Deyganto  Journal of Innovation and

Journal of Innovation and Entrepreneurship (2022) 11:8

https://doi.org/10.1186/s13731-022-00194-8 Entrepreneurship

RESEARCH Open Access

The effect of tax incentives practices

on the sustainability of micro, small
and medium enterprises in Ethiopia
during the outbreak of corona virus pandemic
Kanbiro Orkaido Deyganto*

*Correspondence:
[email protected] Abstract
Department of Accounting Purpose: This study was aimed to identify the effect of tax incentive practices on the
and Finance, Dilla University,
Dilla, Ethiopia sustainability of MSMEs during an outbreak of coronavirus pandemic in Ethiopia.
Design/methodology/approach: To achieve this objective, the researcher has
employed a quantitative research approach with an explanatory research design in
which six hypotheses have been tested. The primary data were collected from 300
MSMEs owners/operators using structured questionnaires. A multiple regression model
was employed to study the effect of tax incentives parameters on the sustainability of
MSMEs.
Findings: According to the regression analysis, this paper revealed that tax holiday, tax
allowance, reduction in the tax rate, accelerated depreciation, loss carry forward, and
tax exemption have a positive and statistically significant effect on the sustainability of
the MSMEs.
Research limitations: The current study was geographically focused on Ethiopia by
considering the MSMEs sector. The subject wise was focused on the effect of the tax
incentives on the sustainability of MSMEs. The primary data were limited to the year
2020. It might be improved in the future if other researchers incorporate large firms
in the country and use secondary data for the analysis of multiple years. Also, future
researchers will improve the same study by considering both monetary and non-mon-
etary incentives as study variables.
Practical implications: To survive during the COVID-19 pandemic, MSMEs need sup-
port from the government in the form of tax incentives. The tax incentives play a great
role in enhancing the growth and the sustainability of MSMEs as well as the economy
as a whole. So the owners of MSMEs have to ask the government to obtain necessary
support in the form of monetary and non-monetary incentives to be sustainable in
economic activity. Also, the findings and recommendations of the current study might
serve as an ingredient and be informative to the policymakers on the MSMEs sector.
The governments have to continue to shape tax incentives policies to support the
MSMEs’ sustainability by providing tax and non-tax incentives.

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Deyganto Journal of Innovation and Entrepreneurship (2022) 11:8 Page 2 of 22

Originality/value: This study contributes to empirical evidence about the effect of tax
incentives practices on the sustainability of MSMEs during the outbreak of COVID-19 in
Ethiopia by considering six tax incentive practices in terms of tax holiday, tax allow-
ance, reduction in the tax rate, accelerated depreciation, loss carried forward, and tax
exemption.
Keywords: Micro, Small and medium-sized enterprise, Tax incentives practices,
Sustainability, Corona virus pandemic, Ethiopia

Introduction
Promoting sustainable development goals (SDGs) are the top agenda of all governments
in the world to achieve the living standard of their people. MSMEs are the key tool to
achieve sustainable development goals. MSMEs are considered as an engine for the
economy and used as key instruments for reducing poverty through promoting sustain-
able development goals (Jansson, et al., 2017). The MSMEs support the governments by
reducing the unemployment rate and paying tax revenue to encourage economic devel-
opment (Agyapong, 2010). To remain their contribution to economic growth, MSMEs
have to be sustainable at any time (Tekola & Gidey, 2019). Even if MSMEs play a great
role in world economic growth, MSMEs were hit by the outbreak of the coronavirus
pandemic (Mogaji, 2020). The labor market impact of the COVID-19 pandemic reveals
the devastating effect on workers in the informal economy and hundreds of millions of
MSMEs worldwide, and as a result, MSME’s contribution to national GDP, creation of
employment opportunity, and other benefits are being hampered. MSMEs are mostly
at the bottom of the industrial chain and face problems of high energy consumption
and low output in developing countries. Thus, studying the sustainability of MSMEs
in emerging economies is necessary and solutions are needed to give them the support
they need to survive and continue to contribute to the global economy (Engidaw, 2021).
Currently, the Government of Ethiopia has formulated 10-year strategic plans from the
period 2020 to 2030 for becoming an African Beacon of Prosperity in 2030. Sustainable
development goals can be achieved if MSMEs sustain themselves in the country. But, the
pandemic led to massive damage to economic activities in general and MSMEs in par-
ticular following restrictions on human mobility by the government and stay-at-home
advice by the ministry of health. These actions and advice, then, have adversely affected
both the supply and demand side of MSME’s operation specifically, and the pandemic’s
negative consequences on MSME’s include raw material supply was stopped, shortage of
workers happened, shortage of working capital created, their operational cost increased,
and decline in consumers consumption of products of MSMEs (Engidaw, 2021). So, the
sustainability of MSMEs during COVID-19 pressure is a matter and burning issue of
researchers and academicians across the world. It is time for the governments to sup-
port the MSMEs during this hard time to achieve the sustainability of MSMEs. The gov-
ernment can also take on new responsibilities to support wider government actions and
help address the impact of the COVID-19 pandemic on their business activity. The tax
incentive is the best government measure in place intended to encourage MSMEs by
deduction, exclusion, exemption from tax liability for a certain period to sustain sustain-
ability, and contribution to economic development. Tax incentives are ways of reduc-
ing taxes for businesses and encouraging those businesses and individuals to engage in
Deyganto Journal of Innovation and Entrepreneurship (2022) 11:8 Page 3 of 22

behavior that is socially responsible and benefits the community. So that well-designed
tax incentive practices have a positive and statistically significant effect on the growth
and sustainability of MSMEs (Atawodi & Ojekal, 2012; Ahmedova, 2015; Twesige &
Gasheja, 2019).
The topic effect of tax incentives practices on the sustainability of MSMEs in Ethiopia
is overlooked and not researched well during the Outbreak of the Corona Virus Pan-
demic. To the level of knowledge of the researcher, few pieces of research have been
conducted on a related topic in Ethiopia. For instance, Ayele (2006); Alene (2020); and
Engidaw (2021) were addressed factors affecting micro and small business enterprises’
performance in Ethiopia. The empirical studies ignored the effect of tax incentives prac-
tice on the sustainability of MSMEs during the COVID-19 pandemic because MSMEs in
the country were hit by the pandemic. This is why the researcher was motivated to con-
duct this research work to fill the aforementioned research gaps. Specifically, the paper
was designed to identify the effect of six tax incentive indicators, like tax holiday, tax
allowance, decrease in the tax rate, accelerated depreciation, loss carry forward, and tax
exemption, on the sustainability of MSMEs in Ethiopia during the COVID-19 pandemic.
Hence, the findings and recommendations of the current study would serve as an ingre-
dient and be informative to the government, MSMEs owners, and policymakers on the
MSMEs sector.
The rest of the paper was organized as follows: section two reviews related to liter-
ature. Section three describes the methodology. Results and discussion is included in
section four. Section five provides conclusions and recommendations. Lastly, section six
provides direction for future research.

