ABSTRACT

Tax revenue collection is one significant issue of economic development among others. Taxation is
defined as government revenue to fulfill public necessities. Despite the fact that taxation is not favored
by many, it is vital that it is understood because it forms a critical element of how a government affects
the lives of its citizens. Governments of developing countries struggle to create modern tax systems.
However most of these developing countries are burdened with weak tax administration and tax
payers’ resentment towards taxes. The objective of this study is to assess tax collection problems
regard to category “A” tax payers found in Nifas-silk lafto sub-city. To achieve this objective, both
primary and secondary sources to collect data. The questionnaires will be distributed to selected tax
payers, tax officers and in- depth interview with management bodies. The study will be used descriptive
research design. The statistical treatment of data will be done by using the frequencies and percentages
through SPSS software.
 CHAPTER ONE

1. INTRODUCTION

1.1 Background of the Study

Tax is defined as a "a compulsory contribution payable by an economic unit to a government without
expectation of direct and equivalent return from the government for the contribution made ” (Bhatia,
2003).

The revenue of the Ethiopian government comes from different sources such as tax, public borrowing,
sales of public assets, and transfer payments. A tax is a fee charged or levied by a government on a
product, income, or activity. The purpose of taxation is to finance government expenditure (Gupta,
2001). One of the most important uses of taxes is to finance public goods and services, public goods
like roads, power, municipal services, street cleaning and other public infrastructures. Since public
goods and services do not allow a non-payer to be excluded, or allow exclusion by a consumer, there
cannot be a market in the good or service, and so they need to be provided by the government or a
quasi-government agency, which tend to finance themselves largely through taxes. Tax revenue

collection is one significant issue of economic development among others. Taxation is defined as
government revenue to fulfill public necessities. Despite the fact that taxation is not favored by many, it
is vital that it is understood because it forms a critical element of how a government affects the lives of
its citizens (Oberholzer, 2008).
Ethiopian Revenue and Customs Authority (ERCA) is the body responsible with taxes at federal
level .In Addis Ababa, there are different tax administrators at each sub city, in which Nifas Silk Lafto
sub city is one.
ERCA focuses on those people and vehicles that may involve in the act of bringing into or taking out of
goods, which customs duty and taxes are not paid and whose importation or exportation are prohibited
by law. The authority conducts investigation, audit and prosecutes offenders. In the attempt to
discharge its responsibility, the authority closely works with the Federal Police, Standardization
Authority, Ministry of Health and Immigration Service and with other stakeholders. There are ten sub
cities in Addis Ababa that are engaged in administering taxes from Category “A” and Category “B”
taxpayers. Besides the different Woredas found in each sub city are also dealing with taxes on Category
“C” taxpayers.
The study focus is on category “A” taxpayers that are found in Nifas Silk Lafto sub city. This category
is required to maintain proper books of account and other necessary documents for tax purpose (council
of Ministers, 2002). On the basis of the above background, this study is initiated to examine the
challenges of Category “A” taxpayers found in Nifas Silk Lafto sub city.
1.2. Statement of the Problem

To finance its expenditures a government may acquire fund from the service given by the government, tax,
loan and donation. From all sources of finance, tax is the major source. In principle, government could use
both domestic and external sources of finance that a country can tap to finance the deficit. The government
collected significant amount of revenue including grants, which could not fully finance the total
expenditure. Without grants, the deficit could have been also about significant. This makes the
borrowing and grant element of government’s total expenditure counts too much. Of the external grant
that constitute part of government revenue, almost half comes in the form of grants in kind and the
remaining comes in the form of untied cash (IMF, 2006).

Moreover, the prevalence such significant deficit demands the government to improve internal revenue
generating activities to reduce dependence on foreign funding. Perhaps the most commonly used is to
take corrective measures on the potential problems of tax administration at each tax office.
In order to raise adequate revenue to minimize revenue shortfall, ERCA and the different sub cities are
working together. Nifas Silk Lafto sub city tax authority has mandate to look into tax assessment,
periodic declarations, records and books of accounts to be maintained and submitted by taxpayers. The
authority conducts pre-audit assessment by the time these documents are submitted so as to perform
timely collection. This low revenue yield of taxation can be attributed to the fact that tax provisions are
not properly enforced either on account of the inability of administration to cope with them or on
account of straight forward collusion between the tax administration and taxpayers (World Bank,
1999).

