DEBRE BERHAN UNIVERSITY

COLLEGE OF BUSINESS ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

Determinants of Business Taxpayers Compliance with Tax System: A case of

Debre Berhan City, Amhara Regional State, Ethiopia

A Thesis Submitted to Debre Berhan University Department of Accounting and Finance in

Partial Fulfillment of the Requirements for the Degree of Master of Science in Accounting
and Finance

By:

Fitsum Abegaz

Advisor:

Kidanie Kerebih, PhD

JUNE, 2019

DEBRE BERHAN, ETHIOPIA

 DECLARATION

I, Fitsum Abegaz, declare that this thesis entitled “Determinants of Business Taxpayers
Compliance with tax System: A case of Debre Birhan city, Amhara region, Ethiopia”
submitted in partial fulfillment of the degree of Masters of Science in Accounting and Finance is
an outcome of my own effort and that all sources of materials used for the study have been duly
acknowledged. I have carried out the research work independently with the guidance and
support of the research advisor and this study has not been submitted for any degree or diploma
program in this or any other institution.

By: Fitsum Abegaz

Signature................................

Date......................................

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 CERTIFICATE

This is to certify that the thesis entitled “Determinants of Business Taxpayers’ Compliance
with Tax System: A case of Debre Berhan City, Amhara Regional State, Ethiopia”
submitted to the Department of Accounting and Finance, College of Business and Economics,
Debre Berhan University, in partial fulfillment of the requirements for the award of the Degree
of Mater of Science in Accounting and Finance is a record of original research work done by
Fitsum Abegaz during the period 2011 E.C under my supervision and guidance and the thesis has
not formed the basis for the award of any Degree / Master / Associate ship / Fellowship or other
similar title of any candidate of any University.

NAME OF ADVISOR: KIDANE KEREBIH, PhD

SIGNATURE: _______________
DATE: _____________________

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 ACKNOWLEDGEMENT

I would like to extend my first and most gratitude to almighty GOD and His mother Saint Marry,
without whom nothing good is possible. I would like to extend my heartfelt appreciation and
deepest gratitude to my advisor, Dr. Kidane K for his expert guidance, helpful criticism, valuable
suggestions and encouragement at every stage of this work. I am deeply appreciative of the
dedication, encouragement and time that he has significantly contributed to the completion of my
thesis. My heartfelt gratitude goes to my lovely friend and my co-worker Mr. Robel Siyoum, I really
thank you for your unreserved motivation and support.

My gratitude is also extends to Debre Birhan city administration revenue office staffs for providing me
with the relevant data which was very important for this study. I am also indebted to Debre Birhan city
Category “C” business taxpayers for their enthusiasm to participate in the survey and plays significant
contribution to the success of this study.

Furthermore I also owe a special recognition to my friends, classmates and staffs who have
contributed in many ways toward the completion of this thesis.

Finally, my heartfelt thanks go to my family, for their unconditional love and support. I am
deeply grateful to my parents who have been motivating and praying for my success.

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 ABSTRACT

Despite the increasing need to increase revenue collection and enforcement to provide public
services, developing countries like Ethiopia still face the challenges of low tax compliance and
inefficient tax administration. Improving the tax compliance behavior of taxpayers helps to boost
the revenues available for supporting public services without increasing the current tax burden
on compliant tax payers. Compliance behavior of the taxpayers is determined by various factors
and identifying these factors and treating them accordingly should be the central premises of any
tax system in order to maintain effective tax compliance. This study was meant to identify
determinants of business taxpayers’ compliance with tax system with a special reference to
category “C” tax payers in Debre Birhan city, Amhara region, Ethiopia. The study adopted a
survey research design. The target population for this study was 4131 category “C” business
taxpayers operated in Debre Birhan city. Out of the total population 365 respondents were
selected as a sample. Convenience sampling techniques was applied to select respondents from
the target population. The data collection method used for the study is questionnaire. A five point
likert scale was used to measure responses of variables. To assess the internal consistency of the
instrument, Cronbach’s alpha was used. The instrument was validated through content validity
and reliability. In order to analyze and present the results of this study, descriptive statistics,
Pearson correlation and Ordinary Least Square (OLS) regression model were employed using
STATA software version 13. The found that awareness level, fairness, influences of peer groups,
income level, detection and punishment have significant positive influence on tax compliance
with a 5% significant level. The result also revealed that there is an inverse relationship between
attitude of taxpayers towards the government and tax compliance behavior. The result of the
study also reveals that among the explanatory variables considered, fairness followed by
detection and punishment is found to be the most important determinant factors influencing
category “C” business tax payers’ compliance with tax system in the city administration.

Keywords: Tax, Taxation, Tax Compliance, Tax Administration, Business Taxpayers.

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 Table of Contents
DECLARATION.......................................................................................................................................... i
CERTIFICATE ........................................................................................................................................... ii
ACKNOWLEDGEMENT ......................................................................................................................... iii
LIST OF TABLES ..................................................................................................................................... ix
LIST OF FIGURES .................................................................................................................................... x
LIST OF ACRONYMS ............................................................................................................................. xi
CHAPTER I: ............................................................................................................................................... 1
INTRODUCTION....................................................................................................................................... 1
1.1. Background of The Study............................................................................................................... 1
1.2. Statement of the Problem ............................................................................................................... 8
1.3. Objectives of the Study ................................................................................................................. 10
1.3.1 General Objective ............................................................................................................................ 10
1.3.1 Specific Objectives ........................................................................................................................... 10
1.4. Research Questions ....................................................................................................................... 10
1.5. Hypotheses ..................................................................................................................................... 10
1.6. Scope of the Study ......................................................................................................................... 11
1.7. Significance of the Study .............................................................................................................. 11
CHAPTER II:............................................................................................................................................ 12
REVIEW OF RELATED LITERATURE .............................................................................................. 12
2.1. Theoretical Review of Literature...................................................................................................... 12
2.1.1. Definition of Compliance ................................................................................................................ 12
2.1.2. Theories of Tax Compliance .......................................................................................................... 14
2.1.2.1. Economic Deterrence Theory ..................................................................................................... 14
2.1.2.2. Fiscal Exchange Theory............................................................................................................... 14
2.1.2.3. Social Influences ........................................................................................................................... 15
2.1.2.4. Comparative Treatment .............................................................................................................. 15
2.1.2.5. Political Legitimacy ..................................................................................................................... 16
2.1.3. Tax Compliance Costs .................................................................................................................... 16
2.1.3.1 Components of Tax Compliance Benefits ................................................................................... 17
2.1.4. Factors Determining Tax Compliance Behavior .......................................................................... 18

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2.1.4.1. Tax Knowledge ............................................................................................................................. 19
2.1.4.2. Fairness or Equity ........................................................................................................................ 20
2.1.4.3. Influences of Peer Groups ........................................................................................................... 21
2.1.4.4. Attitude of Taxpayers towards the Government....................................................................... 22
2.1.4.5. Income Level of Taxpayers ......................................................................................................... 23
2.1.4.6. Detection and Punishment........................................................................................................... 23
2.2. Empirical Review of Literature ........................................................................................................ 24
2.3. Summary of Literature and Research Gap ..................................................................................... 28
2.4. Conceptual Frame Work .............................................................................................................. 29
CHAPTER III: .......................................................................................................................................... 30
RESEARCH DESIGN AND METHODOLOGY .................................................................................. 30
3.1. Introduction ........................................................................................................................................ 30
3.2. Research Approach ............................................................................................................................ 30
3.3. Research Design ................................................................................................................................. 31
3.4. Target Population .............................................................................................................................. 31
3.5. Sample Size ......................................................................................................................................... 31
3.6. Sampling Techniques ......................................................................................................................... 32
3.7. Data Type and Sources ...................................................................................................................... 33
3.8 Research Instruments ......................................................................................................................... 33
3.8.1. Questionnaires ................................................................................................................................. 33
3.8.1.1 Questionnaire Design .................................................................................................................... 34
3.8.1.2 Scale of Measurement ................................................................................................................... 34
3.8.1.3. Validity and Reliability................................................................................................................ 35
3.9. Method of Data Analysis ................................................................................................................... 35
3.10. Model Specification .......................................................................................................................... 36
CHAPTER IV: .......................................................................................................................................... 38
DATA PRESANTATION AND ANALYSIS .......................................................................................... 38
4.1. Introduction ........................................................................................................................................ 38
4.2. Questionnaire Response Rate ........................................................................................................... 38
4.3. Respondents Profile ........................................................................................................................... 39
Gender of Respondents............................................................................................................................. 39
Age of Respondents ................................................................................................................................... 40

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Education Level of Respondents.............................................................................................................. 40
Respondents’ Position ............................................................................................................................... 41
Type of Business ........................................................................................................................................ 42
4.4. Assessment of Factors of Tax Compliance....................................................................................... 42
4.4.1 Awareness Level of Tax payers....................................................................................................... 42
4.4.2. Tax Fairness/Equity ........................................................................................................................ 44
4.4.3. The Influence of Peer Groups on tax Compliance ....................................................................... 46
4.4.4. Taxpayers Attitude towards the government ............................................................................... 48
4.4.5. Income Level on Tax compliance .................................................................................................. 51
4.4.6. Detection and Punishment ............................................................................................................. 52
4.4.8. Level of Tax compliance ................................................................................................................. 56
4.5. Econometric Analysis ........................................................................................................................ 57
4.5.1. Validity ............................................................................................................................................. 57
4.5.2. Reliability ......................................................................................................................................... 57
4.5.3. Model Fitness and Regressions ...................................................................................................... 58
4.5.3.1. Tests for Normality ...................................................................................................................... 58
4.5.3.2. Test for Multicollinearity ............................................................................................................ 60
4.5.3.3. Test for Hetroscedasticity............................................................................................................ 61
4.5.4. Correlation Analysis ....................................................................................................................... 61
4.5.5. Discussion of the Regression Results ............................................................................................. 63
4.5.6. Testing of Research Hypothesis ..................................................................................................... 65
4.5.6.1. Awareness Level of Business Taxpayers and Tax Compliance............................................ 65
4.5.6.2. Effect of Perception of Tax Fairness on Tax Compliance ........................................................ 66
4.5.6.3. The Influence of Peer groups on the Level of Tax Compliance ............................................... 66
4.5.6.4. Attitude of Taxpayers towards the Government and Tax Compliance .................................. 67
4.5.6.5. The Impact of Income Level on Tax Compliance ................................................................. 67
4.5.6.6. The Role of Detection and Punishment on Tax Compliance.................................................... 68
4.6. Summary of Analysis ......................................................................................................................... 69
CHAPTER V: ............................................................................................................................................ 70
CONCLUSION AND RECOMMENDATION ...................................................................................... 70
5.1 Introduction ......................................................................................................................................... 70
5.2. Conclusion .......................................................................................................................................... 70

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5.3. Recommendation................................................................................................................................ 71
5.4. Scope for Future Research ................................................................................................................ 73
Reference ................................................................................................................................................... 74
Appendices 1- Business Taxpayers survey instrument ............................................................................. 81

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 LIST OF TABLES
Table 1: Age of Respondents .............................................................................................................. 40

Table 2: Education Level of Respondents ........................................................................................ 40

Table 3: Business Activity of Respondents ....................................................................................... 42

Table 4: Awareness Level of Taxpayers ........................................................................................... 43

Table 5: Tax Fairness/Equity .............................................................................................................. 45

Table 6: Influences of Peer Groups .................................................................................................. 47

Table 7: Attitude of Taxpayers towards the Government Services ........................................... 49

Table 8: Income Level on Tax Compliance ...................................................................................... 51

Table 9: Detection and Punishment ................................................................................................... 53

Table 10: Tax Administrative Effectiveness .................................................................................... 55

Table 11: Revenue Performances of Debre Birhan City............................................................... 56

Table 12: Results of the Reliability Test ........................................................................................... 57

Table 13: Tests of Normality ............................................................................................................... 59

Table 14: Test for Multicollinearity ................................................................................................... 60

Table 15 Pearson Correlations Matrix .............................................................................................. 62

Table 16: OLS Regression Result ....................................................................................................... 64

Table 17: Impact of Factors of Tax Compliance ............................................................................ 69

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 LIST OF FIGURES

Figure 1: conceptual Framework ....................................................................................................... 29

Figure 2: Response Rate ....................................................................................................................... 38

Figure 3: Respondents by Gender ...................................................................................................... 39

Figure 4: Respondents’ position in the business ............................................................................. 41

Figure 5: Test for Hetroscedasticity................................................................................................... 61

x
 LIST OF ACRONYMS

CLRM- Classical Liner Regression Model

EC-Ethiopian Calendar

EPRDF- Federal Democratic Republic of Ethiopia

ERCA-Ethiopia Revenue and Custom Authority

FDRE- Federal Democratic Republic of Ethiopia

GAAP-Generally Accepted Accounting Principles

GDP-Gross Domestic Product

GTP- Growth and Development Program

IMF-International Monetary Fund

OECD- Organization for Economic Cooperation and Development

OLS- Ordinary Least Square

PRGT-Poverty Reduction and Growth Trust

TOT- Turnover Tax

UNDP-United Nations Development Program

VAT- Value Added Tax

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 CHAPTER I:

INTRODUCTION

1.1. Background of The Study

Taxation dates back to the earliest recorded history. In Egypt, tax collectors are depicted in tomb
paintings dated at 2000 BC. Egyptian pharaohs taxed cooking oil, and the tax collectors (scribes)
ensured that citizens didn’t use substitutes to avoid the tax. In ancient Greece, Athenians
imposed a tax referred to as eisphora in times of war. No one was exempt from tax which was
used to pay for special war time expenditure. The Greeks are one of few societies that were able
to resend the tax once the emergency was over when additional resources were gained by the war
effort resources were used to refund the tax. Athenians imposed a monthly pool tax on foreigners
referred to as metoikion. (William.H, 1992)

Ancient Rome had an elaborate tax system that included sales taxes, inheritance taxes, land
taxes, pool taxes on imports and exports. During the occupation by the Roman Empire, the first
taxes were imposed in England. When Rome fell, the Saxon kings imposed customs duties and
taxes on land and property. During the reign of Charles I, taxes were imposed on land, and excise
taxes were collected. In 1904, parliament passed the world’s first income tax, but the tax was so
unpopular it was rescinded. The British enacted a precursor to the modern income tax in 1980 to
finance the war with napoleon (Public finance overview, 2015).

Tax may be defined Bhatia (2003) as a compulsory payment or contribution by the people to the
Government for which there is no direct return to the taxpayers. Tax imposes a personal
obligation on the people to pay if they are liable to pay it. 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.

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Taxation is world- widely used public institution that serves for the sustainability of both
developed and developing countries. Almost every state in the world imposes certain tax
obligations on its citizens within its domain for many purposes. Firstly, taxation is the main
source of central government revenue, since tax collection is mandatory and regular, which can
guarantee the stability of income. Secondly, taxation aims to meet the social and public needs by
providing public goods and services. Thirdly, government need tax revenue to establish armed
forces and judicial systems to ensure the secure and justice of the society. On the other hand,
government is also concerned with the formation and implementation of the socio-economic
programs aimed at promoting the welfare of its citizens. Moreover, the government needs fund to
be able to discharge its functions to the governed. It has been observed by Fjeldstad (2013) that
an “effective tax system in most countries has been considered as essential for suitable
development because it can mobilize domestic revenue and avoid dependency on single natural
resources especially in emerging economies”. This has made it possible for government to use
taxation as a tool to achieve its objectives.

Economic development is the main objective that all developing countries are striving for. But
evidences indicated that developing countries are not financing their development mainly from
taxation. According to Bhushan and Samy (2012) global economic crisis coupled with
uncertainty and instability of aid flows has given due attention for governments to look for stable
and sustainable modes of development finance. In addition, excessive reliance on foreign
financing may in the long run leads to problems of debt sustainability. According to IMF report,
2018, in sub-Saharan African countries, foreign currency denominated public debt increased by
about 40 percent from 2010-13 to 2017 and accounted for about 60 percent of total public debt in
2017 on average. Several countries, mostly resource intensive countries in fragile situation, have
accumulated external arrears. Debt sustainability has deteriorated among sub-Saharan African
PRGT eligible low-income developing countries. As of 2017, six countries have been assessed to
be in doubt distress (Chad, Eritrea, Mozambique, Republic of Congo, South Sudan, and
Zimbabwe) and two countries Zambia and Ethiopia were changed to high risk of debt distress.
Most of countries in debt distress are resource intensive countries in fragile situation (IMF,
2018), As a result, developing countries will need to rely substantially on domestic revenue
mobilization. (Gupta, 2007; Neway 2017). One way of mobilizing domestic resource is achieved
through raising of revenue from taxation.
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According to African growth initiative report (2018), Africa has made some progress in raising
non-resource tax revenues over the past two decades. The ratio of tax revenues excluding natural
resource taxes and social contributions rose steadily from roughly 11 percent in the early 2000s
to around 15 percent in 2015. Administrative and legislative reforms during the 1990s and 2000s
have been important in improving revenue collection. Reforms included the introduction of
value-added tax in several countries, programs to improve taxpayer services, and the roll out of
electronic filing systems (OECD, 2017). The creation of semiautonomous revenue agencies in
several countries also improved non-resource tax mobilization (Ebeke et al., 2016). Elsewhere,
depending on domestic conditions, countries have removed tax exemptions, revised investment
codes, and implemented tax reforms for small businesses (IMF, 2018). Over the past three
decades, IMF (2018) many sub-Saharan African countries have achieved substantial gains in
revenue mobilization. For sub-Saharan African economy, total revenue excluding grants
increased from around 14 percent of GDP in the mid-1990s, to more than 18 percent in 2016,
while tax revenue increased from 11 to 15 percent and also 15 sub-Saharan African countries
have successfully transitioned to tax-to-GDP ratio about 13 percent and above.