Literature review
Coronavirus disease
In early 2020, after a December 2019 outbreak in China, the World Health Organiza-
tion identified SARS-CoV-2 as a new type of coronavirus. The outbreak quickly spread
around the world. COVID-19 is a disease caused by SARS-CoV-2 that can trigger what
doctors call a respiratory tract infection. It can affect your upper respiratory tract
(sinuses, nose, and throat) or lower respiratory tract (windpipe and lungs). It spreads
the same way other coronaviruses do, mainly through person-to-person contact. Infec-
tions range from mild to deadly. The World Health Organization (WHO) on March 11
declared COVID-19 a pandemic, pointing to the over 118,000 cases of coronavirus ill-
ness in over 110 countries and territories around the world and the sustained risk of
further global spread. An epidemic refers to an uptick in the spread of a disease within a
specific community. By contrast, the WHO defines a pandemic as the global spread of a
new disease, though the specific threshold for meeting those criteria is fuzzy. The term
is most often applied to new influenza strains, and the CDC says it is used when viruses
“can infect people easily and spread from person to person in an efficient and sustained
way” in multiple regions. The declaration refers to the spread of a disease, rather than
the severity of the illness it causes (Ratten, 2020).
Coronavirus disease (COVID-19) is an infectious disease caused by a newly discov-
ered coronavirus. Most people who fall sick with COVID-19 will experience mild to
moderate symptoms and recover without special treatment. The virus that causes
Deyganto Journal of Innovation and Entrepreneurship (2022) 11:8 Page 4 of 22

COVID-19 is mainly transmitted through droplets generated when an infected person

coughs, sneezes, or exhales. These droplets are too heavy to hang in the air and quickly
fall on floors or surfaces. You can be infected by breathing in the virus if you are within
proximity of someone who has COVID-19, or by touching a contaminated surface and
then your eyes, nose, or mouth. A coronavirus is a kind of common virus that causes
an infection in your nose, sinuses, or upper throat. Most coronaviruses are not danger-
ous. Corona Virus emerged in Wuhan, China, spread across the world infecting more
than 6.1 million and causing the death of more than 371,857 people as of June 1, 2020.
In Africa, since the first case was reported in Egypt, the virus has spread to 53 coun-
tries within weeks. As of June 1, 2020, more than 146,996 cases and 4222 deaths were
reported. In Ethiopia, a total of 1257 cases and 12 deaths were reported by the Minis-
try of Health on June 1, 2020(MOH, 2020) and Community Health Institute (2020). The
outbreak of the COVID-19 pandemic has disturbed the political, economic, social, reli-
gious, and financial structure of the world (Mogaji, 2020).

Definition of MSMEs
While there still lacks a universally accepted definition, MSMEs are widely recognized
for the important contributions they make to sustainable development, in terms of con-
tributions to economic growth, creation of decent jobs, provision of public goods and
services, as well as poverty alleviation and reduced inequality. According to the revised
MSMEs Growth Stages Guideline No. 004/2011, the revised definition considers used
labor force, including family labor; total assets without working building and the division
of sub-sector into service and industry are the main criteria (Table 1).
Besides, the minister’s proclamation number 201/2011 defines micro-enterprises as an
enterprise having total capital of Br 50,000 not including building for service enterprise
or not exceeding Br 100,000 for industrial enterprise. The proclamation also defines a
small-scale enterprise as an enterprise having to total capital of Br 50,001 to 100,000
not including building and having 6–30 employees for service or having the capital of
Br 100, 001 to 1,500,000 for the industry. Medium enterprises are these business enter-
prises with a total investment between Birr 500,000 up to Birr 1 million, including
those enterprises that have high technical consultancy and excluding another high-tech
establishment.

Sustainability of MSMEs
Research shows that investing and enabling MSMEs to fulfill their development poten-
tial can have significant contributions to 60% of the SDG targets, including those related
to goals SDG 8 (Promote sustained, inclusive, and sustainable economic growth, full and
productive employment, and decent work for all) and SDG 9 (Build resilient infrastruc-
ture, promote inclusive and sustainable industrialization, and foster innovation), among
others. Thus, investing in and supporting the sustainability of MSMEs in the world is an
integral part of the sustainability efforts of clients, can yield significant progress towards
an economy that works for all. MSMEs represent the lion’s share of businesses and
employment, as they represent 99% of businesses and 67% of employment. Therefore,
they are among the strongest drivers of economic development. However, despite their
Table 1 Definition of MSMEs in Ethiopia
Deyganto Journal of Innovation and Entrepreneurship

Level of enterprise Sector Employment Total asset(in Birr)

Microenterprise Industry sector: (includes manufacturing, construction, A business enterprise which uses not over five labor The monetary value of the enterprise’s total asset is not
and mining sub-sectors) force, including business owner over 100,000 Ethiopian Br
Service sector: (includes retail trade, transport, hotel, A business enterprise which uses not over five labor The total asset is not over 100,000 Ethiopian Br
(2022) 11:8

and tourism information technology and repairs) force, including business owner
Small enterprise Industrial sector: (includes manufacturing, construc- A business enterprise that uses 6–30 labor force, The financial value of the enterprise’s total asset ranging
tion, and mining sub-sectors) including business owners and family labor from 100,001 to 1500,000 Br
Service sector: (includes retail trade, transport, hotel, A business enterprise that uses 6–30 labor force, The monetary value of the enterprise’s total asset rang-
and tourism information technology and repairs) including business owners and family labor ing from 50,001 to 500,000 Br
Medium-sized Enterprises Industrial sector: (includes manufacturing, construc- Above 30 labor Birr 1,500,000 up to Birr 2 million
tion)
Service sector: (includes retail trade, transport, hotel, Above 30 labor Birr 500,000 up to Birr 1 million
and tourism information technology and repairs)
Source: Alene (2020)
Page 5 of 22
Deyganto Journal of Innovation and Entrepreneurship (2022) 11:8 Page 6 of 22