Tax administration has to secure compliance with the laws by applying an array of registration,
assessment and collection procedures. A government can keep taxpayers from doing these activities,
and thus successfully avoid tax evasion depends on the nature of economy’s actual tax base. Tax
administration therefore, should aim at improving on laws regarding the registration, assessment,
collection revenue, and exploiting fully taxation potential of a country.
Therefore, identifying assessment tax collection problems at each tax office and taking corrective
measures need attention since they have adverse effects on the overall revenue of the government.
Accordingly, this study will tries to identify assessment of tax collection problems of the Nifas Silk
Lafto Sub-city Revenue and Customs Authority Branch Office.

1.3. Research Questions

 How effective and efficient tax assessment and collection system for category ’A’ tax payers in
Nifas Silk Lafto sub-city Revenues and Customs Authority Branch Office.?
  What problems are faced in the tax collection system at Nifas Silk Lafto sub city Revenues and
Customs Authority Branch Office?
 Do Tax payers have enough knowledge and awareness about taxation?

1.4 Objectives of the Study

1.4.1 General Objective

The general objective of this study is an assessment of tax collection problems in category ‘’A’’ tax payers
the case of Nifas Silk Lafto sub city Revenues and Customs Authority Branch Office.
1.4.2 Specific Objectives

 To assess the effective tax assessment and collection practices of the sub city.
 To identify problems that the authority faces with its customers with regard to collection of tax.
 To assess the tax payer’s knowledge and awareness about taxation.

1.5 Significance of the Study

This study will be important for the following reasons. It may give clear understanding of what problems
are there and how those problems were handled by both tax payers and Administrators. Thus, the
government will be able to adopt a comprehensive strategy, and disclosing the core problems on the tax
assessment and collection procedures so as to enabling them to put their effort to triumph over the observed
problems. The revenue bureau may use this finding to revise its strategies concerning tax assessment
and collection. Furthermore the results of finding will serve as a reference for other researchers on this
area.

1.6. Scope of the Study

More specifically, the scope of this study will be limited to assessment of tax collection problems in
category ‘’A’’ tax payers which are found in Nifas Silk Lafto sub city Revenues and Customs
Authority Branch Office.

1.7. Research Design and Methodology

The research design and methodology are elaborated in detail as mentioned below.

1.7.1. Research Design

The study will be adopted a descriptive research design in order to achieve the stated research objective
and to answer research questions. The design to study problem more easily and clearly by using
quantitative and qualitative methods.
1.7.2. Population and Sampling Techniques
Addis Ababa is a city which consists 10 sub cities. From these Sub-cities, Nifas Silk Lafto Sub-Cities
will be selected using random sampling technique, which gives each of them an equal chance of being
included in the study, because it was difficult and unmanageable to conduct a research on all of these
sub-cities at a time. Simple random sampling technique will be used to select sample tax payers.
According to 2005 E.C record of Dessie town Trade and Transport Office, there are a total of 7530 tax
payers out of which 553 under category of tax payer To determine the sample size of the study we
apply the formula provided by (Yamane, 1967).

Sample size needed (n) = N/ (1+N (e2))

Where 95% degree of confidence is selected in the study. Whereas the standard error (e) was 5% (0.05)
and the target population in the study was 708 households. Therefore, population size (N) could be 708.
Computed the needed sample size by plugging the values into the above formula,

Sample Size needed (n) = 708/ (1+708(0.05)2)

= 708/ (1+1.77)

=708/2.77

=255.59≅ 256

The sample size was 256 but due to time and resources constraints we have determined the sample size
to be 10% of the target population (708). Therefore the sample size was 71.

1.7.3. Data Sources

The data required for this study will be collected from both primary and secondary data.

1.7.4. Data Collection Instrument

The data will be collected from both primary and secondary sources through Questionnaire, interview
and document analysis which enable the researcher to gain genuine information from respondents.

1.7.5. Methods of Data Analysis

The research findings regarding an assessment of tax collection problems on category “A” tax payers
in case of Nifas Silk Lafto sub city Ethiopian customs and revenue authority’s branch administration
are the result of the data analysis and interpretation will be subjected to Statistical Software Package for
Social Science (SPSS). The research will be used descriptive statistics to analyze the collected data
with the aid of Statistical Package for Social Scientists (SPSS) version 16.0.
1.8. Organization of the Study

This paper is organized in two chapters. The first chapter is introduction, background of the study,
research problem, research objective, and significance of the study, scope of the study, and
organization of the study while the second chapter is literature review.
 CHAPTER TWO