Despite the progress in revenue mobilization, the region still has the lowest tax-to-GDP ratio
compared other regions in the world. At around 15 percent, sub-Saharan Africa has one of the
lowest ratios in the world, significantly below the 24 percent average in OECD countries (IMF,
2018). Low tax –to-GDP ratios are exacerbated by limited capacity to collect revenues especially
tax revenues. Progress will be needed expanding tax coverage, strengthening accountability,
improving tax administration, and closing loopholes could make significant difference in lower-
income countries, where tax revenues account for only about 10 to 14 percent of GDP, one-third
less than in middle income countries and far below the 20 - 30 percent of GDP reached in high
income countries (World Bank, 2013).As stated by Vadde and Gundarapu (2012) Ethiopia, like
any other developing countries, has faced difficulty in raising revenue to the level required for
the promotion of economic growth. Hence, the country has been experienced a consistent surplus
of expenditure over revenue for sufficiently long period of time.

Taxation in Ethiopia had been applied long years ago. According to Misrak.T (2008) taxation
was source of government revenue from early Axum kingdom in Ethiopia around 500 AD. The
kind of traditional system continued for several centuries smoothly until it was replaced by the

3
modern tax system in the mid of 20th century. The modern Ethiopian tax system is a product of
more than half a century of experimentation in legislation and tax reform.

The first major change in Ethiopia’s tax system was initiated in the post-Second World War
period ‘between’ 1942-1944, the years 1947-1952 covering its second stage. These changes were
generally discretionary, including amendments to property taxes (land and cattle). Broad-based
taxes on goods and services were also introduced in the mid-1950s. Later in the decade and in
the early 1960s, changes were also made in the rate and structure of taxes, especially on income.
In the post-revolution period (1974-1991), particularly during 1976-1979, significant major
changes on the rate and structure of all types of taxes were made. These involved widening the
land tax base, introducing capital and surplus transfers from nationalized firms, as well as certain
minor arrangements on other taxes (Alemayehu G., & Abebe S., 2005).

In Ethiopia, the year 1991 marked the end of the previous policy regime of hard control that had
lasted for nearly two decades. This was the year when the seventeen year old socialist regime
was toppled by the coalition of rebel forces and the current government that is, (EPRDF) was
formed. Starting from the year 1992, the EPRDF government has initiated a wide range of
reforms that can be termed as liberalization. Reform of the tax system was among the range of
liberalization policies that also extended, among others, to the exchange rate, interest rates, trade,
domestic production and distribution. Literature shows that taxation in Ethiopia had been
practiced for a long year ago even the structure and tax system is different. When we come to the
current government, before the Ethiopian revenue and customs authority had established, most of
the investors engaged in export and import commercial activities have been the Federal
Government tax payers, however that those government services in relation to tax and export and
import trade are being rendered by a number of institutions problem: regarding with the manner
of service rendering, keeping and utilization of information and promotion of law and order are
being resulted; whereas , in addition to their similar activities the Ministry of Revenue, the
Ethiopian Customs Authority and the Federal Inland Revenue Authority have been following
similar resource uti1ization and organizational arrangement, thus the merging of the three
institutions will provide for the establishment of modern tax and customs administration system,
expeditious and effective resource utilization and manner of service rendering.(Ethiopian
revenue and customs authority establishment proclamation.No.587/2008). ERCA was

4
established by merging the former ministry of revenue, federal Inland Revenue authority and the
Ethiopian customs authority in 2008 by proclamation No. 587/2008. The main mission of the
authority is to establish modern tax and custom administration dedicated to meet the requirement
of the business community, encouraging voluntarily compliance combating smuggling, tax
evasion and there by contributing to development of the countries.

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

The principal taxes that affect businesses in Ethiopia are income taxes, value added tax (VAT),
turnover tax (TOT) and excise taxes (World Bank group, 2016). Income tax proclamation No.
286/ 2002 (as amended) and council of Ministers regulations 78/ 2002 (as amended) provide the
legal basis for income taxation in Ethiopia. According to this legislation, there are four schedules
of income, namely: income from employment (schedule A), income from rental of buildings
(schedule B), business profit (schedule C) and other income (schedule D). A further look at the
income tax under schedule C (business profit tax) shows that the tax is imposed on profit
obtained from an entrepreneurial activity. It is chargeable at rates ranging from 10 to 35 percent
if the taxpayer an individual (unincorporated entity) and 30 percent on profits earned by a body
(an incorporated entity). The income tax legislation classifies businesses into three categories as
A, B, and C. Category A businesses are those that have annual turnover of ETB 500,000 or
above and all incorporated entities; category B includes those that are not already classified as A
and have annual turnover of more than ETB 100,000 but less than ETB500,000. Category C
taxpayers are those that are not already included in categories A and B and have annual turnover
up to ETB 100,000. For categories A and B the tax is assessed based on the profit and loss
statement prepared in accordance with the Generally Accepted Accounting Principles (GAAP)
subject to the specific rules as provided in the income tax legislation.

5
On the other hand, standard assessment is used to determine the income tax liability of Category
‘C’ taxpayers. This type of assessment is a fixed amount of tax determined in accordance with
the Council of Ministers Regulation established Schedules. This category of taxpayers is the
most problematic category of taxpayers and it is considered as hard to tax group. This is due to
the fact that these taxpayers pay taxes at fixed rate on the income estimated by the tax authority
rather than declaring their income by themselves. Their daily income is estimated by assessment
committee and the taxpayers have little room to address their view.

The Ethiopian Government has been introducing tax policy reforms with a view to improving tax
revenues collection because the fiscal deficit has necessitated tax reforms in the Tax and
Customs Administrations since 1992. As pointed out by Delessa Daba (2014); Demrew (2004)
the country faced severe macroeconomic imbalances such as falling export earnings, worsening
balance of payments, and mounting debts and declining economic growth, the country undertook
various policy measures following a major economic shift from central planning to market
oriented system. The government has attempted to rationalize the tax structure, broaden the tax
base, and improve equity, fairness, consistency, in the administration and the tax laws so as to
increase revenues performance.

The primary objective of the tax policy and administration reform was to raise tax revenues
measured in terms of tax to GDP ratio from less than 10 percent to 18 to 20 percent of over
medium range plan after implementation of the reform program. (Delessa Daba, 2014).

According to UNDP report, 2016, in the past decade Ethiopia has made encouraging progress in
mobilizing more revenues from domestic sources, particularly in tax revenue. Tax collection
increased from Birr12.4 billion in 2005 to Birr 165.3 billion in 2015 indicating over thirteen fold
increases in the decade. Similarly the share of domestic revenue in the total public revenue
increased from 77 percent to 94 percent in the same period, and the share of tax revenue stands at
83 percent in 2015. However, there is a challenge increasing the tax revenue proportionate GDP;
the tax to GDP ratio remained low at 13.4 percent in 2015 which is way below the Sub Saharan
Average of about 18percent, over 20percent for emerging economies and above 30percent for
developed economies. In 2005 Ethiopia’s tax to GDP ratio was 12.5percent after a decade of
robust and strong economic growth this ratio came to 13.4percent posting very little progress.

6
Furthermore World Bank report (2016) states that tax revenue (% of GDP) in Ethiopia was last
measured as less than 23% which is even less than the average value of sub Saharan country that
has 26% of GDP.

Although the economy has been growing at a remarkable rate averaging more than 10 percent,
the slow growth in the tax to GDP ratio suggests the growth in tax collection is not
commensurate with the economic growth perhaps indicating a huge untaxed potential (UNDP
Ethiopia ,2016). Furthermore according to World Bank group (2016) the share of tax revenue in
GDP hardly changed suggesting that tax revenue (which should rise relative to GDP due to
progressive rate structure) has failed to grow as much as expected with the overall economic
growth. This situation in the revenue system might be due to such things as poor tax compliance
behavior and weak tax administration.

7
 1.2. Statement of the Problem

Tax compliance is a major problem for many tax authorities and it is not an easy task to persuade
taxpayers to comply with tax requirements even though tax laws are not always precise. The
definition of compliance is usually cast in terms of the degree to which tax payers comply with
tax law. It has been said that the degree of non-compliance can be measured in terms of the 'tax
gap' (difference between taxes paid and owed for all taxes and all taxpayers if there were 100%
compliance) (James, 2000).

Tax compliance is a function of public attitude towards taxation and organizational strength
(efficiency and effectiveness) of the tax authority. Public attitude towards taxation is also in turn
affected by the social, cultural, economic, and political factors as well as awareness about tax
and fairness of the tax system. If it is perceived that only those who are wealthy or dishonesty or
both benefit from non-compliance, this might reduce tax morale and the willingness of the rest of
the population to comply.

The Ethiopian tax system conservatively focuses its strategies on legal enforcement as remedy to
ensure its proper functioning. For example, the income tax Proclamation number 286/2002 and
the amended proclamation number 608/2008 has increased the amount of penalties and
strengthened the means of enforcement. However, the current tax system in general states
nothing about how to create and enhance the awareness of the taxpayers. Taxpayers lack
knowledge about taxation and the details of the tax laws and procedures. Therefore, the dangers
of non-compliance remain a key issue in the Ethiopian tax system in general.

According to Cobham (2005), Tax compliance is a problem to many countries as measured by

tax to GDP ratio. The tax revenue performance of Ethiopia as a percentage of GDP remains low
(Temtme, 2014). Similarly, as it has been mentioned in the second Growth and transformation
plan (GTP II), the share of tax revenue amounted to only 13.3 percent of the GDP, which is far
below the average tax-to-GDP ratio for sub- Saharan countries. Administrative bottlenecks and
weak tax compliance have been the main obstacles to revenue administration. Given the current
low collection rate, achieving the target of 17.2 percent of GDP by 2019/20 will be challenging.
Some countries in the region have successfully implemented reform programs aimed at

8
improving tax compliance and strengthening effectiveness and efficiency in revenue
administration (e.g. Mozambique, Congo Republic, Cab Verde and Liberia), (IMF, 2018).

The Ethiopian government has been undertaking substantial efforts in reforming and
modernizing the revenue administration with the aim of simplifying the tax system and
increasing government revenue. Despite the effort taken by government, there has been poor tax
revenue collection and tax compliance has still remained a problem. There are also poor handling
taxpayer queries and complaints on tax matters, lengthy bureaucratic tax administrative
procedures coupled with the nature of physical facilities in keeping and processing taxpayer
information. According Dinku T & Alamirew A. (2018), tax compliance in Amhara National
Regional State is low. In 2006 EC and 2007 E.C tax year, tax payer’s behavior in comparison
accounts only 8.94 percent and 11 percent respectively. This indicates tax payer’s compliance in
the region is very low.

When it comes to Debre Birhan city, information from the city revenue office implies that there
is low tax collection performance. According to Debre Birhan city Administration Revenue
office, in 2011/12 and 2012/13 budget years the revenue office recorded high uncollected
revenue of birr 10.3 million and 18.9 million respectively. Similarly, in 2016/17 Budget year the
revenue office plans to collect revenue of birr 249.4 million from 5,410 tax payers, while it has
collected birr 234.8 million from 4,515 actual tax payers.

Despite the low collection performance of city revenue offices, the percentage increment of the
plan is low. For example in 2007 EC Budget year the percentage of the plan increment is 1.94
percent which is lower than the previous Budget year 38.54. Similarly in 2010 EC, the increment
percentage of the plan is 29.34 this is lower than the previous budget year which is 45.40
percent. For the current year 2011 EC, the Revenue office plans to collect total revenue of Birr
285.48 million, 14.47 percent increment from the previous Budget year. Given the low revenue
collection performance, achieving this target is challenging for the revenue office.

As it is mentioned by Ministry of Finance and Economic Cooperation, contribution of researches

are required on areas which includes but not limited to the functioning of the tax system and
ways of improving the system so as to increase revenue collection and meet budgetary
requirements of the country. As a result of this, more local studies on tax payers compliance and

9
Understanding the factors that determine the compliance and non-compliance behavior of
taxpayers with tax laws is very much significant to provide the policy makers and the
implementers in the area with relevant information that can help them in designing the
appropriate tax system and collection methods.

This study has, therefore, attempted to find out determinants of business tax payers compliance
with tax system with a special reference to category “C” tax payers in Debre Birhan city,
Amhara region, Ethiopia.

1.3. Objectives of the Study

1.3.1 General Objective

The main objective of the study is to find out determinants of business tax payers compliance
with the tax system in the study area.

1.3.1 Specific Objectives

1. To determine the level of tax compliance by business tax payers.
2. To investigate factors affecting business tax payers compliance with the tax system.
3. To investigate the effectiveness of tax administration of the city.
4. To suggest mechanisms that can enhance the tax revenue of the city administration.
1.4. Research Questions

The motivation of this study will seek to answer the question.

Q1. What is the level of Tax compliance among business tax payers in the study area?

Q2. What are the factors affecting business taxpayers compliance with the tax system?

Q3. What are the services given to business taxpayers by city Administration Revenue office?

1.5. Hypotheses

Based on the review of literature and the conceptual model, the following six hypotheses are
developed to achieve the objectives of the study; examine the determinants of business tax
payers’ compliance with the tax system in Debre Birhan city. The hypotheses are listed as below:

10
Hypotheses1: H01: Awareness level of tax payers has no effect on tax compliance.

Hypotheses 2:H02: Tax Fairness has no impact on tax compliance.

Hypotheses 3: H03: A Peer Group influence has no effect on tax Compliance.

Hypotheses 4:H04: Taxpayers attitude towards the government has no effect on tax compliance.

Hypotheses 5:H05: Taxpayers Income level has no effect on tax Compliance.

Hypotheses 6: H06: Detection and Punishment of taxpayers has no impact on tax Compliance.

1.6. Scope of the Study

So as to critically examine the objectives of the study in some details, the paper will focused on
determinant factors that influence business income tax payer’s compliance by only focusing on
category “C” business tax payers in Debre Birhan city. Therefore, the research is limited itself
towards determinants of business taxpayers compliance with the tax system in Debre Birhan city,
with special reference to category “C” tax payers.

1.7. Significance of the Study

In a country like Ethiopia where the contribution of revenue to the overall economic
development is believed to be very much significant, there is need for studies on the tax payers’
compliance. This study is significant in that it may help the policy makers of the city
administration and at regional level to make use of the outputs of the study in addressing the tax
compliance problems. It also hoped that by unearthing the burden associated with tax compliance
on tax payers, Debre Birhan city administration revenue offices will gain a deeper understanding
of the business community and hence customize its services to better suit its clientele because, it
will identify factors that determine the compliance and non- compliance behavior of taxpayers
with tax system. Furthermore, it will provide researchers with baseline information that could be
useful in future studies in this field.

11
 CHAPTER II:

REVIEW OF RELATED LITERATURE

2.1. Theoretical Review of Literature

2.1.1. Definition of Compliance

Tax compliance has been defined in various ways by various authors. As stated by Song and
Yarbrough, 1978, tax compliance defined as taxpayers’ ability and willingness to comply with
tax laws which are determined by ethics, legal environment and other situational factors at a
particular time and place. According to James (2000) cited on Tilahun (2007) 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 the difference between the
taxes that the law seeks to collect and those in fact collected.

Furthermore, according to Song and Yarbrough (1978) tax compliance has also been segregated
into two perspectives, namely compliance in terms of administration and compliance in terms of
completing (accuracy) the tax returns. Compliance in pure administrational terms therefore
includes registering or informing tax authorities of status as a taxpayer, submitting a tax return
every year (if required) and following the required payment time frames. In contrast, the wider
perspective of tax compliance requires a degree of honesty, adequate tax knowledge and
capability to use this knowledge, timeliness, accuracy, and adequate records in order to complete
the tax returns and associated tax documentation.