potential, MSMEs in the region tend to stay small and are significantly less productive
than large firms (Inter-American Development Bank, 2021).
At IDB Invest we offer inclusive and sustainable financial solutions by supporting
financial services clients to maximize their unique role in promoting sustainable and
inclusive economic growth. We do this by integrating a sustainability lens in their invest-
ments, products, and services to their clients, and also by expanding our clients’ finan-
cial inclusion of MSMEs and underserved populations. MSMEs have a very important
role in developing the Philippine economy. They help reduce poverty by creating jobs
for the country’s growing labor force. They stimulate economic development in rural
and far-flung areas; MSMEs are one of the core engines of the Indian economy and are
projected to grow further in the coming decade. MSMEs, especially manufacturing sec-
tor enterprises, are particularly resource-intensive and emit a high quantum of pollution
and carbon emissions. MSMEs in Ethiopia are the chief sources of jobs and income, sig-
nificantly contribute to the local, regional and national GDP and key policies to elimi-
nate poverty (Tekola & Gidey, 2019).

Empirical review of related studies

Emerging economies have introduced tax incentives for various reasons. In some coun-
tries in transition, such instruments may be seen as a counterweight to the investment
disincentives inherent in the general tax system. In other countries, the incentives are
intended to offset other disadvantages that investors may face, such as a lack of infra-
structure, complicated and antiquated laws, bureaucratic complexities, and weak
administration. In Ethiopia, with the increase in the number of people infected with
COVID-19, the government declared a state of emergency aiming to curb the spread of
the virus in the country. The state of emergency puts restrictions on travel and human
mobility which hurt the economy and businesses particularly micro and small sec-
tors. This effect requires more research-based evidence that shows the extent to which
MSMEs are affected. Although reports are coming out from different media outlets, fur-
ther evaluation is required to reveal the effect of the unprecedented pandemic on the
MSMEs and provide possible solutions. So far no study is conducted on this issue. Now,
it is time to respond to the mentioned gap through rapid assessment of the effect of
Corona Virus on MSME’s operation and provide insight for decision-makers in the sec-
tor and researchers to conduct a further investigation (Lemi et al., 2020). Prior studies
addressed the same issue and suggested that tax incentive indicators like tax holiday, tax
allowance, decrease in the tax rate, accelerated depreciation, loss carryforward, and tax
exemption on the sustainability of MSMEs.. The empirical findings are summarized as
follows (Table 2):

Conceptual framework
The theoretical framework explains the entire research briefly; for this study, there are
six explanatory variables, including tax holiday, tax allowance reduction in the tax rate,
accelerated depreciation, loss carried forward, and tax exemption as explanatory vari-
ables, and the sustainability of MSMEs as the dependent variable (Fig. 1).
Deyganto Journal of Innovation and Entrepreneurship (2022) 11:8 Page 7 of 22

Table 2 Summary of empirical review and hypotheses

Variable name Empirical Studies findings

Tax holiday Empirical studies, like Atawodi and Ojekal (2012); Tekola and Gidey (2019); Ahmedova
(2015); Boso et al. (2017); Fernández-Viñé et al. (2013); Twesige and Gasheja (2019);
and Jansson et al. (2017), were evidenced that tax holiday has positive effect On
Sustainability Of MSMEs. So it can be hypothesized that
H1: holiday has a positive and statistically significant effect on the sustainability of
MSMEs
Tax allowance Prior studies, such as Atawodi and Ojekal (2012); Ahmedova (2015); Boso et al. (2017);
Fernández-Viñé et al. (2013); and Twesige and Gasheja (2019), were suggested that
tax allowance has a positive effect On the Sustainability of MSMEs. So that a tentative
statement could be developed
H2: tax allowance has a positive and statistically significant effect on the sustainability
of MSMEs
Reduction in tax rate Studies were conducted by Ahmedova, (2015); Voronkova et al. (2018); Boso et al.
(2017); Fernández-Viñé et al. (2013); and Twesige and Gasheja (2019) were reduction
in tax rate has a positive effect on the sustainability of MSMEs. Hence, the hypothesis
can be developed as follows:
H3: reduction in tax rate has a positive and statistically significant effect on the sus-
tainability of MSMEs
Accelerated depreciation Experimental studies of Ahmedova (2015); Atawodi and Ojekal (2012); Boso et al.
(2017); Fernández-Viñé et al. (2013); Twesige and Gasheja (2019); and Jansson et al.
(2017) were evidenced that accelerated depreciation has a positive effect on the
sustainability of MSMEs
H4: accelerated depreciation has a positive and statistically significant effect on the
sustainability of MSMEs
Loss carry forward First-hand studies, like Ahmedova (2015); Boso et al. (2017); Fernández-Viñé et al.
(2013); Twesige and Gasheja (2019); Jansson et al. (2017); and Atawodi and Ojekal
(2012), were found out that Loss carry forward has a positive effect on the sustainabil-
ity of MSMEs. So the researcher developed the tentative statement as follows:
H5: Loss carry forward has a positive and statistically significant effect on the sustain-
ability of MSMEs
Tax exemption Previous studies were undertaken by Boso et al. (2017); Fernández-Viñé et al. (2013);
Twesige and Gasheja (2019); Jansson et al. (2017); Atawodi and Ojekal (2012); and
Ahmedova (2015) where evidenced tax exemption has a positive effect on the sus-
tainability of MSMEs. It can be hypothesized that
H6: Tax exemption has a positive and statistically significant effect on the sustainabil-
ity of MSMEs
Source: own development based on the empirical review (2020)

Research methodology
Research design and research approach
This paper has employed an explanatory research design because the objective of this
study is to identify the effects of tax incentives on the growth of MSMEs in Ethiopia.
The research approach that was employed in this study was a quantitative research
approach due to the quantitative nature of the data.

