FACTORS AFFECTING TAX PAYERS COMPLIANCE WITH THE TAX

SYSTEM: CATEGORY “A” TAX PAYER’S IN ADDIS ABABA

BY
MEAZA WUDENEH

DECEMBER 2018
ADDIS ABABA, ETHIOPIA
FACTORS AFFECTING TAX PAYERS COMPLIANCE WITH THE TAX
SYSTEM: CATEGORY “A” TAX PAYER’S IN ADDIS ABABA

BY
MEAZA WUDENEH

A THESIS SUBMITTED TO ST.MARY'S UNIVERSITY SCHOOL OF

GRADUATE STUDIES IN PARTIAL FULFILLMENT OF THE
REQUIREMENTS FOR THE AWARD OF DEGREE OF
MASTERS OF BUSINESS ADMINSTRATION IN ACCOUNTING AND
FINANCE

DECEMBER 2018
ADDIS ABABA, ETHIOPIA
 ST.MARY’S UNIVERSITY
SCHOOL OF GRADUATE STUDIES

FACTORS AFFECTING TAX PAYERS COMPLIANCE WITH THE TAX

SYSTEM: CATEGORY “A” TAX PAYER’S IN ADDIS ABABA

BY
MEAZA WUDENEH

APPROVED BY THE BOARD OF EXAMINERS

____________________ __________________ __________________

Dean, Graduate Studies Signature Date

____________________ __________________ __________________

Advisor Signature Date

____________________ __________________ __________________

Internal Examiner Signature Date

____________________ __________________ __________________

External Examiner Signature Date
 DECLARATION

I, the undersigned, declare that this thesis is my original work, prepared under the guidance of
Abraham Gebregiorgies (Asst.Prof.). All sources of materials used for the thesis have been duly
acknowledged. I further confirm that the thesis has not been submitted either in part or in full to
any other higher learning institution for the purpose of earning any degree.

_________________________ ______________________
Name Signature& Date

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 ENDORSEMENT

This thesis has been submitted to St. Mary’s University, School of Graduate studies for
examination with my approval as a university advisor.

_________________________ ______________________
Advisor Signature& Date

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 ACKNOWLEDGEMENT

Foremost my thanks go to almighty God for his endless help in giving me strength to accomplish
this research work, and success in my entire life.

I am heartily thankful to my supervisor, Abraham Gebregiorgies (Asst.Prof.) whose

encouragement, guidance and support from the initial to the final level enabled me to develop an
understanding of the subject.

Finally, yet importantly, without the unconditional love and support of my family, I could have
never accomplished this. In this respect, I am deeply grateful to my father Ato Wudeneh Belay,
my mother W/ro Tiruainet Kebede, my beloved sisisters Serkalem Wudeneh and Netsanet
Wudeneh and my brother Mingizem Wudeneh who have been motivating and praying for me.

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 ABSTRACT

The objective of this study is to examine factors affecting category “A” tax payers in Addis
Ababa. A conceptual framework was adopted based on the economic, social, individual and
demographic factors. The study adopted a quantitative research approach to test the hypotheses
and answer research questions. The data collected from 120 Category “A” tax payers in Addis
Ababa through distributing self-administered questionnaires. Date was analyzed using STATA.
Two analysis methods were used, descriptive statistics and ordered probit model to examine
significant determinant factors of tax compliance. The result founds that majority of tax payers
were not compliant. It also revealed that education level, tax audit, government spending, the
influence of referent group, personal financial constraint, awareness on offences and penalty
rate, and tax knowledge are significant factors of tax compliance. Others factors considered
under this study, age, gender, income level, equity and fairness, government policy were found to
be insignificant. Finally the study suggests that the government has to improve public services to
enhance tax compliance behavior. Following this it is mandatory to create awareness about
benefits of paying tax, conducting preventive education to the public and conduct through audit
to discourage non compliance behavior. In addition it would be helpful if further study is
conducted on influence of referral group on compliance behavior since social norms and ethical
values will create different incentives for tax compliance.

Key Words; Tax Compliance, Ordered probit, Category “A” tax payers

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 TABLE OF CONTENTS
Contents
ENDORSEMENT....................................................................................................................................... ii
ACKNOWLEDGEMENT ..........................................................................................................................iii
ABSTRACT ...............................................................................................................................................iv
LIST OF TABLES .................................................................................................................................... viii
LIST OF FIGURES .................................................................................................................................. viii
ACRONYMS............................................................................................................................................ viii
CHAPTER I................................................................................................................................................ 1
Introduction ................................................................................................................................................ 1
1.1 Background of the Study ............................................................................................................. 1
1.2 Statement of the Problem ............................................................................................................ 2
1.3 Research Objective ..................................................................................................................... 5
1.4. Research Questions .......................................................................................................................... 5
1.5. Significance of the Study ................................................................................................................. 5
1.6. Scope of the Study ........................................................................................................................... 6
1.7. Limitations of the Study ................................................................................................................... 6
1.8. Organization of the paper ................................................................................................................. 7
CHAPTER II .............................................................................................................................................. 8
Literature Review ................................................................................................................................... 8
2.1 Definition of Tax............................................................................................................................... 8
2.2 Taxation in Ethiopia .......................................................................................................................... 9
2.2.1 Business Categories in Ethiopia ................................................................................................. 9
2.2.2 Declaration of Business income ............................................................................................... 10
2.3. Tax Compliance .............................................................................................................................. 10
2.3.1. Definition of tax Compliance ................................................................................................... 10
2.3.2. Theoretical Approaches of Tax Compliance ........................................................................... 11
2.4. Determinants of tax compliance ..................................................................................................... 13

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 2.4.1 Tax Audit ................................................................................................................................. 14
2.4.2. Perception of Government Spending ....................................................................................... 15
2.4.3. Perceived equity and fairness of the tax system ..................................................................... 16
2.4.4. Changes on current government policy ................................................................................... 17
2.4.5. Referent group ........................................................................................................................ 18
2.4.6. Personal financial constraint ................................................................................................... 18
2.4.7. Tax Knowledge ....................................................................................................................... 19
2.4.8. Awareness of offences and penality ....................................................................................... 19
2.4.9. Age.......................................................................................................................................... 20
2.4.10. Gender................................................................................................................................... 20
2.4.11. Education .............................................................................................................................. 21
2.4.12. Level of Income and Compliance .......................................................................................... 21
2.5. Empirical Studies and Knowledge Gap .......................................................................................... 22
2.6. Conceptual Framework .................................................................................................................. 25
CHAPTER III ........................................................................................................................................... 26
Research Methodology ............................................................................................................................. 26
3.1 Design of the Study ....................................................................................................................... 26
3.2 Research Approach ......................................................................................................................... 27
3.2.1 Quantitative approach .............................................................................................................. 27
3.2.2 Qualitative approach ................................................................................................................ 28
3.2.3 Mixed method approach ........................................................................................................... 29
3.3 Research Methods Adopted ............................................................................................................ 29
3.4 Source of Data ................................................................................................................................ 29
3.5 Research Instruments ...................................................................................................................... 30
3.6 Date Collection ............................................................................................................................... 30
3.7 Target Population ............................................................................................................................ 31
3.8 Sampling size and Sampling Technique .......................................................................................... 31
3.9 Data analysis ................................................................................................................................... 31
Model Specification .............................................................................................................................. 32
3.10 Variables Definition ...................................................................................................................... 33
3.10.1 Dependant Variable: Tax compliance .................................................................................... 33
3.10.2 Independent Variables ............................................................................................................ 33

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 Changes to current government policies ............................................................................................... 35
CHAPTER IV ........................................................................................................................................... 40
4. Results and Discussion ......................................................................................................................... 40
4.1 Respondents general back ground ................................................................................................... 40
4.2 Descriptive Analysis of Tax Compliance .................................................................................... 43
4.3 Determinants of tax compliance – Ordered probit model ................................................................ 51
CHAPTER V ............................................................................................................................................ 54
5. Conclusion and Recommendation ......................................................................................................... 54
5.1 Conclusion ...................................................................................................................................... 54
5.2 Recommendations ........................................................................................................................... 56
REFERENCES ......................................................................................................................................... 58
ANNEXES ............................................................................................................................................... 64
Annex 1: Taxpayers survey instrument (English version)......................................................................... 64
Annex 2 : Tax payers survey instrument (Amharic Version) .................................................................... 71
Appendices 3: Number of large tax payers in Addis Ababa ........................................................................ 77

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 LIST OF TABLES

Table 1 Variables description and expected associations with the level of tax compliance 39
Table 2 Respondents general back ground – Gender 40
Table 3 Respondents general back ground - Age 41
Table 4 Respondents general back ground- Education Level 42
Table 5 Respondents general back ground - Income Level 42
Table 6 Tax compliance attitude 44
Table 7 Non Compliance attitude 45
Table 8 Demographic factors 46
Table 9 Descriptive statistics of Economic, Social & Individual factors 50
Table 10 Determinants of tax compliance ― Ordered probit regression result 53

LIST OF FIGURES

Figure 1 Factors affecting compliance behaviour 25

ACRONYMS

ERCA Ethiopian Revenues and Customs Authority and tax payers

GDP Gross Domestic Product
GAAP Generally Accepted Accounting Principles

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 CHAPTER I

Introduction

1.1 Background of the Study

Taxation in developing countries is a challenging topic and has attracted increasing attention in
the last two decades. During this period, many problems observed like poor administration,
failing to collect sufficient tax revenues, lack of government and economic stability (Vadde and
Gundarapu, 2012). As stated by Vadde and Gundarapu (2012), Ethiopia, like any other
developing countries, has faced difficulty in raising revenue to the level required for the
promotion of economic growth. The revenue of the Ethiopian government comes from different
sources such as tax, Public borrowing, sales of public assets, and transfer payments (Asaminew,
2011).

Taxes are fundamental to the existence of governments, for the tax revenues help to finance the
bulk of services that governments provide including education, welfare, public safety,
infrastructure and other basic public services (Tilahun andYidersal, 2014). These public
expenditures are meant for public goods and services that are very essential for the development
and wellbeing of the society (Asamnew, 2011). Improved tax compliance amplifies the revenues
available for supporting public services without increasing the current tax burden on compliant
taxpayers (Bird, 1998). Thus, tax compliance has been an important subject of research in a large
number of developed and a number of developing countries (Tilahun andYidersal, 2014). Since
each country has its own approach to managing tax compliance levels and each has different tax
laws and regulations, the factors impacting tax compliance behavior appear to vary among
countries (Palil, 2010).

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To escape from aid dependency and from poverty, it is essential that Ethiopian Revenues and
Customs Authority offices have the capacity to collect taxes efficiently and in ways that are just
and equitable. This requires measures both to enhance internal tax collection and also to reduce
the barriers that are quite simply not fit for their intended purposes, educating the taxpayers,
counseling service to taxpayers on tax rules and procedures and increasing audit coverage
(Gebrewahid, 2012).
Most developing countries are currently dependent more on external financial resources to fund
their development activities. As Akalu (2016) noted, in Ethiopia the tax contribution to GDP
ratio remained consistently low and is relatively shrinking due to low tax compliance.
Taxpayers’ resentment and noncompliance may be due to taxpayers’ perceptions and attitudes on
paying taxes (Yesegat and Fjeldstad, 2016). Hence, dealing with the problems of tax compliance
requires a detailed understanding of the factors affecting the tax payer’s decision either to pay or
evade taxes.

Therefore, the objective of this study is to examine the factors affecting business taxpayers’
compliance on Category “A” tax payers in Addis Ababa. The results of the study are expected to
give an insight for policy makers and tax authority in addition to a reference for further study.

1.2 Statement of the Problem

Ethiopia is low performing country in terms of tax to GDP ratio. It is approximately 13 percent;
this is lower than the average for low-income countries (Yesegat and Fjeldstad, 2016).
According to Akalu(2016), tax payers fails to fulfill income tax requirements and a number of
them face prosecution for failing to pay taxes on time.

Empirical evidence in Kenya shows there has been hostility between the taxpayers and tax
collectors on issues relating to tax compliance and outward resistance from taxpayers for
example the recent protest by taxpayers over implementation of Electronic Tax Register.Hostile
taxpayers behavior implies that given a chance taxpayers would not comply with tax
laws(Lumumba, Migwi and Obara, 2010).Likewise, Ethiopia also facing similar protest by tax

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payers on the year 2016.It has been reported by different Medias about the hostility between
Ethiopian Revenue and Customs Authority and tax payers (ERCA, 2016).

ERCA(2016) noted that, the authority investigates tax evasion by the tax payers frequently and
prosecues those that evade taxes, Investigation thus far points out that the suspects were
involved in issuing illegal receipts and misusing the fisical memory installed on the sales
machines that leads to the destrution of government revenue.

There are anumber of factors leads tax payers to evade taxes. According to Kirchler (2007) and
Loo (2006), tax compliance determinants are classified in four categories based on an
interdisciplinary perspective representing a wider perspective of tax compliance determinants
compared to other researchers. The four categories are 1) economic factors (tax rates, tax audits
and perceptions of government spending); 2) institutional factors (the role of the tax authority,
simplicity of the tax returns and administration and probability of detection); 3) social factors
(ethics and attitude, perceptions of equity and fairness, political affiliation and changes on
current government policy, referent groups); and 4) individual factors (personal financial
constraints, awareness of offences and of penalties). On the other hand, Nicoleta (2011) reveal
that tax compliance determinants classified into Economic (level of actual income, tax rate, fines,
penalties, tax benefits and tax audit probabilities) and Non-economic (attitude towards taxes,
personal, social and national norms and perceived fairness of tax system)factors. Singh (2003)
and Kasipillai, Norhani, and Noor (2003) also identified enumerated factors that influenced tax
compliance behavior such as demographic, income, compliance cost, and tax agents, in addition
to moral or ethical factors .