This perspective further reveals, although it is inevitable that tax authorities will seek to
‘influence’ the areas taxpayers have influence over determining to reduce the risks of non-
compliant behavior they face otherwise e.g. through continuously conducting tax audits of
different sorts and other means such as various compliance influencing activities including tax
education. According to Brown and Mazur (2003) theoretically tax compliance can be defined by
considering three distinct types of compliance that is payment compliance, filing compliance and

12
reporting compliance. Organization for Economic Cooperation and Development (2001),
advocates, dividing compliance into categories in considering definitions of tax compliance.

These categories are administrative compliance and technical compliance where the former
refers to complying with administrative rules of lodging and paying otherwise referred to as
reporting compliance, procedural compliance or regulatory compliance and the latter refer to
complying with technical requirements of tax laws in calculating taxes or provisions of the tax
laws in paying the share of tax. Theoretically, views of the tax payers and tax collectors are that
tax compliance means adhering to the tax laws, which are different from one country to another.
According to McBarnett (2003) cited in Mohad,R. et al. (2011) compliance may take three
forms, which include committed compliance, capitulated compliance and creative compliance.

1) Committed compliance - taxpayers’ willingness to pay taxes without complaint;

2) Capitulated compliance - reluctantly giving in and paying taxes and,

3) Creative compliance – engagement to reduce taxes by taking advantage of possibilities to

redefine income and deduct expenditures within the bracket of tax laws.

Some literatures explain tax compliance as the output of interrelation among variables including
perception of equity, efficiency and incidence (public finance views). Tax enforcement aspects
like penalties and the probability of detection also relate to tax compliance while other labor
market behavior factors including an individual’s wages and tax bracket also contribute to tax
compliance (Kirchler, 2007).

In contrast with tax compliance, tax non-compliance is defined as taxpayer’s failure to remit a
proper amount of tax, perhaps on account of the complexity or even contradictions in the tax
legislation or tax administration procedure. Non-compliance is also perceived as the failure of a
taxpayer to report (correctly) the actual income, claim deductions and rebates and remit the
actual amount of tax payable to the tax authority on time (Kirchler, 2007). Furthermore, it has
been defined as failure to comply with tax laws and/or report incorrect income, the act of
claiming incorrect deductions, relief and rebates and/or paying the incorrect amount of tax
beyond the stipulated time frame.

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2.1.2. Theories of Tax Compliance
The main theoretical approaches to tax compliance have commonly been divided into the
economic deterrence approach, and the wider behavioral approach which incorporates both
social and fiscal psychological approaches.

2.1.2.1. Economic Deterrence Theory

Deterrence is based on the concept that the risk of detection and punishment will improve
compliance behavior. Under this approach taxpayers pay their taxes out of fear that the
government will catch and penalize them. The theory suggests that taxpayers are amoral utility
maximizes- they are influenced by economic motives such as profit maximization and
probability of detection. As such they analyze alternative compliance paths for instance whether
or not to evade tax, the likelihood of being detected and resulting repercussions and then select
the alternative that maximizes their expected after tax returns after adjusting for risk (Trivedi and
Shehata, 2005). The economic deterrence theory states that taxpayer’s behavior is influenced by
factors such as the tax rate determining the benefits of evasion, and the probability of detection
and penalties for fraud which determine the costs (Allingham and Sandmo, 1972). This implies
that if detection is likely and penalties are severe, few people will evade taxes. In contrast, under
low audit probabilities and low penalties, the expected return to evasion is high. The model then
predicts substantial non-compliance. The theoretical principles of economic deterrence have also
been widely adopted by tax administrations when developing enforcement strategies that rely
principally on penalties and the fear of getting caught.

2.1.2.2. Fiscal Exchange Theory

The fiscal exchange theory suggests that the presence of government expenditures may motivate
compliance. For instance, Alm et al. (1992) note that compliance increases with (perceptions of)
the availability of public goods and services. They suggest that governments can increase
compliance by providing goods that citizens prefer in a more efficient and accessible manner, or
by more effectively emphasizing that taxes are necessary for the receipt of government services.

Accordingly, the main concern of taxpayers is what they get directly in return for their tax
payments in the form of public services (quid pro quo). In this perspective, taxation and the
provision of public goods and services are interpreted as a contractual relationship between

14
taxpayers and the government. Individuals may pay taxes because they value the goods provided
by the government, recognizing that their payments are necessary both to help finance the goods
and services and to get others to contribute (Fjeldstad and Semboja, 2001). A taxpayer may
therefore be seen as exchanging purchasing power in the market in return for government
services. The existence of positive benefits may increase the probability that taxpayers will
comply voluntarily, without direct coercion.

The behavioral literature on tax compliance incorporates social and political motives to explain a
sense of moral or social duty to pay taxes (Andreoni et al. (1998); Odd H.Fjeldstad, 2012). Three
main lines of theoretical arguments have been made in relation to tax morale, i.e. arguments
focusing on (i) social influences, (ii) comparative treatment of citizens, and (iii) the strength of
the national political community. Each of these is now presented in turn.

2.1.2.3. Social Influences

It is reasonable to assume that human behavior in the area of taxation is influenced by social
interactions much in the same way as other forms of behavior (Snavely, 1990; cited on Fjeldstad,
2012). Compliance behavior and attitudes towards the tax system may therefore be affected by
the behavior of an individual’s reference group such as relatives, neighbors and friends.
Therefore, if a taxpayer knows many people in groups important to him who evade taxes, his/her
commitment to comply will be weaker. On the other hand, social relationships may also help
deter individuals from engaging in evasion in fear of the social sanctions imposed once
discovered and revealed publicly (Grasmick and Green 1980; Grasmick and Scott 1982;
Fjeldstad, 2012).

2.1.2.4. Comparative Treatment

The comparative treatment model is based on equity theory and posits that addressing inequities
in the exchange relationship between government and taxpayers would result in improved
compliance (McKerchar and Evans 2009; Fjeldstad,Herzenberg, and Sjursen, 2012). Where there
are perceived inequities, individuals will adjust their inputs to the exchange until fairness is
restored. Based on equity theory, addressing inequities in the exchange relationship between
government and taxpayers would result in improved compliance.

15
Citizens may not consider their relationship with the state in a vacuum where both parties are the
only actors. Likewise, they may not think about their fellow citizens without considering their
own relationship with the state. They may also consider how the state treats them relative to their
fellow citizens (Fjeldstad, Herzenberg, and Sjursen, 2012). Citizens feel able to trust their fellow
citizens if they trust the state to intervene and resolve fairly when there is a breakdown in
relations between citizens. Thus, compliance rests not only citizens’ trust in government, but also
on their trust in each other.

2.1.2.5. Political Legitimacy

Legitimacy could be described as belief or trust in the authorities, institutions, and social
arrangements to be appropriate, proper, just and work for the common good. According to the
political legitimacy theory, tax compliance is positively related to perceptions about the
government’s, in particular the tax authorities, trustworthiness (Tayler 2006; Kirchler et al. 2008;
Fjeldstad, and Herzenberg, 2012). Related to political legitimacy is identification with the state
in the sense of national pride.

2.1.3. Tax Compliance Costs

The imposition of taxes represents a transfer of resources from households and businesses to the
government. This transfer generates three broad types of social costs: efficiency, administrative,
and compliance. Efficiency costs (alternatively referred to as deadweight losses or excess
burdens), arising from tax-induced changes in relative prices, distort consumer and producer
choices, and cause losses in overall output. Administrative costs are the costs to the government
of collecting taxes; and compliance costs are the value of resources expended by taxpayers in
meeting their tax obligations (Binh Tran-Nam, 2000).

Tax compliance costs are costs that the taxpayer has to bear to gather the necessary information
like preparing and maintaining books of accounts and filling out tax forms can be other reasons
for not complying with tax legislation. Compliance cost involves a myriad of expenses or
difficulties encountered by the taxpayer in complying with the tax law both in terms of
administrative compliance; that is registration, filing and subsequent payment of the taxes and
also technical compliance which involves maintenance of appropriate records, machines and
organization of the supply chain so as to observe the requirements of the law (Majiwa, 2014).

16
Sandford (1989) cited on Binh Tran- Nam (2014) states the three components of tax compliance
namely, monetary costs, time costs and psychological costs to the taxpayers. Monetary costs
include sums spent on tax professionals (i.e. tax agents and accountants) and expenses related to
taxation guides, books, communication and other incidental costs. Time costs are incurred by the
taxpayer, mainly on record keeping for the purposes of completing the tax return and preparing
tax details for the tax professionals as well as time spent on dealing with the tax authorities.
Psychological costs comprise costs such as anxiety of handling complex tax matters. Similarly,
Binh Tran-Nam (2014) states three major areas of opportunity costs applicable to tax compliance
activities.

1. time spent by taxpayers, unpaid helpers and (internal) paid employees

2. (external) paid tax advisers
3. non-labor costs (i.e., tax-related personal incidental expenses or business overhead costs)
such as equipment, computers, stationery, photocopying, postage, telephone, facsimile,
electricity, specific travel, etc

Some of these costs are explicit, involving direct payments (e.g. paid employees or external tax
advisers and non-labor costs) while others are implicit (e.g. taxpayers’ own time and that of
unpaid helpers).

2.1.3.1 Components of Tax Compliance Benefits

Offsetting benefits of tax compliance to taxpayers include managerial benefits, cash flow
benefits and tax deductibility benefits (Binh Tran-Nam, 2014).

Managerial benefits (both to personal and business taxpayers) have proved too difficult to
quantify. Cash flow benefits/costs (cash flow benefits may be negative for some individual
taxpayers, in which case they are referred to as cash flow costs) are a critical component in
arriving at an estimate of taxpayer compliance costs. The relative importance of cash flow
benefits/costs to taxpayers depends crucially on the tax system under consideration. Tax
deductibility benefits also need to be taken into account in determining taxpayer compliance
costs. The tax deductibility of some compliance activities drives a wedge between Social
compliance costs and Taxpayer compliance costs. The underlying assumption of tax deductibility
benefits is that taxpayers are optimizing and well informed so that they will always claim the full

17
amount of allowable tax deductions in order to minimize their income tax liabilities. Under this
assumption, the value of the tax deductibility benefit to taxpayers depends upon:

• The portion of taxpayers’ compliance costs which is tax deductible

• The taxpayers’ marginal income tax rates

• Whether taxpayers are income taxable or not.

2.1.4. Factors Determining Tax Compliance Behavior

Neway and Wondwesen (2015) states that tax knowledge, simplicity of tax returns and
administration, perception on fairness and equity, probability of auditing, and the influence of
referral group were determinant factors that influence compliance behavior of tax payers in self-
assessment system. Similarly Jackson and Milliron (1986) listed fourteen main factors that have
influenced tax compliance as discussed by various researchers. These factors are age, gender,
education, income, occupation or status, peers’ or other taxpayers’ influence, ethics, legal
sanction, complexity, relationship with taxation authority (IRS), income sources, perceived
fairness of the tax system, possibility of being audited and tax rate. Kirchler (2007) provides a
thorough description of the determinants of tax compliance, dividing them into three categories.
He states there are social psychological determinants comprising attitudes, different types of
norms, fairness perceptions, as well as motivational features relating to tax compliance, political
determinants such as complexity of law and tax system, or fiscal policy, and economic
determinants like the rational decision-making process and the effect of audits, fines, tax rates,
income on tax behavior. Similarly Fischer et al. (1992) cited on Geletaw (2015) stated there are
four basic factors that determine tax compliance behavior in his expanded model (Fischer
Model). i.e.

(i) Demographic (e.g. - age, gender and education)

(ii) Noncompliance opportunity (e.g. income level, income source and occupation),
(iii) Attitudes and perceptions (e.g. fairness of the tax system and peer influence) and
(iv) Tax system/structure (e.g. complexity of the tax system, probability of detection and
penalties and tax rates).

18
A comprehensive review of determinants of tax payers’ compliance with tax system such as,
awareness level/knowledge of tax payers, fairness/equity, tax payers’ attitude towards
government, Influences of Peer Groups, organizational strength of tax authority, and Detection
and Punishment will be touched. The empirical work of various researchers and other reference
materials are scanned to have basic conceptual framework of the subject matter.

2.1.4.1. Tax Knowledge

Tax knowledge is the level of awareness or sensitivity of the taxpayers to the tax legislation. Tax
knowledge refers to the processes, by which taxpayers become aware of tax legislation and other
tax-related information. The level of formal general education received by taxpayers is an
important factor that contributes to the understanding of tax requirements, especially regarding
registration and filling requirements. Generally, citizens have very limited knowledge on
government true expenditures and the cost of public services provided by the government.
Hence, those taxpayers without tax knowledge are compelled to solicit the service of tax
professionals (Oladipupo and Obazee, 2016). High awareness by the society would encourage
people to fulfill their obligations to register as taxpayer reporting and paying taxes properly are
forms of national and civic responsibility. Most citizens do not have much understanding of what
tax laws mean and why the tax system is structured and administered as it is.

Studies on knowledge and evaluation have addressed people's understanding and acceptance of
tax phenomena as well as relevant associations towards taxation held by different groups of
taxpayers. While from the perspective of the community, tax avoidance, tax evasion, and tax
flight all have similar negative consequences, people evaluate these phenomena differently. Palil
(2012), states that in addition to tax education, knowledge about tax laws also plays a major role
in determining taxpayers’ compliance behavior. Therefore a step ahead, for example continuous
education programs and effective monitoring mechanisms must be taken into account by tax
authorities to ascertain that taxpayers have a good and reasonable knowledge and understanding
of tax matters. On the contrary, awareness and attitude of the taxpayer himself is more important
since the effectiveness of tax education depends on the readiness, acceptance and honesty of
taxpayers. Greater education is directly linked to a likelihood of compliance. Educated taxpayers
may be aware of non-compliance opportunities, but their potentially better understanding of the
tax system and their higher level of moral development promotes a more favorable taxpayer

19
attitude and therefore greater compliance (Chan et al., 2000). Chan et al. (2000) also suggested
that those with a higher education level are more likely to have a higher level of moral
development and higher level attitudes toward compliance and thus will tend to comply more.

From the foregoing, it is observed that previous studies have evidenced that tax knowledge play
an important role in increasing tax compliance. Tax knowledge could potentially encourage
taxpayers to be more prudent in completing their tax returns.

2.1.4.2. Fairness or Equity

A good tax system is the one which is designed on the basis of an appropriate set of principles,
such as equality or fairness and certainty. Within literature of tax compliance, the perception of
the taxpayers about the fairness of the tax system is recognized as an important factor that can
have significant influence on tax compliance behavior. According to Bhatia (1976) cited on
Lemmesa (2007) 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 his
share to be within the general level of tax burden being borne by others. If this is not so, he will
feel exploited.

In some literatures Tax fairness is perceived either be vertical or horizontal fairness. According
to Erich, Niemirowski & Wearing (2006) vertical tax fairness is when taxpayers are being treated
or taxed with different rate based on their different business activities. Horizontal tax fairness is
the instances where taxpayers are being treated equally in terms of their taxes (Michael 1978).
Horizontal tax fairness indicated that taxpayers that are into same business activities and earned
same income should probably pay same taxes. On the other hand Kirchler (2007); Wenzel
(2004); O. Alabede (2011); Ariffin (2011) and Md Idris (2011), suggested that fairness can be
conceptualized as distributive justice, procedural justice and retributive justice. Distributive
justice is concerned with fairness in exchange of resources in both the benefit and cost, while
procedural justice refers to fairness in the process of resources distribution and retributive justice
is concerned with about the fairness in appropriateness of sanctions when rules are broken.
However, Kirchler (2007) stated that research relating to fairness and tax compliance only
focuses on distributive justice.

20
With regard to distributive justice, comparisons are made on the basis of individuals, groups and
societal level and at individual level; taxpayers will be interested in the fairness of his tax
burden, if it is perceived to be too high compare to other individuals’ tax burden, his rate of
compliance is likely to decrease. At the group level, the taxpayers are interested on the fairness
of treating their groups compare to other groups, when a group perceived that it is not fairly
treated in respect to tax burden in relation to other groups that may lead tax noncompliance in the
group. At societal level, the taxpayers are concerned with the fairness of tax system of the whole
society, where they perceived the tax system to be unfair, tax noncompliance is likely to increase
in the society (Kirchler et al., 2017).