Target population, sampling techniques, and sample size determination

Target population
The target population was 2,490,645 MSMEs licensed operated in Ethiopia as of May
2020.
Deyganto Journal of Innovation and Entrepreneurship (2022) 11:8 Page 8 of 22

Independent Variables Dependent Variable

1) Tax holiday

2) Tax Allowance

3) Reduction in tax rate

4) Accelerated Depreciation
Sustainability of MSMEs

5) Loss carryforward

6) Tax Exemption

Fig. 1 Conceptual Framework. Source: Own development based on literature review (2020)

Table 3 Sample size distribution

Sampling Unit The population of Sample Size calculations Sample size from
each enterprise each enterprise

Micro business Enterprises 930,215 (930,215/2,490,645) × 400 150

Small-scale Enterprises 830,215 (830,215/2,490,645) × 400 133
Medium-Sized Enterprises 730,215 730,215/2,490,645) × 400 117
Total 2,490,645 (2,490,645/2,490,645) × 400 400
Source: Federal Micro and Small Enterprises Development Agency (2020)

Sampling techniques
To select a sample size from 2,490,645 MSMEs, the researcher used a simple random
sampling technique to give equal chances to MSMEs owners/operators.

Sample size determination

To determine the sample size for this study, the researcher has used the mathematical
formula of Yamane (1967) by taking into account the total population, the sampling
error, and the level of reliability, and it is assumed that the sample would have 95% reli-
ability about population and a sampling error will be 5%. This simplest formula is.

N
n= ,
1 + 0.052 ∗ N
 

where n is the sample size; N is the target population; 1+0.05 2 ∗2,490,645 = 400.
2,490,645


The four hundred sample size was distributed among Micro business Enterprises,
Small-scale Enterprises, and Medium-Sized Enterprises in Ethiopia (Table 3).
Deyganto Journal of Innovation and Entrepreneurship (2022) 11:8 Page 9 of 22

Therefore, the maximum sample size of this study was 400 MSMEs officers/owners in
Ethiopia, which consists of 150 Microbusiness Enterprises, 133 Small-Scale Enterprises,
and 117 Medium-Sized Enterprises.

Operational definition of variables

Variables
The dependent variable is the sustainability of MSMEs and independent variables are six
tax incentive indicators (tax holiday, tax allowance, decrease in the tax rate, accelerated
depreciation, loss carry forward, and tax exemption). They have operationally defined as
follows (Table 4):

Econometric model specification

To examine the effect of tax incentives on the sustainability status of MSMEs, the mul-
tiple regression model has been employed to observe the relation of each tax incen-
tive parameter with sustainability indicators, such as increasing number of employees,
sales volumes, market share, customer base, and assets growth using Likert scale due
to tax incentives provided to the enterprises for last 12 months during the existence of
COVID-19. The equation of the model was expressed as:

Table 4 Summary of variables operational definition and scale of measurement

Variables incorporated in the model Unit of measurement Sign expected

Dependent variable
Sustainability MSMEs: increasing in sustainability indicators, such Likert scale questionnaire
as increasing number of employees, sales volumes, market share,
customer base as highly decreased (1), decreased (2), constant
(3), improved (4), and highly improved (5) since last 12 months
Explanatory variables
Tax holiday: tax holidays are the temporary exemption of a new Likert scale questionnaire +
firm or investment from certain specified taxes, typically at least
corporate income tax
Tax allowance: tax allowance is a deduction of a certain fraction Likert scale questionnaire +
of investment from taxable profits (in addition to depreciation)
Reduction in tax rate: reduction in tax rates leads to lower Likert scale questionnaire +
production, distribution, and selling costs which lead to higher
prices, and as a result, consumers change their buying behavior
Accelerated depreciation: accelerated depreciation is depre- Likert scale questionnaire +
ciation at a faster schedule than available for the rest of the
economy. This can be implemented in different ways, including
a higher first-year allowance, or increased depreciation rates.
Total tax payments in nominal terms over time are unaffected,
but their net present value is reduced and the liquidity of firms is
improved
Loss carry forward: loss carried forward refers to an accounting Likert scale questionnaire +
technique that applies the current year’s net operating loss (NOL)
to future years’ net income to reduce tax liability. This results
in lower taxable income in positive NOI years and reduces the
amount the company owes the government in taxes
Tax Exemption: a tax exemption is the right to exclude all or some Likert scale questionnaire +
income from taxation by federal or states governments. Most tax-
payers are entitled to various exemptions to reduce their taxable
income, and certain individuals and organizations are completely
exempt from paying taxes
Source: Own construct, 2020
Deyganto Journal of Innovation and Entrepreneurship (2022) 11:8 Page 10 of 22

Table 5 Reliability Statistics

Cronbach’s Alpha No. of items

0.947 44
Source: Survey data and SPSS result, 2020

Table 6 KMO and Bartlett’s test

Kaiser–Meyer–Olkin measure of sampling adequacy 0.889

Bartlett’s test of sphericity Approx, Chi-square 8230.901
df 136
Sig 0.000
Survey data and SPSS result, 2020

   
SustainabilityofMSME =β0 + β1 ∗ Taxholiday + β2 ∗ TaxAllowance
   
+ β3 ∗ ReductioninTaxRate + β4 ∗ AcceleratedDepreciation
   
+ β5 ∗ LossCarryForward + β6 ∗ Taxexemption + U ,

whereas Ü = error term.

Data collection instruments and methods analysis

To collect appropriate and sufficient data for the study structured questionnaire were
used. It has prepared both in English and Amharic languages to minimize language
understanding barriers. This has been done because most MSMEs were not understood
the English language. After the accomplishment of the data collection procedure, it was
classified as per each variable; the qualitative data were coded to be measured quantita-
tively. In this research, both descriptive and inferential statistics will make with the help
of SPSS version 21.0.

Reliability and validity test

Reliability test
To test reliability, the researcher employed Cronbach’s Alpha (α) which is the most com-
mon measure of reliability and a value greater than 0.7 is very acceptable. This has been
tested as follows (Table 5):
Result depicted that the value Cronbach’s Alpha value for the whole 44 items is valid
for 0. 947, which means that the instrument has a high level of consistency (above 0.85).
This indicates that all the variables under consideration accounts above the scientifi-
cally accepted threshold; therefore, the study is reliable under this circumstance. Com-
pared with the minimum value of alpha 0.70 advocated by Cronbach’s (1951), then the
responses generated for all of the variables used in this research were reliable enough for
data analysis. This implies that the data incorporated in SPSS is reliable.
Deyganto Journal of Innovation and Entrepreneurship (2022) 11:8 Page 11 of 22

Validity test
Test validity is the extent to which a test accurately measures what it is supposed to
measure. In this research, the researcher employed exploratory factor analysis to test the
validity of the questionnaire. Before running exploratory factor analysis, KMO and Bart-
lett’s tests have been carried out.