Emperical studies have been conducted in Ethiopia on determinants of tax compliance focusing
on various factors. Yesegat and Fjeldstad (2016) examine factors that determine business
people’s attitudes towards paying taxes in Ethiopia using ordered probit model founds a
statistically significant relationship between tax-compliance attitude and factors such as the
perception of probability of audit, corruption, satisfaction with the tax administration, peer
influence, gender and education. Akalu (2016) examined determinants of tax compliance
behavior of large corporate taxpayers in Ethiopia with ten potential determinants of tax

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compliance namely; tax compliance cost, business sector, business size, tax liability, business
age, sector, length, and tax attitudinal aspects such as tax complexity, tax rate structure, tax
deterrence sanctions, fairness in the tax rate/ tax system and perceived level of psychological
costs. Additional researches have been conducted on factors affecting tax compliance by Tadesse
and Goitom, (2014) at Bahirdar and Tilahun and Yidersal (2014) at Mekelle cities. Apart from
that their methodologies and findings were not consistent and they recommend further study on
this regard. For example, Tadesse and Goitom, (2014) recommended further study at a national
level to gain a better understanding on compliance determinates in the country. In addition,
Yesegat and Fjeldstad (2016) indicated that, understanding taxpayers’ behavior and taking
corrective measures is important in order to enhance domestic revenue mobilization and sustain
Ethiopia’s recent growth.

As it is mentioned above studies have been conducted in different areas on determinants of tax
compliances, However, tax compliance behavior is a function of culture as a result their findings
were different. Roth, Scholz, & Dryden-Witte (1989, 162) claim that the various cultural
contexts which shape a person’s interpretation of events may assist in influencing his or her
attitude toward tax evasion. They argue that culture is reflected to varying degrees in general
values and specific behavioral norms.

In view of the inadequacies in the institutional framework and insufficient expertise and
resources to monitor the intricacies of the tax compliance problems, developing countries are
particularly vulnerable to tax noncompliance. Ethiopia is one of the developing countries having
many development plans but the government is reporting low tax revenue collection. Results of
Empirical studies on determinants of tax compliance recommended that further studies and
investigations will lead to a better compliance level. In addition, Studies were not conducted on
determinants of tax compliance in the case of category “A” tax payers in Addis Ababa and all
factors of tax compliance were not included in the previous studies .

So based on the gap on this field area the researcher is interested to examine factors of tax
compliance in the case of category “A” tax payers at Addis Ababa and put its own contribution
to alleviate non compliance problem.

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1.3 Research Objective

The General objective of this study is to examine factors affecting tax payers ‘compliance with
the tax system in the case of category “A” tax payers in Addis Ababa. The specific objectives of
this study are

1. To assess compliance level of Category “A” tax payers in Addis Ababa.

2. To examine the perception of tax payer’s tax compliance towards economic,
social, individual and demographic factors of category “A” tax payers in Addis
Ababa.

1.4. Research Questions

Specific research questions under this study are to examine;

1. What is the impact of economic factors on tax payer’s compliance with the tax
system
2. What is the impact of social factors on tax payer’s compliance with the tax system
3. What is the impact of individual factors on tax payer’s compliance with the tax
system
4. What is the impact of demographic factors on tax payer’s compliance with the tax
system

1.5. Significance of the Study

The findings of this study will contribute in enhancing the tax revenue of the government by
identifying factors affecting tax payer’s compliance. From policy makers perspectives, this
information will assist tax authority to develop appropriate strategies in order to minimize tax
compliance problem so as to improve tax collection. ERCA, policy makers and tax collectors

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will get better understanding about factors affecting tax compliance and take the necessary action
to enhance level of compliance. It will also be used as a reference for those who need to conduct
further study in the field.

Last but not least it will fill the gap identified under this study and will enhance the level of tax
revenue which is very important to successfully deliver public services, achieve growth and
development plans of the country.

1.6. Scope of the Study

There are multiple factors that affect tax compliance however this study limited to examine only
twelve factors ( tax audit, government spending, perception on equity and fairness, changes to
government spending, referral group, personal financial constraint, awareness on penalty and
offence, tax knowledge, age, gender, education and income level) which will affect tax payers’
compliance. In addition, the study would be more comprehensive if it embraces all Categories of
tax payers in Addis Ababa. However, large scale study requires much resources, time and man
power. Due to this to make the study manageable, it is delimited to Category “A” tax payers in
Addis Ababa.

1.7. Limitations of the Study

The methodology applied in this research has limitations. Firstly, determinant factors of tax
compliance were analyzed only based on a limited coverage of the Income Tax law. However,
the results might be different if a wider scope of tax rules were used. A wider coverage of tax
law would not be able to be conducted in this study as doing so would make the questionnaire
lengthy and cumbersome and it thus might be potentially disregarded by the respondents and
therefore the response rate might decrease.
Secondly, the compliance measure is a judgment based measure using hypothetical situations. As
tax evasion is a sensitive issue, respondents may not feel comfortable answering the questions
without any control or direct contact. Actual behavior of the subjects may vary from the

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responses given. Acknowledging this constraint, however, it is believed that this is the most
suitable way to predict taxpayers’ compliance behavior, as direct questions might lead
respondents to answer the questions dishonestly and could be potentially embarrassing for
respondents.

1.8. Organization of the paper

The thesis is structured as follows: Chapter two contains a review of the literature of the
definitions of tax, taxation in Ethiopia, tax compliance, and conceptual framework of the study.
The research design and methodology are presented in chapter three. Specifically, this chapter
presents sampling techniques, data sources, data collection instruments and research model.
Chapter four presents the results of survey subsequently followed by an analysis of the results of
the different methods. Finally, chapter five presented conclusion and recommendations.

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 CHAPTER II

Literature Review

2.1 Definition of Tax

According to Bhatia (1996), “a tax is a liability imposed up on the tax assesses who may be
individuals, groups of individuals, or other legal entities.” It is a liability to pay an amount on
account of the fact that the tax assesses have income of a minimum amount and from certain
tangible or intangible property, or that they carry on certain economic activities which have been
for taxation. Tax is defined as ‘a compulsory levy, imposed by government or other tax raising
body, on income, expenditure, or capital assets, for which the taxpayer receives nothing specific
in return’ (Lymer and Oats, 2009).

A tax is a compulsory levy and those who are taxed have to pay the sums irrespective of any
direct corresponding return of services or goods by the government. Government needs financial
resources to act as a government and play a role that is expected from it by the public (James and
Nobes, 2000).

Taxes are fundamental to the existence of governments, for the tax revenues help to finance the
bulk of services that governments provide including education, welfare, public safety,
infrastructure and other basic public services. Improved tax compliance amplifies the revenues
available for supporting public services without increasing the current tax burden on compliant
taxpayers (Bird & Casanegra, 1992).

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The main objective of imposing certain taxes on the public is to generate revenues for the
government for public expenditure (Singh, 1999; Shanmugam, 2003; Lymer and Oats, 2009).
However, there are other functions of taxes as suggested by Lymer and Oats (2009) including to
reduce inequalities through a policy of redistribution of income and wealth so that income gap
between the rich and the poor is not as significant. Tax systems are also designed for social
purposes, such as discouraging certain activities which are considered undesirable and protecting
the environment. For instance, the excise taxes on alcohol and tobacco are (at least partly)
exercised to decrease consumption and thus encourage a healthier lifestyle (Lymer and Oats,
2009).

2.2 Taxation in Ethiopia

The 1995 Constitution of the Federal Democratic Republic of Ethiopia (FDRE) classifies
taxation power into three: as those assigned exclusively to the federal government, regional
states, and concurrently to both regional and federal governments. As per the constitution,
regional states have the power to levy and collect taxes from sources assigned to them. Ethiopian
Revenue and Customs Authority (ERCA) is responsible for administration of revenues that
belong exclusively to the federal government and those concurrently owned by both. Regional
revenue authorities are entrusted with the responsibility of administering taxes assigned to them
(World Bank Group, 2016)

2.2.1 Business Categories in Ethiopia

The law has classified the business income tax payers in to three major categories with respect to
their legal personality and gross income. According to Federal Income tax proclamation No.
976/2016;
1) Category “A” tax payer being
a. A body; or
b. Any person having an annual gross income of birr 1,000,000 or more

9
 2) Category “B” tax payers being a person, other that a body , having an annual gross
income of birr 500,000 or more but less than 1000,000
3) Category “C” tax payer being a person other than a body having annual gross income of
less than birr 500,000

According to this legislation, there are four schedules of income, namely: income from
employment (schedule A), income from rental of buildings (schedule B), business profit
(Schedule C) and other income (schedule D). A further look at the income tax under schedule C
(business profit tax) shows that the tax is imposed on profit obtained from an entrepreneurial
activity. It is chargeable at rates ranging from 10 to 35 percent if the taxpayer an individual
(unincorporated entity) and 30 percent on profits earned by a body (an incorporated entity)
(World Bank Group, 2016).

2.2.2 Declaration of Business income

Categories A and B the tax is assessed based on the profit and loss statement prepared in
accordance with the Generally Accepted Accounting Principles (GAAP) subject to the specific
rules as provided in the income tax legislation (World Bank Group, 2016).

In accordance with income tax proclamation no 979/2016, category “A” tax payers shall prepare
and submit balance sheet and profit and loss statement within 4 month from the end of the tax
payers tax year. Category “B” tax payers within 2 months from the tax payers’ tax years.
Category “C” tax payers within 1 month from the tax payers tax year.

2.3. Tax Compliance

2.3.1. Definition of tax Compliance

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According to James and Alley (2002), tax compliance refers to the willingness of individuals to
act in accordance with both the spirit and the letter of the tax law and administration without the
application of enforcement activity.

Tax compliance is defined as the accurate reporting of income and claiming of expenses in
accordance with stipulated tax laws. Thus, the failure of corporations to accurately report or pay
tax is considered corporate tax non-compliance (Noor, Jeyapalan and Uchenna, 2014).

A wider definition of tax compliance, tax compliance should be defined as taxpayers’ ability and
willingness to comply with tax laws which are determined by ethics, legal environment and other
situational factors at a particular time and place (Kirchler, 2007)
Tax compliance, simply put, means adherence to tax reporting requirements; that is, that the
taxpayer files all required tax returns at the proper time and that the returns accurately report tax
liability in accordance with the tax laws, regulations, and court decisions applicable at the time
the return is filed (Roth, Scholz and Witte 1989)

2.3.2. Theoretical Approaches of Tax Compliance

As Devos (2014) noted the main theoretical approaches to tax compliance have commonly been
divided into the ‘economic deterrence’ approach, and the wider ‘behavioral’ approach which
incorporates both social and fiscal psychological approaches.

There are two broad approaches which researchers have used to explain evasion behavior,
namely, Fiscal psychology Models and economic deterrence models (Trivedi & Shehata, 2005).
An economic based theory emphasizes incentives where as psychology based theories emphasize
attitude (Trivedi & Shehata, 2005).

James, Hasseldine, Hite and Toumi (2001) reported that there are two main approaches to
understand tax compliance issues: the economic approach and behavioral approach. The
economic approach is premised on the concept of economic rationality, while the behavioral
approach applies concepts from disciplines such as psychology and sociology.

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2.3.2.1 Economic Based Theories

The economic deterrence theory states that taxpayers’ behavior is influenced by factors such as
the tax rate determining the benefits of evasion, and the probability of detection and penalties for
fraud which determine the costs (Sandmo, 1972).

Economic factors which is also referred as deterrence theory (tax rates, tax audits and
perceptions of government spending) in relation to tax compliance refer to actions which are
associated with the costs and benefits of performing the actions (Loo, 2006).

According to Trivedi and Shehata (2005), economic theories suggest that taxpayers “play the
audit lottery,” i.e. they make calculations of the economic consequences of different compliant
alternative, such as whether or not to evade tax; the probability of detection and consequences
thereof, and choose the alternative which maximizes their expected after tax- return/profit
(possibly after adjustment for the desired level of risk).

2.3.2.2. Psychology Theories

The social/fiscal psychological model focuses on psychological variables which include moral
values and the perception of fairness of the tax system and the tax authorities (Devos, 2014).
As Yesegat and Fjeldstad (2016) noted, the social psychology model, unlike the economic
deterrence model, pertains to the relationship between tax compliance and social interactions and
conventions. An aspect of this theory says that perceptions and attitudes towards a tax system
and compliance behavior may be affected by the behavior of an individual’s peer groups. The
compliance behavior of peer groups like friends, neighbors and relatives is expected to impact on
the perceptions and compliance decisions of others. More specifically, noncompliant decisions
by peer groups may reduce the level of tax compliance by others.

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According to Trivedi and Shehata (2005) Psychology theories of tax compliance assume that
psychological factors including moral and ethical concerns are also important to tax payers and
tax payers may complay even when the risk of audit is low.As it is noted their Psychology
studies deemphasizes audits and penalities and insteed foucs on changing individual attitudes
towards tax system.

Compliance is also affected by demographic factors. For instance, there may be differences in
perception about taxation between age groups, urban–rural location, gender, education levels,
occupation, ethnicity, religion, and so on (Fjeldstad et al. 2012).