2.1.4.3. Influences of Peer Groups

Both psychologists and economists believe that individuals conform to social norms established
by peers. First, individuals can incur a high psychological cost (e.g. feelings of guilt, loss of self-
respect) in undertaking an undesirable action when other individuals are inclined to follow the
norm of truthful reporting. People tend to feel worse as the proportion of others in one’s
reference group who respect the norm increases (Geletaw, 2015). There is an existing social
bond between the society and this bond influences the members of the society in complying with
the tax law. According to Social psychology theories, tax compliance pertains to the relationship
between tax compliance and social interactions and conventions. An aspect of this theory says
that perceptions and attitudes towards a tax system and compliance behavior may be affected by
the behavior of an individual’s peer groups. The compliance behavior of peer groups like friends,
neighbors and relatives is expected to impact on the perceptions and compliance decisions of
others. More specifically, noncompliant decisions by peer groups may reduce the level of tax
compliance by others. The literature further identifies comparative treatment of taxpayers as a
factor that is expected to have a bearing on tax compliance behavior. The comparative treatment
perspective implies that taxpayers may consider how the state, and the tax administration in
particular, treats them relative to their fellow taxpayers. If taxpayers perceive that the tax
administration treats certain groups favorably, this may affect their relationship with the tax
administration, the state at large, and the group receiving favors, and hence may impact on their
willingness to comply. D’Arcy (2011) cited onYesegat and Odd-Helge Fjeldstad (2016) argues
that citizens think about how the state treats them relative to their fellow citizens; this judgment

21
will affect not only their judgment of the state, but also how they view their peers. Similarly as
cited by Geletaw (2015), Fischer and Huddart (2008) show how ‘established norms’ or ‘peer
pressure’ can influence an individual’s desirable actions, because agents occur at a personal cost
in not following their peers. A second reason is that agents gain information from peers’
behavior and form an accurate interpretation of reality and behave accordingly. According to
these views, much of one’s behavior is influenced by one’s perceptions of what is ‘typical’ or
considered to be ‘normal’. This suggests that when other people behave honestly, such behavior
will be followed. Yet, if the number of transgressors grows, the incentive to comply can dwindle.

2.1.4.4. Attitude of Taxpayers towards the Government

Taxes are the price paid for government services and taxpayers generally are sensitive to the way
the government uses tax revenues. Taxpayers perceive their relationship with the state not only
as a relationship of coercion, but also as one of exchange (Abebe B., 2015). If the government is
wisely spending the national revenue, for example for basic facilities like education, health and
safety and public transportation, it is likely that voluntary compliance will increase. In contrast,
if taxpayers perceive that the government is spending too much on something considered
unnecessary or unbeneficial to them then taxpayers will feel betrayed and attempt to evade.
Positive actions by the state are intended to increase taxpayers’ positive attitudes and
commitment to the tax system and tax-payment and thus compliant behavior (Smith 1992). If the
government acts in a trustworthy fashion, taxpayers might be more willing to comply with the
taxes. On the other hand, as cited by Abebe (2015), Torgler (2004) States that perceived
unfairness increases the incentive to act against the tax law as psychological costs are reduced.

According to Torgler, B. (2004) cited on Abebe B. (2015) noted that trust in the legal system, the
government, the parliament and the national officer has a strong impact on tax morale. A
government based on a well-functioning democracy produces more trust than a dictatorship. A
lack of public trust could undermine state revenues and thus the government’s ability to perform
its function. Taxes can be seen as a price paid for government’s positive actions. Thus, if
taxpayers trust the public officials, they are more willing to be honest. If the government acts
trustworthily, taxpayers might be more willing to comply with the taxes. Similar to the tax
administration, the relationship between taxpayers and government can be seen as a relational
contract or psychological contract, which involves strong emotional ties and loyalties. Such a

22
psychological tax contract can be maintained by positive actions, based on trust. If the
government tries to generate trust with well-functioning institutions, co-operation can be initiated
or increased. Furthermore, when taxpayers are satisfied with the way they are treated, the co-
operation is enhanced.

2.1.4.5. Income Level of Taxpayers

Studies on tax compliance have proof the relationship between noncompliance opportunity
factors and tax compliance behavior. Depending on risk preferences and the progression of the
income tax schedules, income may increase or reduce tax morale. In countries with a progressive
income tax rate, taxpayers with a higher income realize a higher dollar return by evading, but
with possibly less economic utility. On the other hand, lower income taxpayers might have lower
social “stakes” or restrictions but are less in the position to take these risks, because of a high
marginal utility loss (wealth reduction) if they are caught and penalized (Jackson and Milliron,
1986 cited on Torgler, 2003)

Similarly, Barbuta-Misu as cited by Torgler (2003) pointed out that level of income actually
earned by the taxpayer and tax rate imposed on small and medium enterprises are the main
factors for non-compliant behavior. Another study by Fjeldstad and Semboja (2001) also
observed that employees paying their taxes through a withholding system have fewer
opportunities to be non-compliant.

2.1.4.6. Detection and Punishment

The concept of deterrence approach is based on the risk of detection and punishment will
improve compliance behavior. Under this approach taxpayers pay their taxes out of fear that the
government will catch and penalize them (Lavoie, 2008). This reduces tax evasion but the
concept also includes the idea that the punishment of an evader will discourage future evasion.
Valerie Braithwaite (2009) has described deterrence as a double edged sword because it can
strengthen the moral obligation to pay tax by pointing out what is the right thing to do but can
have a positive or negative effect on compliance. Research has shown that the effect of fines on
tax compliance is usually also very small or negligible. As it is stated by Wenzel (2004) when
personal norms are strong, compliance are strong, deterrence will have weak effect on
compliance. Taxpayers then comply because they think it is the right thing to do, not because

23
they are afraid of punishment. But when personal norms are weak, deterrence becomes more
important. If the taxpayer is not affected by a moral obligation to pay tax then the threat of
punishment can have a positive impact on behavior. When social norms are strong, compliance
are weak, deterrence will have weak effect on compliance, but when social norms are strong,
deterrence will have a greater impact on behavior (Wenzel 2004). Allingham and sandmo (1972)
as cited by Alabede, et al. (2011) introduced a theoretical economic model that indicates that
penalties have an impact on tax compliance. There have been mixed results on the effect of tax
penalties on tax compliance. Virmani (1989) observed that penalty rates had a positive
association with tax evasion, meaning that higher rates would encourage people to cheat. The
study shows a positive effect of fines and penalties on tax compliance. However, some studies
suggest that an increase of penalties can have undesirable effect and result in more tax avoidance
(Kirchler, 2007). The higher the penalty has the greater the discouragement for potential tax
evasion. On the one hand, fines should be high enough to decrease the expected value of tax
evasion and to assure its deterrent effect on tax payers.

2.2. Empirical Review of Literature

This section highlights a number of previous studies and some specific finding that deal with tax
compliance behavior and the determinant factors of tax compliance of the tax payers.

A research conducted by Pamella B. (2014) on the determinants of tax compliance by Small and
Medium Enterprises (SMEs). The study was conducted in Magaba area, Harare with the main
objectives of assessing the level of tax compliance among SMEs in Harare and establishes SMEs
tax determinants that affect their level of compliance. The finding of the study reveals that the
level of compliance among SMEs was very low. The study then concluded that most SMEs were
not voluntarily willing to pay tax and the researcher recommended that the tax authorities should
make an effort to educate the SMEs about issues concerning tax.

Another study by Anthony Majiwa (2014) on determinants of tax compliance in Kenya by

analyzing data obtained from taxpayers interviewed within Nairobi County. The finding of the
study reveals that compliance levels are higher in corporate than with individual tax payers. And
also it showed that for corporate tax payers, enforcement measures had a negative impact on tax
compliance level while tax rates, compliance costs and nature of tax had a positive impact. For

24
individual tax payers; enforcement measures had a positive impact on tax compliance while tax
rates, compliance costs, nature of tax had a negative impact on tax compliance.

A study made by Alabede (2014) analyzed individual taxpayers’ compliance behavior in Nigeria.
The researcher used demographic variables such as age, income level, employment sector, and
ethnicity in analyzing tax compliance problems. The study identifies that the demographic
factors such as age and employment status are statistically significant in affecting taxpayers’
compliance behavior in Nigeria. However, his result displays that gender and education are not
statistically significant in influencing tax compliance. The finding of the study shows that older
taxpayers are more compliant than younger taxpayers. Moreover, the result of the study also
exhibits that taxpayers who have higher income level are more compliant than those who have
lower income level. Additionally, taxpayers who are already settled with their job have better tax
awareness than those who are unemployed. Finally, the research claims that education and
religion are not statistically significant with tax compliance status.

Allingham and Sandmo (1972) conducted a study on compliance behavior of taxpayers.

According to the study the compliance decision of taxpayers is considered to be affected by
income of the taxpayer, tax rate, probability of audit, and fine rate. Similarly, Jackson and
Millron (1986) came up with fourteen key determinants for tax compliance and these
determinants were later categorized into four group determinants in the study of Fischer, Wartick
and Mark (1992) cited on Geletaw (2017) and became known as Fischer’s model of tax
compliance. Demographic variables are within one of these groups of determinants. The
demographic factors in Fischer’s model include gender, age, education, and income level and
employment status.

A study conducted by Helhel & Ahmed (2014) on elements impacting attitudes on and
compliance to tax: A survey study of Yemen. The aim of the study was to bring about the
influence of attitudes and considerations of individual tax payers on tax compliance in Yemen
while taking into consideration the internal and external factors. The study was conducted in
Sana’a the capital city of Yemen to evaluate and rank the factors that reduce tax payers’
compliance rate. The results indicated that high tax rates and partial tax systems were the two
major factors related to low tax compliance rate. Furthermore, there was an insufficient tax audit,
little deterrent effects of tax penalties and tax amnesties. It was also revealed that the tax

25
collected did not give as much return with the delivery of public services and goods. Comparison
on the response made based on gender, females were found to be more compliant compared to
their male counterparts.

Ondieki Magiya (2016) Explore the different factors that determine tax payers’ compliance in
Nairobi East Tax District. The study found some similarities and differences in factors that are
correlated to tax compliance in the locality under study. An increase in the tax payers
understanding of the tax laws and the tax system as well as an increase in government
accountability with regards to provision of public good and services results into higher
compliance levels, thus more of funds through revenue collection. Hasseldine and Hite (2003)
cited on Ondieki Magiya (2016) resolved that first, political party attachment does have a
noteworthy effect on the behavior of taxpayers; moreover, the more narrowly recognized the
provisions of tax are to a particular political party, the great positively it will be acknowledged
by affiliates of that party in relation to taxpayers affiliated to other political parties; further, the
strategy amendments inclined to be regarded positively by taxpayers; producing a rise in
taxpayers confidence and in unforced compliance, and those who perceived it positively also
tended to recognize the existing system as being fairer. In conclusion it was obvious that
government resolutions and changes to strategies in accord with the economic and political state
have a noteworthy influence on compliance. For instance, an affirmative move by the
administration like tax rebate incensement is probable to enhance taxpayers’ compliance.

Study made by Nelson Maseko (2014) on Determinants of tax compliance by small and medium
enterprises in Zimbabwe can be summarized as follows: The main objectives of the study were
to investigate how the unique business conditions of small and medium enterprises, the
perceptions of small and medium operators towards taxation, levels of tax knowledge and
compliance costs affect tax compliance of small and medium enterprise taxpayers. To achieve
these objectives, the researcher stated research propositions: the current tax system in Zimbabwe
does not cater for the special business needs of small and medium enterprises and that strong
correlation do exist among tax knowledge, compliance costs, and tax compliance. The results
indicated that small and medium enterprises face different business conditions from large
companies which cause them to bear high tax compliance burdens. The results also indicated that
the perceptions of small and medium enterprise operators about tax fairness, tax service quality

26
and government spending priorities greatly affect their tax compliance decisions. Tax knowledge
was discovered to have no correlation with tax registration compliance but week negative
correlations with filing compliance.

Most tax compliance studies to date are based on data from developed countries. There are few
studies that provide evidence from developing countries. Studies conducted in Ethiopia regarding
tax compliance has provided evidence suggesting that compliance is influenced by numerous
factors. Lemessa T. (2007) attempted to reveal determinants of taxpayers’ voluntary compliance
with the tax system. The study was conducted in Dire Dawa City, Ethiopia. The result of the
study identifies the determinant factors of compliance include, maintaining tax fairness and
equity, building capacity of the tax authority, conducting extensive awareness creation programs,
and providing social services to the general public. Similarly Tilahun &Yadersal (2014) study on
Determinants of Tax Compliance Behavior in Ethiopia: The Case of Bahir Dar City. The study
focused only on category ‘C’ taxpayers. The results revealed that tax compliance influenced by
the probability of audited, financial constraints, and changes in government policy. Other
variable such as perception of government spending, perception of equity and fairness, penalties,
role of the tax authority and tax knowledge not significantly corrected with tax compliance.

Another study conducted by Tadesse and Goitom (2014) on Factors Influencing taxpayers’
compliance with the tax system. The study is conducted in Mekelle city, Ethiopia. Based on the
findings the researcher has concluded that tax compliance was influenced by the probability of
being audited, financial constraints, and changes in government policy. The findings indicated
that tax compliance was influenced by the probability of being audited, financial constraints and
changes on current government policy. Other variables such as perception of government
spending, perception of equity and fairness, penalties, roles of the tax authority and tax
knowledge were not significantly correlated with tax compliance.

Desta Kassa (2010) conducts a study on assessment of taxpayers’ voluntary compliance with
taxation: a case of Mekelle city, Tigray, Ethiopia. The finding of the study indicated that, factors
such as equity or fairness, organizational strength of tax authority, awareness level of tax payers,
social factors, cultural factors and tax payers’ attitude towards the government were found to be
the determinant factors affecting taxpayers’ voluntary compliance.

27
A study conducted by Niway and Wondwossen (2015) on Determinants of Voluntary Tax
Compliance Behavior in Self-Assessment System. The study conducted in SNNPRS, Ethiopia.
The study focused only on category ‘A’ taxpayers. The result of the study revealed that tax
knowledge, simplicity of tax returns and administration, perception on fairness and equity,
perception on government spending, probability of auditing, and the influence of referral group
were determinant factors that influence voluntary compliance behavior of tax payers in SAS.

2.3. Summary of Literature and Research Gap

From the above literature there is a wealth of knowledge in the area of tax compliance and the
determinant factors affecting tax compliance. It can be observed that age, gender, knowledge of
tax payers, income level of tax payers, financial constraints, changes in government policy
occupation or status, peers’ or other taxpayers’ influence, ethics, legal sanction, complexity,
relationship with taxation authority , income sources, strength of the revenue authority,
perception on government spending, perceived fairness of the tax system, possibility of being
audited and tax rate are the factors affecting tax compliance behavior of tax payers identified by
various researchers.

Tax compliance has been an important subject of research in a large number of developed and a
number of developing countries. Since each country has its own approach to managing tax
compliance levels and each has different tax laws and regulations, the factors affecting tax
compliance behavior appear to vary among countries. From the previous empirical research
found that the determinants of tax compliance have been found to differ between countries. This
means there is no universal findings are highlighted by researchers pertaining to genuine tax
compliance determinants among countries sharing similar tax systems, and cultures.

In Ethiopia the issue of tax compliance is under-explored area, there were few researches made
on determinants of tax compliance. As a result, more local studies on tax payers’ compliance and
Understanding the factors that determine the compliance and non-compliance behavior of
taxpayers with tax system is very much important to solve problems associated with tax payers
and local revenue authority. This encourages the researcher to identify determinants of business
tax payers’ compliance with tax system with a special reference to category “B” and category
“C” tax payers in Debre Birhan city, Amhara region, Ethiopia.

28
2.4. Conceptual Frame Work

As indicated in the literature, it is tried to show that factors that influence business income
taxpayers compliance with tax law and regulation like; Awareness level of tax payers, Fairness
or Equity, Influences of Peer Groups, Attitude of tax payers towards the government, Income
Level, and Detection and Punishment. Based on this the following conceptual frame work has
been developed to guide this particular study.

Figure 1 conceptual Framework

Independent Variables Dependent Variable

Awareness level

Fairness or Equity

Influences of Peer Business

Groups
Taxpayers
compliance
Attitude of tax
payers towards the
government

Income Level

Detection and
Punishment

Source: Researcher own construction based on literature review

29
 CHAPTER III:

RESEARCH DESIGN AND METHODOLOGY

3.1. Introduction

This chapter discusses the methodological procedures used in the collection and analyses of data.
The research design, study area, population of the study, sampling procedure and sample size,
data collection, and data analysis methods are thoroughly discussed.

