FACTORS AFFECTING TAX PAYERS VOLUNTARY COMPLIANCE (IN CASE OF

JIMMA TOWN)

BY:-ABDO RYA
ADVISOR: Mr. TESFAYE MELAKU (Msc.)

SENIOR ESSAY SUBMITTED TO THE DEPARTEMENT OF ECONOMICS IN

PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF
BACHELOR OF ARTS IN ECONOMICS

JIMMA UNIVERSITY
COLLEGE OF BUSSINES AND ECONOMICS

DEPARTEMENT OF ECONOMICS

JIMMA, ETHIOPIA
JUNE, 2015
 ACKNOWLEDGMENT

First and for most I would like to thanks to my ALLAH the most Gracious and merciful for
nothing I have done without his help. Also I would like to express my deepest appreciation and
gratitude to my advisor Mr. TesfayeMelaku(Msc.) who gave me good advice and constructive
comments as well as valuable suggestion through my research work.The last but not the list I am
interesting to express my heart beat thanks to my all brothers for being in my side in every
situation while I am working this paper.

II
 ABSTRACT

Tax is a contribution accepted by the state. It is non penal but compulsory and unrequited
transfer of resources from the private to the public sectors. It provides stable flow of revenue to
finance economic activities. The main objective of this study is to draw out a response factors
that determine the tax payer’s voluntary compliance in Dedo town. The data was collected from
both primary and secondary sources of data. The primary data was collected through personal
observation, questionnaires and interviews in the study area. The secondary data was collected
from different documents and related the above tools through both quantitative and qualitative
tools. The survey was cover 78 samples of tax payers of selected from360 total population
category “B” tax payer. The major finding from data gathered shows, lack of awareness, poor
effect of both tax authority and town administration and lack of fairness of tax system are the
major factors that attributed to poor tax collection practice. Due to this the researcher conclude
and recommend that efficient tax collection practice need tax authority committed for creating
and empowerment of tax payers with knowledge and improvement of tax administration system.

III
 CHAPTER ONE

INTRODUCTION
1.1BACKGROUND OF THE STUDY
Tax is a contribution exacted by the state. It is non penal but compulsory and unrequited transfer
of resources from the privet to the public sector, levied on the basis of predetermined criteria
(James, 2000).

The classical economic were in view that the only objective of taxation was to raise government.
But with the changes in circumstances and ideologies, the aim of taxes has been also changed.
These days apart from the object of raising the public revenue, taxes levied to affect
consumption, production and distribution with a view to ensuring the social welfare through the
economic development of a country (Tanzi, 2011).

Taxation is central idea to the current economic development agenda. It provides a stable flow of
revenue to finance development priorities, such as strengthening physical infrastructure and inter
woven with numerous other policy areas, from good government and formalizing the economy to
promote growth (Circler, 2007).

Generally, governments levy taxes for multiple of purposes, but mainly to raise funds in order to
cover the public expenditures and on the other hand for the proper allocation of resources
(Lemesa,2005).But in most developing countries like Ethiopia, the collected tax could not be
able to cover all the needed fund to finance the economy. This is mainly due to the inefficiency
of the tax collection system. In some cases having poor quality of tax collection system it may be
collected large amount of revenue from easy to tax sectors such as wage earners, while unable to
enforce taxes on business and professionals. Hence, measuring the effectiveness of the tax
collection system by the size of tax collected is unsophisticated judgment. Considering the size
of the compliance gap is rather a much stronger criterion to the effectiveness of the collection
system (FIRA, 2000).
The financial status of Dedo town is very low. The local revenue covers only 16% of the total
expenditure the remaining 84 % is covered by the regional and federal government transfers and

1
other donors as a grant. On the other hand the town administrations and municipality capability
to perform enhanced service functions depend up on their ability to generate increased municipal
management system to widen its financial capacity (Dedo town tax authority, 2017).

The main existing bottleneck that hinders the town to deliver adequate services to the people is
scarcity of budget (Dedo town finance office, 2017). The town Administration should have
adequate budget at least to deliver the necessary needs and services. The local revenue collected
in the city has never met its total expenditure spent every year. Therefore, the city administration
is in the problem of budget in adequacy to discharge their duties towards the people of the town.
In other words, the city has a gap between expenditure requirements and revenue availability.
Understanding the factors that affect the compliance behavior of tax payers with tax law in Dedo
town is a key further motivating and assisting the compliers and designing appropriate strategies
to deal with non- compliers so that they will gradually develop the desired behavior of
voluntarycompliance.

1.2 STATEMENT OF THE PROBLEM

Taxation in developing countries is a challenging topic and has attracted increasing attention in
the last two decades. Many problems, such as poor administration, failing to collect sufficient tax
revenue tax structures and in many developing countries it is observed that there is a low
capacity of tax collection system to monitor tax payer’s voluntary compliance among tax payers
(Lemesa, 2010).

To address this problem, the government introduced the imposition of tax (direct and indirect)
among others; as major and important sources of public revenue. However, this imposition of tax
couldn’t still brings he required result (Tazi.2011).

Tax systems are usually not elaborated properly within the society. Consequently, the tax payers
complain that the tax assessment method is based on subjective estimation (Tanzi, 2010). Like of
the other town Dedo also have its tax compliance problem. It appears to be collectable from
economically active individuals in the town and tax that is actually being collected is only 60%
in 2016(the Dedo town tax authority bureaus).One of the main reason for the gap is non-
compliance of tax payers and potential tax payers with the tax legislation. Previous research
(Lamesa, 2010) has been done on the assessment of taxation on developing countries, the result

2
indicate there is not effective tax collection due to low capacity of tax collection system. Other
researcher (Tanzi) on taxation in the case of developing countries, it can be conclude that
imposition of tax is not effective as a result of tax system are not elaborated properly within the
society. Based on these fact the purpose of these study was tounderstanding the factors that
affect the compliance and non- compliance behavior of taxpayers with tax laws in Dedo town is
a key to further motivating and assisting the compliers and designing appropriate strategies to
deal with non-compliers so that they will gradually develop the desired behavior of voluntary
compliance. It will also develop awareness among non voluntary tax payers and enhance the
capacity of voluntary tax payers.

