under take according to their
relevance for successfulness of the study. Each activity under associated with current and
market condition of our country, it describes by the as follows

No Material No.unit Unit Total

Requirement requirement Cost Cost

1 Paper 40 3 120

2 Pen 5 20 100

3 Pencil 2 10 20

29
4 Flash 1 600 600

Memory(32GB)

5 Telephone 10 20 200

Calls

6 Transport 20 10 200

7 Typing and 50 5 250

Printing

8 Bending 1 200 200

Cost

9 Storage 32GB Flash 600 600

Device

10 Internet 3GB 300 300

Miscellaneous 1 100 100

Expense

Total 2690

Cost

REFERENCES
Asmanw ,A. (2000).major problem that face during tax collection.

30
Bermard, B.,herber modern public finance fifth edition.

Gebrie, G.(2006).Tax accounting in Ethiopia context first edition

Jemes, J. (2011).Tax contribution for GTP

Kaldor, K. (1980).Purpose of government collect tax.

Misrak, M. (2006).Ethiopian tax accounting principles and practice 2nd edition.

Mithani, M. (2006).Functions and Purpose of taxation.

Mohad, M. (2010).Definitions of tax and Purpose of collection of tax

Parames warren, P. (2005). public finance and taxation.

S.Ksingh, S. (2008). principle of taxation.

Yemen, Y. (1967). statistical analysis book.

Ageazin Teka (2003). Saving and Taxation in Ethiopia. Addis Ababa. Bole P.P. Amsale
Ayalew (2010). Assessment of VAT Implementation: in the case of bole sub city”.
Unpublished BA thesis, St. Mary University.

Asamnew G/silassie (2008). Tax Assessment and Collection Problems of Category “B”
Taxpayers: B case of Chiro Town. Unpublished Masters Thesis, Addis Ababa University.

Derese Getahun, Mintamir Wubeshet, and Nebyou Zewge (2012). Assessment of Income tax
administration. Unpublished BA thesis. St. Mary University.

Ermias Seyoum, Hayat Nuri, and Amsale Tilahun (2011). Study on the Assessment of Tax
Administration Practice in ERCA. Unpublished BA thesis, St. Mary University.

Misrak Tasfaye (2008). Ethiopian Tax Accounting: theory and practice. Addis Ababa.
Ethiopia.

Negarit Gazeta Federal Government of Ethiopia. VAT and Income Tax Proclamation
Number 285/2002, 286/2002. Addis Ababa.

Yohanes Mesfin and Sisay Bogale (2009). Tax law. Prepared under the sponsorship of the
Justice and Legal system Research Institute.

APPENDIX
Part 1. General Information
1. Sex: - Male Female

31
2. Age 18-25 26-35 >35

3. Education status: High school complete Certificate Diploma 1st degree Above degree

4. How long have you been working in Kirkos Sub city branch office? Less than 1 year 1-5
years 5-10 years above 10 Years

5. What is mostly the educational background of tax payers in your catchment area? Illiterate
Elementary High School Tertiary Part 2: Tax Related

6. How do you rate taxpayers understanding about tax? Sufficient Not Sufficient Poor No
Understanding

7. Is tax being collected timely? Yes Sometimes

8. If no, what do you think is the reason may be?

___________________________________________________________________________
___________________________________________
___________________________________________________________________________
__________________________________________
___________________________________________________________________________
___________________________________________

9. How do you evaluate tax payers’ feeling while they registered for VAT? VAT is an
obligation VAT is burden VAT is useful VAT is bad Other, please specify
______________________________________________________

10. Is there any increment in the number of taxpayers from year to year? Yes To some extent
No

11. If your answer is yes for the above question, the reason is Taxpayer’s willingness
Obligation Fear of penalty 64 other, please
specify___________________________________________________

12. What kind of problems do you face during tax assessment and collection? How do you
solve it?
___________________________________________________________________________
___________________________________________________________________
___________________________________________________________________________
___________________________________________________________________

13. When do most tax payers come to declare their tax liability? Early On the middle dates At
the end of the month 1

4. If your answer is at the end of the month Why do you think is the reason and what kind of
inconvenience does it create?
___________________________________________________________________________
___________________________________________

32
___________________________________________________________________________
___________________________________________
___________________________________________________________________________
__________________________________________

15. What kind of support does your office provide for registered tax payers?
___________________________________________________________________________
__________________________________________
___________________________________________________________________________
__________________________________________
___________________________________________________________________________
___________________________________________

16. What is your professional opinion concerning the fairness of the ERCA’s tax assessment
and collection?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
_______________________________________________

17. How do you evaluate the behavior of tax payers concerning tax ethics? Ethical Few are
unethical Mostly Unethical Unethical

18. What do you think the reason may be for the above question, in your opinion?
______________________________________________________________________
___________________________________________________________________________
__________________________________________________________
___________________________________________________________________________
__________________________________________________________

33