3.2. Research Approach

Quantitative research approach was used in the study. A quantitative methodological approach
refers to an approach dealing with numbers and anything that is measurable in a systematic way
of investigation of phenomena and their relationships. It is used to answer questions on relations
with in measurable variables with an intension to explain and predict a phenomenon (Leedy,
1993). Creswell (2006) asserted, quantitative research is a type of research in which the
researcher decides what to study, asks specific narrow questions, collects numeric (numbered)
data from participants and analyzes these numbers using statistics, and conducts the inquiry in an
unbiased, objective manner. The process of measurement is central to quantitative research
because it provides the fundamental connection between empirical observation and mathematical
expression of an attribute. i.e., in this approach, the research problem translated to specific
variables and hypotheses. In this approach a researcher uses a theory which is an interrelated set
of variables formed into hypotheses, which specify the relationship among variables in terms of
magnitude or direction. This research adopts a quantitative research approach as it is suitable to
test for relationships using hypotheses.

The primary justification of this study to adopt a quantitative research approach it has a
significant contribution of generalizing of the broader population and leads to consistent
procedures in sample selection, instrument design, implementation, and analysis.

30
3.3. Research Design
A research design is the framework or plan for a study used, it details the procedures necessary
for obtaining the information needed to structure or solve research problems (Malhotra, 2010).

The research design used for this study is survey research design. A survey research design
involves the selection of a sample of respondents and administering questionnaires or conducting
interviews to gather information on variables of interest (McMillan & Schumacher, 1993). In a
survey design information is data collected from respondents about their experiences and
opinions about a particular topic under study in order to generalize the findings to the population
that the sample is intended to represent (Gall, Borg & Gall, 1996). Surveys are popular as they
allow the collection of a large amount of data from a sizeable population in a highly economical
way. Often obtained by using a questionnaire administered to a sample, these data are
standardized, allowing easy comparison. In addition the adoption of survey design in the study is
helpful in order to represents a wider population, provides descriptive, inferential and
explanatory information, gather data on a one-shot basis, or gathering of information that will not
available from archive records. And also, the data collected using a survey strategy can be used
to suggest possible reasons for particular relationships between variables and to produce models
of these relationships (Saunders, 2009).

3.4. Target Population

According to Malhotra (2007) target population is the collection of elements or objects that
possess the information sought by the researcher and about which inferences are to be made. The
term population means the collection of distinct elements under consideration that is of interest
in a particular study. The population of the study was category “C” business taxpayers of Debre
Birhan city Administration. According to the city administration Revenue Authority Office
document in the year 2010 E.C, total number of category “C” taxpayers are 4131. Hence the total
populations of the study are 4131 business taxpayers.

3.5. Sample Size

Sample size refers to the number of element to be included in the study. According to the
information obtained from the city administration revenue office the total number of category

31
“C” business tax payers in the year 2010 E.C are 4131. The researcher uses the formula of
Yamane, 1967 to select the sample out of the total population.

n= ( )

Where;

n = sample size

N= total number of population

e = level of precision

By applying the above formula, the sample size is calculated as follows given the total
population of the study is 4131.

( )

Sample size= 365

N. B. Here the error is assumed to be 5 percent.

3.6. Sampling Techniques

Purposive non-probability sampling method was used for this study. Purposive sampling uses the
judgment of an expert in selecting cases or it selects cases with a specific purpose in mind
(Neuman, 2000). A researcher used purposive sampling to focus on particular population which
will best enable to answer research questions (Lund, 2012).

This study used convenience sampling technique in order to have more effective responses by
taking the people which are not busy at the time of distributing and collecting questionnaires.
Convenience sampling is a non-probability sampling techniques that aims to obtain a sample of
convenient elements in a quick and inexpensive manner Malhotra (2010). The advantage of
32
using Convenience sampling is the sampling units are accessible, easy to measure and
cooperative.

3.7. Data Type and Sources

The study used both Primary and secondary data. Primary data is defined as data that is collected
for a specified purpose by a researcher from a targeted population of respondents whereas
secondary data refers to data collected from sources that are published or data which is in
existence as a result of past events or other investigations that would have taken place.

For this study primary data were the major source of data and it is gathered through the use of
self-administered questionnaire. Primary data were used because the information that is gathered
is up to date and also the data is gathered from the problem at hand. Another reason is that it
gives a reliable picture since it is original and direct from the parties involved. In this research it
has an advantage that data is sourced straight from a sample of a population.

Secondary data is defined as historical data structures of variables previously collected and
assembled for some research problem or opportunity situation other than the current situation
(Hair et al., 2006). Different types of sources are available for the purposes of gathering data for
secondary information. The purpose of secondary data is to help the researcher gain an initial
overview of the research problem. Secondary source of data were sourced from Debre Birhan
city revenue office, internet, books, journals, researches and websites. Secondary data proved to
be cheaper in accessing and less time consuming as compared to sources of primary data. The
internet provided the bulk of literature including electronic books, journals and other
publications by different authors on the subject of tax compliance providing a sense of direction
to the research.

3.8 Research Instruments

3.8.1. Questionnaires
Creswell (2009) noted that the survey as the preferred type of data collection procedure for
research. Survey is the most appropriate for obtaining factual and attitudinal information or for
research questions about self-reported beliefs, opinion, characteristics and present or past
behaviors (Neuman, 2000). A survey by a self-administered questionnaire will be considered the

33
most appropriate method for measuring taxpayers’ compliance behavior. Questionnaires was
used because the information that is used can be collected from a sample that is large and
confidentiality in respect of the information collected is upheld and in addition Self-administered
questionnaires are considered cheaper and quicker way to surveying a large number of
respondents.

The questionnaire was developed based on the literature reviewed and by modifying questions
from previous researches. The researcher made an effort to ensure that all questionnaires were
completed and collected within a short period of time. The researcher also made an effort to
ensure that questions were concise, easy to understand and clear to avoid any misinterpretations.

3.8.1.1 Questionnaire Design

Closed-ended questions were used in the survey questionnaires. Closed-ended questions are
providing multiple-choice answer to the respondents that require the respondents to choose the
answer based on the given multiple-choice answer. Hence, this can reduce the amount of
thinking and effort required by the respondents. According to Bryman and Bell (2003) closed
questions have some advantages: it is easy to process answers; it enhances the comparability of
answers, and makes them easier to show the relationship between variables. Furthermore, closed-
ended questions are easy to code and analyze.

On the other hand, the questionnaire was prepared in English and Amharic languages. The
beginning of the questionnaire includes the introduction, title of the research, and purpose for
conduct the research study. The questionnaires consisted of two major sections. The first section
is for acquiring demographic and personal profile of the respondents and second section of
questionnaire consisted of questions regarding on the subject of tax compliance behavior of
taxpayers and its determinant factors.

3.8.1.2 Scale of Measurement

Five-point Likert rating scale method of questionnaire was used in this study. The Likert-style
rating method of questionnaire design enables numerical value to be assigned to cases for easy
quantitative analysis. According to Hair et al. (2010) Likert scales are most appropriate for
research designs that use self-administered surveys, personal interviews, or online surveys. The
response scale for statements in the survey questionnaire ranges as 1 = strongly disagree, 2 =

34
Disagree, 3 = Neutral, 4 = Agree, 5 = strongly agree. For the purpose of the study, respondents
were asked to indicate the degree to which they agreed or disagreed with each statement in every
dimension in the questionnaire.

3.8.1.3. Validity and Reliability

The content validity of the data collection instruments is the extent to which the data provides
accurate and adequate coverage of the objectives of the study. The instruments were evaluated
by my supervisor and peers for content validity to determine whether the items would really
solicit relevant information and their suggestions used to improve on the instruments. Beside
this, the study addresses validity through the review of literature and adapting instruments used
in previous research.

Reliability of a research instrument is a measure of the degree to which the instrument yields
consistent data after repeated trials. There are several different reliability coefficients. One of the
most commonly used is called Cronbach’s Alpha. Cronbach’s Alpha is based on the average
correlation of items with in a test if the items are standardized. The Cronbach’s coefficient alpha
was tested for both determinant factors and tax compliance Items for the reliability of the
measures. According to the Hair et al. (2006) the minimum acceptable level of the Cronbach
alpha is more than 0.70. Accordingly the results revealed that the internal reliability of each
construct has ranged from 0.967 to 0.988. This represents a high consistency and reliability
among statements in questionnaire.

3.9. Method of Data Analysis

To analyze the data both descriptive and inferential statistics was used. The researcher employed
descriptive method of data analysis using STATA 13 software to tabulate the data and present it
in tables. The STATA is regarded as the main instrument used to analyze quantitative data. Here,
percentages and frequencies were used as tools for the analysis of the data. In additions to this,
the author adopted inferential statistic such as correlation and multiple regression analysis so as
to find out if there exist direct association between the determinants factors constructed as the
independent variable with tax compliance constructed as the dependent variable.

35
3.10. Model Specification
This research uses the following multiple (Ordinary Least Squares (OLS)) regression model to
examine the impact of independent variables on tax compliance. It is basically used to identify
the determinant factors that affect tax payers’ compliance with tax system in the study area.

The Ordinary Least Square (OLS) have the following form:

The regression model

TC = α + β1 (AL) +β2 (FE) + β3 (IPG) + β4 (ATPG) + β5 (IL) +β6 (DP) + εi

Where:

TC = Tax compliance (Dependent variable)

α = Intercept of the regression line

β1 to β6=slope coefficient of the regression line

AL = Awareness level of tax payers (independent variable)

FE = Fairness or Equity (independent variable)

IPG = Influences of Peer Groups (independent variable)

ATPG = Attitude of tax payers towards the government (independent variable)

IL = Income Level (independent variable)

DP = Detection and Punishment (independent variable)

εi=is the error term associated with the ith observation.

Torgler (2003) had used the above model to check the direct association between the nine
determinants variables and tax moral in Austria and also Singa Naomi Jepkoech and James
Nganga Muya (2016) used the model to identify the association between taxpayers’ perception
of fairness and tax audit with taxpayer’s compliance. Dinku T. and Alamrew A. (2018) also used

36
the model to examine the impact of three independent variables on voluntary tax compliance of
taxpayers in Amhara national regional state. Another study by Desta K. (2010) and Yoseph E.
(2018) used the above model to identify the direct association between the six determinant
factors and tax compliance in Mekelle City, Tigray Regional State and to identify the direct
association between the ten determinant factors and tax compliance in west shewa zone, oromia,
respectively. Therefore, the researcher has modified the model by adding and deleting variables
in to the model used by those researchers and specifies the above model used to identify the
effect of six determinant factors and tax compliance in Debre Birhan, Ethiopia.

37
 CHAPTER IV:

DATA PRESANTATION AND ANALYSIS

4.1. Introduction

This chapter presents and discusses the data and information that was gathered and collected
through questionnaires. Further the chapter analyses and interprets the findings on the
determinants of taxpayers’ compliance by category “C” business tax payers in DebreBirhan city.
The discussion addressed the research objectives of the study.

4.2. Questionnaire Response Rate

To achieve the objectives of the study a questionnaire was prepared and distributed to category
“C” tax payers of Debre Birhan city. For these, 365 questionnaires are distributed to the tax
payers and at the end of the field work, a total of 312 questionnaires were returned filled
completely and properly. This constitutes 85% response rate which is enough to represent the
population as well as to generalize the findings to the entire population.

Figure 2: Response Rate

Responded
Non Responded
Response Rate (non usable)
13% 2%

Usable
85.%

Source: Survey, 2019

38
4.3. Respondents Profile
This section presents a brief description about the demographic characteristics of the respondents
in line to their gender, age, education level, business type respondents engaged, and their
position in the business. Such a description is considered to be very important in providing a
better understanding of the respondents included in the study and therefore provide a good
foundation for a detailed discussion of the results based on the stipulated objectives of the study.

Gender of Respondents
From the total sample of respondents 207 (66%) of them responded were male and 105 (34%)
were female taxpayers. Therefore, it could be concluded that most of category ‘C’ taxpayers of
Debre Birhan city is dominated by males (Figure 3).

Figure 3 Respondents by Gender

Gender

Female
34%
Male
66%

Source: Survey, 2019

39
Age of Respondents

Table 1: Age of Respondents

Age Brackets Frequency Percent Cumulative percent
less than 30 92 29.5 29.5
30 to 39 125 40 69.5
40 to 49 63 20.2 89.7
50 to 59 25 8 97.7
60 years and above 7 2.3 100
Total 312 100
Source: Survey, 2019

Table 1 above depicted that the age brackets of respondents. The age of respondents were
categorized in to five age brackets as it is shown in the above table. Accordingly, the results
showed that majority of respondents (40 percent) were aged between 30 and 39 years old, 29.5
percent were less than 30 years, 20.2 percent of respondents were between 40 and 49 and 8
percent of respondents were between 50 and 59. Respondents in the group of above 60 years old
were the lowest number with 7 responses which represent 2.3 percent of the total respondents.
This is an indication that most taxpayers in the sample are in their productive ages.

Education Level of Respondents

Table 2: Education level of respondents

Level of education Frequency Percent Cumulative percent
Below 12 grade 197 63.2 63.2
12 grade completed 44 14 77.2
Diploma 42 13.5 90.7
Degree 8 2.6 93.3
Illiterate 21 6.7 100
Total 312 100
Source: Survey, 2019

40
Level of education is an important factor in the taxpayer’s ability to understand and interpret the
tax laws. The above table reflects the academic qualifications of the respondents (Table 2).With
this regard the survey result shows that 197 respondents are below grade 12 and 44 respondents
are completed grade 12 and each of them accounts to 63.2 percent and 14 percent respectively.
On the other hand 42 respondents are diploma holders and 8 of respondents indicated that they
had degree (BSC or BA), and each of them representing 13.5 percent and 2.6 percent
respectively. The remaining 6.7 percent of respondents are illiterate business tax payers. From
this it can be concluded that majority of respondents are educated to know the need for taxation
and they can understand and interpret the tax law as well and to provide important input for this
study.

Respondents’ Position
Figure 4: Respondents’ Position

Respondents Position
Owner Employee

18%

82%

Source: Survey, 2019

In respect of respondents position the survey result showed that 257 (82 percent) of respondents
were owners and the remaining 55 (17 percent) of respondents were employees. This implies that
majority of category “C” business taxpayers of the city, manage and operate their businesses by
themselves and, it can be inferred that the respondents have the potential to provide accurate data
about the subject.

41
Type of Business
Table 3: Business Activity of Respondents

Business Types Frequency Percent

Wholesale and Retail 192 61.5
Service Provider 107 34.3
other 13 4.2
Total 312 100
Source: Survey, 2019

In respect of business type the above table shows that majority (61.5 percent) of respondents
were engaged in wholesale and retail businesses. 34.3 percent of respondents were service
providers and the remaining 4.2 percent of respondents were engaged in businesses other than
wholesale and retail and service. Therefore, majority of category “C” business taxpayers of the
city were engaged in wholesale and retail and service providing.

4.4. Assessment of Factors of Tax Compliance

4.4.1 Awareness Level of Tax payers

The awareness level of taxpayers is an important factor that contributes to the understanding of
tax requirements. Taxpayers’ tax awareness does have both positive and negative impact on the
tax morale or taxpaying attitude of business profit tax payers. This tax awareness shall be
obtained through continuous training, opportunities, expertise, and nearness to tax related
information’s. Therefore, respondents were asked different questions to assess their level of
awareness regarding the laws guiding payments of business income tax, procedure for appeal,
calculation of income tax, penalties of non-compliance and how they are complying with tax
requirements. Therefore, respondents were asked to rate their tax compliance level using the
variables in table 4 below on a five point Likert scale, where strongly agree (5); agree (4);
uncertain (3); disagree (2); strongly disagree (1).

42
 Table 4: Awareness Level of Taxpayers

Strongly Strongly
Disagree Disagree Neutral Agree Agree
statements Freq. Freq. Freq. Freq. Freq. S.
% % % % % Mean Dev.

I have a clear awareness

regarding the laws
guiding payments of 87 109 37 52 27
1 business income tax. 27.88% 34.94% 12% 17% 9% 2.43 1.28
I clearly know the 91 127 41 21 32
2 procedure for appeal. 29.17% 40.71% 13% 7% 10% 2.28 1.24

I know how to calculate 77 136 34 55 10 1.12

3 my taxable income 24.68% 43.59% 11% 18% 3% 2.31

It is easy to understand
the tax laws i.e. rates of
tax; filing and paying 40 112 51 63 46
4 dates etc. 12.82% 36% 16% 20.19% 15% 2.88 1.28
I know all what is
required from
me in respect of my tax 52 126 27 36 71
5 obligations 16.67% 40% 9% 11.54% 23% 2.83 1.44
Source: Survey, 2019

Table 4 deals with the evaluation of factors related with awareness. With regard to the statement,
having awareness regarding the laws and guiding payments of business income tax, majority of
respondents (34.94%) disagreed and 27.88% strongly disagreed with the statement. Similarly,
17% agreed and 9% strongly agreed with the statement. Therefore, the results show that business
taxpayers have no adequate awareness about the laws guiding business tax payments.