Therefore, addressing this attitudinal or knowledge gap among the tax payers was the primary
purpose of this study. It is for these reasons that determine tax payers’ compliance with system in
Dedo town.

1.3 RESEARCH QUESTIONS

This study was tried to answer the following questions:
1. What are the variables that generally affect the taxpayer’s voluntary compliance behavior?
2. What are the factors that encourage or force taxpayers to pay taxes inDedo town?
3. What factors make the taxpayers evade or avoid tax or make them non-compliers in Dedo
town?

1.4 OBJECTIVE OF THE STUDY

1.4.1 General objective

The general objective of this study was to identify the factors that affect the tax payers voluntary
compliance behavior in Dedo town and came up with feasible recommendation for identified
problem.

1.4.2 Specific objectives

 The following are the specific objectives of the study.
 To identify the determinants of tax payers voluntary compliance in Dedo town.
 To explore the factors which make the taxpayers not to comply with tax law in Dedo town.
 To provide the policy makers with some inputs in this aspect.

3
1.5. SIGNIFICANCE OF THE STUDY

The researcher would hope that, the result of this study might have substantial contribution for
the people of Dedo town in particular in order to decrease tax non- compliance to set attitudinal
change and increase compliance behavior of the payers in Dedo town. Thus it can be used for the
following purposes.
 It could be aspiring bored for farther research activities by any interested academician or
particular in the area of tax non- compliance.
 It may help concerned stack holder sand government organs found in Dedo town to
understand factors affecting tax payer’s voluntary compliance.
 Finally it would be help for those citizens who are tax payers not to grasp the theoretical or
particular realities of the reels, the changes and the remedies of factor affecting tax payers’
voluntary compliance.
Hence, this study would significant in that it may help the policy makers of the town
administration and at national level to make use of the outputs of the study in addressing the
voluntary compliance problems. Moreover, it may give some highlights that would serve as a
basis for further nationwide research and policy design in addressing the issue.

1.6. SCOPE OF THE STUDY

This study aimed to investigating the category "B" tax payer’s voluntary compliance in Jimma
town. This study is determined this specific topic and single town due to the shortage of time and
capital

1.7 ORGANIZATION/OUTLINE OF THE PAPER

The research paper was contains five chapters. The first chapter deals with introduction, back
ground of the study, statement of the problem, objective of the study and others. The second
chapter deals with review of literature. The third chapter deals with methodology of the study.
The fourth chapter deals with data analysis and interpretation. The last chapter focuses on the
conclusion and recommendation part of the study.

4
 CHAPTER TWO

REVIEW LITERATURE
2.1. INTRODUCTION

A tax is a compulsory levy and those who are taxed have to pay the sums irrespective of any
corresponding return of services or goods by the government (Bhatia, 1976; James, 2000).
Government needs financial resources to act as a government and play a role that is expected
from it by the public. So what the government gives it must first take away.

The economic resources available to society are limited, and so an increase in government
expenditure normally means a reduction in private spending. In this regard James (2000) states
that taxation is one method of transferring resources from the private to the public sector Other
writers (Auld & Miller, 1984) describe the role of taxes as an instrument that stabilizes the
economy, and reduces private demand so that resources can be released for public sector use.

2.2. DEFINITION OF TAX COMPLIANCE

The definitions of tax compliance frequently used in the literature might be considered to be too
simplistic. As cited by James et al (2003), a more comprehensive definition has been developed
by James and Alley (1999). The most common previous approach has been to conceptualize
compliance in terms of the ‘tax gap.’ This represents the difference between the actual revenue
collected and the amount that would be collected if there were 100 percent compliance, though
there are some variations.

Similarly according to James (2000), tax compliance is expressed in terms of degree to which
taxpayers comply with tax law, and the degree of non- compliance is measured in terms of the
tax gap, which is defined as (Andreoni et al, 1998 and Adams, 1921) the difference between the
taxes that the law seeks to collect and those in fact collected. This gap happens by means of both
tax avoidance and tax evasion. Similarly, compliance gap is also defined in (FIRA, 2000) as the
break between the actual and the potential tax revenue and how that gap varies among the
different sectors of the taxpaying population.

5
Andreoniet al (1998) include a time dimension to compliance, but are still mainly concerned
with tax evasion as the central part of the tax gap definition. Regarding time dimension, James
(2000) states that a tax payer might eventually pay his/her full liability but, if the payment is late,
the taxpayer cannot be considered to have been compliant.

A more recent definition consists of three distinct types: payment compliance, filing compliance
and reporting compliance. However, these basic concepts of the ‘tax gap’ of non-compliance
seem to be far too simplistic for practical policy purposes. Successful tax administration requires
taxpayers to co-operate in the operation of a tax, rather than be forced to undertake every aspect
of their obligations unwillingly. Tax law cannot cope with every eventuality and has to be
supplemented with administrative procedures and decisions and, just as importantly, in order to
work it has to have a reasonable degree of willing compliance on the part of the taxpayers
themselves (James et al, 2003).

One issue is whether ‘compliance’ refers to voluntary or compulsory behavior. If taxpayers

‘comply’ only because of their threats or harassment or both, this would not appear to be full
compliance, even if 100 percent of the tax was raised in line with the ‘tax gap’ concept of non-
compliance. Instead, it might be argued that proper compliance means that taxpayers meet their
tax obligations willingly, without the need for enquiries, obtrusive investigations, reminders or
the threat or application of legal or administrative sanctions.

A more appropriate definition could therefore include the degree of compliance with tax law and
administration that can be achieved without the immediate threat or actual application of
enforcement activity. Tax compliance may be seen in terms of tax avoidance and tax evasion.
The two activities are conventionally distinguished in terms of legality, with avoidance referring
to legal measures to reduce tax liability and evasion to illegal measures. Describes, tax avoidance
as the legal manipulation of individual’s affairs in order to reduce tax (James 2000).