The classifications of factors as identified by scholars include the social, economic, and
psychological factors (Jackson & Millron, 1986; Fischer, Wartick & Mark, 1992; Fischer, 1993;
Alm, 1999; Kirchler, 2007; Devos, 2008). To resolve the issues of non-compliance of tax,
appreciating the factors that determine tax compliance is of paramount importance towards
influencing individual tax payer’s decision to comply with the provision of the tax laws. The
early researches on tax compliance were more of economic factors inclined and which they paid
attention to tax rate, penalty and detection probability as the main determinants of the tax payers’
compliance behavior (Allingham & Sandmo, 1972).

Recent studies have identified some new factors that have significant influence on the tax payers’
decision making; and these new factors were the social and psychological factors, which the
following studies were known to incorporate the identified factors (Jackson & Millron, 1986;
Fischer, 1993; Wenzel, 2004; Jabbar, 2009).

2.4. Determinants of tax compliance

Tax compliance determinants from a social perspective relates to taxpayers’ willingness to

comply with tax laws in response to other people’s behavior and their social environment (i.e.
the government, friends and family members) (Torgler, 2007). On the other hand, Kirchler
(2007) suggested that social factors should be viewed in a broader sense than Torgler’s
perspective; this includes the psychology of the taxpayers.

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Jackson and Milliron (1986), in their earlier review of tax compliance studies undertaken
identified fourteen key variables of compliance behavior, which include: age; gender; education;
income level; income source; occupation; peer influence; ethics; fairness; complexity; tax
authority contact; sanctions; probability of detection; and tax rates.

Previous studies revealed that probability of being audited; perception on government spending;
perception on equity and fairness of the tax system; penalties; financial constraint; changes on
current government policies; and referral group (friends, relatives etc.) are also important factors
in assessing tax compliance behavior (Palil,2010; Troutman,1993; Chan et al, 2000).

According to Kirchler (2007) and Loo (2006), tax compliance determinants are classified in four
categories based on an interdisciplinary perspective representing a wider perspective of tax
compliance determinants compared to other researchers. The four categories are 1) economic
factors (tax rates, tax audits and perceptions of government spending); 2) institutional factors
(the role of the tax authority, simplicity of the tax returns and administration and probability of
detection); 3) social factors (ethics and attitude, perceptions of equity and fairness, political
affiliation and changes on current government policy, referent groups); and 4) individual factors
(personal financial constraints, awareness of offences and penalties).

2.4.1 Tax Audit

Audit rates and the thoroughness of the audits could encourage taxpayers to be more prudent in
completing their tax returns, report all income and claim the correct deductions to ascertain their
tax liability. In contrast, taxpayers who have never been audited might be tempted to under
report their actual income and claim false deductions (Mohd et al., (2011).

Jackson and Jaouen, (1989), Shanmugam, (2003) , Dubin,( 2004) in their findings suggest that in
self assessment systems, tax audits can play an important role and their central role is to increase
voluntary compliance

14
 Friedland et al., (1978) found that a higher (random) audit rate leads to more compliance.
However Alm et al., (1992) find that this impact appears to be small and nonlinear, so that the
deterrent effect of a higher audit rate eventually disappears. They also find that many subjects
appear to substantially overweight the probability of an audit, so that there is far more
compliance than is predicted by expected theory.

Previous studies have evidenced that tax audits play an important role in increasing voluntary
compliance. For instance Butler (1993) and Witte and Woodbury (198) found that audits rates
and the thoroughness of the audits could potentially encourage taxpayers to be more prudent in
completing their tax returns.

The perception of audit probability was found to have a statistically significant association with
compliance attitude (Yesegat and Fjeldstad, 2016).

Currently, the Government of Ethiopia is taking a number of measures which are expected to
enhance the administration capacity of revenue authorities, including continued capacity-
building programmes in various areas including audit. Measures are also being taken against tax
officials who are suspected of being corrupt. These and similar measures are likely to contribute
to the observed perception of taxpayers on tax audit (Yesegat and Fjeldstad, 2016).

2.4.2. Perception of Government Spending

Roberts, Hite and Bradley (1994) indicated that if the government is wisely spending the national
revenue, for example for basic facilities like education, health and safety and public
transportation, it is likely that voluntary compliance will increase. In contrast, if taxpayers
perceive that the government is spending too much on something considered unnecessary or
unbeneficial to them then taxpayers will feel betrayed and attempt to evade.

According to the political legitimacy theory, tax compliance is influencedby the extent that
citizen trust their government (Tayler 2006;Kirchler.et.al.2008; Fauvelle&Aymar1999).As per
these studies legitimacy could be described as belief or trust in the authorities, institutions, and
social arrangements to be appropriate, proper, just and work for the common good.

15
2.4.3. Perceived equity and fairness of the tax system

Fairness is another factor that can affect tax compliance. An unfair tax system could enhance the
incentives to rationalize cheating. A number of survey research studies have reported positive
correlations between perceptions of fiscal inequity and tax evasion (Spicer, 1974).

Spicer M. and Becker, L, (1980), in experimental research found that the amount of tax evaded
increases when people are told that their tax burden is higher than that of the rest of the group.
Nevertheless, there is no agreement regarding the empirical evidence on fairness.
One of the main principles of the taxation system design is equity or fairness, which can be
perceived via three dimensional views – horizontal equity (people with the same income or
wealth brackets should pay the same amount of taxes), vertical equity (taxes paid increase with
the amount of the tax base) and Exchange Equity (Wallschultzky 1984; Richardson, 2006). The
perceived fairness of the tax system also has an influence on the inclination towards tax evasion
(Jackson and Milliron, 1986; Richardson, 2008).
Alm J. , (1992) suggest that compliance occurs because some individuals value the public goods
as their tax finance. If there is an increase in the amount individuals receive from a given tax
payment, their compliance rate increases. Individuals then pay taxes to receive government
services even when there is no chance to be detected or punished when evading. Cowell (1992),
shows that taxpayer will reduce tax evasion when perceiving equity. Falkinger (1995) has
pointed out concrete economic situations in which individuals reduce evasion if the socio-
economic system is considered to be relatively equal and fair. The fairness of a system in which
a person lives may result in bad reputation for evaders if people consider evasion to be blame-
worthy, so that risk aversion will increase with perceived equity.

Wenzel (2003) suggested three areas of fairness from the taxpayers’ point of view (social
psychology): namely distributive justice which refers to the exchange of resources, i.e. benefit
and cost; procedural justice which refers to the process of resource distribution; and retributive
justice which refers to the appropriateness of sanctions when norm-breaking, occurs.

In distributive justice, an individual is concerned about the fairness of their actions and wants to
be treated in relation to his merits, efforts and needs (Kirchler et. al., 2008).If he feels that his tax

16
burden is higher than other people within the same income group, his tax compliance probably
decreases more widely at group levels; taxpayers want a fair treatment of their group relative to
other income groups

With regard to procedural justice, the main elements for perceived fairness are neutrality of
procedures used, trustworthiness of the tax authorities, and the polite, dignified, and respectful
treatment of taxpayers as individuals or groups (Tyler and Lind, 1992).

On the other hand, Retributive justice, unreasonable gand intrusive audits and unfair penalties
lead to stressful and dissatisfied taxpayers (Spicer and Lundsted, 1976). Unfavorable retributive
justice perceptions could lead to non compliant behaviour and consequently increase tax evasion
and inflate the tax gap.

Similarly Spicer M. W., (1980) examined the relationship between fiscal inequity and tax
evasion. The study revealed that high income groups (“high-tax group”) had the highest
percentage of tax evasion cases compared to other groups (“low tax and medium tax group”).
They suggested that tax evasion increases when taxpayers perceive fiscal inequity (equity)
because they feel to be victimized by an imbalance of income redistributions. The perceived
fairness of the tax system also has an influence on the inclination towards tax evasion
(Richardson, 2008).

2.4.4. Changes on current government policy

Political stability and the ruling government party in a country might play a significant role in
determining tax evasion behaviour. For instance, if an individual favours the current ruling
government party, he might choose to be compliant because he believes that the government is
trusted, efficient and equitable. Conversely, a taxpayer from the opposition party might be more
noncompliant because he perceives that the government is not on his side. Hasseldine and Hite
(2003) examined two potential influences on taxpaye attitudes, namely political party affiliation
and attribute framing. Since tax attitudes may be influenced by one’s political preferences.
Hasseldine and Hite (2003) concluded that firstly, political party affiliation has a significant
impact on taxpayers’ behaviour; secondly, the more closely identified the tax provision is to a

17
specific party, the more favorably it will be received by members of that party relative to
taxpayers with other political party affiliations.

2.4.5. Referent group

Researches on as tax compliance have evidenced that the influence of friends and family
members in making decisions may be important. Decisions either to evade or not to evade tax
sometimes are influenced by family members or friends (i.e. according to Allingham and
Sandmo, (1972) although the extent of the influence was not clearly stated in this research.
Clotfelter (1983) also claimed that referent groups play a significant role in evasion although it
was also not clearly discussed which was stronger (family members or friends) in this paper.
Hasseldine, Kaplan and Fuller (1994) report that the numbers of evaders known to the
respondent made the largest contribution to the model of under reporting income which means
that the more respondents know the evaders, the more under reporting of income may happen.

2.4.6. Personal financial constraint

Mohani and Sheehan (2004) and Mohani (2001) reported that Personal financial constraints are
believed to have an impact on tax evasion as financial distress faced by an individual may
encourage him to prioritise what has to be paid first as basic survival needs (foods, clothing,
housing etc.) or where immediate demand on limited income is enforced (i.e perceived threat of
action from money lenders etc.) rather than tax liabilities.Accorging to the studies people who
face personal financial problems are likely to be more prone to evade tax when compared to
people in less financial distress.
Conversely, however Vogel (1974) and Warneryd and Walerud (1982) illustrate that people with
no financial distress also exercise tax evasion and surprisingly, the level of evasion they exhibit
can be more serious than people in financial distress. Vogel (1974) presumed that this situation is
related to economic status rather than personal conditions.

18
2.4.7. Tax Knowledge

The researches illustrated the importance of tax knowledge in a tax system for example ; Eriksen
and Fallan (1996) ,Mohamad Ali et. al., (2007), Singh, (2003 ). Eriksen and Fallan (1996)
claimed that ‘knowledge about tax law is assumed to be important for preferences and attitudes
towards taxation.
Mohamad et al (2007) examine the influence of tax knowledge on compliance behaviour by
dividing the tax knowledge in to groups those are, knowledge explicitly focused at possible
opportunities to evade tax and knowledge gained through formal education. Study result
indicated that, regarding the rules and regulation of the taxation, the level of education received
by taxpayer’ is an important factor that contributes to the general understanding.
Mohd (2010) presents taxation knowledge is necessary to increase public awareness especially in
areas concerning taxation laws, the role of tax in national development, and especially to explain
how and where the money collected is spent by the government.
Eriksen and Fallan (1996) suggested that a taxpayer should be given better tax knowledge to
improve perceptions of fairness, tax ethics and attitudes to others tax evasion and thus suggesting
that a successful means of preventing tax evasion is to provide more tax knowledge to larger
segment of society in order to improve tax .

2.4.8. Awareness of offences and penality

A theoretical economic model introduced by Allingham and Sandmo (1972) has clearly indicated
that penalties as well as audit probability have an impact on tax compliance.
Various arguments arise regarding the impact of fines and penalties on tax compliance to explain
this lack of a clear impact relationship. For example, fines that are too low could be perceived as
an indicator that the authorities are weak and unable to control non-compliant taxpayers, thereby
undermining trust among honest taxpayers and leading to a lack of encouragement to comply
with tax law.Paul & Osebe (2014) employed in their study that fines and penalties play a vital
role in improving tax compliance. Specifically, for a tax system with fair tax rates of fines and
penalties, tax compliance is likely to be improved.

19
Higher fines simply make evading taxes more hazardous for taxpayers and should deter from
evasion. Empirically the deterrent effect of fines could not always be supported. The observed
effects were weaker than expected and some studies even suggest that an increase of penalties
can have undesirable effect and result in more tax avoidance (Kirchler et al, 2007). Virman
(1989) indicated that penalty rates had a positive association with evasion, meaning that higher
rates did indeed encourage people to cheat.
Fines and and audit rates may substitute each other due to their multiplicative linkage as long as
neither of them is set to zero (Kirchler et.al 2007). The most extreme penalties will have no
effect, if it is common knowledge that audits virtually do not occur. The increasing tax avoidance
and tax resistance due to an increase of fines puts into question how fines should be assessed to
be effective. On the one hand fines should be high enough to decrease the expected value of tax
evasion and to assure its deterrent effect on tax payers. On the other hand, if fines are too high,
the tax system would be perceived as unjust and unfair and taxpayers would use any possibility
to legally avoid taxes (Kirchler et al., 2007).

2.4.9. Age

Demographic factors such as age have long been studied by researchers; however the findings
from different studies remain inconclusive. For example Tittle (1980), Warneryd and Walerud
(1982) and Wahlund (1982) posit a negative association i.e older people are less compliant. In
contrast, Clotfelter (1983), Dubin and Wilde (1986) and Beron et. al. (1992) argued that age was
positively related with compliance. However, there have been a significant number of studies
that have found no relationship between age and tax compliance (Spicer and Lundstedt (1976),
Spicer and Becker (1980) and Porcano (1988)).