KMO and Bartlett’s test

Table 6 shows two tests that indicate the suitability of your data for structure detec-
tion. The Kaiser–Meyer–Olkin Measure of Sampling Adequacy is a statistic that indi-
cates the proportion of variance in your variables that might be caused by underlying
factors. High values (close to 1.0) generally indicate that factor analysis may be useful
with your data. If the value is less than 0.50, the results of the factor analysis prob-
ably will not be very useful. Bartlett’s test of sphericity tests the hypothesis that your
correlation matrix is an identity matrix, which would indicate that your variables are
unrelated and therefore unsuitable for structure detection. Small values (less than
0.05) of the significance level indicate that factor analysis may be useful with your
data. This test specifies factor analysis is suitable for testing validity.
Table 7 presents the results of Exploratory Factor Analysis (EFA) carried out on the
current study and the results were obtained from SPSS. The items with less than 0.5
associated variable load factor will be deleted, but there is no item with less than 0.5
load factor. The value of all items is greater than five of the items, which is kept to
examine the variables. This showed that the validity is satisfied through Exploratory
Factor Analysis.

Ethical considerations
The ethical considerations given attention by the researchers and enumerators while
conducting the research that includes voluntary participation, no harm would to par-
ticipants, anonymity, and confidentiality, not deceiving the subjects, and privacy of
participants. The finding of this study will encourage the sustainability of MSMEs
other than harming them.

Results and discussion

Response rate
This part deals with the analysis and discussion of data collected from 300 respond-
ents out of 400 MSMEs officers/owners in Ethiopia. The response rate was 75% con-
sists which imply almost more than 50% of MSMEs owners/operators have been
taking part in the process of data collection. Then, the analysis of the data was based
on the availability of tax incentives offered to MSMEs, descriptive statistics, person
correlation matrix, linear regression model assumptions, regression analysis, and
hypotheses testing.
Deyganto Journal of Innovation and Entrepreneurship (2022) 11:8 Page 12 of 22

Table 7 Exploratory factor analysis

Items 1 2 3 4 5 6 7

MSMEs Sustainability
There is an increase in profitability compared to main com- 0.865
petitors during the last 12 months
There is an increase in sales volumes compared to main 0.819
competitors during the last 12 months
There is an increase in Market share compared to similar busi- 0.540
ness during the last 12 months
There is an increased Customer base compared to main 0.661
competitors during the last 12 months
There is an increasing number of employees compared to 0.570
main competitors during the last 12 months
There is increased Assets growth compared to main competi- 0.843
tors since the last 12 months
There is increased Product quality compared to main com- 0.810
petitors during the last 12 months
There is increase Production levels compared to main com- 0.570
petitors during the last 12 months
There is increase The overall performance compared to main 0.848
competitors during the last 12 months
Tax holiday
Tax holiday incentives existing in the country is too costly 0.830
to become beneficiary for MSMEs
Government make publicly available information about tax 0.726
holiday incentives for MSMEs
The country adopted an equivalent standard for granting 0.861
tax holiday incentives for MSMEs
Everyone of MSMEs knows that which authority has the 0.861
final decision on whether to grant tax holiday incentives to
the specific investment
MSMEs operators know that where does the country’s tax 0.814
incentives regime provisions include tax holidays
The tax holiday incentive is known and in practice in your 0.504
enterprise
Our enterprise has given the tax relief due to purchasing 0.731
business equipment
Tax allowance incentives existing in the country is too 0.549
costly to become beneficiary for MSMEs
Tax allowance
State make publicly available information about tax allow- 0.710
ance incentives for MSMEs
The country adopted an equivalent standard for granting 0.640
tax allowance incentives for MSMEs
MSMEs knows that which authority has the final decision 0.841
on whether to grant tax allowance incentive to the specific
investment
Operators of MSMEs know that where the country’s tax 0.740
incentives regime provisions include tax allowance
The tax allowance incentive is known and in practice in 0.641
your enterprise
Accelerated depreciation
Accelerated depreciation provides MSMEs a way of defer- 0.856
ring income taxes by reducing taxable income in current
years
I believe that accelerated depreciation is a valuable tax 0.707
incentive that encourages SMEs to purchase new assets
Deyganto Journal of Innovation and Entrepreneurship (2022) 11:8 Page 13 of 22

Table 7 (continued)
Items 1 2 3 4 5 6 7

Our enterprise uses the double-declining balance method 0.683

to calculate the depreciation expense of fixed assets by
SMEs
Our firm has always used accelerated depreciation during 0.571
the last five years
Accelerated depreciation is expected to be much more 0.480
productive during its early years
The government of Ethiopia charged a lower tax rate for 0.824
encouraging MSME
I believe that the tax rate of SMEs is lower in completion 0.825
sole proprietorship and partnership
Reduced tax rate
Deduction of tax rates for SMEs is helpful to increase 0.971
retained profits for reinvestment purposes
The government protects the market for MSMEs import 0.514
duties and promoting of purchases of locally produced
goods by reducing the tax rate
When reduced tax incentive plans are in place, employees 0.848
recognize that significant effort on their behalf will be
acknowledged and rewarded
The tax authority of Ethiopia charged a lower tax rate for 0.830
encouraging MSME
I believe that the tax rate of MSMEs is lower than other 0.726
business enterprises
loss carried forward:
The government of Ethiopia charged a lower tax rate for 0.947
encouraging MSME
Our enterprise granted Loss carry forward by the govern- 0.948
ment
A loss carry forward refers to an accounting technique 0.944
that applies the current year’s net operating loss (NOL) to
future years’ net income to reduce tax liability
A tax loss carry forward allows taxpayers to use a taxable 0.948
loss in the current period and apply it to a future tax
period
Government Provides to use a tax loss carry forward for 0.944
several different purposes
The loss of income in the current year cannot be carried 0.947
forward if an ITR reporting the loss has not been filed
within the due date
Tax exemptions
A tax exemption is the right to exclude all or some income 0.947
from taxation by federal or states governments
I believe that tax exemption boosts our business sustain- 0.948
ability
Tax exemption MSMEs is helpful to increase retained prof- 0.947
its for reinvestment purposes
Tax incentives can have both positive and negative 0.948
impacts on an economy
Survey data and SPSS result, 2020

Availability of tax incentives offered to MSMEs

Before collecting data in the form of a five-point Likert scale, the researcher asked the
Deyganto Journal of Innovation and Entrepreneurship (2022) 11:8 Page 14 of 22

Table 8 Tax Incentives offered to MSMEs

Do you ever offer tax incentives by tax authority during Frequency Percentage
an outbreak of COVID-19?