However, if taxpayers go to inordinate lengths to reduce their tax liability, this could hardly be
considered ‘compliance’, even if it were within the letter of the law. The ‘tax gap’ approach
overlooks the liability that some tax payers pay more than their moral obligation. Not all tax
payers seek out every possible method of reducing their tax liability and unknown number do not
claim their full entitlement to allocate dedications (James 2000).

6
A better definition of compliance can be therefore including actions which are consistent with
the spirit as well as the letter of the law. On the other hand a definition of non-compliance might
be the failure of taxpayers to act in accordance with the statutory requirements or intentions of
the tax law and administration without the application of enforcement activity.

In all the expressions, compliance can be understood as acting in accordance with the law and
non- compliance is deviation from the law. Based on the above expressions the definition of tax
compliance can be shortly refined as the desire or willingness of the taxpayers to act in
accordance with the tax law and the voluntary effort they exercise to pay their tax liability on
timely basis.

2.3. FACTORS DETERMINING TAX COMPLIANCE BEHAVIOR

2.3.1. Fairness/Equity
According to James (2000), the most obvious requirement of equity or fairness is to treat equal
people in equal circumstances in an equal way. The problem here is in deciding who is equal to
whom. Similarly, Due and Friedlander (1981), also argue that what is fair equitable in taxation is
inevitably a value judgment; no scientific specification of an equitable distribution pattern is
possible, or people may be equal income wise while they may be unequal regarding their
expenditure, wealth, total utility and so on. Such a pattern can be specified only on the basis of a
consensus of attitudes of persons in the contemporary society.

Lemessa (2005) also adds that a major responsibility is to ensure that all taxpayers dealt with by
a given official are accorded similar treatment and that all officials dealing with a given taxpayer
would accord the same treatment.

Similarly, Brooks (2001) states that fairness has always been widely regarded as the most
important criteria in judging a tax system. The problem of unfairness is that a tax system allows
taxes to be shifted from dishonest to honest taxpayers. The fairness of a tax system may also be
perceived in different ways by the taxpayers and tax authorities. What is fair in the eye of the tax
authorities may not have the same image in the mind of the taxpayers.

According to Bhatia (1976), the attitude of taxpayers is an important variable determining the
contents of a good tax system. It may be assumed that each taxpayer would like to be exempted
from taxpaying, while he would not mind if others bear that burden. In any case, he would want
7
his share to be within the general level of tax burden being borne by others. If this is not so, he
will feel exploited.

2.3.2. Organizational Strength of Tax Authorities

According to Bird and Old man (1967), no tax will work effectively, unless its administrators
maintain an aggressive attitude with respect to the correctness of the taxpayers’ actions. Some
taxpayers will fail to file or make mistakes through ignorance or neglect; others will deliberately
cheat. A passive attitude by the authorities towards these errors and falsifications will soon
undermine the entire structure, since the diligent and honest taxpayers will almost in self-defense
be forced to the level of the careless and dishonest.

A tax administration which seeks compliance must protect those who comply or else compliance
will not be forthcoming. Bird and Old man (1967) further state that the sure sign of ineffective
tax administration is the presence of a very large delinquency in tax payments for it indicates the
lack of taxpayer respect for the tax system. The taxpayer in effect is acting on his belief that the
administrative machinery may bark, but that it has no bite. These writers argue that in large part
the solution for the large delinquency lies in providing the bite. In this sense effective tax
collection is a facet of the larger problem of providing adequate penalties, to which reference
will later made. In other words tax is evaded to the extent that tax authorities are perceived as
weak by taxpayers (Peacock and Forte, 1981).

2.3.3. Awareness

As already pointed out for a tax system to be effective the majority of the taxpayers have to
comply. It follows that there may be greater gains in assisting basically compliant taxpayers to
meet their fiscal obligations than in spending more resources in pursuing the minority of non-
compliers. Many taxpayers might be willing to comply in full, but are unable to do so because
they are not aware of, or do not understand, their full obligations. Even if such tax payers
understand their obligations, they may not know how to meet them or may be unable to do so for
other reasons. On other side, other writers such as Smith and Kinsey (1987) argue that tax non-
compliance is an intentional behavior. In countries like Ethiopia where most of the business
community have no access to information, lack of awareness cannot simply be overlooked rather
it can be assumed as a major determinant of tax compliance behavior.

8
2.3.4. Culture
As stated by Fields tad and Ranker (2003), raised efficiency of the tax administration, however,
is not enough. Many observers conclude that a lack of taxpaying ‘culture’ is the largest obstacle
to building a firm long-term revenue base. The opposite may, however, also be the case: as long
as the tax administration culture is perceived to be influenced by sectarianism, nepotism, and
corruption, it is unlikely to contribute to the fostering of a more conducive taxpaying culture.

Gaining a better understanding of why people do and do not accurately report and fully pay the
taxes they owe is obviously interesting to policy makers (Smith and Kinsey, 1987). In Ethiopia
where the system of government has evolved from feudal (where taxes were used by individuals
in government) to current one, it is obvious that negative attitude towards tax has been developed
in the society. In this sense it is difficult to conclude that there is a culture in the country that
appreciates voluntary compliance.

2.3.5. Honesty of the taxpayers

It is stated out by Adams (1921), that the success of income tax rests primarily upon the honesty
of taxpayers. Some authors (Brooks, 2001) indicated that tax morality has declined over the past
few decades and this is attributed to wasteful, inefficient, and even perverse governments.
Adams further states that one of the factors that contribute to the dishonesty of the taxpayers is
the complexity of the tax system, as it may lead to administrative failures. This can be viewed as
it has relation with the tax culture of the society.

Practically, it is difficult to obtain genuine information from taxpayers regarding their income.
Hence, tax gap is created to the extent the taxpayers hide information regarding their business
activity.