2.4.10. Gender

The association between gender and tax compliance has received some attention in prior
literature however, findings vary across studies. Some studies found that males are more

20
compliant but others found the other way around. Vogel (1974), Kinsey and Grasmick ( 1993),
and Tittle (1980) founds in their study that males are more compliant while Friedland, et.al.
(1978), Hasseldine and Hit (2003) and Mohamad Ali (2007) explained that females are more
compliant than males.
The impact of gender on tax compliance is inconsistent, and recent studies by Richardson (2008)
continue to find no association between gender and compliance.

2.4.11. Education

Chan et. al.(2000) postulate that greater education is directly linked to a likelihood of
compliance. They argue that educated taxpayers may be aware of non compliance opportunities,
but their potentially better understanding of the tax system and their higher level of moral
development promotes a more favorable taxpayer attitude and therefore greater compliance.
Mohani (2001) suggested that one of the measures to increase voluntary compliance is by
assuring that taxpayers have a certain level of qualifications, ability and confidence to exercise
their tax responsibility. In contrast, the most recent study, by Richardson (2008) also revealed
that there is a negative association between education and compliance.

2.4.12. Level of Income and Compliance

Predictions of the standard economic model in regards to income effects on tax compliance are
ambiguous. Though wealthier citizens are more likely to evade taxes since the level of absolute
risk aversion decreases with income, it is not clear if severity of evasion is an increasing or
decreasing function of income (Kirchler et al., 2007).Once taxpayers have decided to evade
taxes, the degree of underreporting depends on the relative risk aversion. The relation of income
and relative risk aversion is not unique and consequently Allingham and Sandom (1972)
conclude, that when actual income varies, the fraction of income declared increases, stays
constant or decreases accordingly as relative risk aversion is an increasing, constant or
decreasing function of income‟

21
Chau and Leung (2009) also reveal the respondents in the lower income group tend to have a
lower proportion of tax compliance by under-reporting income and by over-claiming expenses
than their counter parts in the higher income group.

Jackson B. R (1986), found that income level has a mixed and unclear impact on compliance,
and some later research agrees with that statement. Although (Jackson B. R., 1986) did not
clearly mention the reason, it is presumed that endogenous tax regulations among countries
might contribute to inconsistent findings. For example, progressive tax rates might encourage the
higher income group to evade rather than the lower income group because their (higher income
group) tax rates and taxable income are high, thus, making the tax liabilities much higher than
lower income group. In a country where income redistribution is not satisfying, the higher
income group tends to evade more (Mohani A. 2001) because the high income earner might feel
betrayed and unfairly treated.

2.5. Empirical Studies and Knowledge Gap

Fjeldstad et.al (2012) in their study explore factors that determine citizens’ tax compliance
behavior in Kenya, Tanzania, Uganda and South Africa using survey method for data collection.
Results from the probit regression provide that individuals are more likely to express tax
compliant attitude if they perceive that enforcement makes evasion more difficult in South
Africa and Kenya. This is in line with the prescription of the standard economic theory of
deterrence. The analysis also finds evidence that those who are more satisfied with public service
provision are more likely to support the government’s right to tax in all the four countries,
supporting certain elements of the fiscal exchange theory. However, the link between tax
compliance attitude and public service provision depends on the specific service in question and
differs between countries.

Noor sharoja, (2014) conducted a research on determinants of taxpayer compliance behavior

with respect to corporate income tax reporting requirements in Malaysia. A researcher
administered questionnaire survey method for data collection. The findings of this study reveal
that business age, tax liability and tax complexity consistently influence the likelihood of tax

22
non-compliance behavior in the areas of under-reporting income, over-claiming expenses and
overall non-compliance. Nonetheless, the tax compliance costs have an insignificant relationship
with the non-compliance behavior of corporate taxpayers.

Taddese and Goitom ((2014) studied Factors Influencing taxpayers’ compliance with the tax
system in Mekelle City, Ethiopia. The study used a cross-sectional survey method of research
design. Given the scaled ranking information of the dependent variable (tax compliance), an
ordered probit was applied to examine determinants of tax compliance in Mekelle city, Ethiopia.
The study results from the survey conducted in Mekelle using 102 respondents indicate that tax
compliance was influenced by the probability of being audited, financial constraints, and changes
in government policy. The result also revealed that other variables such as perception of
government spending, perception of equity and fairness, penalties, roles of the tax authority and
tax knowledge were not significantly correlated with tax compliance at the time of this study.

Tilahun and Yidersal (2014) investigated determinants of Tax Compliance Behavior in Ethiopia:
using one-way ANOVA, two samples and one sample T- test, this study examined the
determinants of tax compliance behavior in Ethiopia particularly in Bahir Dar city
administration. The data was collected using structured questionnaire. The results revealed that
perception on government spending; perception on equity and fairness of the tax system;
penalties; personal financial constraint; changes on current government policies; and referral
group (friends, relatives etc.) are factors that significantly affect tax compliance behavior.
However, gender and probability of being audited have no significant impact on tax compliance
behavior. Finally, the findings show that older people will comply less if there is no equity and
fairness in the tax system and any changes in government policy on fuel prices, electricity and
water rates are not favorable.

Yesegat and Fjeldstad, (2016) examined factors that determine business people’s attitudes
towards paying taxes in Ethiopia. Based on data obtained from a survey of business taxpayers in
Addis Ababa, the study finds a statistically significant relation between tax-compliance attitude
and factors such as the perception of probability of audit, corruption, satisfaction with the tax
administration, peer influence, gender and education. The study emphasizes the need for better

23
understanding of why taxpayers are dissatisfied with the tax administration, including
perceptions of corrupt practices.

Akalu (2016) conducted a survey on determinants of tax compliance behavior of large corporate
taxpayers in Ethiopia. The data required for this research was collected from both primary and
secondary sources. Primary data were collected directly from tax payers through researcher-
administered questionnaire survey method and focus group discussion. Secondary data collected
from relevant legislation enacted in connection with the topic, tax journals, as well as published
articles. In addition, the researcher also applied his personal knowledge he gained from working
in ERCA. The results revealed that business size, business age and tax psychological cost
consistently influence the likelihood of tax non-compliance behavior in the areas of under-
reporting income, over-claiming expenses and overall non-compliance. Nonetheless, business
sector, tax complexity, fairness in the tax rate/ tax system and tax deterrence sanctions have an
insignificant relationship with the non-compliance behavior of corporate taxpayers. Tax liability,
compliance cost and tax rate structure are significant determinants in at least one type of non-
compliance behavior.

Studies have been conducted in different parts of Ethiopia to asses determinants of tax
compliance targeting a specific group of tax payers .However, the models used and results of
those studies were not consistent which a researcher consider it as a gap in this field. Culture is
considered to be a powerful environmental factor that affects the taxpayer’s compliance.
Different social norms and ethical values will create different incentives for tax compliance
(Chau and Leung, 2009).

A study by Yesegat and Fjeldstad, (2016) on business people’s attitudes towards paying taxes in
Ethiopia incorporate government services; perception of tax rates, penalty and audit; perception
of others/peer compliance; perception of government treatment of taxpayers (perception of
discrimination by the tax administration); trust in the administration; satisfaction with the tax
administrative. However, this particular study gives emphasis on institutional factors rather than
individual factors.

24
In addition, as it is compared to studies in other developing countries, researches on determinants
of tax compliance are very limited in Ethiopia which needs further investigation to eliminate
noncompliance behavior.

2.6. Conceptual Framework

This study assumes that the factors under discussion have a direct influence on tax compliance
among Category A tax payers in Addis Ababa. The relationship between the dependent and the
independent variables in the conceptual framework is illustrated bellow based on the literature .

Figure 1 Factors affecting compliance behaviour

Source: Kirchler (2007) and Loo (2006)

25
 CHAPTER III

Research Methodology

The purpose of this chapter is to present the underlying principles of research methodology and

the choice of the appropriate research method for the thesis. The chapter arranged as follows;

Section 3.1 design of the study and Section 3.2 presents the research approaches. This is

followed by the philosophy of quantitative (section 3.2.1), qualitative (section 3.2.2), and mixed

methods (along with discussion of the choice of the appropriate method for the current research)

(section 3.2.3) approaches. Then, the research methods adopted in this study in section 3.3.

3.1 Design of the Study

The study employed based on explanatory approach using survey method which helps the

researcher to gather a large variety of data related to the problem under consideration.

Explanatory research is conducted in order to identify the extent and nature of cause and effect

relationships between variables. It identifies reasons behind a wide range of processes, as well as

assessing the impacts of change on existing norms, processes (Zikmund, 2012). Surveys are used

when researcher want to gather data from a large number of people and when it is impractical to

meet them all face (Noor sharoja, 2014). The survey strategy allows you to collect quantitative

data which you can analyze quantitatively using descriptive and inferential statistics. In addition,

the data collected using a survey strategy can be used to suggest possible reasons for particular

relationships between variables and to produce models of these relationships (Saunders et al.,

26
2012).Therefore, Survey was appropriate for this study to examine factors affecting tax

compliance of Category “A” tax payers in Addis Ababa.

3.2 Research Approach

There are three approaches available for researchers to design their research methodology

namely quantitative, qualitative and mixed methods research approaches (Creswell, 2003).

The inquiry paradigm used in research is generally influenced by a researchers ontological and

epistemological beliefs. These beliefs represent how the researcher views and seeks to

understand the world. The two extremely contradicting paradigms are positivism and

constructivism. Thus, positivist researchers normally adopt quantitative methods and

constructivist researchers adopt qualitative methods. The other paradigm is combination of

positivism and constructivism (that is mixed method) (McKerchar, 2010).

3.2.1 Quantitative approach

In this approach, an investigator relies on numerical data (Creswell, 2009). Researcher uses

postpositive claims for developing knowledge, such as cause and effect thinking, reduction to

specific variables, hypotheses and questions, use of measurement and observation, and the test of

theories.

Quantitative research is the systematic and scientific investigation of quantitative properties and

phenomena and their relationship. Creswell (2009) noted that quantitative research is one in

which the investigator primarily uses positivist claims for developing knowledge. The positivism

27
approach views that the world as objective realism and therefore suggested that knowledge

created by deductive reasoning where by a precise and systematic process is adopted

(McKerchar, 2010).

The main advantage of this approach is that numbers are easy to work with data are readily

collected, coded, summarized, and analyzed. In addition, data collection is relatively quick and

less time consuming and free from bias. But, in this approach researchers know much about the

collective or average experience of research participants, and focus on theory or hypothesis

testing rather than on theory or hypothesis generation (Creswell 2009). In view of this,

quantitative approach is best for examining factors that influence tax compliance of Category

“A” tax payers.

3.2.2 Qualitative approach

Qualitative research, is an inquiry process of understanding where the researcher develops a

complex, holistic picture, analyzes words, reports detailed views of informants, and conducts the

study in a natural setting (Creswell, 2009). In this approach, the researcher makes knowledge

claims based on the constructivist perspectives (Creswell 2009).This has advantage of design

results mainly from its flexibility to follow unexpected ideas during research and to explore

processes effectively. However, knowledge produced may not be generalized to other people or

other settings and it is also difficult to make quantitative predictions and to test hypotheses and

theories. Leedy and ormrod (2005) explains that a study categorized as qualitative, if its purpose

is primarily to describe a situation, phenomenon, problem, or event. i.e., the information is

gathered using variables measured on nominal or ordinal scales (that is, qualitative measurement

scales); and an analysis is done to establish the variation in the situation, phenomenon or

28
problem without quantifying it. In addition qualitative approach views as the world based on

researchers interpretation, which may influenced by the researcher own views, beliefs,

experiences, and existing knowledge (McKerchar, 2010).

3.2.3 Mixed method approach

The third research methods approach is mixed method approach in which the researchers build
the knowledge on pragmatic grounds (Creswell, 2003). A major tenet of pragmatism is that
quantitative and qualitative methods are compatible which can help better understanding of the
research problem.

Other inquiry paradigms lie between positivism, and constructivism known as critical realism
and pragmatism. These two paradigms generally combine both orientations of positivism
(quantitative) and constructivism (qualitative) research approach. Researchers adopting these
paradigms view the world as complex and therefore difficult to understand simply through
empirical realism (McKerchar, 2010).

3.3 Research Methods Adopted

Every research requires a research design that is carefully tailored to the exact needs of the
problem under investigation (Creswell, 2009). If the study relies on numerical data and deals
with cause and effect relation of variables quantitative methods are appropriate (Creswell, 2003).
Accordingly, this study used quantitative design, since the study is examining cause and effect
relationship between variables.

3.4 Source of Data

The adoption of the survey instrument would helpful to represents a wide target population, and
generates numerical data as well as to gather information that would not available from archive

29
records. Babbie (1990) noted that the survey as the preferred type of data collection procedure
for study because it is used to generalize from a sample to a population.

Primary data is preferred because it is original and relevant for the topic especially when the
researcher is interested in primary data about demographic characteristics,
attitude/opinion/interest, awareness/knowledge, intentions, motivation and behavior (Noor
Sharoja, 2014). Therefore the data required for this research was collected mainly from primary
sources through self-administered questionnaire.

3.5 Research Instruments

The primary data was collected through structured questionnaire. Questionnaires were
dispatched to volunteer tax payers face to face. Questions were well structured Likert-type items
which used to assess factors affecting the tax compliance of category “A” taxpayers in Addis
Ababa. The questions were adapted from Noor Sharoja, (2014) which is validity-tested in
previous studies with some modifications that suits to this study.