2. REVIEW OF RELATED LITERATURE

2.1 Definitions and concepts of Tax
A tax is “a compulsory charge imposed by the Government without any expectation of direct return in
benefit”. In other words, a tax is a compulsory payment or contribution by the people to the
government for which there is no direct return to the taxpayers (Bhatia, 2003). A tax may be defined as
a “pecuniary burden laid upon individuals or property to support the government payment exacted by
legislative authority”. “A tax” is not a voluntary payment or donation, but an enforced contribution,
exacted pursuant to legislative authority” and is “any contribution imposed by government whether
under the name of tool, tribute, tangible, duty, custom, excise, subsidy, aid supply, or other name.
2.2. Category of Taxpayers
According to the federal income tax proclamation no.979/2016, source of income has classified into
five schedules: Schedules A (income from employment), Schedule B (income from rental of buildings),
Schedule C (income earned from business) and Schedule D (other income not categorized in any of the
three, e.g. Income from royalties). Schedule E (exempt income).Schedule C type of tax system, which
is the topic of this study, is further divided into three major categories, namely Category “A”, “B”, and
“C” based on the volume of their sales, form of their business and annual turnover.
Category “A” Taxpayers: Ethiopian Tax proclamation 979/2016 describes category ‘A’ taxpayers as
any company incorporated under the laws of Ethiopia or in a foreign country and any business having
an annual turnover of Birr 1,000,000 or more. They are required to submit Balance sheet, profit and
loss statement, incorporate gross profit and the manner in which it is computed, general and
administrative expense depreciation expenses and provisions and reserves to Revenue Authority at the
end of the year.

Category “B” Taxpayers: Category B taxpayers falls under the income range between 500,000 birr and
one million. This category of taxpayers should submit to the Revenue Authority profit and loss
statement at the end of the year similar to category ‘A’ taxpayers.
Category “C” taxpayers: are taxpayers that are not classified under Categories “A” and “B”, and
businesses whose annual turnover is estimated up to Birr 500, 000 are classified under this category of
taxpayers. A standard assessment method should be used to determine the income tax liability of
category “C” taxpayers. The taxpayer should pay the tax determined in accordance with standard
assessment.
The main objectives of taxation are rising of revenue with which governments can drive human
development by providing systems of health, education and social security and the provision of a
successful economy through regulation, administration and investment infrastructure. Additionally
reduction of poverty and inequality to ensure that benefits for development are felt by all, and
appropriate utilization of taxes and subsidies to ensure that all social costs and benefits of production or
consumption of a particular good are reflected in the market price, for example, the taxation of tobacco
to limit damage to the health of citizens. Moreover strengthen and protection of channels of political
representation (Cobham, 2007).
2.3. Tax assessment
A tax assessor is responsible for preparing and maintaining the assessment roll, the tax roll and
collecting the tax levies in accordance with the quality standards.
The core service responsibilities include:
Preparing annual market value assessments for all properties
Preparing the business assessment valuations for all business premises
Maintaining accurate property information and ownership on all realty accounts
Maintaining accurate business information and ownership on all business accounts
Defending assessments before municipal and provincial assessment tribunals
Responding to inquiries and requests for information related to assessment and taxation
Producing and mailing annual assessment and tax notices to tax prayers
Reporting assessment rolls and meeting annual audits
2.11. Procedures for Tax Collection
It is expected that taxpayer’s tax payments should be in line with their income and they are required to
pay a tax in proportion to their level of income (Damme, L, T. Misrahi and Orel 2008). On the other
part of the tax collectors, according to canon of taxation, collection of tax should be time conscious and
convenient and the cost of collecting the taxes should not be high to discourage business. Some of the
procedures undertaken by tax authority to ensure compliance such as Filing return, return processing of
tax, audit and examination, tax collection and tax enforcement.
2.11.3. Tax Collection and Enforcement
Tax collection and enforcements another procedure in the tax administration. When the taxpayer has
not made payment on the due date, and does not object to the tax assessed, tax authority can enforce
payment in a number of ways. The tax administration may bring a suit against the taxpayer or request a
person owing or holding money for the taxpayer to pay the money on a specified date or institute
distress proceedings against the taxpayer’s moveable property. In a wider context, the issue of
enforcement includes offences committed by the taxpayer, and the penalties for these offences (James,
S. and Nobes, C. 2000).
2.10. Tax Implementation and Administration