2.3.6. Social Factors

The idea of non- compliance is not only a question of state-society relationships but also a
question of relationship between citizens and or groups of citizens within local communities.
There is an existing social bond between the society and this bond influences the members of the
society in complying with the tax law. That is taxpayers may be influenced by their peer groups
to comply or not to comply with the tax law.

9
As cited by Slemrod (2000) and Levi (1998) in (Fjeldstad and Ranker, 2003), the dimension of
trust that seem to affect compliance is trust in other citizens to pay their share of service charges.
In particular, trust in other citizens to pay their share seems to be important. The larger the
fraction of the local population that is observed not paying, the lower perceived risk of being
prosecuted. This has impacts on the individual taxpayer’s perception of the credibility and
trustworthiness of the revenue administration.

2.3.7. Attitude towards the Government

Attitudes towards the government (Levi, 1988) may affect the taxpayer’s normative commitment
to comply with law. Similarly, Due and Friedlander (1981), also argue that, attitudes toward the
general level of taxation and tax increases are dependent, of course, on attitudes about the
desirability of governmental programs and on attitudes toward the government itself . On the
other hand, (Fjeldstad, 2004) citizens’ willingness to pay taxes voluntarily rests on the local
government’s capacity to provide services and its demonstrated readiness to secure the
compliance of the otherwise non-compliant.

2.3.8. Communication and Trust

Outcomes as employee participation and Communication is the activity of conveying
information through the exchange of thoughts, messages, or information, as by speech, visuals,
signals, writing, or behavior. The fact is that communication is among the most powerful tools
that tax institution leaders have. Taxpayers who see and hear and understand their tax
institution’s plans for the tax revenue are more likely to pay tax voluntarily. The taxpayer should
be informed that money collected from taxes help the government to provide a variety of
services to citizens. The information about tax audit would also put pressure on the taxpayers to
comply the tax system (Fadjaro and psiahan (2012.)

Communication plays an important role in the development of trust within an organization.

Several studies have demonstrated the central role that communication plays in developing and
maintaining trust. Trust and communication have been shown to enhance such organizational
&two particular aspects of information sharing that are often discussed in the literature are
quality of information and quantity of information. Quality of information tends to be operational
zed in terms of accuracy, timeliness, and usefulness.

10
Research shows that quality of information is associated with higher levels of trust .Taxpayers
will exhibit higher levels of trust when they believe the information they are receiving from the
tax institution is accurate, timely, and/or useful because amount of information reduces
vulnerability. Quantity of information or information Adequacy speaks to whether taxpayers feel
adequately informed. Thus these arguments suggest that a strong relationship exists between
communication and trust Fajardo and O. P. Siahaan (2012).

2.4. IS NON- COMPLIANCE AN INTENTIONAL BEHAVIOR?

Most theories of tax compliance, as well as empirical works (Smith and Kinsey, 1987) have until
recently been premised on the assumption that tax under reporting is an intentional behavior.
Behavior that is unintentional has either been ignored or set aside in a footnote or can be safely
ignored as random noise. However, as noted earlier, the evidence is accumulating that
unintentional noncompliance is neither small nor inconsequential. Nor it is necessarily random in
nature. As far as Ethiopia’s practice is concerned tax non -compliance is not only an intentional
behavior it is also attributed to lack of ability to pay, lack of awareness and weak institutional
capacity of the revenue administrations and other factors.

2.5. DIMENSIONS OF ENSURING COMPLIANCE BEHAVIOR

Edmund Burke in (Long and Swingen, 1991) states ‘the revenue of the state is the state’. Put
another way, without the legal authority to collect taxes and the compliance of the citizenry to
these laws, government is a sham. It is this fact that taxes are profoundly essential to the
existence of all successful states- that makes the age-old question of why people pay or fail to
pay their taxes of central interest. Clearly much depends (James, 2000) on the motives of
taxpayers. This is a complex area and different commentators have offered different analyses.
The two main approaches are to concentrate on the probability of detection and on penalties for
non-compliance (the ‘carrot and stick’ approach) or activities designed to promote voluntary
compliance (the ‘responsible citizen’ approach).

2.5.1. The ‘carrot and stick’ approach

According to James (2000), the carrot and stick approach is based on a relatively narrow
interrelationship of economic rationality. According to this approach, totally amoral individuals
maximize their utility by maximizing their income and wealth. They will evade tax if they

11
consider that by doing so they can expect to increase their spending power. Noncompliance can
therefore be explained by factors such as the level of tax rates. The probability of being caught
evading, the penalties imposed and the degree of risk aversion.

2.5.2. The responsible citizens’ approach

Regarding the responsible citizens approach James (2000) extends his discussion that, looking
outside economics; other academic disciplines have suggested factors which might be important
in influencing taxpayers’ behavior. Sociology has offered a number of variables such as social
support, social influence, attitudes and certain background characteristics such as age, gender,
race and culture. Psychology reinforces this approach and has even created its own branch of
‘fiscal psychology’. The contribution from psychology includes the indication that attitudes
towards the state, the revenue authorities are as important factors as perceptions of equity. If
psychological and sociological factors are important then a major drawback of the carrot and
stick approach becomes apparent. While such an approach might be considered by some as
suitable for donkeys, human beings might not respond so positively. The result might be a
reduction in voluntary compliance. For instance, Strumpel (1969) and Schmolders (1970) as
cited in James (2000) reported that the German tax system was very rigid in its assessment
procedures, which led to an effective but expensive and confrontational system. The result was a
high degree of alienation and resistance among taxpayers.The conclusion would seem to be that
a successful compliance policy should take account of much wider range of motivations than
simply rewards and punishments (James, 2000). The tax system must also be fair, both to
promote the objective of an equitable distribution of income and to assure continued voluntary
compliance by taxpayers (Eckstein, 1979).

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 CHAPTER THREE

RESEARCH METHODOLOGY

3.1. DESCRIPTION OF THE STUDY AREA

Dedo is one of the woreda in the Oromia region of Ethiopia: part of the Jimma zone. Dedo is bordered
on the south by the Gojeb River which separate it from southern nation nationalities and people region.
On the west by the Gera, on the North by Kersa, on the East by the Omo Nada, the major town in
Dedo is Sheki from these town sherefi and sheger selected for survey.