3.6 Date Collection

Data collection for this study utilized the researcher-administered questionnaire survey method.
This method of data collection was employed as a measure to obtain more reliable survey
responses with a possibility of achieving a higher response rate, thus improving the validity of
this study. In most cases, questionnaires were personally distributed to ascertain the person’s
willingness to participate in this study. This arrangement also provided the opportunity for
researchers to explain verbally on the importance of the study. Researchers might cautiously
provide some clarifications and/or examples, when required, with respect to certain difficult,
sensitive or important questions. To avoid bias in this study, however, the researchers only got
involved when respondents asked for clarification.

30
3.7 Target Population

The target population of the study were Category “A” tax payers in Addis Ababa for the fiscal
year 2016/17. A population is a large pool of cases of elements from which the researcher draws
a sample and results generalized from the drawn sample (Leedy & Ormrod, 2013). According to
ERCA (2017), the total population of Category “A” tax payers in Addis Ababa as of March 2017
was 61,550.

3.8 Sampling size and Sampling Technique

It is impossible to consider the population as respondents to this survey due to impracticality,

time and cost. The choice of a sample size has a bearing on the reliability of a study. However,
this does not mean that large sample size always leads to high level of accuracy rather it is to
indicate that sample size is one of the factors that contribute to the credibility of a survey
estimate. For the choice of sample size, different researchers give different ideas. For example,
Alreck and Settle (1995) noted that the choice of sample size is normally made after considering
statistical precision, practical issues and available resources (e.g. cost and time). Fowler (1984 )
noted that there is no a single precise way for the determinations of sample size hence there are a
number of inadequacy for deciding on sample size. Therefore, it is better if to see the sample size
used by other researchers. In this regard, taking the available resources, time, budget, data, and
geographic distances into account, a sample size of 120 were considered feasible from the 61,550
category “A” tax payers in Addis Ababa and sampling technique used was conviniant sampling.

3.9 Data analysis

Questionnaires collected from respondents were tallied, organized, coded and structured
systematically. Both descriptive and inferential tests used in the analysis. Data were described or
summarized using descriptive statistics such as, cross tabulation, frequencies and mean, which
helps in meaningfully describing the distribution of responses. Inferential statistics method used
to infer population characteristics from the sample.

31
Model Specification

Since the data set in this study is ordinal, ordered robit model was preferred to examine factors of
tax compliance like previous studies on similar topic. A research by Torgler (2006) and Alm and
Torgler (2006) use a dataset with a wide sample of countries. Given that tax morale is an ordered
categorical variable, measured with survey questions, ordered probit or logit regression models
are the rule.
The general equation for the model used to test is shown below:
Y = α + β1X1 + β2X2 +β3X3 + β4X4 + β5X5+ β6X6 +Ɛ
Where;
Y – Tax Compliance
α - Constant
Ɛ - Error term

X1,X2….X12Factors of compliance
Substituted Coefficients
Tax Comp= α + β1Prob_Audi + β2 Gov_Spend +β3 Equity_Fair + β4 Gov_Policy + β5 Ref + β6
Fina_Cons+β7 Penalty + β8 Tax_knowldge +β9 Gender+ β10 Income+ β11 age + β12Educ+ Ɛ

X1- tax audit, X2- perception of government spending, X3- Perception of Equity and Fairness,
X4- Changes to current government policies, X5- Referent groups (family and friends), X6-
Personal financial constraint, X7- Awareness of offences and penalties, X 8- tax knowledge, X 9
- Gender, X10- level of income, X11- Age, and X 12- Education are Factors of tax compliances
or independent variables.

In addition, the β coefficients for each independent variable generated from the model β1- tax
audit, β2- perception of government spending, β3- Perception of Equity and Fairness, β4-
Changes to current government policies, β5- Referent groups (family and friends), β6- Personal
financial constraint, β 7- Awareness of offences and penalties, β 8- tax knowledge, β 9 - Gender,
β10- level of income, β11- Age, and β 12- Education are Coefficients indicating rate of change
of tax compliances with respect to independent variables.

32
3.10 Variables Definition

3.10.1 Dependant Variable: Tax compliance

Two alternate measures were used to capture tax compliance direct and indirect questions using
hypothetical questions. The use of hypothetical questions can increase reliability of results and
minimizes respondents’ dishonesty when answering the questionnaire (Troutman, 1993). First, it
was used responses to a more direct question: ‘One should honestly declare all income on one’s
tax return’. The responses range from ‘strongly agree’ = 5 to ‘strongly disagree’ = 1. Secondly, it
was used an indirect question to measure tax compliance: The respondents were asked to rate
each hypothetical question whether as a taxpayer they would undertake the same action if they
faced the same situation.

3.10.2 Independent Variables

3.10.2.1. Economic Factors

Tax Audit

Tax audits, audit rates and prior audit experience have been ambiguously discussed in relation to
tax compliance. Some studies claimed that audits have a positive impact on tax evasion (Jackson
and Jaouen, 1989; Shanmugam, 2003; Dubin, 2004). These findings suggest that in self
assessment systems, tax audits can play an important role and their central role is to increase
voluntary compliance. Audits rates and the thoroughness of the audits could encourage taxpayers
to be more prudent in completing their tax returns, report all income and claim the correct
deductions to ascertain their tax liability. In contrast, taxpayers who have never been audited
might be tempted to under report their actual income and claim false deductions.Butler (1993)
also found that tax audits can change compliance behavior from negative to positive. The
following hypothesis was proposed on compliance based on the extant literature.

33
Hypothesis 1: Probability of being audited is positively associated with tax compliance.

Perceptions of government spending

Trust in government is recognized by Jackson and Milliron (1986) as another determinant of tax
evasion. Levi (1998) claims that if individuals believe that the government will act in their
interests, that its procedures are fair, and that their trust of government and others is reciprocated,
they are more likely to become “contingent consenters” who cooperate in paying taxes. More
trust in government enhances the incentive for individuals to commit themselves to obedience
and comply with tax laws (Feld and Frey, 2002).

Hypothesis 2 ― Positive perception of government spending is positively associated with tax

compliance.

3.10.2.2. Social Factors

Perceptions of equity or fairness

As Smith (1776) mentioned, one of the main principles of the taxation system design is equity or
fairness, which can be perceived via two dimensional views horizontal equity (people with the
same income or wealth brackets should pay the same amount of taxes) and vertical equity (taxes
paid increase with the amount of the tax base). The driving principle behind vertical equity is the
notion that those who are more able to pay taxes should contribute more than those who are
not.The perceived fairness of the tax system also has an influence on the inclination towards tax
evasion (Jackson and Milliron, 1986; Richardson, 2008).

Hypothesis 3 ― Positive perception of equity in the tax system positively associated with tax
compliance.

34
Changes to current government policies

Political stability and the ruling party in a country might play a significant role in determining
tax evasion behavior. For instance, if an individual favors the ruling party, he might choose to be
compliant because he believes that the government is trusted, efficient and equitable.
Conversely, a taxpayer from the opposition party might be more non-compliant because he
perceives that the government is not on his side. Studies have disclosed that the government
decisions and changes to policies in accordance with the economic and political situation have a
significant impact on compliance. For example, a positive move made by the government such as
an increase in tax rebate (Hasseldine and Hite, 2003) is likely to increase taxpayers’ compliance.
Hypothesis 4 ― unfavorably perceived changes to current government policies are negatively
associated with tax compliance.

Referent groups (family and friends)

Allingham and Sandmo (1972), Clotfelter (1983) also claimed that referent groups play a
significant role in evasion although it was also not clearly discussed which was stronger.
Therefore, the influence of referent groups is seemingly important in making a decision,
particularly involving monetary aspects and the obedience to laws (tax compliance).

Hypothesis 5―The influence of referent group is positively associated with tax compliance.

3.10.2.3. Individual Factors

Personal financial constraints

Personal financial constraints are believed to have an impact on tax evasion as financial distress
faced by an individual and may encourage him to prioritize what has to be paid first as basic
survival needs (foods, clothing, housing etc.) or where immediate demand on limited income is

35
enforced (for example, perceived threat of action from money lenders etc.) rather than tax
liabilities. People who face personal financial problems are likely to be more prone to evade tax
when compared to people in less financial distress (Mohani and Sheehan, 2004; Mohani, 2001).

Hypothesis 6 ― Personal financial constraint is negatively associated with tax compliance.

Awareness of offenses and Penalties

A theoretical economic model introduced by Allingham and Sandmo (1972) has clearly indicated
that penalties as well as audit probability have an impact on tax compliance. Davis and Jung
(1991) and Becker, Buchner and Sleeking (1987) found that penalty rates affect tax compliance.
The higher the penalty and the potential audit probability the greater the discouragement for
potential tax evasion. If the taxpayers are aware of the offences they are committing when
evading tax and the consequences of being non compliant taxpayers, they might reduce their
tendency to evade tax.

Hypothesis 7 ― Awareness of penalty is positively associated with tax compliance.

Tax knowledge

The influence of tax knowledge on compliance behavior has been described in various
researches. The level of education received by taxpayers is an important factor that contributes to
the understanding about taxation especially regarding the laws and regulations of taxation
(Eriksen and Fallan, 1996). Previous studies have evidenced that tax knowledge has a very close
relationship with taxpayers’ ability to understand the laws and regulations of taxation, and their
ability to comply (Singh and Bhupalan, 2001).

Hypothesis 8 ― Tax knowledge is positively associated with tax compliance.

36
3.10.2.4. Demographic factors

Gender (male as a reference)

Some studies found that males are more compliant though other studies revealed contradictory
results or no significant difference at all. As agreements on the findings still maintain, the need to
explore current results is relevant. Hasseldine and Hite (2003) found that female taxpayers were
more compliant than males. However, the study reported that males were more compliant
compared to females when a negatively framed message was used, and females were more
compliant than males when a positively framed message was used. In contrast, Richardson
(2006) suggested that gender has no significant impact on compliance across a study of 45
countries.

Hypothesis 9― Male tax payers are more tax compliant.

Age

Researchers come up with different results on the relationship between age and tax compliance.
For example Tittle (1980), Warneryd and Walerud (1982) and Wahlund (1992) posit negative
association, older people are less compliant. In contrast, Dubin, Graetz and Wilde (1987), Chung
and Trivedi (2003) and Beron, Tuachen and Witte (1992) argued that age was positively related
with compliance. However, there have been a significant number of studies which found no
relationship between age and compliance (Spicer and Becker, 1980 and Porcano, 1988). Mohani
(2001) also found that older people are more compliant.

Hypothesis 10 ― Older tax payers are tax compliant.

Income

Jackson and Milliron (1986) found that income level has a mixed and unclear impact on
compliance. Although Jackson and Milliron (1986) did not clearly mention the reason, it is

37
presumed that endogenous tax regulations among countries might contribute to inconsistent
findings. For example, progressive tax rates might encourage the higher income group to evade
rather than the lower income group because their (higher income group) tax rates and taxable
income are high, thus, making the tax liabilities much higher than lower income group. In a
country where income redistribution is not satisfying, the higher income group tends to evade
more (Mohani, 2001) because the high income earner might feel betrayed and unfairly treated.

Hypothesis 11 ― higher income level is positively associated with better tax compliance.

Education

Previous literature supports the direct, positive relationship between educational level and
taxpayer compliance (Jackson and Miliron, 1986). Chan, Troutman, and O’Bryan (2000) also
postulate that education level is directly linked to a likelihood of compliance. Educated taxpayers
may be aware of non- compliance opportunities, but their potentially better understanding of the
tax system and higher level of moral development promote a more favorable taxpayer attitude
and greater compliance.

Hypothesis 12 ― Educational level has direct relationship with tax compliance.

38
Table 1 Variables description and expected associations with the level of tax compliance

Variable Symbols Unit of measurement Expected

signs/hypotheses
Dependent Variable

Level of compliance TCP (1-5) likert scale + (high probability

Ordinal and high frequency,
high compliance)
Independent Variables
Probability of Prob _ Audi +(high probability,
Auditing (1-5 Likert Scale) Ordinal high compliance)

Perception of Gov_Spend (1-5 Likert Scale) Ordinal + (good perception,

Government Spending high compliance)

Perception on Equity Equity_Fair (1-5 Likert Scale) Ordinal + (good perception,

and fairness high compliance)

Referent group Ref (1-5 Likert Scale) Ordinal + (high influence,

high compliance)
Changes on current Gov_Policy (1-5 Likert Scale) Ordinal - (Changes to
government policy government policies,
lower compliance)
Penalty rates and Penalty (1-5 Likert Scale) Ordinal + (High penalty, high
enforcement compliance

Personal_financial Fina_Cons (1-5 Likert Scale) Ordinal - (crucial financial

constraint problem, low
compliance)
Tax knowledge Tax_knowldge (1-5 likert scale) Ordinal + (high tax
knowledge, high
compliance)
Gender Gender (1-2) Nominal - ( Male= 1, higher
compliance)
Income Level Income (1 – 4) Nominal + ( High income,
Higher Compliance)
Age Age (1 – 4) Nominal + ( Older tax payers,
Higher Compliance)
Education level Educ (1 – 5) Nominal + ( Educated tax
payers, Higher
Compliance)

39
 CHAPTER IV

4. Results and Discussion

This chapter describes the results of the study starting with respondents’ profile. The remaining
part of this chapter will then be divided into the two sections: The first section covers descriptive
analysis of determinants factors of tax compliance behavior and the seconded section presents
inferential statistics analysis of dependent and independent variables.

The study sampled 120 Category “A” tax payers in Addis Ababa resides in different sub cities.
The responses of taxpayers gathered through questionnaire were encoded in STATA version 24
software.

4.1 Respondents general back ground

This section describes respondents’ general information such as Gender, Age, Educational level
and Income Level.