Business taxpayers were also asked about their awareness regarding the procedure for appeal. It
is clearly shown that majority of respondents do not have awareness regarding the procedure for
tax appeals. In addition, business taxpayers are not clear with how they can easily calculate their
tax liability and determine their taxable income. Business taxpayers are less aware with respect
to tax rates, filing and paying dates.

Furthermore, business taxpayers were asked about their knowledge of tax. In this regards,
majority 126 (40%) of them disagreed with the statement and 16.67% of respondents strongly
disagreed with the statement. similarly, 36 (16.67%) of respondents agreed with the statement

43
and the 71(23%) of them strongly agreed with the statement and the remaining 27(9%) remain
indifferent in this statement. This implies that majority of business taxpayers are not sufficiently
aware about the tax obligation required from them.

From the above information it can be analyzed that most of category “C” business taxpayers do
not have adequate awareness about tax laws. Understanding what is required by the tax system is
important because a taxpayer would know what is expected of them in order to comply with the
tax system. The fact that most of category “C” business taxpayers are not knowledgeable about
the tax system would encourage non-compliance because the taxpayers would not know what is
required by the tax authorities. In order for taxpayers to comply with the tax system they should
have a clear understanding of what is expected of them by the tax legislature, this is so because
the tax system involves different tax laws that have to be interpreted by a tax payer who is
knowledgeable of the tax system and how it functions.

Variable Observations Mean Std. Dev.

Awareness level 312 2.432692 1.288817

The above findings also show that with a composite mean score of 2.43 the awareness level of
business taxpayers regarding tax laws and procedures and tax information is low. However, a
standard deviation of >1.0 showing more dispersions from the midpoint, this shows that the
respondents differed widely on the extent to which awareness level of business taxpayers
influences tax compliance behavior of business taxpayers.

All in all, from the analysis it can be inferred that the awareness level of category “C” business
taxpayers operated in Debre Birhan city is low.

4.4.2. Tax Fairness/Equity

Perception of fairness is an important factor for compliance and non-compliance behavior of
taxpayers. To analyze this, the study incorporates statements prescribing tax fairness to test
whether business taxpayers perception of fairness or equity affect the compliance behavior of
taxpayers.

44
 Table 5: Tax Fairness/Equity

S.No Statements Strongly Strongly S

Disagree Disagree Neutral Agree Agree Mean Dev.

I believe that my tax 46 97 76 61 32

1 obligation is reasonably fair 14.74% 31.09% 24% 20% 10% 2.79 1.21
compared to my business
income.
I believe that my tax
obligation is fair relative to 29 57 142 65 19 2.96 1.00
2 others. 9.29% 18.27% 46% 21% 6%

3 I believe that the business tax 14 21 26 79 172 4.2 1.12

system is not equitable. 4.49% 6.73% 8% 25% 55%

The tax assessors' committee 37 46 54 102 73 3.41 1.31

4 is biased in determining 11.86% 14.74% 17% 33% 23%
business income tax liability.

I believe that tax authorities 24 38 70 98 82

provide sufficient and 7.69% 12.18% 22% 31% 26% 3.56 1.21
5 equitable information to all
taxpayers.

Unreasonable, intrusive audits 33 41 52 114 72

and unfair penalties of tax 10.58% 13.14% 17% 37% 23% 3.48 1.27
assessors lead towards stress
6 and dissatisfaction.
Source: Survey, 2019

Table 5 above summarizes the responses to the statement related with business taxpayers’
perception of tax fairness. Accordingly, most of respondents believe that the amount of tax
obligation is not fair relative to their business income and majority of respondents are neutral
regarding tax obligation relative to others.

With regard to the fairness of the tax system majority of respondents agreed that the current tax
system is not fair with the mean response of 4.2. Such taxpayers’ perception of tax fairness may
have its own influence for non-compliance behavior of business taxpayers.

As per table 5 above majority of respondents 102 (33%) agreed and 73 (23%) strongly agreed
about the biasness of tax assessor committee in determining business income liability. This
statement has a mean response of 3.41. In addition, the majority of business taxpayers responded

45
that unreasonable, intrusive audits and unfair penalties of tax assessors lead towards stress and
dissatisfaction. Therefore, the results indicate that tax assessing committee adversely affects the
tax administration.

The above analysis shows that the distribution of equal and sufficient information to all business
taxpayers by the tax authority does have its own influence in affecting the tax compliance
behavior of business taxpayers. With regard to this 57% of the population agreed with the
statement prescribing “I believe that tax authorities provide sufficient and equitable information
to all taxpayers”. This statement has been confirmed by the mean values of 3.56.

Variable Observations Mean Std. Dev.

Fairness/Equity 312 3.399069 1.154242

From the above information it can be analyzed that all the factors described regarding tax
fairness influences tax compliance behavior among individual category “C” business taxpayers
with the composite mean scores of 3.4. Standard deviation 1.15 shows that the respondents
differed widely on the extent to which tax fairness influences tax compliance behavior of
business taxpayers.

4.4.3. The Influence of Peer Groups on tax Compliance

Influences of peer groups are an important factor for compliance and non-compliance behavior
of taxpayers. Taxpayers may be influenced by their peer groups to comply or not to comply with
the tax law and it is reflected in an individual’s expectations in relation to the approval or
disapproval of that tax non-compliance behavior. To analyze this, the researcher incorporates
different statements related with the influence of reference groups, trophy, and moral values in
affecting the tax compliance behavior of business taxpayers. Therefore, respondents were asked
to rate their compliance level with the statements using a five point Likert scale.

46
 Table 6: Influences of Peer Groups

S.No Statements Strongly Strongly S.

Disagree Disagree Neutral Agree Agree Mean Dev

I believe my competitors
1 22 30 102 84 74 3.50 1.15
and business colleagues
7.05% 9.72% 33% 27% 24%
are paying tax honestly.

Honest tax payers

encourage me to report
2 and pay the correct 25 26 60 120 81 3.66 1.18
amount of taxes. 8.01% 8.33% 19% 38% 26%
Trophy for best tax
3 payers encourages me to 17 21 34 105 135 4.02 1.14
pay my tax obligation 5.45% 6.73% 11% 34% 43%
properly.
My business colleagues
evade tax and their
business income is 24 38 47 115 88 3.66 1.22
4 growing this encourages 7.69% 12.18% 15% 37% 28%
me to evade.
Paying taxes are my
obligation and I didn’t
see any reference groups 32 36 62 97 85 3.53 1.28
from my business 10.26% 11.54% 20% 31% 27%
5 colleagues.
Source: Survey, 2019

Table 6 above summarizes the responses to the statement related with influences of peer groups.
Accordingly, majority of respondents 102 (33%) are indifferent about whether their business
colleagues or competitors are paying the correct amount of tax honestly or not. Similarly 84
(27%) of respondents agreed and 74 (24%) strongly agreed honesty of competitors and business
colleagues in paying taxes. The remaining 30 (9.72%) disagreed and 22 (7.05%) strongly
disagreed with respect to honesty of peers in payment of their tax liability.

With regard to positive peer influence majority respondents agreed that honest taxpayers
encourages them to report and pay the correct amount of tax. From the total population
201(64.4%) of respondents agreed with the statement describing “Honest tax payers encourage
me to report and pay the correct amount of tax” In addition to this the analysis shows that trophy
for best tax payers influence the compliance behavior of business taxpayers. Majority of
respondents 135 (43%) strongly agreed and 105 (34%) agreed with the statement prescribing

47
“Trophy for best tax payers encourages me to pay my tax obligation properly.” This statement
has been confirmed by the mean values of 4.02.

Negative peer influence does have its own influence in affecting the compliance behavior of
business taxpayers. The above analysis shows that more than half of the total population 203
(65%) agreed with the statement describing “My business colleagues evade tax and their
business income is growing this encourages me to evade.” This statement has been confirmed by
the mean values of 3.66. In addition to this with the mean value of 3.53, most of respondents
respond that paying tax is an obligation for taxpayers they do not influenced by peer groups.

Variable Observations Mean Std. Dev.

Influence of peer groups 312 3.676923 1.168165

The composite mean score of 3.67 indicates that a peer group has influenced tax compliance
behavior of category “C” business taxpayers. However, a standard deviation of >1.0 showing
more dispersions from the midpoint, this shows that the respondents differed widely on the
extent to which influences of peer groups influences tax compliance behavior of business
taxpayers.

4.4.4. Taxpayers Attitude towards the government

Individuals may pay tax because they value the goods provided by the government, recognizing
that their payments are necessary both to help finance the goods and services provided by the
government to the general public. Taxpayers’ attitude towards government spending on basic
infrastructures like education, health and safety and public transportation, attitude towards
government officials, the satisfaction or lack of satisfaction with the government may has its own
influence on the compliance behavior. To analyze this, different statements were incorporated in
the survey to assess the attitude of taxpayers towards government utilization of tax revenue,
government spending on basic infrastructures, towards government officials and others.
Therefore, respondents were asked to rate their attitude towards the government efforts as below.

48
 Table 7: Attitude of Business Taxpayers towards the Government Services

S.No Statements Strongly Strongly S

Disagree Disagree Neutral Agree Agree Mean Dev.

I believe that the 39 107 135 20 11 2.54

government spends the 12.50% 34.29% 43% 6% 4% 0.91
1 collected taxes wisely.
The government
doesn’t provide enough
2 information about how 11 20 50 105 126 4.01 1.06
it utilizes the 3.53% 6.41% 16% 34% 40%
taxpayer’s money.
Government spending
3 on basic infrastructures 13 17 53 97 132 4.02 1.09
encourages me to pay 4.17% 5.45% 17% 31% 42%
my tax obligation.
Corrupt and fraudulent
tax assessors encourage 31 36 40 115 90 3.63 1.28
me to be non-compliant 9.94% 11.54% 13% 37% 29%
4 with the tax system.
I believe that paying
taxes are my obligation
whether the 22 32 65 86 107 3.71 1.23
government spends 7.05% 10.26% 21% 28% 34%
5 wisely or not.
Source: Survey, 2019

The above table 7 summarizes the responses of business taxpayers to the statement related with
attitude of taxpayers towards government. Accordingly, majority of business taxpayers 135
(43%) indifferent about whether the government spends the collected taxes wisely or not.
Similarly 107 (34.29%) of business taxpayers disagreed and 39 (12.50%) strongly disagreed with
the statement describing “I believe that the government spends the collected taxes wisely.” This
statement has been confirmed by the mean values of 2.54. From the total population 46.79% of
respondents disagreed with the statement. Therefore, from the above analysis it can be analyzed
that attitude towards government utilization of tax revenue has its own influence for non-
compliance behavior of category “C” business taxpayers in Debre Birhan city.

The results also show that information to the general public about the utilization of revenue has
its own impact in affecting the compliance behavior of business taxpayers. With the mean

49
response score of 4.01 business taxpayers agreed that government doesn’t provide enough
information about how it utilizes the taxpayer’s money. From the total respondents 74.03% of
respondents agreed with the statement.

With regard to government spending on basic infrastructures the above table shows that with the
mean response score of 4.02, majority of business taxpayers agreed that government spending on
basic infrastructures like education, health and safety and public transportation, encourages them
to pay the correct amount of tax. The survey result depicts that the compliance behavior of
business taxpayers has influenced by the government expenditure on basic public facilities.
However, the study reveals that negative act of government officials discourages business
taxpayers’ tax compliance. Majority of respondents 305 (65.7%) agreed with the statement
describing “Corrupt and fraudulent tax assessors encourage me to be non-compliant with the tax
system.” This statement has been confirmed by the mean values of 3.63. Therefore, from the
analysis it can be conclude that non-compliance behavior of business taxpayers have been
perpetrated by negative acts of tax assessors and or immoral behavior of the tax authority. In
addition, majority of business taxpayers responded that paying tax is the obligation of every
business taxpayers whether the government spends wisely or not. However, their compliance
behavior has been emanated from escaping of penalty or cancellations of trade licenses by the
government authority.

Variable Observations Composite Mean Std. Dev.

Attitude of taxpayers
312 3.571189 1.09195
towards government

The composite mean score of 3.57 implies that attitude of tax payers toward government has
influenced tax compliance behavior of individual category “C” business taxpayers. However, a
standard deviation of >1.0 showing more dispersions from the midpoint, this shows that the
respondents differed widely on the extent to which attitude of business taxpayers towards the
government influences tax compliance behavior of business taxpayers.

50
4.4.5. Income Level on Tax compliance
This variable assesses whether the income level of business taxpayers affects the compliance or
non-compliance behavior of businesses taxpayers operating in Debre Birhan city. In order to
understand those issues this study incorporates statements related with tax rate, the economic
necessity of evasion, the prevailing inflation level, the ability to pay and others. Therefore,
business taxpayers were asked to rate their compliance level with the statements as below.

Table 8: Income Level on Tax Compliance

S.No Statements Strongly Strongly S.

Disagree Disagree Neutral Agree Agree Mean Dev.

If my business income
becomes low tax evasion is an 19 40 35 125 93 3.74 1.18
economic necessity for me to 6.09% 12.82% 11% 40% 30%
1 survive.
The prevailing inflation level
of the country discourages 13 19 20 108 152 4.17 1.06
2 positive tax compliance. 4.17% 6.09% 6% 35% 49%
The applicable tax rate is very
3 high and deteriorates the 5 7 10 123 167 4.41 0.79
income earning capability of 1.6% 2.24% 3% 39% 54%
businesses.

Paying taxes hinders 22 47 80 93 70 3.45 1.19

sustainable growth of my 7.05% 15.06% 26% 30% 22%
4 businesses.

10 15 20 121 146 4.21 0.98

I believe the current business 3.21% 4.81% 6% 39% 47%
5 tax system doesn’t consider
taxpayers ability to pay.
Source: Survey, 2019

The above table 8 summarizes the responses of business taxpayers to the statement related with
the independent variable income. Accordingly, 218 (69.87%) of business taxpayers respond that
tax evasion is an economic necessity for them if the income generated from their business
becomes low. This statement is confirmed by the mean values of 3.74. This implies that low
business income of taxpayers encourages non-compliance behavior of business taxpayers.

51
With regard to the prevailing inflation level of the country, majority of business taxpayers 152
(49%) strongly agreed and 108 (35%) agreed with the statement describing “The prevailing
inflation level of the country discourages positive tax compliance.” With the mean response
score of 4.17, business taxpayers agreed that the current inflation level of the country deteriorates
taxpayers’ ability to pay taxes. In addition, majority of business taxpayers agreed that the
applicable tax rate is very high and deteriorates the income earning capability of businesses. This
statement has been confirmed by the mean values of 4.41. From the total respondents 290
(92.94%) agreed with the statement proposed by the researcher. From this analysis it can be
concluded that high tax rate deteriorates the income earning capacity of businesses and this
encourages the non-compliance behavior of taxpayers.

Results show that with the mean response score of 3.4, majority of respondents 163 (52.2%)
agreed that Paying taxes hinders sustainable growth of businesses. In addition to this 267
(85.57%) of respondents agreed that the current business tax system doesn’t consider taxpayers
ability to pay. This statement has been confirmed by the mean values of 4.21; this implies that
the applicable business tax system obstructs the compliance behavior of category ‘‘C’’ business
taxpayers.

Variable Observations Composite Mean Std. Dev.

Income level 312 3.983987 1.023595

The above findings show that with a composite mean score of 3.98, income level of business
taxpayers has influenced tax compliance behavior of category “C” business taxpayers. A
standard deviation >1 shows that the respondents differed on the extent to which income level of
category “C” business taxpayers influences tax compliance behavior.

4.4.6. Detection and Punishment

Detection and punishment is an important factor in affecting tax payers’ compliance and non-
compliance behavior. Tax payers may comply with the tax legislation because of the fear of the
possibility of being caught and penalize. Detection and punishment, consisting of tax audits, tax
penalties. To analyze this, the researcher incorporates different statements regarding detection

52
and punishment. Therefore, respondents were asked to rate their compliance with the statements
as below on a five point Likert scale.

Table 9: Detection and Punishment

S.No Statements Strongly Strongly S.

Disagree Disagree Neutral Agree Agree Mean Dev.