Tax administration refers to the identification of tax liability based on the existing tax law, the
assessment of this liability, and the collection, prosecution and penalties imposed on disobedient
taxpayers. Tax administration, therefore, covers a wide area of study, encompassing aspects such as
registration of taxpayers, assessments, returns processing, collection, and audits (Murphy, K., 2002).
Since taxes are an involuntary payment for government services (Sjursen, I, 2012), taxpayers have a
strong inventive to minimize their tax liabilities either through avoidance (legal) or through evasion
(illegal). Tax administration, therefore, has to secure compliance with the laws by applying an array of
registration, assessment and collection procedures.
The key precondition for efficient tax administration is tax structure with minimizing distortions,
strictly tax exemptions and elimination of the differences in tax treatment of particular parts of the
economy. Badly conceived or unnecessarily complicated tax structure greatly complicates the operating
function of the tax administration, while simple and transparent tax structure could affect it in the
opposite way. So, the increase of efficiency of the tax administration could be attributed mainly to the
simplification of the tax system.(Damme, L, T. Misrahi and Orel 2008).In developing countries, tax
administration can be organized respecting the functional principles such as collecting, recording,
auditing, and enforcement. These are according to the type of taxpayers, the type of taxes; and type of
enterprises in economy.
2.13. Tax Administration Challenges
The efficiency of a tax system is not determined only by appropriate legal regulation but also by the
efficiency and integrity of the tax administration. In many countries, especially in developing countries,
small amounts of collected public revenue can be explained by either incapability of the tax
administration in realization of its duty, or with some degree of corruption. Regardless of how carefully
tax laws have been made, they could not eliminate conflict between tax administration and tax payers.
Tax administration with a skilled and responsible staff is almost the most important precondition for
realization of "tax potential" of the state. It is generally known that tax laws and tax policy are as good
as is the tax administration (Kaldor, 1980).
Tax administrators face a formidable number of challenges in every country. In many developing
countries tax administration reforms are needed simply to achieve macroeconomic stability. In
countries with economies in transition there is a need to establish a tax administration that can respond
to the demands of a growing market economy and the resulting increase in the number of taxpayers.
Human resource is essential in tax administration. Trained personnel are what actually most developing
countries lack and this forced them, for instance, to organize their activities under the existing tax
administration structure.
During the past decade, diverse developing countries have introduced radical reforms in their collection
of taxes. In more than 15 countries, traditional tax departments have been granted the status of
semiautonomous revenue authorities, which are designed with a number of autonomy-enhancing
features, including self-financing mechanisms, boards of directors with high-ranking public and private
sector representatives, and generic personnel systems (Robert 2003).
All transition countries had a very huge fall of GDP, which, with serious limitation of tax
administration, resulted in an alarming revenue gap. Moreover, in all countries, revenues from taxes
collected from big, mostly state firms, declined, and were not replaced with increased taxes collected
from private, mostly small enterprise. This has created pressure to increase tax rates and introduce new,
very often ad hoc taxes. These diversities, which are called "patches" in the tax system, are to a great
extent a result of the inefficiency of the tax administration in collecting the existing taxes (Kornai,
1990). This situation would lead to a permanent need for new taxes, changes in the tax system and
almost never-ending tax reforms. In transition countries income tax is gaining on importance.
Taxpayers are not used to this form of taxation and when they are faced with it for the first time; they
will obviously regard it as a burden. As Kornai (1990) explained the citizens in these countries are not
used to paying taxes at all. The tax administration and bodies which produce political decisions have to
foresee the attempts to evade taxes and have to design a tax system that will not question the loyalty of
its citizens.
Most developing countries continue to face serious problems in developing adequate and responsive tax
systems (Richard, 2008). No matter what any country may want to do with its tax system, or what
anyone might think it should do from one perspective or another (ethical, political, or developmental),
what it does do is always constrained by what it can do. Economic structure, administrative capacity
and political institutions all limit the range of tax policy options (IMF 2006).
Heavy tax distortions in transition economies come from various sources. First, base rates are often
high. In transition economies with many fledgling small enterprises and weak tax administration, high
tax rates are likely to encourage already widespread tax evasion and participation in informal economy.
Second, many countries still rely heavily on payroll taxes to finance social expenditures. If payroll
taxes are levied mainly on employers (as is the case in the great number of transitional economies) this
can discourage entrepreneurial efforts, disincentive formal hiring and push economic activity
underground. Third, and as World Bank estimations as the most important, the many exemptions and
special tax rates in parts of the economy often coexist with higher tax rates on other activities,
undermine revenue performance, complicate tax administration and distort revenue allocation.
 3. Work plan
3.1. Budget Break Down

Item Unit Unit price Amount of Total price

required

Pen Number 10 6 60

Paper Packet 120 1 120

Flash Number 150 1 150

Total 330

3.2. Time Schedule

The research will be conducted during 2021 with in four months, starting from March to June.

No Activities March April May June

Title selection
1

1stdraft Proposal writing

2

Data collection
3

Data analysis
4

Writing the first draft

5
report

Revising the draft report

7

Writing the final report

8

Presenting the report

9