Table 2 illustrates gender of respondents which shows that 58.3% of the respondents were males
and 41.7% were females. This shows that the majority of Category “A” tax payers’ are males
(Table 2).

Table 2 Respondents general back ground – Gender

SEX

Variable Frequency Percent

Sex
Male 70 58.3
Female 50 41.7
Total 120 100.0

40
Sources: Survey 2017 result

Table 3 shows the age groups of the respondents. Since the study emphasized business taxpayers,
a minimum age of 21 years old was considered as reasonable. There were four age groups
involved in this study with a 10-year range in each group except for above 51 years old. The
largest group of the respondents was between age of 31 – 40 and 41 – 50; both having 30% each.
The next large group was between the age of 21 – 30 representing 26.7%of the total respondents.
Respondents in the group of above 51 years old were the lowest number with 16 responses
13.3%. Generally, respondents within the age group of 31 and 50 and made up with 60% of the
total respondents (Table 3).

Table 3 Respondents general back ground - Age

AGE

AGE Frequency Percent

21 -30 32 26.7
31-40 36 30.0
41-50 36 30.0
above 51 16 13.3
Total 120 100.0
Sources; Survey 2017 result

It is believed to be that the ability to read and write influences one’s ability to understand and
interpret the tax laws. With this regard the survey collected the educational background of the
respondents and table 4 indicated 10% respondents had lower level of educational qualification
in the sample ( 10/12th grade completed ); 17.7% of the total respondents had diploma. On the
other hand, the numbers of respondents who were first degree holders were 50%; the remaining
23.7% of the respondents had masters and above qualifications. Cumulatively, all of the
respondents were in possession of at least reading and writing and none of the respondents were
bellow high school. This indicates that the majority of business taxpayers were well educated to
know the need for taxation and they can understand and interpret the tax law as well (Table4)

41
Table 4 Respondents general back ground- Education Level

Education Level Frequency Percent

10th/12th grade complete 12 10.0
Diploma 20 16.7
Degree 60 50.0
2nd degree and above 28 23.3
Total 120 100.0
Sources: Survey 2017 result

Table 5 illustrates respondent’s level of income their company had for the year of 2016/17 (2009
E.C). Majority of respondents 36.7%had earned Income between 500,000 – 1,000,000.While
30% of companies indicated that their income ranges between 1,000,000 – 5,000,000and
16.7%of companies had annual income above 10,000,000 (Table 5).

Table 5 Respondents general back ground - Income Level

Annual sales turn over Frequency Percent

500,000 - 1,000,000 44 36.7
1,000,001 - 5,000,000 36 30.0
5,000,001 - 10,000,000 20 16.7
Above 10 million 20 16.7
Total 120 100.0
Sources: Survey 2017 result

42
4.2 Descriptive Analysis of Tax Compliance

This section provides descriptive analysis of the variables of this study, namely Economic,
Social, Individual, Demographic factors and tax compliance.

4.2.1 Tax Compliance

As discussed earlier dependent variable have been measured using indirect and hypothetical
questions which was recommended on previous studies to fetch genuine data in the most
confidential information. According to Yesegat and Fjeldsta (2016) tax noncompliance is illegal
and a concealed activity. Gathering data on the compliance behavior of taxpayers through field
data collection methods such as questionnaires suffers from the unwillingness of respondents to
reply honestly to questions about their own compliance.

In this study, tax compliance behavior was measured by gathering responses from hypothetical
tax scenarios. This scenario was introduced to mitigate the sensitive nature of the questions
involved so that respondents would be more likely to provide truthful responses. As most
corporations would have strong incentives to avoid revealing their non-compliance decisions,
any direct measures would invariably suffer from substantial measurement errors (Recker.k,
1988).

With the indirect survey question about tax noncompliance, responses are categorized as ‘very
frequently’, ‘frequently’, ‘not so often’, ‘sometimes’ and ‘never’. Never used as a cut-off point,
and treat it as a measure of compliant attitude; responses indicating the existence of evasion in
different levels of frequency are considered as measures of a noncompliant attitude.
Compliance attitude on the first senario is composite factor from responses to statements: How
frequently do you think taxpayers evade taxes?’ How frequently do you think taxpayers under
report their income? And how frequently do you think taxpayers over state their deductable
expenses?

43
The questions measure the frequency of tax payer’s tax evasion (embedding themselves)
responses ranging from “very frequently”=5 through “Never”=1.

Table 6 describes respondent’s tax compliance attitude based on their response to “How
frequently do you think tax payers evade taxes? Underreport their income? & overstate their
deductable expenses? Only 31.7% of the total respondents never evade taxes while the rest
68.3% evade taxes either by underreporting income or overstating expenses. This implies that
majority of category “A” tax payers do not comply with the tax law (Table 6).

Table 6 Tax compliance attitude

Tax compliance attitude N Percent

How Frequently tax payers Never 114 31.7%
evade tax a Sometimes 80 22.2%
Not so often 64 17.8%
Frequently 48 13.3%
Very frequently 54 15.0%
Total 360 100.0%
a
group

On the seconded scenario the respondents were requested to read a scenario about tempt to
under-report income. Compliance level measured using composite factor from responses to
statements “To what extent do you agree with Mr Abebe’s possible action of not reporting that
cash sale of ETB100, 000 as his business income? ” and “To what extent do you agree with Mr
Abebe’s possible action if he reports only part of the ETB 100,000 as business income?” .The
extent of agreement with the under-reporting of income was measured via a five-point Likert
scale ranging from strongly agree=5 to strongly disagree=1. Higher scores would indicate likely
non-compliance behavior and vice-versa.

44
As shown below in Table 7, 14.2% and 2.5 % of respondents agree and strongly agree with
income under reporting respectively while 35.8% and 20% were strongly disagree and disagree.
The rest 27.5% remain neutral. Overall result of this scenario indicates majority of category “A”
tax payers do not agree with non compliance attitude.

Table 7 Non Compliance attitude

Non Compliance attitude N Percent

Do you agree with strongly disagree 86 35.8%
partial/full evasion? a Disagree 48 20.0%
Neutral 66 27.5%
Agree 34 14.2%
Strongly agree 6 2.5%
Total 240 100.0%
a
group

4.2.2 Descriptive Analysis of Independent variables

4.2.2.1 Demographic Factors

Since Never is taken as a cutoff point, compliance attitude was classified under compliant
(Never) and non compliant (very frequently, frequently, often & sometimes). Table 8
summarizes demographic factors against compliance attitude.
Demographic factors that previous research has illustrated may affect tax compliance behavior.
These include age, gender, general level of education and income level. These are the most
common variables used in tax compliance research (Devos, 2005).
The results in table 8 shows that Females are more compliant than males and compliance attitude
increases as tax payers get older. On the other hand number of complaints increases as education
level of tax payers increases. However, Level of income didn’t show linier relation with
compliance attitude of category “A” tax payers (Table 8).

45
Table 8 Demographic factors
Tax compliance
Compliant non-
Demographic factors compliant Total
Male 4 66 70
SEX Female 10 40 50
Total 14 106 120
21 -30 0 32 32
31-40 4 32 36
41-50 4 32 36
AGE above 51 6 10 16
Total 14 106 120
10th/12th grade 0 12 12
complete
Diploma 0 20 20
Degree 4 56 60
Education 2nd degree and 10 18 28
Level above
Total 14 106 120
500,000 - 4 40 44
1,000,000
1,000,001 - 4 32 36
5,000,000
6 14 20
5,000,001 -

Annual sales 10,000,000

turn over Above 10 million 0 20 20

Total 14 106 120

46
4.2.2.2 Economic, Social and Individual Factors

The description of variables in this paragraph is based on responses to statements in the survey
that range from ‘strongly disagree’ = 1 to ‘strongly agree’ = 5. As table 9 summarizes
respondents agree (͞x = 2.67, σ = 1.34) that the tax authority has limited capability to investigate
all income reported and they believe they have an opportunity to escape from audit. The result of
the survey is in line with previous literature e.g. Allingham and Sandmo (1972) claimed that
taxpayers will always declare their income correctly if the probability of detection is high.

Respondents agree with the government spends a reasonable amount on welfare (͞x = 2.62, σ =
1.44) and very thank full about government services, facilities and infrastructure (͞x = 2.58, σ =
1.33).However, they disagree with the government does not waste too much money (͞x = 2.22, σ
= 1.25). Over all result showed that respondents disagree with fairness of government spending
(͞x = 2.47).This May be the reason why most tax payers did not complying with tax system.
Studies showed that if taxpayers perceive that the government is spending too much on
something considered unnecessary or unbeneficial to them then taxpayers will feel betrayed and
attempt to evade (Roberts, 1994).

With regard to Principle of equity and fairness respondents replied higher income earners should
pay more taxes (͞x = 2.70, σ = 1.53) and believe they are paying the same taxes as others making
similar income (͞x = 2.63, σ = 1.28).In addition majority of respondents agreed that paying the
right amount of income tax will benefit other people especially the poor (͞x = 3.27, σ = 1.5). They
also agreed with the statement government policy is in favor of their business, and have tax
advantage on their business area with (͞x = 3.20 &3.00, σ = 1.14 & 1.06) respectively. When we
sum up responses on perception of equity fairness, results indicated that most tax payers agree
about equity and fairness of the tax system (͞x (composite) = 2.87).

Survey result on government policy explained by the statement ‘Government policy is in favor of
my business”; “I have tax advantage in my business area” and “I believe that the ruling party has
fair policies for Category “A” tax payer”. Weighted mean for those questions is 3.06 which

47
implies that respondents agree with government policy. Hasseldine and Hite’s (2003) study
examined two potential influences on taxpayer attitudes, namely political party affiliation and
attribute framing.

Regarding the referral group respondents do not comply because their friends and parents did not
compile and never been penalized (͞x = 2.70, σ = 1.22) (͞x = 2.72, σ = 1.2) respectively. In line
with previous literature tax payers agreed that they are influenced by referral group (͞x
(composite) = 2.72). Research in ascertaining the importance of referent groups i.e family
members and friends in tax compliance is limited although Ajzen (1988) and Ajzen and Fishbein
(1980) (in their Theory of Reasoned Action (TRA) and Theory of Planned Behavior (TPB))
theorized that referent groups play a significant role in determining people’s intentions and
behavior.

According to the survey result most respondents agreed that their expenditure always exceeds
their income (͞x =3.08, σ = 1.26), and the price of basic needs keep on increasing (͞x = 3.02, σ =
1.21).Majority of the respondents pay their debt & basic needs first rather than tax liabilities (͞x =
2.63, σ = 1.28). In general tax payers agreed that personal financial constraint affects their
compliance behavior (͞x =3.08 (composite= 2.91).

In respect of the awareness of offences and penalty majority of respondents disagree with the
statement penalty rates are very low and can afford to pay the penalty (͞x = 2.02, σ =0 .99), The
survey result also show their disagreement with enforcement is very weak (͞x = 2.17, σ = 1.1) and
tax authorities tolerance towards their offence (͞x = 2.02, σ = 1.01).Most respondents disagree
with the statement I have no idea about penalty rates and offences (͞x = 2.02, σ = 0.89).The sum
of responses towards awareness on offences and penalty is inclined to disagreement (͞x
(composite)= 2.05) .So majority of them know about the penalty rates and the quencequence of
offence acts.

In terms of tax knowledge, tax payers are more inclined towards strongly agree with the
statement I know how to declare actual income received (͞x = 3.77, σ = 1.19), how to keep
records/documents pertaining to income and expenditure (͞x = 3.87, σ = 1.05) and understand that

48
they should pay taxes due within the prescribed period (͞x = 4.12, σ = 0.92). The sum of results
towards tax knowledge is (͞x (composite)= 3.92) which implies that majority of tax payers has
knowledge about tax system.

49
 Table 9 Descriptive statistics of Economic, Social & Individual factors
Descriptive Statistics N Min. Max. Mean Std.Dev.
Tax authority has limited capability to investigate all income reported , so I have an opportunity to escape 120 1 5 2.67 1.343
Sum of Government spending 2.47
The government spends a reasonable amount on welfare 120 1 5 2.62 1.445
I am very thank full about government services, facilities and infrastructure 120 1 5 2.58 1.326
The government does not wastes too much money 120 1 5 2.22 1.245
Sum of Equity and Fairness 2.87
Higher income earners should pay more taxes 120 1 5 2.70 1.537
I pay about the same amount of taxes 120 1 5 2.63 1.283
paying right amount of income tax, I believe that other people especially the poor will get the benefit 120 1 5 3.27 1.510
Sum of Government Policy 3.06
Government policy is in favor of my business 120 1 5 3.20 1.142
I have tax advantage in my business area 120 1 4 3.00 1.069
believe that the ruling party has fair policies for Category “A” tax payers 120 1 5 2.98 1.108
Sum of Referral group 2.71
My friends do not comply and they have never been penalized 120 1 5 2.70 1.220
My parents and relatives do not comply and they have never been penalized 120 1 5 2.72 1.204
Sum of Financial Constraint 2.91
My expenditure always exceeds my income 120 1 5 3.08 1.261
The price of basic needs is keep on increasing 120 1 5 3.02 1.209
I will pay my debts and basic needs first 120 1 5 2.63 1.270
Sum of Penalty and Offences 2.05
The penalty rates are very low and I can afford to pay the penalty 120 1 4 2.02 0.979
The enforcement is very weak 120 1 4 2.17 1.103
I believe that the tax authority is tolerant towards my offence 120 1 4 2.02 1.012
I have no idea about penalty rates and offences 120 1 4 2.02 0.889
Sum of Tax Knowledge 3.92
I know how to declare actual income received 120 1 5 3.77 1.193
I know how to keep records/documents pertaining to income and expenditure 120 2 5 3.87 1.045
I understand that I should pay taxes due within the prescribed period 120 2 5 4.12 0.918

50
4.3 Determinants of tax compliance – Ordered probit model

This section presents the result of ordered probit analysis through significant test using STATA.
There were a number of significant correlations between level of tax compliance and
independent variables. Based on Table 4.9 , ordered probit analysis result significant factors
affecting tax compliance were Education, tax audit, government spending, referral group,
financial constraint, awareness of penalty and offence and tax knowledge, Whereas Gender, age,
income, equity and fairness and government policy were not significant factors to determine tax
compliance behaviors.