I believe Penalty or legal 13 14 60 115 110 3.94 1.04

1 enforcement increase positive 4.17% 4.49% 19% 37% 35%
tax compliance.
There is a high degree of
being detected for 30 78 32 107 65 3.31 1.30
2 nonpayment of the taxes. 9.62% 25% 10% 34% 21%
I will pay my tax obligations
3 because of fear of being 24 36 20 110 122 3.86 1.26
caught and penalized. 7.69% 11.54% 6% 35% 39%
The severity of sanctions and
penalties of the revenue
office is high and these 4 11 10 120 167 4.39 0.81
4 ensure tax compliance. 1.28% 3.53% 3% 38% 54%

Tax assessors make

continuous audits as a result 19 20 91 130 52 3.56 1.03
there is no room to non- 6.09% 6.41% 29% 42% 17%
5 compliance.
Source: Survey, 2019

The above table 9 summarizes the response of business taxpayers regarding the statement
describes detection and punishment. Accordingly, with the mean response of 3.94 majority of
respondents 225 (72.11%) agreed that penalty or legal enforcement increases positive tax
compliance. In addition to this, 107 (34%) of respondents agreed and 65 (21%) strongly agreed
with the statement describing “There is a high degree of being detected for nonpayment of the
taxes.” And the remaining 108 (34.61%) of respondents disagreed with the statement. this
statement has been confirmed by the mean response score of 3.31. therefore, it can be conclude
that high degree of detection and penalty increases the compliance behavior of business
taxpayers.

The above analysis shows that category “C” business taxpayers in the study area comply with the
tax system because of the fear of the possibility of being caught and penalize. With the mean
response score of 3.86 the respondents agree with the statement describing “I will pay my tax

53
obligations because of fear of being caught and penalized.” In addition to this, almost all of
respondents 287 (91.98%) agreed that the severity of sanctions and penalties of the revenue
office is high and these ensure tax compliance behavior of business taxpayers. these statement is
confirmed with the mean response score 4.39. Moreover, with a standard deviation of <1.0
shows less dispersions from the midpoint, this shows that the respondents did not differ widely
on the extent to which the severity of sanction and penalty ensures tax compliance behavior of
category “C” business tax payers in the study area. With regard to the tax assessors continuous
audit, with the mean response score 3.56, more than half of respondents 182 (58.33%) agreed
that there is no room for non-compliance because of the tax assessors committee make
continuous audit.

Composite
Variable Observations Std. Dev.
Mean

Detection and punishment 312 3.817308 1.044272

The composite mean score (3.82) implies that detection and punishment has influenced tax
compliance behavior of individual category “C” business taxpayers. However, with a standard
deviation of >1 shows more dispersions from the midpoint, this shows that the respondents
differed widely on the extent to which detection and punishment influences tax compliance
behavior among category “C” business taxpayers operated in Debre Birhan city.

4.4.7. Effectiveness of Tax Administration

Taxpayer service plays a critical role in maximizing tax compliance behavior by providing
taxpayers with the information, advice, training and assistance they need to enable them to meet
their tax obligations. By providing effective customer service and by convincing non-compliant
taxpayers that they can comply with relative ease, tax payer services can encourage and helps to
accomplish greater tax compliance.

54
 Table 10: Tax Administration Effectiveness

S.No Statements Strongly Strongly S.

Disagree Disagree Neutral Agree Agree Mean Dev.
The services rendered by the
revenue office are fast and 85 111 21 50 45
1 clear. 27.24% 35.58% 6.73% 16.03% 14.42% 2.55 1.40
The revenue offices provide
information, advice and 62 93 58 60 39
training about tax to tax 19.87% 29.81% 18.59% 19.23% 12.50% 2.74 1.31
2 payers.

Employees working in the 43 72 86 64 47

3 tax office are positive. 13.78% 23.08% 27.56% 20.51% 15.06% 3 1.26
The knowledge of staff
working in the tax office is
adequate for effective 15 85 112 52 48 3.10 1.11
4 service. 4.81% 27.24% 35.90% 16.67% 15.38%
Source: Survey, 2019

The above table 10 summarizes the response of business taxpayers regarding the statement
describes the service delivery of the revenue authority. Accordingly, with the mean response
score of 2.55 majority of respondents 196 (62.82%) of business taxpayers disagreed with the
statement describing that “the service rendered by the revenue office are fast and clear”. 95
(30.45%) of respondents agreed with the statement and the remaining 21 (6.73%) of respondents
are indifferent with the statement. This implies that the services rendered by the revenue office
are not clear and fast enough to meet the need of business taxpayers.

With regard to the information, advice and training provided by the tax authority the above
analysis shows that half 155 (50%) of respondents answered that the revenue office doesn’t
provide information, advice and training about tax to business taxpayers. However, 60(19.23%)
of respondents agreed with the statement and 39 (12.50%) of respondents strongly agreed with
the statement and the remaining 58 (18.59%) of respondents are neutral. From this, it can be
inferred that the revenue office are not supportive enough to meet the need of business taxpayers
with regard to timely and effective tax information, advice and training.

The result also shows that with the mean response score of 3, 115 (36.85%) of business
taxpayers disagreed that employees working in the revenue office are positive and 111 (35.6%)
of respondents agreed that employees are positive. In addition to this majority of respondents

55
112 (36%) of respondents are neutral about the knowledge of employees working in tax office is
adequate for effective service.

4.4.8. Level of Tax compliance

According to James (2000) Level of compliance can be measured in terms of the 'tax gap'
(difference between actual taxes collected and taxes owed for all taxes and all taxpayers if there
were 100% compliance). The following table (table 11) shows the revenue performances of
Debre Birhan city revenue office and tax gap from the year 2011/12 to 2016/17.

Table 11 Revenue Performances of Debre Birhan City

Year Plan Actual Gap

2011/12 64,616,504 54,289,843.42 (10,326,660.58)
2012/13 89,520,630 70,623,849.71 (18,896,780.29)
2013/14 91,253,470 106,261,724.51 15,008,254.51
2014/15 132,616,752 145,492,502.95 13,978,674.51
2015/16 192,825,745 190,102,333.52 1,981,921.96
2016/17 249,400,000 234,848,356.17 (14,551,643.83)
Source: DebreBirhan city Administration Revenue office, 2018.

The above table shows that in 2011/12 and 2012/13 budget years the revenue office recorded
high uncollected revenue of birr 10.3 million and 18.9 million respectively. Similarly, in 2016/17
Budget year the revenue office plans to collect revenue of birr 249.4 million from 5,410 tax
payers, while it has collected birr 234.8 million from 4,515 actual tax payers. The revenue office
slightly achieves its target for three consecutive years (2013/14-2015/16). However the
percentage increment of the plan is low. The above table also shows that in the previous budget
year (2016/17) the tax gap (difference between actual taxes collected and taxes owed) is
negative, this shows that making other structural factors contributed for tax collection
unchanged, the level of compliance of business taxpayers is low.

56
4.5. Econometric Analysis
This section of the study presents the results and discussions of the regression
(econometrics) analysis. So far the study has established a framework of literature and data
analysis including summary statistics and correlation analysis in order to investigate the
determinants of tax compliance Before running the regressions, the data sets were checked for
certain tests; heteroscedasticity, normality, multicollinearity, and model specification tests have
been made to fit the Classical Liner Regression Model (CLRM) assumptions and to undertake
reliable estimations.

4.5.1. Validity
Validity is the most critical criterion and indicates the degree to which an instrument measures
what it is supposed to measure (Kothari, 2004). The content validity of the data collection
instruments is the extent to which the data provides accurate and adequate coverage of the
objectives of the study (Cohenet, 2000). In order to ensure the validness of the research
instrument of this study, the instrument was evaluated by the researcher director and instruments
used bay previous researchers were consulted. In addition, the content of the instrument was
evaluated by peers.

4.5.2. Reliability
Reliability is the measure of the degree to which the research instruments yield consistent results.
To carry out the reliability analysis, Cronbach’s Alpha (α) is the most common measure of scale
reliability. The Cronbach’s coefficient alpha was tested for both determinant factors and tax
compliance Items for the reliability of the measures. According to the Hair et al. (2006) the
minimum acceptable level of the Cronbach alpha is more than 0.70. Table 12 shows the
Cronbach’s alpha coefficient of all independent and dependent variable.

Table 12: Results of the reliability test

Scale reliability Number of items in the

S.No Variables coefficient scale
1 Awareness Level 0.9828 5
2 Fairness or Equity 0.9827 6
3 Influences of peer groups 0.9866 5

57
4 Income Level 0.9707 5
5 Attitude of taxpayers towards Government 0.9751 5

6 Detection and punishment 0.9676 5

Tax compliance (Dependent Variable)

7 0.9791 6
Source: STATA (Version 13) output

The value of alpha coefficient is range from 0 to 1. According to Malhotra (2009) a value of 0.7
or less generally indicates unsatisfactory internal consistency reliability. Cronbach’s Alpha was
employed to examine the internal reliability of the 37 items and used to measure the 6
independent variables and dependent variables. According to Table 12, the results revealed that
the internal reliability of each construct has ranged from 0.96 to 0.98. The Cronbach’s alpha
coefficient of the all variables are more than 0.7, this represents a high consistency and reliability
among statements in questionnaire.

4.5.3. Model Fitness and Regressions

The objective of the model is to predict the strength and direction of association among
the dependent and independent variables. Thus, in order to maintain the validity and robustness
of the regression result of the research in classical linear regression model (CLRM), it is
better to satisfy basic assumption CLRM. Accordingly, the diagnostic tests were undertaken
to ensure that the assumptions of classical linear regression model. According to Brooks (2008)
the first assumption required that the average value of the errors is zero (E (ui) = 0). In fact, if a
constant term is included in the regression equation, this assumption will never be
violated. Since, no intercept parameter without constant term the first assumption will never
be go against that means, there is no potentially severe biases in the slope coefficient estimates
in the regression model. So, the diagnosis taste included normality, multicollinearity, and
heteroscedasticity.

4.5.3.1. Tests for Normality

According to Brooks (2008) in order to conduct hypothesis test about the model parameter, the
normality assumption must be fulfilled. The normality assumption is about the mean of the
residuals is zero. The test of normal distribution can be done either numerically with the help of

58
Skewnes /Kurtosis tests for Normality or graphically with the help of histogram and dot plot
tests. The decision rule behind the Skewnes/Kurtosis tests for Normality states that if the
p-value of the error term is greater than at the chosen level of significances (1%, 5%, or 10 %)
indicates that, the error terms are normally distributed. In order to test the normality of
data, skewness/kurtosis tests of normality were used.

As shown below from the normality test output of regression, the result of Skewnes /Kurtosis
tests for normality the residuals, the p-value (0.9802) is much greater than 0.05. As a
result it can be conclude that the error terms of the specified models are found to be normally
distributed.

Table 13: Tests of Normality

Skewness/Kurtosis tests for Normality

joint
Variable Obs Pr(Skewness) Pr(Kurtosis) adj chi2(2) Prob>chi2

residuals 312 1.0000 0.8414 0.04 0.9802

residual

Percentiles Smallest
1% -.1286428 -.1756094
5% -.0932006 -.147132
10% -.0722206 -.1354972 Obs 312
25% -.0381917 -.1286428 Sum of Wgt. 312

50% 0 Mean 0
Largest Std. Dev. .0567048
75% .0381917 .1286428
90% .0722206 .1354972 Variance .0032154
95% .0932006 .147132 Skewness 2.64e-16
99% .1286428 .1756094 Kurtosis 3.000787

Source: STATA (Version 13) output

59
4.5.3.2. Test for Multicollinearity
Another basic assumption of OLS is that there is no multicollinearity among the explanatory
variables included in the regression model. Multicollinearity indicates the existence of exact
linear association among some or all explanatory variables in the regression model. If correlation
exists between explanatory variables, then we are in the state of multicollinearity problem. In this
case, the regression model will end up with an incorrect result and therefore, invalid conclusion
will be prevailed. According to Gujarati (2004) the effect of multicollinearity is that in regressing
model estimates of the coefficients of the regressor become unstable and the standard errors for
the coefficients can get wildly inflated.

To test the existence or not-existence of multicollinearity problem, variance inflation factor

(VIF) was used. As a rule of thumb, a value of 1 means that the predictor is not correlated with
other variables. VIF value of more than 4 or 5 are regarded as being moderate to high and values
of 10 or more being regarded as very high.

The following table shows that the mean value of VIF is 1.49, indicates that there is no problem
of multicollinearity in the regression model.

Table 14: Test for Multicollinearity

Variable VIF 1/VIF

dp 1.99 0.503370
ipg 1.69 0.592059
al 1.44 0.692650
il 1.35 0.742655
fe 1.25 0.798673
atpg 1.22 0.819179

Mean VIF 1.49

Source: STATA (Version 13) output

60
4.5.3.3. Test for Hetroscedasticity
The other important assumption for the OLS regression is the homogeneity of variance of the
residuals (variance of the errors is constant). If the variance of the residuals is non-constant then
the error variance is said to be heteroscedastic. This study carries out Breusch-Pagan/cook-
Weisberg test for heteroscedasticity. The null hypothesis of this test is homoscedasticity or
constant variance. At 5% level of significance, if the p-value > 5%, it is possible to conclude that
we have no heteroscedasticity problem. Thus, as shown in the figure 5, there is no
heteroscedasticity problem for this study hence the p value is above 5%.

Figure 5: Tests for Hetroscedasticity

Breusch-Pagan / Cook-Weisberg test for heteroskedasticity

Ho: Constant variance
Variables: residuals

chi2(1) = 1.42
Prob > chi2 = 0.2328

Source: STATA (Version 13) output

4.5.4. Correlation Analysis

Correlation is a way to index the degree to which two or more variables are associated with or
related to each other. According Brooks (2008), the values of the correlation coefficient are
always between -1 and +1. A correlation coefficient of +1 indicates that the two variables are
perfectly related in a positive linear sense; while a correlation coefficient of -1 indicates that two
variables are perfectly related in a negative linear sense. A correlation coefficient of 0, on the
other hand indicates that there is no linear relationship between two variables. The correlation
matrix in table 4.6.1 predicts the likely relationship among variables in the study.

61
 Table 15: Pearson Correlations Matrix

. pwcorr tcom al fe ipg atpg il dp, star(1)

tcom al fe ipg atpg il dp

tcom 1.0000
al 0.3647* 1.0000
fe 0.4113* -0.0900 1.0000
ipg 0.3489* 0.4719* -0.0068 1.0000
atpg -0.0437 -0.1299 0.2717* -0.0144 1.0000
il 0.3161* 0.1868* 0.1677* -0.0597 -0.1727* 1.0000
dp 0.2989* 0.1598* 0.3040* 0.3229* 0.6023* -0.1489* 1.0000

*. Correlation is significant at the 0.01 level.

Source: STATA (Version 13) output

The correlation matrix in Table 15 produced statistical evidence that awareness level, fairness,
influences of peer groups, income level and detection and punishment are significantly and
positively linear relationship with tax compliance at 1% significant level with correlation
coefficient of 0.3647, 0.4113, 0.3489, 0.3161, and 0.2989 respectively, While attitude of
taxpayers towards government has no significant correlation with tax compliance.

According to Pearson correlation matrix results in the above table, explanatory variables were
significantly correlated with tax compliance and the highest correlation occurred between tax
compliance and fairness or equity, followed by awareness level of business taxpayers, influences
of peer groups, income level of business taxpayers, and detection and punishment were
positively and significantly correlated with tax compliance while the correlation matrix depicted
that no significant relationship between attitude of business taxpayers towards the government
and tax compliance behavior. Even though the correlation analysis shows the direction and
degree of associations between variables, it does not allow the researcher to make cause and
effect inferences regarding the relationship between the identified variables. Brooks (2008) stated

62
that y and x are correlated; it means that y and x are being treated in a completely symmetrical
way. Thus, it is not implied that changes in x cause changes in y, or indeed that changes in y
cause changes in x rather, it is simply stated that there is evidence for a linear relationship
between the two variables, and that movements in variables are on average related to an
extent given by the correlation coefficient. Thus, to examine the effects of explanatory
variables on tax compliance behavior, the econometric regression analysis were used which is
discussed in the next section of the study gives assurance to overcome the shortcomings of
correlation analysis.

4.5.5. Discussion of the Regression Results

After correcting for all CLRM assumptions, a regression was made to explore the necessary
indicators of the tax compliance behavior of taxpayers by using the variables identified in the
model. In this regression analysis the dependent variable is tax compliance (TCOM) while the
independent variables are Awareness level (AL), Fairness or Equity (FE), Influences of Peer
Groups (IPG), Attitude of tax payers towards the government (ATPG), Income Level (IL), and
Detection and Punishment (DP).

The regression coefficients are analyzed the independent and dependent variables and identify
both magnitude and the direction of impact. Under the following regression outputs the beta
coefficient may be negative or positive; beta indicates that each variable’s level of influence
on the dependent variable. P-value indicates at what percentage or precession level of each
variable is significant. The adjusted R2 value used to see the explanatory power of the models.