3.2 THE DATA TYPE AND SOURCES

The data was collected from both primary and secondary sources of data. The primary data was
collected through personal observation, questionnaires and interviews in the study area. The secondary
data was collected from different documents, published and unpublished materials and related through
the above tools are both quantitative and qualitative.

3.3DATA COLLECTION INSTRUMENTS

The researcher would conduct questionnaires, interview to get information from tax payers in Dedo
town. In data collection process deferent data collection would be used in the study. These methods
would vary according to the source of data collected.

3.4 SAMPLING TECHNIQUES AND SAMPLE SIZE DETERMINATION

3.4.1 Sampling Technique

In the study, the researcher used judgmental sampling technique for gathering primary source of data.
In judgmental sampling the researcher had complete freedom in choosing the sample respondent
according to the state. Therefore, this sample method depends entirely on the researcher. The reason
why, the researcher would used for judgmental sampling technique is that it had low cost and save
time as well as, it was convenience to use a effectively target respondent that proved relevant
information.

13
3.4.2 Sample size determination
The population of the tax payer’s category “B” Thus, the researcher would study category “B”
tax payers the town due to the fact that those tax payers are not required by law to declare their
income or keep book of account and considered as hard to tax group. According to income tax
regulation No 78/2002.category “B” tax payers are those whose annual turnover is greater than
100,000 Birr up to 500,000Birr. As standard assessment method would used to determine the
income tax liability of category “B” tax payers. The standard should be fixed amount tax that
affects variation in the type of business, business size and business location. An appropriate
sample size was taken from total population to distribute questionnaire.

The target groups these research are 360 population mainly the tax payer of category B. the
researcher was used judgmental sampling technique to select 10% of respondent from each tax
payer of category B. these indicate that of total population of tax payers category B, the
researcher take 78 respondent as the sample size.
The researcher would select some of taxpayers from the above population by using the following
formula.

N
n= 2 whereas :-………………..( Ireal, 1992)
1+ N (e)

n = sample size

N= total population

e= the acceptable sampling error

z=confidence interval
But, a researcher have N=360
z =90% e =10% =0.1
360
Thus, n= 2
1+ 360(0.1)

360
n=
4.6
n=78

14
 Let I calculate the sample size of each kebele:
Ns
n= . nwhereas:-
¿
Ns………..Total population of each kebele.
Ni ……….Total population of two (2) kebele.
n………sample size of two (2)kebele.
ni……… sample size of eachkebele.
But, a researcher has prepared the total tax payer group “B” of each kebele as follows:-
Total taxpayer of sheriff kebele…………………..186
Total taxpayer of sheggerkebele………………..174

Thus,
Ns
n1= . n…………………….….for Kebele sherifi
¿
186
n1= .78 =40
360
Ns
n2= . n………………………..for kebele shegger
¿
174
n2= .78=38
360
The total sample size of the two kebele= 40+38=78

3.4 METHOD OF DATA ANALYSIS

The study would used qualitative and quantitative type of data analysis the study would be descriptive.
First data was collected and arranged. The study was further analyzed the by using different forms of
expression such as tabulation, percentage, graphs and charts.

15
 CHAPTER FOUR
4 DATA ANALYSIS AND INTERPRETATION

This part of the study present analysis and major findings based on the data obtained in the form
of questionnaires distributed for selected respondents. Description and analysis of questionnaires
from respondents of different business owner in Dedo town and who participated in filling the
questionnaires describe and analyze responds as follow.

4.1 Demographic characteristics of the respondents

4.1.1 Age, sex and marital status

A. Age of the respondents

Table: 4.1Demographic characteristics

Age Respondents Percentage

<30 15 19.23
30-40 40 51.28
>40 23 29.49
Total 78 100%

Figure 4.1.1 graphically the above table illustrated as fallows

60.00%

50.00%

40.00%

30.00%

20.00%

10.00%

0.00%
<30 30-40 >40

16
B. Sex of the Respondents

Sex Respondents Percentage

Male 55 70.51

Femal 23 29.49
e

Total 78 100%

Figure 4.1.2 the above table shown graphically as follows

80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
male femle

C. Marital status

Marital status Respondent Percentage Cum.

s

Single 19 24.36 24.36

Married 50 64.1

Divorced 9 11.54

Total 78 100%

Sources; survey 2017 (2009E.C)

17
Figure 4.1.3 graphically the above table depicted as follows

70.00%

60.00%

50.00%

40.00%

30.00%

20.00%

10.00%

0.00%
single married divorced

We can understand the entire above table’s idea from the following description. Item 1, of
theabove table show that 40 (51.28%) and 23 (29.49%) tax payers between the age 30_40 and
above 40 years respectively. About 15 (19.23%) tax payers are below 30 years. from this the
researcher concluded that large tax payers are between the age of 30_40 which are active group
and they where exist at the age of productive labor force. As indicated on the above table 2,55
(70.51%) and 23 (29.49%) tax payers in the town are respectively male and female. From this
researcher concludes more male paid tax than female. As depicted the above table of item3,
shows 50 (64.1%) of tax payers in the town are married, about 9 (11.54%) of them are divorced
respectively.From this the researcher concludes that, more the tax payers are married and the
least accounted for divorced.

4.1.2Educational status
Table: 4.2 educational statuses

Education level Respondent Expressed in percentage Cumulative

Continuing education 5 6.41 6.41
Elementary education 11 14.1 20.5
Secondary 25 32.05 50.7
Preparatory 20 25.64 78.2
Higher education 17 21.8 100
Figure 4.2.1 graphical illustration of the above table

18
 35.00%

30.00%

25.00%

20.00%

15.00%

10.00%

5.00%

0.00%
te . . n .
ra duc edu tio duc
lil it . E y ca e
en da
r u er
m n . Ed gi h
ele co ep h
se pr

Sources; survey 2017 (2009E.C)

The above table shows educational status of tax payers voluntary compliance accordingly,5
(6.41%) of them are learned continuingeducation11 (14.1%) are learned primary education,
about 25 (32.1%) of them are learned secondary education, about 20 (25.64%) are learned
preparatory education and about 17 (21.8%) of them are learned higher education .From this the
researcher conclude that the highest percentage shows whose educational level is secondary
education and the table tell us the majority of respondent were above elementary education. That
mean greater than (75%) of respondent have better understanding as far as voluntary compliance
concerned. This may play vital role in having awareness about taxation.