Personal financial constraints appear to be the main factor in determining tax compliance
behavior followed by tax knowledge, awareness of penalty and offence, government spending,
referral group and education. Results evidenced that taxpayers who had crucial financial
constraint tend to be less compliant (negative association) because a person with financial
distress will be forced to give priority for personal needs rather than tax liability, subsequently
Hypothesis 6(Personal financial constraint is negatively associated with tax compliance) was
accepted.

It has been described in previous study that tax knowledge has strong relationship with
taxpayers’ ability to understand the laws and regulations of taxation, and their ability to comply.
Table 4.9 also revealed that tax knowledge has positive relation with compliance behavior
supporting Hypothesis 8 (Tax knowledge is positively associated with tax compliance).

Supporting Hypothesis 7 (Awareness of penalty is positively associated with tax compliance)

and Hypothesis 1(Probability of being audited is positively associated with tax compliance), and
the result also showed awareness of offences and penalties and tax audit has positive relation
with compliance. The higher the penalty and the potential audit probability the greater the
discouragement for potential tax evasion. Probability of audit detection will enhance compliance
behavior of tax payers since they might afraid to be spotted for penalty.

51
In line with Hypothesis 2 (Positive perception of government spending is positively associated
with tax compliance) ordered probit analysis result indicated government spending has positive
relation with tax compliance. If the government is wisely spending the national revenue, for
example, for basic facilities like education, health and safety and public transportation, it is likely
that voluntary compliance will increase.

Among social factors only referral group influence has significant relation with tax compliance.
If tax payers perceive that peers are noncompliant and never been penalized they will decide to
commit the same. The study also suggests that friends and family members are of significant
influence to taxpayers’ behavior. The influence of referent groups tends to be important as
taxpayers are keen to refer their tax matters to their immediate family members, as result
Hypothesis 5(The influence of referent group is positively associated with tax compliance) was
accepted.

Supporting Hypothesis 12 (Educational level has direct relationship with tax compliance) the
survey result indicated that education was positively associated with tax compliance. This is due
to the fact that tax payers’ education level will help them to understand the tax system easily and
act accordingly.

52
Table 10 Determinants of tax compliance ― Ordered probit regression result
TAX_COMP Coef. SE P>|z|

GENDER .91 .285197 0.154

AGE .12 .145 0.401
EDUC .27 .1526521 0.075 *
INCOME .11 .131835 0.381
TAX_AUD .23 .1002571 0.017**
GOV_SPEN .27 .106214 0.006 **
EQUI_FAIR .09 .0936102 0.323
GOV_POLICY .29 .1419631 0.722
REFER .28 .1156123 0.016**
FIN_CONS -.48 .128683 0.000 ***
PENAL .41 .1634631 0.012 ***
TAX_KNOWL .48 .1422776 0.001 ***
Prob > chi2 = 0.0000 Pseudo R2 = 0.2122
Note: * Significant at p < 0.10 ** Significant at p < 0.05 *** significant at p < 0.001

53
 CHAPTER V

5. Conclusion and Recommendation

This chapter presents the conclusions and recommendations. The purpose of the chapter is to
review the whole thesis and highlight future research directions. Accordingly, section one
presents overview of the thesis and its major findings while the second section presents the
recommendations with future research directions.

5.1 Conclusion

Based on the presiding analysis the paper finally drawn the following conclusions/findings

 The research measures tax compliance attitude using indirect and hypothetical questions
and the result of descriptive analysis of both scenarios indicated majority of them were not
compliant. This is an implication for the government to work on determinant factors to
improve tax revenue. In the second scenario majority of respondents replied they are
compliant, this might be due to the sensitive nature of compliance behavior as discussed in
limitation section of this paper. As a result this scenario was disregarded from further
analysis.

 Personal financial constraints are believed to have an impact on tax evasion as financial
distress faced by an individual may encourage him/her to prioritize what has to be paid first
as basic survival needs (foods, clothing, housing etc.) or where immediate demand on
limited income is enforced (i.e perceived threat of action from money lenders etc.). In line
with previous studies the result of analysis on this paper indicated that personal financial
constraint leads to non compliance behavior of tax payers. (Mohani and Sheehan, 2004;
Mohani, 2001).

54
 This work was aimed to study a comprehensive overview of business income tax payers’
knowledge towards the tax law focusing on category “A” tax payers in Addis Ababa. The
result of the study revealed tax payers who know and understand tax rule and regulation
meet their obligation. Tax attitudes can be improved through better tax knowledge’ (Tax
attitudes can be improved through better tax knowledge’ (Eriksen and Fallan, 1996).

 Tax audit and awareness on penalty and offence were identified as significant factors to
determine compliance behavior of tax payers’. Fines and Audit rates may substitute each
other due to their multiplicative linkages as long as neither of them is set to zero (Kirchler
et al 2007). Higher fines simply make evading taxes more hazardous for taxpayers and
should deter from evasion. Empirically the deterrent effect of fines could not always be
supported. The observed effects were weaker than expected and some studies even suggest
that an increase of penalties can have undesirable effect and result in more tax avoidance
(Kirchler et al, (2007).

 Most taxpayers were conditioned by fairness of government spending and they are keen to
know where their tax contribution will be spent. The analysis also finds evidence that those
who are more satisfied with public service provision are more likely to comply with tax
rule. Those who engage in tax evasion often justify such behavior by suggesting that the
government wastes tax revenue and spends unwisely; such arguments can decrease
voluntary compliance in the long run (Braithwaite et. al. 2009).

 Most of the respondents confirmed in both descriptive and ordered probit analysis result
that they are influenced by Family or a friends’ experience of noncompliance act.
Allingham and Sandmo (1972), Clotfelter (1983) also claimed that referent groups play a
significant role in evasion although it was also not clearly discussed which was
stronger(family members or friends)

 We can draw the conclusion that education level has an impact on compliance. The result
of descriptive analysis confirmed that as education level increases number of compliant tax
payers’ increase. This is because of educated taxpayers may be aware of non compliance

55
 opportunities, but their potentially better understanding of the tax system and their higher
level of moral development promotes a more favorable taxpayer attitude and therefore
greater compliance. Chan et. al. (2000) also postulates that greater education is directly
linked to a likelihood of compliance

5.2 Recommendations

Based on the findings of this study, the researcher came up with the following recommendations
to enhance tax compliance of category “A” taxpayers’.

 With regard to economic factors, category “A” tax payers’ will tempt to evade taxes if they
believe that the probability of audit detection is low. This study revealed that if the
government is wisely spending the national revenue, for example for basic facilities like
education, health and safety and public transportation, it is likely that voluntary compliance
will increase. In contrast, if taxpayers perceive that the government is spending too much on
something considered unnecessary or unbeneficial to them then taxpayers will feel betrayed
and attempt to evade. Therefore to avoid inefficiency of tax collection, the government
officials and policy makers have to think about the thoroughness of audit practice and
reasonableness of government spending.

 With regard to social factors, the influence of referral group is critical because as much
literature describes, decisions either to evade or not to evade tax sometimes are work on
social norms and ethical values and will create different incentives for tax compliance.

 Individual factors also play a key role in determining compliance behavior of category “A”
tax payers. Personal circumstantial factors like personal financial constraints, awareness on
penalties and offences and tax knowledge are likely to have a significant impact on taxpayer
compliance behavior. Since Personal financial constraint was identified as the most
significant determinant factor of compliance ERCA and policy makers has to regulate the
economy to enable tax payers fulfill their obligation. It is also important for the ERCA to be

56
 kept informed of taxpayers’ level of knowledge so that it can effectively and efficiently
communicate (i.e. current changes in tax laws) and design tax policies (for example,
Reporting, filing requirements, penalties etc.).

 Finally the thesis suggests a series of measures, which could be taken by the government in
general, and tax authorities in particular; improving thoroughness of audit, educating the
taxpayers and conducting awareness creation and providing all necessary social services to
the public will enhance compliance level. Awareness creation should go beyond simply
giving tax education to taxpayers it should extended to having consultative sessions. There
should be more preventative education for the public and increased awareness of tax
responsibilities in schools. In addition further studies and investigations on this topic will
help to analyze significant factors from different perspectives and increases compliance level
by exploring the factors that make people to comply.

57
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 ANNEXES

Annex 1: Taxpayers survey instrument (English version)

Saint Mary’s University

Department of Accounting & Finance

Dear Respondents,

This study entitled “Factors Affecting tax compliance of Category “A” tax payers in Addis
Ababa” and will be conducted for partial fulfillment of Masters of Business Administration in
Accounting and Finance at Saint Mary’s University. Its main objective is to examine determinant
factors of tax compliance in the case of Category “A” tax payers at Addis Ababa.

Your cooperation of filling the questionnaire is very important to this study because it represents
a number of others who are not included in the sample. The information provided is purely for
academic purpose and I would promise that all information you provide would be strictly
confidential. In order to accomplish this study, you are kindly requested to answer every question
and your kind cooperation is highly appreciated.

I thank you very much in advance for your cooperation

Meaza Wudeneh
Phone number: 0947650143
E-mail address: [email protected]

64
REQUEST FOR THE COMPLETION OF QUESTIONNAIRE

General Instruction

This close ended questionnaire has three parts, part I is regarding respondents’ general
back ground ,the second (II) part of the questionnaire contains questions on the degree of
tax payers’ compliance towards the tax law .Finally questions about the factors of tax
compliance presented in part III.

PART I: Tax payers’ general information

Kindly tick (√) on the choice you do believe that it is the most appropriate response.
1) Gender Male Female

2) Age

From 21-30 From 41 – 50

From 31 – 40 Above51

3) Education level

Education Level Please tick (√ ) one

Bellow 10
10th /12th complete
Diploma
Degree
MA and above

65
 4) How much was your annual turnover for the year 2016/17 (2009 E.C)?

500,000 – 1,000,000 5000,001 – 10,000,000

1000,001 – 5000,000 Above 10 million

PART II; Tax compliance

Questions on part II are used to examine tax compliance of Category “A” tax payers.
2.1 Please read the following and kindly indicate your opinion and put a tick mark (√)

Very frequently VF) = 5, ‘Frequently (F) = 4, Not so often (O) = 3, Sometimes (S) = 2, and
Never (N) = 1.

Ser. N S O F VF
N o S t a t e m e n t s 1 2 3 4 5

1 How frequently do you think taxpayers evade taxes?’

2 How frequently do you think taxpayersunder report their income?

3 How frequently do you think taxpayers over state their deductable expenses?

2.2. Please read the following scenario and kindly indicate your opinion based your experience
Strongly agree (SA) = 5, Agree (A) = 4, Neutral (N) = 3, Disagree (DA)= 2, and strongly
disagree (SD)= 1.

66
“Mr Abebe, a self-employed businessman is considering not disclosing a cash sale of
ETB100,000 as business income in his 2017/18 tax return. Legally, the cash receipts of
ETB100,000 should be included as a business income. However, he is almost certain that the tax
authority will not audit him and would not know if the amount is not disclosed”.

Ser. Statement SD DA N A SA
No 1 2 3 4 5

1 To what extent do you agree with Mr Abebe’s possible

action of not reporting that cash sale of ETB100,000 as
his business income?
2 To what extent do you agree with Mr Abebe’s possible
action if he reports only part of the ETB 100,000 as
business income?