Valid No 0 0
Yes 300 300
Total 300 100.0
Source: Personal survey, 2020

Table 9 Summary of descriptive statistics

Variables N Minimum Maximum Mean Std. deviation

Sustainability of MSMEs 300 1.00 5.00 2.6700 1.20246

Tax holiday 300 1.00 5.00 2.6000 1.11541
Tax allowance 300 1.00 5.00 3.1000 1.32509
Reduction in tax rate 300 1.00 5.00 3.2804 0.96692
Accelerated depreciation 300 1.00 5.00 2.9980 0.75470
Loss carry forward 300 1.00 5.00 2.8300 1.24348
Tax exemption 300 1.00 5.00 2.8700 0.96759
Sources: Survey data, 2020

owners/operators of MSMEs whether they offered any kind of tax incentives by tax
authority during an outbreak of COVID-19 to check the existence of tax incentive prac-
tices in Ethiopia (Table 8).
The role of tax incentives in enhancing the sustainability of micro, small, and medium-
sized enterprises is a very significant issue because the sustainability of small and
medium-sized enterprises promotes the economic development of the nation in general.
In this study, more than 100% (300) used tax incentives provided by the tax authority. If
other things are constant, the most MSMEs in the city will achieve their sustainability.

Descriptive statistics results

Descriptive statistics are very important because if we simply presented our raw data it
would be hard to visualize what the data were showing, especially if there was a lot of it.
Descriptive statistics, therefore, enables us to present the data in a more meaningful way,
which allows a simpler interpretation of the data. In this study, descriptive statistics were
analyzed as follows:
The Likert scale questionnaire of sustainability has 5 maximum and 1 minimum values
respectively. The standard deviation value of 1.20246 was indicated that there was a vari-
ation of actual responses from the mean. About other variables the tax holiday 2.6000
with (SD) 1.11541, tax allowance of mean 3.1000, (SD) of 1.32509, reduction in tax rate
3.2804 with SD of 0.96692, accelerated depreciation 2.9980 with SD 0.75470, loss carry
forward 0.8300 with SD of 1.24348 and tax exemption with 2.8700 with SD 0.96759 have
the overall mean and standard deviation, respectively. In short, all variables incorpo-
rated in the model have a moderate contribution to the response variable sustainability
of MSMEs. But the mean value of the variables could not be considered for interpreta-
tion since it was affected by the extraneous values.
Deyganto Journal of Innovation and Entrepreneurship (2022) 11:8 Page 15 of 22

Correlation analysis
Correlation analysis measures the relationship between two items. The correlation
matrix for this study was computed as follows:
With regard to the relationship between the sustainability of MSMEs and independent
variables with a coefficient of correlation 1 indicates that each variable is perfectly cor-
related with each other. The result of the correlation analysis in Table 9 shows that tax
holiday, tax allowance, reduction in the tax rate, accelerated depreciation, loss carried
forward, and tax exemption were positive and significantly correlated with sustainability
at a 1% level of significance. The correlation among independent variables is not more
than 0.8. This implies that there is no multicollinearity problem in the model and the
values of correlation are reliable.

Assessment of ordinary least square assumptions

The most common assumptions to be tested before running the final regression result
are normality, multicollinearity, autocorrelation, and heteroscedasticity.

Assumption #1: the values of the residuals are normally distributed (normality test)
The Classical Linear Regression Model assumes that the error term is normally distrib-
uted with the mean of error being zero as the positive error will offset the negative error.
This assumption can be tested by looking at the distribution of residuals. We can do this
by checking the histogram this has shown as follows:

Table 10 Pearson correlation matrix of the variables

Variables 1 2 3 4 5 6 7

Sustainability of MSMEs (1) 1

Tax holiday (2) 0.350** 1
Tax allowance (3) 0.153** 0.285** 1
**
Reduction in tax rate (4) 0.257 0.132* 0.060 1
Accelerated depreciation (5) 0.067** 0.064 − 0.181** 0.264** 1
** * **
Loss carry forward (6) 0.352 − 0.129 − 0.452 0.045 0.005 1
Tax exemption (7) 0.368** − 0.262** − 0.021 0.017 − 0.184** 0.399** 1
**Correlation is significant at the 0.01 level (2 tailed)
*Correlation is significant at the 0.05 level (2 tailed)
Source: Survey data, 2020
Deyganto Journal of Innovation and Entrepreneurship (2022) 11:8 Page 16 of 22

Source: Personal Survey data, 2020.

Based on the results shown above, the histogram on the distribution of residuals which
is bell shaped is linear to the regression line from the SPSS output. So, the researcher
concluded that there is no normality problem (the values of the residuals are normally
distributed) on the data used for this study (Table 10).

Assumption #2: test for multicollinearity

This is essentially the assumption that your predictors are not too highly correlated with
one another. The tolerance levels for all variables are greater than 0.10 and the VIF value
is less than 10; then we can conclude that predictors are not too highly correlated with
one another.
As shown in the collinearity Table 11, the tolerance levels for all variables are greater
than 0.10 and the VIF value is less than 10. This indicates that there were no multicollin-
earity problems that alter the analysis of the findings; rather it leads to the acceptance of
R-value, tolerance, and VIF values.