19
4.2 RESULTS AND INTERPRETATION
Table 4.3 distribution of business sectors covered by the sample

No Business type Respondents percentage cumulative

1 Hotel & Cafeteria 7 8.97 8.97
2 Cloth & shoes shops 22 28.21 37.18
3 Retail shops 14 17.95 55.13
4 Electronics 12 15.38 70.51
5 Spare parts 9 11.54 82.05
6 Gold silver smith &Jewelry trade 5 6.41 88.46
7 Construction material 9 11.54 100
Total 78 100%
Sources; survey 2017(2009E.C)

From above table, about 22 (28.21%) and 5(6.41%) of the respondents are engaged in cloth and
shoes shop and hotel and cafeteria. From this the researcher conclude that large percent of
respondent engaged in cloth and shoes shop and small percent of respondent are engaged in
hotel and cafeterias business activity.

4.2.2. Taxpayer’s knowledge about taxation

Almost all of the respondents know why they pay tax. The following table shows the reason why
they pay tax.

Table; 4.4 reasons why tax payers pay tax.

No, Options No, of respondents In percentage cumulative

1 To save yourself from penalties, 3 3.85 3.85
sanction
2 In the anticipation of public services 47 60.26 64.11
3 There is no opportunity to evade 5 6.41 70.52
4 It is an obligation towards the 23 29.48 100
government
Total 78 100%
Source; Survey 2017 (2009 E.C)

Table 4.4 shows about 60.26% of the respondents pay tax because of anticipation of public
service and 29.48% pays due to, it is an obligation towards the government. This indicates that

20
there is a good or positive understanding as to why people pay tax. But some respondents has
responded that they pay tax because of to save their self from penalties, sanction and there is no
opportunity to evade 3.85% and 6.41% respectively. This shows more efforts are needed to
enhance people awareness about tax. So, better results can be registered, if successive efforts are
done.

4.2.3 Tax payer’s attitude towards taxation

Tax payer’s attitude towards taxation is a major determinant of tax payer’s voluntary compliance
behavior. Accordingly, the respondents were asked different various questions in order to know
their attitude towards taxation and their response is summarized in the following table.

Table 4.5 Tax payer’s attitude towards taxation

No Item Resp. Innumber In percent

1 Would you pay if there is no
legal enforcement?
Yes 14 17.95
No 64 82.05
Total 78 100
2 Does the non compliance of
the tax payer have negative
impact on your compliance
behavior?
28 35.9
Yes
50 64.1
No
Total 78 100
3 Did you trust in the employer
of Dedo town revenue
authority?
Yes
17 21.8
No
61 78.2
Total 78 100
4 Paying tax is unfair?
Strongly agree 5 6.41
Moderately agree 8 10.26
Strongly disagree 12 15.38
Moderately disagree 53 67.95

Total 78 100

Source; Survey 2017 (2009 E.C)

21
The above table summarized as follows;

From the above table we observe that the majority (82.05%) of the respondents responded that
they did not pay tax if there is no legal enforcement and only 17.95% respondents said they
would pay tax if there is no legal enforcement. About 35.9% of respondent responded the non-
compliance behavior of other taxpayers have negative impact on their compliance behavior and
64.1% of respondent said the non-compliant behavior of other tax payers does not have any
impact on their compliance behavior.

4.2.4 Related to organizational effectiveness of Dedo town tax authority

Respondents evaluated the tax authority based on the following parameters.

Table 4.6 evaluation of tax authority by respondents

No Item Resp. in no Percentage

1 How did you evaluate efficiency of tax authority in tax collection?

1 Excellent 16 20.51

2. Good 23 29.49

3.Fair 28 35.9

4.Poor 11 14

Total 78 100

2 How did you evaluate tax authority in law enforcement?

1.Excellent 9 11.5

2.Good 14 17.95

3.Fair 34 43.59

4.Poor 21 26.92

Total 78 100

3 How did you evaluate tax authority in awareness creation?

22
 1.Excellent 6 7.7

2.Good 11 14.1

3.Fair 18 23.07

4.Poor 43 55.13

Total 78 100

4 Who is blamed for poor tax compliance?

1.Tax authority and tax administration 47 60.02

2 Licensee and permit authority 19 24.36

3 Tax payer 12 15.38

Total 78 100

From the above table it is captured that the majority of respondents evaluated the tax authority
from excellent to fair except for awareness creation were said poor. In all parameters most of
responded rated the authorities effect as fair and below that.

This clearly shows the tax authority is not effective and not providing satisfying service
for taxpayers. On the other hand, the effort of the authority in creating awareness was evaluated
as poor accounted for (55.13%). This can be cited as the main cause for problems as far as
voluntary compliance is concerned.

The respondents were asked other question related with who is blamed for the poor tax
compliance.

Out of 78 sample size,47( 60.26%) of the respondents said that the tax authority and the
town administration are jointly responsible for poor tax compliance and 12( 15.38)% of the
respondents said taxpayers are responsible and the remaining19( 24.36%) of the respondents
said license and permit authorities are responsible for poor tax compliance. This can be directly
related to the authority’s weakness and in effectiveness in providing service, information,
and creating awareness. Additionally the respondent reason out that both tax authority and town

23
administration did not play their role effectively to improve tax administration, tax collection
system, people awareness about tax, providing social service and other information regarding tax
system. Hence, poor effort of both tax authority and town administration in these area can be
cited as the major factor that has contributed to the underlying problem and so that both tax
authority and town administration are responsible for poor tax compliance.