PART III; Factors affecting tax compliance

Questions on part III will be used to assess determinant factors of tax compliance. Please kindly
respond to the following statements to depending on degree of agreement or disagreement to
each of the statements. There are no right and wrong answer. (Please tick (√) from the given 5
scale boxes.
Strongly disagree (SD)= 1. Disagree (DA)= 2, Neutral (N) = 3, Agree (A) = 4, and Strongly
agree (SA) = 5

67
3.1. Tax audit
I wish NOT TO COMPLY with tax laws for the following reasons:
S.N Statement SDA DA N A SA
1 2 3 4 5
1 I believe the tax authority has limited capacity to
investigate all income reported , so I have an opportunity
to escape from auditing of my under reporting income

3.2. Perception of Government Spending

I wish to comply because;
S.N Statement SD DA N A SA
1 2 3 4 5
1 The government spends a reasonable amount on welfare
2 There are a number of government services, facilities and
infrastructure for which I am very thankful
3 The government does not waste too much money

3.3. Principle of Equity and Fairness

I wish to comply because;
S.N Statement SD DA N A SA
1 2 3 4 5
1 Higher income earners should pay more taxes than lower
income earners
2 I pay about the same amount of taxes as others making the
same income
3 By paying right amount of income tax, I believe that other
people especially the poor will get the benefit

3.4. Changes to government policy

68
I wish to comply because;

Ser. Statement SD DA N A SA
No 1 2 3 4 5
1 Government policy is in favor of my business in
many aspects
2 I have tax advantage in my business area

3 I believe that the ruling party has fair policies for

Category “A” tax payers’

3.5. Referral group (Friends, Relative Etc.)

I wish NOT TO COMPLY with tax laws for the following reasons:
Ser. Statement SD DA N A SA
No 1 2 3 4 5
1 My friends do not comply and they have never
been penalized

2 My parents and relatives do not comply and they

have never been penalized

3.6. Personal financial constraint

I wish NOT TO COMPLY with tax laws for the following reasons:
Ser. Statement SD DA N A SA
No 1 2 3 4 5
1 My expenditure always exceeds my income
2 The price of basic needs is keep on increasing
3 I will pay my debts and basic needs first rather
than income tax

69
3.7. Awareness of offences and penalty

I wish NOT TO COMPLY with tax laws for the following reasons:

Ser. Statement SD DA N A SA
No 1 2 3 4 5
1 The penalty rates are very low and I can afford to
pay the penalty
2 The enforcement is very weak
3 If I detected not reporting my exact income, I
believe that the tax authority is tolerant towards my
offence and most probably it will escape without
any punishment.
4 I have no idea about penalty rates and offences

3.8. Tax knowledge

I wish to comply because;

S.N Statement SD DA N A SA
1 2 3 4 5
1 I know how to declare actual income received from
all sources to the tax authority
2 I know how to keep records/documents pertaining to
income and expenditure for a required period of years
after submission of the tax return
3 I understand that I should pay taxes due within the
prescribed period from the date of issue of the Notice
of Assessment or within the stipulated period

70
Annex 2 : Tax payers survey instrument (Amharic Version)

ክፍል አንድ፤ የግብር ከፋዮች አጠቃላይ መረጃ

1. ጾታ ወንድ ሴት

2. እድሜ
ከ 22 - 30 ከ 41 - 50
ከ30 – 40 ከ 51 በላይ

3. ትምህርት ደገጃ
ከ10ኛ ከፍል በታች ድግሪ
10ኛ/12ኛ ክፍል ያጠናቀቀ 2ኛ ዲግሪ እና ከዚያ በላይ
ዲፕሎማ

71
 4. የድርጅትዎ ሽያጭ በ 2009 ወይም 2016/17 በብር በምን ያህል ይገመታል
ከ500,000 – 1,000,000
ከ1,000,001 – 5,000,000
ከ5,000,001 – 10,000,000
ከ10 ሚሊዮን በላይ

ክፍል ሁለት ግብር ከፋዮች ለግብር ለህጉ ያላቸዉን ተገዢነት የሚገመግም የመጠይቅ ክፍል ነዉ፡፡
2.1. እባክዎ በሚቀጥለዉ ሰንጠረዥ ዉስጥ ላሉት ሃሳቦች በተሰጠዉ መለኪያ መሰረት አስያየተዎን ያስቀምጡ፡፡ በፍፁም (1) ፤
አልፎ አልፎ (2) ፤ ብዙ ጊዜ (3) ፤ በተደጋጋሚ (4)፤ በጣም በተደጋጋሚ (5)

በፍፁም 1 አልፎ አልፎ 2 ብዙ ጊዜ 3 በተደጋጋሚ 4 በጣም በተደጋጋሚ 5

ተ.ቁ ሃ ሳ ቦ ች

1 ግብር ከፋዮች በምን ያህል ድግግሞሽ ግብራቸዉን ይደብቃሉ

2 ግብር ከፋዮች በምን ያህል ድግግሞሽ ገቢያቸዉን ያሳንሳሉ
3 ግብር ከፋዮች በምን ያህል ድግግሞሽ ወጪያቸዉን ያጋንናሉ

2.2. የሚከተለዉን ፅሁፍ ካነበቡ በሁዋላ እባክዎ ቀጥሎ ላሉት ጥያቄዎች ትክክለኛዉን አስተያየት ያስቀመጡ፡፡

በጣም አልስማማም (1)፤ አልስማማም (2)፤ ገለልተኛ ነኝ (3)፤ እስማማለሁ (4)፤ በጣም እስማማለሁ (5)

“አቶ አበበ በግል ስራ ላይ የተሰማሩ ነጋዴ ናቸዉ:: አቶ አበበ በ2009 የግብር አመት የ100,000 ብር ሽያጭ ነበራቸዉ
ሆኖም ግን ለግብር ሰብሳቢዉ መስሪያ ቤት ላለማወቅ ወስነዋል :: በግብር ህጉ መሰረት የ100,000 ብር እጅ በእጅ ሽያጭ
ገቢያቸዉ ሪፖርት መደረግ አለበት:: ነገር ግን አቶ አበበ ግብር ሰብሳቢዉ መስሪያ ቤት ኦዲት እንደማያደርጋቸዉ እና
ያላሳወቁትን ገቢ እንደማይገኝባቸዉ እርግጠኛ ናቸዉ::”

በጣም አልስማማም ገለልተኛ እስማማለሁ በጣም እስማማለሁ

አልስማማም 1 2 ነኝ 3 4 5
ተ.ቁ ሃሳቦች

1 አቶ አበበ የ100,000 እጅ በእጅ ሽያጭአቸዉን

ሙሉ ለሙሉ ላለማሳወቅ ቢወስኑ ምን ያህል
በአቶ አበበ ሃሳብ ይስማማሉ
2 አቶ አበበ የ100,000 ብር እጅ በእጅ
ሽያጭአቸዉን በከፊል ለማሳወቅ ቢወስኑ ምን
ያህልበአቶ አበበ ሃሳብ ይስማማሉ

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ክፍል ሶስት ግብር ከፋዮች ለግብር ህጉ ያላቸዉን ተገዥነት የሚወስኑ ምክንያቶች
እባክዎ በሚቀጥለዉ ሰንጠረዥ ላሉት ሃሳቦች በተሰጠዉ መለኪያ መሰረት አስያየተዎን ያስቀምጡ

3.1. የግብር ምርመራ (ኦዲት)

በሚከተሉት ምክንያቶች ለግብር ህግና ደንቡ ተገዥ አለመሆንን እመርጣለሁ

በጣም አልስማማም ገለልተኛ እስማማለሁ በጣም

አልስማማም 2 ነኝ 4 እስማማለሁ
ተ.ቁ ሃሳቦች 1 3 5

1 ግብር ሰብሳቢዉ መስሪያ ቤት ትክክለኛ ገቢየን

መርምሮ የማሳወቅ ብቃቱ ዉስን ስለሆነ የገቢየን
አሳንሶ የማሳወቅ እድል አለኝ

3.2. በመንግስት ወጭዎች ላይ ያለ ምልከታ

በሚከተሉት ምክንያቶች ለግብር ህግና ደንቡ ተገዥ መሆንን እመርጣለሁ

በጣም አልስማማም ገለልተኛ እስማማለሁ በጣም

አልስማማም 2 ነኝ 4 እስማማለሁ
ተ.ቁ ሃሳቦች 1 3 5

1 የመንግስት ወጭዎች ለመሰረታዊ አገልግሎት

የሚዉሉ እና ምክንታዊ ናቸዉ ብየ አምናለሁ
2 መንግስት በተገቢዉ መንገድ የመሰረተ ልማት
አገልግሎቶች ያቀርባል ብየ አምናለሁ
3 መንግስት ያለ አግባብ ገንዘብ አያባክንም ብየ
አምናለሁ

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3.3. የግብር ህጉ እኩልነት እና ፍትሃዊነት

በሚከተሉት ምክንያቶች ለግብር ህግና ደንቡ ተገዥ መሆንን እመርጣለሁ

በጣም አልስማማም ገለልተኛ እስማማለሁ በጣም

አልስማማም 2 ነኝ 4 እስማማለሁ
ተ.ቁ ሃሳቦች 1 3 5

1 ከፍትኛ ገቢ ያላቸዉ ግብር ከፋዮች አነስተኛ ገቢ

ካላቸዉ የበለጠ ግብር ስለሚከፍሉ
2 እኔ የምከፍለዉ ግብር ተመጣጣኝ ገቢ ካላቸዉ ጋር
ሲነፃፀር እኩል ስለሆነ
3 ተገቢዉን ግብር በመክፈል ደሃዉ ህብረተሰብ
ተጠቃሚ ይሆናል

3.4. የመንግስት ህግ እና ደንብ ለዉጥ

በሚከተሉት ምክንያቶች ለግብር ህግና ደንቡ ተገዥ መሆንን እመርጣለሁ

በጣም አልስማማም ገለልተኛ እስማማለሁ በጣም

አልስማማም 1 2 ነኝ 3 4 እስማማለሁ
ተ.ቁ ሃሳቦች 5

1 በተለያየ መንገድ የመንግስት ህግ እና ደንብ እኔ

ለምሰራዉ ንግድ ጠቃሚ ነዉ
2 የግብር ህጉ እኔ የተሰማራሁበትን የንግድ ዘርፍ
ይደግፋል
3 አሁን በስልጣን ላይ ያለዉ ፓርቲ ለደረጃ “ሀ”
ግብር ከፋዮች የተለየ አትኩረት አለዉ

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3.5. የቤተሰብ ተፅእኖ (ወላጅ፤ ዘመድ፤ ጉዋደኛ…ወ.ዘ.ተ.)

በሚከተሉት ምክንያቶች ለግብር ህግና ደንቡ ተገዥ አለመሆንን እመርጣለሁ

በጣም አልስማማም ገለልተኛ እስማማለሁ በጣም

አልስማማም 2 ነኝ 4 እስማማለሁ
ተ.ቁ ሃሳቦች 1 3 5

1 የቅርብ ጓደኞቼ ለግብር ህጉ አይገዙም ነገር ግን

ቅጣት ተጥሎባቸዉ አያዉቅም
2 ወላጆቼ እና ዘመዶቼ ለግብር ህጉ አይገዙም ነገር
ግን ቅጣት ተጥሎባቸዉ አያዉቅም

3.6. የገንዘብ እጥረት

በሚከተሉት ምክንያቶች ለግብር ህግና ደንቡ ተገዥ አለመሆንን እመርጣለሁ

በጣም አልስማማም ገለልተኛ ነኝ እስማማ በጣም

አልስማማም 2 3 ለሁ እስማማለሁ
ተ.ቁ ሃሳቦች 1 4 5

1 ሁልጊዜ ወጭየ ከገቢየ ስለሚበልጥ

2 የእለት ፍጆታ ወጭየ በየጊዜዉ የዋጋ ግሽበት
ስለሚያሳይ
3 የእዳ ክፍያዎቼን እና የእለት ፍጆታየን ከግብር እዳየ
ስለማስቀድም

3.7. ስለቅጣት ያለ ግንዛቤ

በሚከተሉት ምክንያቶች ለግብር ህግና ደንቡ ተገዥ አለመሆንን እመርጣለሁ

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 በጣም አልስማማም ገለልተኛ እስማማለሁ በጣም

አልስማማም 2 ነኝ 4 እስማማለሁ
ተ.ቁ ሃሳቦች 1 3 5

1 የቅጣት መጠኑ አነስተኛ ስለሆነ መክፈል እችላለሁ

2 የህጉ ተፈፃሚነት አነስተኛ ስለሆነ
3 የታክስ ህጉን ባላከብርም ግብር ሰብሳቢ መስሪያ
ቤቱ አይቶ እንዳላየ ያልፈኛል እና ያለቅጣት
ያልፈኛል
4 ቅጣትን በተመለከተ ምንም አይነት ግንዛቤ የለኝም

3.8. የግብር ህግ እዉቀት

በሚከተሉት ምክንያቶች ለግብር ህግና ደንቡ ተገዥ መሆንን እመርጣለሁ

በጣም አልስማማም ገለልተኛ እስማማለሁ በጣም

አልስማማም 2 ነኝ 4 እስማማለሁ
ተ.ቁ ሃሳቦች 1 3 5

1 ገቢየን እንዴት ለግብር ሰብሳቢዉ መሰሪያቤት

እንደማሳዉቅ በቂ ግንዛቤ አለኝ
2 ወጪ እና ገቢየን እንዴት መመዝገብ እንዳለብኝ
እና ለምን ያህል ጊዜ የሂሳብ ሰነድ ማስቀመጥ
እንዳለብኝ አዉቃለሁ
3 የሚጠበቅብኝን ግብር በተሰጠኝ የጊዜ ገደብ
መክፈል እንዳለብኝ አዉቃለሁ

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 Appendices 3: Number of large tax payers in Addis Ababa

No. Sub city Total Tax payers Category “A” Category “B”

1 Ledeta Sub city 4,018 1,906 2,112

2 Arada Sub city 6,409 4,262 2,147
3 Gulele 6,217 4,111 2,106
4 Nefas Silk 14,450 6,064 8,386
5 Bole 11,024 5,813 5,211
6 Yeka 11,119 4,857 6,262
7 Kirkos 9,834 6,100 3,734
8 Akaki Kality 7,088 2,329 4,759
9 Addis Ketema 5,952 2,358 3,594
10 Kolefe Keranyo 8,110 4,091 4,019
11 Merkato 1 Branch 6,460 3,566 2,894
12 Merkato 2 Branch 8,101 6,691 1,410
13 Addis Ababa 1 4,295 4,295 -
አ/አ/ቁ 1/መ/ግ/ከ/ቅ/ፅ
14 Addis Ababa 2 5,107 5,107 -
አ/አ/ቁ 2/መ/ግ/ከ/ቅ/ፅ
Source: Ethiopian Revenue and Customs Authority Large tax payers’ office, Tax payers Report
March, 2017

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