Table 11 Collinearity statistics

Variables Collinearity statistics
Tolerance VIV

Tax holiday 0.824 1.214

Tax allowance 0.658 1.519
Reduction in tax rate 0.897 1.115
Accelerated Dep 0.852 1.174
Loss carry forward 0.629 1.590
Tax exemption 0.720 1.388
Source: Personal survey data, 2020
Deyganto Journal of Innovation and Entrepreneurship (2022) 11:8 Page 17 of 22

Fig. 2 Assessment of heteroscedasticity using Scatter plot. Source: Personal survey data, 2020

Assumption #3: the values of the residuals are independent (autocorrelation)

This is the same as saying that we need our observations (or individual data points) to
be independent of one another (or uncorrelated). We can test this assumption using
the Durbin-Watson statistic, through SPSS. The Durbin-Watson closer to 2 or more is
acceptable. The Durbin-Watson statistics value which is close to 2, equal to 2, or more
suggests that there is no autocorrelation among error terms. Accordingly, the Durbin-
Watson statistics value of 1.932 is close to 2, which indicates that autocorrelation is not
a threat to the use of OLS in this study (see regression Table 7). Therefore, it can be con-
cluded that the values of the residuals are independent which implies the absence of a
serial correlation problem in our regression analysis.

Assumption #4: the variance of the residuals is constant (heteroscedasticity test)

This is called homoscedasticity and is the assumption that the variation in the residu-
als (or amount of error in the model) is similar at each point across the model. In other
words, the spread of the residuals should be fairly constant at each point of the predictor
variables (or across the linear model). We can get an idea of this by looking at our origi-
nal scatterplot but to properly test this, we need to ask SPSS to produce a special scatter-
plot for us that includes the whole model (and not just the individual predictors). To test
the 4th assumption, we need to plot the standardized values our model would predict,
against the standardized residuals obtained. This has shown as follows (Fig. 2):
The above figure showed that there is homoscedasticity and the assumption that the
variation in the residuals (or amount of error in the model) is similar at each point across
the model is satisfied. So, we can conclude that there is no heteroscedasticity problem in
the model.
Table 12 Regression results
Deyganto Journal of Innovation and Entrepreneurship

R = 0.687, R2 = 0.472, Ad R2.461,Std. Error of the Estimate = 0.88299, Durbin-Watson (d) = 1.932, F-statistic = 43.583, p-value = 0.000, ANOVA with (p-value of 0.000
Model Unstandardized Coefficients Standardized T Sig 95.0% Confidence Interval for B Collinearity Statistics
Coefficients
B Std. Error Beta Lower Bound Upper Bound Tolerance VIF
(2022) 11:8

(Constant) − 2.378 0.378 − 6.285 0.000 − 3.123 − 1.633

Tax holiday 0.433 0.050 0.401 8.578 0.000** 0.333 0.532 0.824 1.214
Tax Allowance 0.199 0.047 0.217 4.139 0.000** 0.103 0.290 0.658 1.519
Reduction in Tax Rate 0.178 0.056 0.141 3.136 0.002** 0.065 0.285 0.897 1.115
Accelerated Dep 0.170 0.073 0.107 2.314 0.021* 0.025 0.314 0.852 1.174
Loss Carry Forward 0.341 0.052 0.353 6.594 0.000** 0.240 0.443 0.629 1.590
Tax exemption 0.441 0.062 0.355 7.088 0.000** 0.318 0.563 0.720 1.388
The dependent variable, sustainability of MSMEs, **Correlation is significant at the 0.01 level, *Correlation is significant at the 0.05 level (2 tailed)
Source: Personal Survey data, 2020
Page 18 of 22
Deyganto Journal of Innovation and Entrepreneurship (2022) 11:8 Page 19 of 22

The regression analysis (inferential statistics): sustainability of MSMEs

As long as the model satisfies the OLS assumptions for linear regression, the regression
coefficients give us the best possible estimates. Before running the final regression analy-
sis, this study tested normality, multicollinearity, autocorrelation, and heteroscedasticity
assumptions and confirmed that all the assumptions were satisfied in the aforemen-
tioned section. Then, the regression analysis was done as follows.
The multiple linear regression results are presented in Table 12; the adjusted
R-squared statistics of the model was 46.1 percent. The result indicates that 46.1 percent
variation in the dependent variable was jointly explained by the explanatory variables
in the model, whereas the remaining 53.9 percent of the variation in the sustainability
of MSMEs (as measured by the Likert scale) is explained by other variables which are
not included in the model. The coefficient of explanatory variables tax holiday 0.433, tax
allowance 0.199, reduction in tax rate 0.178, accelerated deprecation 0.170, loss carry
forward 0.341, tax exemption 0.441 implies that 1% increase in the variables leads to
43.3%,19.9%, 17.8%, 17%, 34.1%, and 44.1% increase in sustainability of MSMEs. Besides,
the F-statistics (43.583) in the model summary and ANOVA with (p-value of 0.000) were
used to test the overall significance of the model and indicated the reliability and validity
of the model at a 1% level of significance. This tells us that the model as a whole is statis-
tically significant.

Discussion
The result of this study shows that tax holiday with a coefficient of regression [β = 0.433]
has a positive and statistically significant effect on the sustainability of MSMEs at a 1%
level of significance since (p-value of 0.000 > 0.01). Hence, hypothesis one is accepted.
This finding is consistent with the finding of other studies results, such as Atawodi and
Ojekal (2012); Tekola and Gidey (2019); Ahmedova (2015); Boso et al. (2017); Fernández-
Viñé et al. (2013); Twesige and Gasheja (2019); and Jansson et al. (2017) who evidenced
tax holiday positive effect on the sustainability of MSMEs in Ethiopia. This implies that
the existence of a tax holiday enhances the sustainability of MSMEs operating in Ethio-
pia. Secondly, the coefficient of regression tax allowance [β = 0.199] is positive and sta-
tistically significant at a 1% level of significance with (p-value of 0.000 > 1%). Therefore,
hypothesis two stated is accepted. This finding is consistent with the general logic that
the existence of tax freedom enables to accumulation of capital since there are no annual
payments to the government. It is also consistent with empirical findings of Atawodi and
Ojekal (2012); Ahmedova (2015); Fernández-Viñé et al. (2013); and Twesige and Gasheja
(2019) which suggested that tax allowance has a positive effect on the sustainability of
MSMEs. This evidenced that tax allowance has a positive and significant effect on the
sustainability of MSMEs.
The result of coefficient of [β = 0.178] is positive and statistically significant at a 1%
level of significance because the sig of 0.002 is less than 1%. Hence, hypothesis three is
accepted. This finding is consistent with the empirical findings of Atawodi and Ojekal
(2012); Ahmedova (2015); Fernández-Viñé et al., (2013); and Twesige and Gasheja (2019)
where reduction in tax rate has a positive effect on the sustainability of MSMEs. This
tells us tax rate reduction has higher contribution tax sustainability of MSMEs. On
the other hand, the accelerated depreciation variable has a coefficient of regression is
Deyganto Journal of Innovation and Entrepreneurship (2022) 11:8 Page 20 of 22