4.2.5. Tax equity or fairness

Different questions were asked related with equity and fairness. The results from respondents
were summarized on below table as follows; Most of the respondents responded that the tax they
are paying is not based on their ability to pay.

Table: 4.7 tables that depicts overstatement/understatement of tax and major problem in tax
system

No, Item respondent Percentage Cumulative

1 Is your tax liability overstated or

understated?
66 84.62 84.62
1.Overstated
12 15.38 100
2.Understated

Total 78 100

2 What are the major problems in tax

system?
40 51.28 51.28
1.Tax rate are too high
20 25.64 76.92
2.several tax items at the same time
10 12.82
3. tax revenue are not spent on public 89.74
service 8 10.26
100
4.tax payer are not willing

Total 78 100

Source survey 2017(2009 E.C).

24
Based on the above table, only 15.38% respondent said that the tax they are paying is understated
and the majority of respondents about 84.62% said it is overstated. The respondents were asked
another question to rank the major problem in the tax system and they responded accordingly.
From the list of four probable options the majority of the respondents about 40 (51.28%) said
that the tax rates are too high ,about 20( 25.64%) said several tax items are levied at the same
time, about 10((12.82%) said tax revenues are not spent on public services and also8( 10.25%)of
respondent said taxpayers are not willing to pay. From this response firstly, it is clear that the tax
rate is not based on the ability-to-pay principle or it is perceived to be unfair by taxpayers. Even
though the principle says the tax should be based on the ability- to-pay, the problem here is in
determining this ‘ability’ for each taxpayer. Actually the tax rate may not be as such high but the
communication gap between the tax authority and taxpayers might have created this perception
and as far as the understanding of the taxpayers to be continuous regarding tax rates, assessment,
calculation is low.

Secondly, 25.64% of the respondents said that several tax items levied at the same time is the
second major problem. This shows that the authorities’ tax collection schedule is not convenient.

Thirdly, (12.82%) of the respondent said that tax revenues are no tspent on public services.
Theoretically tax revenue is used to finance services provided by the government. This
implies efficient provision of these social services which are being financed by the taxpayers’
money was directly required from public. Finally, the other issue which was raised as problem
was that tax payers are not willing to pay tax. This problem is the central problem as long as
attitudinal problem cannot be changed.

4.2.6. Awareness
Different questions were asked related with awareness of tax payers have about taxation. About
47(60.3%) of respondents said they never take training on taxation and 39(39.7% of respondents
said they take. (Source; Survey 2017 (2009 E.C).

From the above information we understand that tax payers do not have enough information about
taxation. From this response it is clear that there are sizable amount of individuals who have the
capacity to pay tax but not paying. In other words, this shows there is a significance tax evasion

25
or tax gap. Since our issue as far as concerned with voluntary compliance so more works were
needed in order improves the awareness of tax payers about taxation.

4.2.7. Honesty
The respondents were also asked to know how far they are loyal to the tax system.
Hence their responses were summarized in the table below.

Table 4.8: response on honesty/ loyalty of taxpayers to tax system

Question Evaluation Percentage

How do you evaluate the Excellent 6.41%

honesty and loyalty of
taxpayers to the tax system Good 38.46%
including you?
Fair 33.33%

Poor 21.8%

Total 100%

Source; Survey 2017 (2009E.C).

From the above table about 6.41% of respondents said loyalty of tax payers is excellent and the
majority 38.46%, 33.33%, 21.8% said good, fair, and poor respectively. In general most
responses indicate tax payers more or less are loyal but loyalty of taxpayers is still under
question so this marks further action is needed from tax authority.

4.2.8. Comments raised by respondents

The respondents were also given opportunities to indicate their general comment on the overall
tax system. Accordingly they issued several comments and mainly regarding problems and
measures that has to be undertaken. These comments were listed as follow:

 The tax system lacks fairness or equity.

 No sufficient tax education/ lack of awareness, and poor communication between the tax
authority and taxpayers.
 No adequate provision of social services.
 Weakness in tax collection and enforcement.

26
 Absence of transparency in the overall tax system.

The respondents also stated the possible actions that have to be undertaken in order to bring
about improvement in the tax system and ultimately ensure voluntary tax compliance.
Based on the detail comments given by the respondent several respondents firmly commented
that the tax system lacks fairness and equity. They further elaborated their comment that
individuals having equal income are not paying equal tax and this highly affects the
taxpayers’ motivation to be compliant. In other words, as long as the tax system lacks
horizontal equity (individuals with equal income pay equal tax) it is difficult to change
taxpayers’ attitude in order to bring about voluntary compliance.

The other comment given by the respondents is that the tax authority does not provide
sufficient education to taxpayers to boost awareness. According to the respondent the root cause
of all problem in the overall tax system is lack of awareness which is attributed to poor tax
collection practice and absence of consultation session between taxpayers and the authority. On
the other hand, the respondents indicated that there is no sufficient provision of social services by
the government. According to their comment, the taxpayers need various social services from
the government in return of what they have paid as a tax. If there is no sufficient provision
services the willingness and motivation of the taxpayers to pay their tax obligation may be
affected.

CHAPTER FIVE
CONCLUSION AND RECOMMENDATIONS

27
 5.1. CONCLUSION

Since the effectiveness and efficiency of a given tax system is a function of tax payer voluntary
compliance, this particular study tries to draw out response to the factor that affect tax payer voluntary
compliance behavior in Dedo town. The data was collected from both primary and secondary sources
of data. The primary data was collected through personal observation, questionnaires and interviews in
the study area. The secondary data was collected from different documents, published and unpublished
materials and related through the above tools are both quantitative and qualitative.

The researcher would conduct questionnaires, interview to get information from tax payers in Dedo
town. In data collection process deferent data collection would be used in the study. These methods
would vary according to the source of data collected.

In the study, the researcher used judgmental sampling technique for gathering primary source of data.
In judgmental sampling the researcher had complete freedom in choosing the sample respondent
according to the state. Therefore, this sample method depends entirely on the researcher

The target groups these research are 360 population mainly the tax payer of category B. the researcher
was used judgmental sampling technique to select 10% of respondent from each tax payer of category
B. these indicate that of total population of tax payers category B, the researcher take 78 respondent
as the sample size.