[β = 0.170] is positive and statistically significant with (p-value of 0.021) which is signifi-
cant at a 5%level of significances. Therefore, hypothesis four is accepted. This finding is
consistent with regression results of studies by Boso et al. (2017); Fernández-Viñé et al.
(2013); and Twesige and Gasheja (2019) which evidenced that accelerated depreciation
has a positive effect on the sustainability of MSMEs. This indicates that considering the
higher amount of accelerated depreciation amount from income tax has a positive effect
on the sustainability of MSMEs in Ethiopia.
Concerning the loss carry forward, the result of this study shows that the increase in
loss carried forward with a coefficient of regression [β = 0.341] has positive and statisti-
cally significant at 5% level of significance (p value of 0. 0.00 < 1% level of significances).
Hence, hypothesis five is accepted. The result is similar with findings of Ahmedova
(2015); Boso et al. (2017); Fernández-Viñé et al. (2013); Twesige and Gasheja (2019); and
Twesige and Gasheja (2019) that found out that loss carry forward has a positive effect on
the sustainability of MSMEs. It can be concluded that loss carry forward has a positive
and significant effect on the sustainability of MSMEs. Last but not least, a tax exemp-
tion with a coefficient of regression of [β = 0.441] has a positive and significant effect on
the sustainability of MSMEs with a p value 0.000 < 5% level of significance. Therefore,
hypothesis six is accepted by the researcher. This finding is consistent with the empirical
result of Fernández-Viñé et al. (2013); Twesige and Gasheja (2019); Atawodi and Ojekal
(2012); and Ahmedova (2015) where evidenced tax exemption has a positive effect on
the sustainability of MSMEs. This implies that tax exemption for MSMEs has a positive
contribution to the sustainability of MSMEs.

Conclusion and recommendations

In this paper, the researcher explored the effect of tax incentive parameters, such as
tax holiday, tax allowance, tax reduction, accelerated depreciation, and loss carry for-
ward, on the sustainability of MSMEs. By keeping this objective in mind, the researcher
collected the primary data through a self-administrated questionnaire and analyzed
it through SPSS version 21.0. A multiple regression model was employed to test the
hypothesis. The conclusion that can be drawn from the findings was that hypotheses
one up to six have been accepted by the researcher. This tells us an increase in the tax
holiday, tax allowance, reduction in the tax rate, accelerated depreciation, loss carry for-
ward, and tax exemption, which lead to an increase in business sustainability of MSMEs.
This means the existence of tax incentive practices promotes the existence of MSMEs.
Hence, to attract MSMEs expansion sustainability, governments should give top prior-
ity to improving their countries’ MSMEs business climates by adopting additional tax
incentive practices to reduce the negative effect of the COVID-19 pandemic on overall
business to improve and promote the economic development of the nation while mini-
mizing the diverse effect of coronavirus on the survival and growth of MSMEs. The pol-
icymakers should continue to shape tax incentives policies by taking into account the
parameters, like tax holiday, tax allowance, reduction in the tax rate, accelerated depre-
ciation, loss carry forward, and tax exemption, to support the sustainability and growth
of MSMEs across the world. Besides, the MSMEs business owners/operators have to
understand and work on appropriate implementation of tax and non-tax incentives
Deyganto Journal of Innovation and Entrepreneurship (2022) 11:8 Page 21 of 22

provided for them to sustain their business performance and contribution to economic
development.

Further research direction for improving limitations of this study

No study is free of limitations; accordingly, there are limitations in the current study that
needs future improvements. This study was geographically focused on Ethiopia by con-
sidering the MSMEs sector. The subject wise was focused on the effect of the tax incen-
tives (tax holiday, tax allowance, accelerated depreciation, reduction in the tax rate, loss
carried forward, and tax exemptions) and on the sustainability of MSMEs during the
existence of COVID-19. It was set out to investigate the effect of six tax incentives indi-
cators. This study used only primary data which are limited to the year 2020. Hence, this
study can be enhanced/improved if it is done at continental and global levels and also
it is possible if it is done by using different methodology and sampling techniques. Fur-
ther researchers can also study the topic of non-tax incentives together with the sustain-
ability of MSMEs since the current variables explained about 46.1% and the remaining
53.9% variation on the growth of MSEs that were not incorporated in the current study.
The impact of the COVID-19 pandemic on the overall performance of MSMEs should
be further investigated with a combination of monetary incentives and non-monetary
incentives to be more confident in this study.

Authors’ information
Mr. Kanbiro Orkaido Deyganto has earned the MBA in Finance in 2017 G.C. Currently,
he was working at Dilla University as a lecturer and researcher in the Department of
Accounting and Finance. He has been published about 20 articles in areas of accounting,
auditing, small business enterprise performance, capital structure, public finance and
taxation, and credit risk management on different reputable journals with 53 citations
counted on the google scholar website.

Abbreviations
COVID-19: Coronavirus disease; MSMEs: Micro, small and medium-sized enterprises; IDB: Inter-American Development
Bank; SDGs: Sustainable development goals.

Acknowledgements
The author much honored to appreciate Dilla University which is the best educational institution in Ethiopia that strives
to serve the community and support problem-solving researches thoroughly. He also thanks the editors and the anony-
mous reviewers for their guidance in developing this research paper.

Authors’ contributions
The author has carried out all the whole works of this study. He designed the study research design and carried out the
fieldwork, document analysis, literature work, manuscript draft, and editorial. He undertook this study. The author also
read and approved the final manuscript.

Funding
This study was conducted by the author finance only. There is no financial support from any organization.

Availability of data and materials

The data are included in this manuscript.

Declarations
Ethics approval and consent to participate
Not applicable since this research did not involve human subjects.
Deyganto Journal of Innovation and Entrepreneurship (2022) 11:8 Page 22 of 22

Consent for publication

Not applicable.

Competing interests
The author declare that there are no competing interests.

Received: 14 December 2020 Accepted: 12 January 2022

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