This research was conducted to examine a sample of tax payer attitude and factor that determine their
compliance with tax law in Dedo town. As the survey result indicated tax system lack tax of fairness
or equity so as long as the tax being lived is not faire and equitable it reduce motivation and voluntary
compliance behavior . Furthermore the study show tax rate is higher than what most tax payer would
like to pay. As survey data has shown lack of awareness was the major and leading reason for tax
evasion or tax gap. so awareness is the corner stone as far as voluntary compliance is concerned.

As the survey result indicated the tax authority of the city administration is not efficient and effective
in various aspects, such as awareness creation, improving tax collection system and procedure,
providing social service efficiently.

28
Generally the survey indicated factors that determine taxpayers’ voluntary compliance behavior. These
are:

 equity and fairness of the tax system

 level of awareness of taxpayers
 effectiveness and efficiency of tax authority and

other factors such as taxpayers’ attitude and honesty/loyalty are found to be the result of
lack of awareness has found to have little impact on taxpayers’ attitude towards taxation.

29
5.2. RECOMMENDATIONS
An effective compliance program requires that tax administration has sufficient powers that
enable it to enforce compliance effectively. Voluntary compliance is promoted not only by an
awareness of rights and expectations of a fair and efficient treatment, but also by clear, simple
and user friendly administrative systems and procedures.

 Based on my research findings, researcher can draw the following five policy implication:
 The tax authority should strengthen its capacity by educating, training its employees,
computerizing its operation and devoting additional resource to increase an efficient tax
administration.
 The tax authority should perform function such as tax assessment, tax collection and
awareness creation effectively.
 The authority must empower voluntary compliance with knowledge to develop persuasive
between tax authority and tax payer.
 Sustainable awareness creation program must be given by government to change tax payer
attitude toward taxation.
 The authority should promote voluntary compliances by protecting their rights, fair
treatments and exercising accountable and transparent administrative system and procedure.

30
 JIMMA UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ECONOMICS

QUESTIONNAIRE ON TAX PAYERS’ VOLUNTARY COMPLIANCE

Contingent Valuation Method Survey of Offices Questionnaire Of Dedo Town Tax

Payer Voluntary Compliance.

This survey is being undertaken by a student of Jimma University, College of Business and
Economics in the Department of Economics for award of BA Degree in Economics. This
questionnaire is designed to obtain information on the current situation of tax payer voluntary

compliance in Dedo town. The information collected is for purely academic purpose and will
be kept confidential. And your name personal information will never be linked with your
responses. Hence you are requested to participate in this discussion as truthfully as you can

Name of the Interviewer_________________________________

Interview Started/ended_________________________________

Kebeles No______________________ House No___________

I. Question related to demographic characteristics

1. Age: A <30 B 30-40 C >40

2.Sexes: A male B female

3. Marital statuses:

A single B married C divorced

4 Educational statuses:

Aadult education (informal education) B primary education C secondary education D

preparatory education E higher education

31
II question related to tax payers knowledge about taxation

5 Why do you pay taxes?

A to avoid disturbance (penalties, sanction)

B in the anticipation of public service

C there is no opportunities to evade

D it is an obligation towards the government

III Question related to tax payers attitudes towards taxation

6 Would you pay tax there is no legal enforcement

A yes B no

7 Does the non compliance of other tax payers have negative impact on your own compliance?

A yes B no

8 Do you have in the employees of Dedo town revenue authority

A yes B no

9 Paying tax is unfair:

A strongly agree B moderately agree

C strongly disagree D moderately disagree

III question related the tax authority

10 How do you evaluate the strength of tax authority with respect to tax collection efficiency
parameters?

A excellent B Good C fair D poor

11 How do you evaluate the strength of tax authority with to low enforcement?

32
A Excellent B good C Fair D poor

12 How do you evaluate the strength of tax authority with respect to awareness creation?

A excellent B good C Fair D good

IV question related to tax equity or fairness and major problem in tax system

13 Is tax liability understated or overstated

A overstated B understated

14 What is the major problem in tax system / collection?

A Tax rates are too high

B several tax items are levied at the same times

C tax revenues are not spent on public services

Dtax payers are not willing to pay

V question related to honesty

15 How do you evaluate the honesty and loyalty of tax payers to tax systems.

A excellent B good C fair D poor

33
Reference

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35(4),527-557

2. Bahtia,H,1(1976) public finance,19th edition, new delhi, india; vikas publishing house pvt.Itd

3. Bird,P.M and oldman .o.Readings on taxation in developing countries revised.

Baltimore,USA;The John Hopkns press.

4. Brooks. N. (2001).Key issue income tax; challenges of tax administration and compliance
Asian development bank tax conference.

5. Eckste in otto. (1979). Public finance 4th edition.ENGLE wood cliffs, USA; printice hall Inc.

6. Edlund. J. (2003).Attitude towards taxation, ignorant and I choherent, Scandinavian political

studies.vol. 26.No 2.Nardic political association.

7.Federal Inland Revenue authority (2000). Components of tax administration Tax, vol 1, No3,
fIRA.AdissAbeba.

8. Lemesa. B. (2005)federal income tax administration in Ethiopia; the case of employment and
business income tax, unpublished MSE. Thesis A.A.U.

9. NegaritGazetta,2005income tax proclamation 286/05, FDRE; AdissAbeba, BSPE. Shultz and

Harriss(1949).

10. International Journal of Business and Social Science vol.3 No, 21; November 2012

34
 DECLARATION

I undersigned declare that this is my original work and has not been presented for degree in

any other university and all material will be used for the study have been duly acknowledge.

Name of student ………………………………………

Signature ………………………

Date ……………………………

This Research has been submitted for examination with my approval as a university advisor

Name of advisor ………………………………………

Signature ………………………………….

Date ………………………………………..

35