As indicated in the following table 16, the R2 and Adjusted R2 values of 0.58 and 0.57
respectively, is an indication that the model is a good fit. This means that more than 57% of
variations of taxpayers’ tax compliance were explained by the variation in explanatory variables
included in the model. However, the remaining 43% changes in tax compliance are caused by
other factors that are not included in the model. In addition, the probability of not rejecting the
null hypothesis that there is no statistically significant relationship exist between the dependent
variable and the explanatory variables ( p-value), is 0.0000 indicates that the overall model is
highly significant at 5% and that all the explanatory variables are jointly significant in causing
variation in tax compliance behavior of taxpayers.

63
 Table 16: OLS Regression Result

Source SS df MS Number of obs = 312

F( 6, 305) = 70.82
Model 229.041354 6 38.173559 Prob > F = 0.0000
Residual 164.411659 305 .539054619 R-squared = 0.5821
Adj R-squared = 0.5739
Total 393.453013 311 1.26512223 Root MSE = .7342

tcom Coef. Std. Err. t P>|t| [95% Conf. Interval]

al .1799905 .0355189 5.07 0.000 .1100974 .2498837

fe .4188324 .0436803 9.59 0.000 .3328795 .5047852
ipg .0926193 .0423718 2.19 0.030 .0092412 .1759974
atpg -.2446168 .04544 -5.38 0.000 -.3340323 -.1552013
il .2786699 .0496128 5.62 0.000 .1810433 .3762966
dp .3007184 .0470948 6.39 0.000 .2080466 .3933902
_cons .1259487 .2960304 0.43 0.671 -.4565718 .7084691

Source: STATA (Version 13) output

The regression result in the above table 16 shows that, coefficient intercept (α) is 0.1259487.
This means, when all explanatory variables took a value of zero, the average value of tax
compliance would be take 0.1259487 unit and statistically significant at 5% level of significance
and based on the result, the following model was developed to examine the determinants of tax
compliance behavior (TCOMP) in this study.

64
The Regression Model

TCOM = α + β1 (AL) +β2 (FE) + β3 (IPG) + β4 (ATPG) + β5 (IL) +β6 (DP) + εi

TCOM=0.1259+0 .1799(AL) +0 .4188(FE) + 0.0926(IPG) + -0.2446(ATPG)

+0 .2786(IL) +0 .3007(DP) + εi

4.5.6. Testing of Research Hypothesis

As the above section presents the brief discussion of the regression results, this section of the
study gives a detail hypothesis testing and discussion of results. Hypothesis testing conducted on
the basis of the relationship of dependent variable tax compliance and independent variables
namely, awareness level, fairness, influences of peer groups, attitude of taxpayers towards
government, income level and detection and punishment by utilizing the regression results
obtained from the model.

Null hypothesis to be tested is that the explanatory variables used in the model have no
significant effect on tax compliance. If the p-value of any independent variable is less than at 5%
significance, such variable is said to have significant influence on tax compliance, and if
otherwise it has no significant influence. The result from multiple regression in the above table
16 indicated that tax compliance behavior have been significantly influenced by five variables
namely, awareness level of taxpayers, fairness, influences of peer groups, attitude of taxpayers
towards government, Income Level, and detection & punishments. The regression result also
shows that belief in fairness becomes the main factor with a beta coefficient of 0.4188, followed
by detection and punishments (β= 0.3007), income level (β= 0.2788), attitude of taxpayers
towards government (β = -0.2446), awareness level (β =0.1799) and influences of peer groups (β
0.0926).

4.5.6.1. Awareness Level of Business Taxpayers and Tax Compliance

The result in table 16 shows that, the coefficient of awareness level is 0.1799 and its P-value is
0.000. This indicates that, holding other explanatory variables constant at their average value,

65
when awareness level of taxpayers increases by one percent tax compliance behavior of business
taxpayers will increases by 18% and statistically significant at 5% of significant level. This
means that there is no negative significant relationship between awareness level of business
taxpayers and tax compliance. Therefore, the null hypothesis is rejected.

The relationship is positive and significant at 5% significant level, and indicating that awareness
about the tax rules, regulations and procedures encourages business taxpayers to report and pay
the correct tax liability. This finding is consistent with previous studies done by Aregawi
G/Michael (2010), Tsegaw Tessema (2015), Oladipupo and Obazee (2016), Yosef Eshetu (2018)
and Pail (2010). According to those researchers high awareness by the society would encourage
people to fulfill their obligations to register as taxpayer reporting and paying taxes properly and
plays a major role in determining taxpayers’ compliance behavior.

4.5.6.2. Effect of Perception of Tax Fairness on Tax Compliance

The result in table 16 shows that the coefficient of fairness is 0.4188 and its P-value is 0.000.
This indicates that, holding other explanatory variables constant at their average value, when
perception of fairness increases by one percent tax compliance behavior of business taxpayers
will increases by 42% and statistically significant at 5% of significant level. This means that
there is positive significant relationship between perception of fairness and equity and tax
compliance. Therefore, the null hypothesis is rejected and the alternative hypothesis is accepted.

This finding is consistent with previous studies with Tsegaw Tessema (2015), Lemmesa (2007),
and Amina Ahimed (2013) and R.K.Korir (2011). According to those researchers, the perception
of the taxpayers about the fairness of the tax system is recognized as an important factor that can
have significant influence on tax compliance behavior.

4.5.6.3. The Influence of Peer groups on the Level of Tax Compliance

The multiple regression result in table 16 shows that Influences of peer groups showed a positive
sign with coefficient 0.0926 and the probability value is 0.030 which is lower than 5% indicates
a significant relationship with tax compliance. Assuming other explanatory variables constant at
their average value, when influences of peer groups increases by one percent tax compliance
behavior of business taxpayers will increases by 9% and statistically significant at 5% of
significant level. This means that there is positive significant relationship between perception

66
of fairness and equity and tax compliance. Therefore, the null hypothesis is rejected and the
alternative hypothesis is accepted.

The positive sign here is quite acceptable since positive influences of business colleagues and
partners of business taxpayers encourages positive tax compliance. This finding is consistent
with previous studies done by Yosef Eshetu (2018), Allingham and Sandmo (1972), and Tsegaw
Tessema (2015). According to those researchers, reference groups play a significant role in tax
evasion and friends and family members plays a major role in influencing taxpayers’ compliance
behavior.

4.5.6.4. Attitude of Taxpayers towards the Government and Tax Compliance

Attitude of taxpayers towards government is found to have negative coefficient (-0.2446) and
statistically significant at 5% significance level. This indicates that, holding other explanatory
variables constant at their average value, when attitude of taxpayers towards government
increases by one percent tax compliance behavior of business taxpayers will decreases by 24%
and statistically significant at 5% of significant level. This means that there is no positive
significant relation between attitudes of taxpayers towards government and tax compliance.
Therefore, the null hypothesis is accepted and the alternative hypothesis is rejected. The negative
sign here is quite acceptable since taxpayers perceive that the government doesn’t utilize the
revenue collected wisely or the government fails to provide basic goods and services, tax payers
will not be willing to pay tax. This finding is consistent with previous studies done by Yosef
Eshetu (2018). According to the researcher, if taxpayers perceive that the government is
spending too much on unnecessary things; taxpayers may feel betrayed and attempt to evade.
And also P. Bingura (2014) suggests that if the government fails to provide the basic
infrastructure, public goods and services or if they do not provide for them sufficiently the tax
payers will not be willing to pay tax.

4.5.6.5. The Impact of Income Level on Tax Compliance

The result in table 16 shows that the coefficient of income level is 0.2786 and its P-value is
0.000. This indicates that, holding other explanatory variables constant at their average value,
when income level of taxpayers increases by one percent tax compliance behavior of business
taxpayers will increases by 27% and statistically significant at 5% of significant level. This

67
means that there is no negative significant relationship between income level of business
taxpayers and tax compliance. Therefore, the null hypothesis is rejected and the alternate
hypothesis is accepted. This finding is goes with Fischer’s model, as source of income, level of
income and occupation are considered as factors providing opportunity for tax noncompliance.
Similarly, Barbuta-Misu pointed out that level of income actually earned by the taxpayer and tax
rate imposed on small and medium enterprises are the main factors for compliance and non-
compliant behavior. In addition, this finding is consistent with the study done by Tsegaw
Tessema, (2015), suggests that income level of tax payers does have positive and significant
impact on the tax compliance behaviors of business profit tax payers.

4.5.6.6. The Role of Detection and Punishment on Tax Compliance

Detection and punishment is found to have positive coefficient (0.3007) and statistically
significant at 5% significance level. This indicates that, holding other explanatory variables
constant at their average value, when detection and punishment increases by one percent tax
compliance behavior of business taxpayers will increases by 30% and statistically significant at
5% of significant level. This means that there is no negative significant relationship between
income level of business taxpayers and tax compliance. Therefore, the null hypothesis is rejected
and the alternate hypothesis is accepted.

The relationship is positive and significant at 5% significant level and indicating that the severity
of sanctions and penalties of the revenue office, the tax assessors’ continuous audits and other
measures gives no room to non-compliance. This finding is consistent with previous studies with
Allingham and Sandmo (1972), Palil (2010), Tsegaw Tessema (2015), and R.K.Korir (2011).
According to those researchers, a high probability of being audited would encourage taxpayers to
be more compliant and fines and penalties have appositive significant impact on tax compliance
behavior.

68
4.6. Summary of Analysis
The impact of explanatory variables on tax compliance behavior of business taxpayers is
summarized as indicated in the following table.

Table 17: Impact of Factors of Tax Compliance

Explanatory Variables Expected impact Results

Awareness Level No Impact Positive and significant

Perception of Fairness No Impact Positive and significant
Influences of Peer Groups No Impact Positive and significant
Attitude of Business Taxpayers No Impact Negative and significant
towards Government
Income Level No Impact Positive and significant
Detection Punishment No Impact Positive and significant

69
 CHAPTER V:

CONCLUSION AND RECOMMENDATION

5.1 Introduction

This section presents conclusions and recommendations based on the different analysis made in
previous sections. Accordingly, the chapter starts with its discussion by briefly sum up the
overviews of the study and its main findings. In section two based on the study finding the
researcher highlight some recommendations for the target populations the study pivoting on.

5.2. Conclusion
The study assesses the tax compliance factors affecting the compliance and non-compliance
behavior of category ‘‘C” business taxpayers’ operated in Debre Birhan city by constructing an
econometric model to study the effect of factors on tax compliance such as, awareness level of
taxpayers, perception of fairness, influences of peer groups, attitude towards the government,
income level of taxpayers and detection and punishment. Accordingly, factors that determine tax
compliance behavior were carefully analyzed using descriptive and econometric analysis.

The study identifies that, awareness level, fairness, influences of peer groups; income level,
detection and punishment have positive and significant influence on tax compliance with a 5%
significant level. While the study revealed an inverse relationship between attitude of taxpayers
towards the government and tax compliance behavior. A conclusion made from the findings that
majority of business taxpayers lacked enough and adequate awareness about tax laws, how to
suit grievance, calculating business income by applying business tax rate and deductibles and in
addition to this, lack of access to information about rules and regulations, complex tax procedure
makes taxpayers unaware of their rights and exposes them to discretionary treatment by corrupt
officers. This encourages them to be non-compliant with the tax system. It was also concluded
that majority of business taxpayers believe that the current tax system is unfair. Tax payers feel
that their tax burden is higher than other people within the same income group, their tax
compliance probably decreases. Therefore, it can be concluded that fair and equitable tax system
improves the compliance behavior of taxpayers’.

70
The study also revealed that a positive influence of peer groups encourages the compliance
behavior of business taxpayers and negative peer influences encourages non-compliance
behavior. If a taxpayer refers to a compliant taxpayer, then the tendency to be non-compliant is
lower, but if a taxpayer refers to a non-compliant taxpayer, they might become a non-compliant
taxpayer as well. The results of the study showed that taxpayers attitude towards the government
influences the compliance behavior. Majority of business tax payers perceive that the
government utilization of tax revenue is unwise and it doesn’t provide information to the public
about revenue utilization. In addition to this business taxpayers agreed that Corrupt and
fraudulent tax assessors encourages them to be non-compliant with the tax system Therefore, it
can be conclude that non-compliance behavior of business taxpayers have been influenced by
taxpayers perception of government spending and negative acts of tax assessors.

From the study, it is concluded that the current business tax system doesn’t consider taxpayers
ability to pay and the applicable tax rate is very high and deteriorates the income earning
capability of businesses. In addition, from the study result it was concluded that penalty or legal
enforcement increases positive tax compliance and category “C” business taxpayers in the study
area comply with the tax system because of the fear of the possibility of being caught and
penalize.

Finally, the study noted that awareness level of taxpayers, perception of tax fairness, influences
of peer groups, attitude towards government, income level and punishment are determinant
factors that are influencing category “C” business tax payers’ compliance with tax system in the
study area. Among the established explanatory variables, Fairness followed by detection and
punishment is found to be the most important determinant factors influencing category “C”
business tax payers’ compliance with tax system in the study area.

5.3. Recommendation
To enhance the level of tax compliance proper tax education should be given to taxpayers by
authorities. This can be achieved by giving training to employees of the revenue authority and
taxpayers, by preparing education programs on different Medias. This helps to create common
and better understanding on the major points like, the legal aspects of taxation, how to

71
provide appeal procedures and the like. In addition, there is also need to simplify the tax laws
and regulations so that it will be easy to understand and interpret.

With regard to the fairness of the tax system it is recommended that the authority should
maintain fair and equitable tax system. This can be achieved by levying fair tax relative to
taxpayers’ income, providing enough and equitable information to all taxpayers. The tax
assessors committee should be unbiased, honest, loyal and well disciplined. Therefore, the
authority should select tax assessor committee by considering those qualities of employees and
also it is critical to investigate areas leading to corrupt practices and to mitigate the prevalence of
actual and perceived mal operations in order to increase the legitimacy of the tax system.
Generally, the authority has to ensure tax fairness and equity among category “C” business
taxpayers so that tax compliance behavior can be enhanced.

It is also recommended that the tax authorities should give trophy and recognition to best
taxpayers to improve positive peer influences. And also educating the whole taxpayers about the
benefit and importance of the tax will helps to minimize the negative peer influences.

Individuals may pay tax because they value the goods provided by the government, recognizing
that their payments are necessary both to help finance the goods and services provided by the
government to the general public. If there is no provision of sufficient services, the willingness
and motivation of the taxpayers’ to pay their tax obligation honestly is affected. Therefore, the
government should design and implement the system which ensures transparency and fair
utilization of tax revenue.

In order to enhance the compliance behavior, the authorities should improve the payment system
by adopting best technologies such as electronic payment systems (mobile bank, pos, internet
and others). In addition to this, the authority should develop customer contact centers which
helps to manage grievances, gathering constructive comments, to give support and advises.

It is also recommends that stiffer penalties should be imposed for those who would be caught on
the wrong side of the law. This would make taxpayers desist from the idea of evading from
paying tax.

72
Building accountable, transparent, and non – bureaucratic, institution and focusing on the
efficiency and transparency of public spending helps to ensure the tax administration is smooth
and encourages the compliance behavior of business tax payers.

5.4. Scope for Future Research

The findings of this study expected to provide updated information regarding the compliance
behavior of category “C” business tax payers operated in Debre Birhan city. Thus, the findings
documented in this study will be a “stepping stone” for more studies in the future. This study
identifies only six determinant factors which affects the compliance behavior of business tax
payers in the city. Therefore, the researcher recommends a study to be conducted by
incorporating more variables in to the model that are expected to affect taxpayers’ compliance
behavior. And it is recommended that a study to be conducted on similar topic by changing the
sample population to category “B” and category “C” business taxpayers. The researcher also
recommends a study to be conducted using larger sample, and evaluate the above concepts in
other parts of the country to improve on the revenue collection so as to build our developing
economy. A Subsequent research to confirm the findings and to determine how best to apply
them in policy contexts is needed before such findings can be applied to make policy decisions.

73
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80
Appendices 1- Business Taxpayers survey instrument
(English version)
DebreBirhan University
College of Business and Economics
Master of Accounting and Finance
Dear Respondents:

The objective of this questionnaire is to secure the necessary and relevant first- hand information
that may be useful to conduct a research project regards “Determinants of Business Taxpayers
compliance with Tax System: The Case of DebreBirhan city, Ethiopia”. It is prepared by Ato
Fitsum Abegaz who is currently following his MSc (in accounting and finance) at Debre Birhan
University. The information you provide is believed to have a great value for the success of this
research. No names or any identification marks are required. Please feel free to respond honestly.
The information you are going to supply will be used for academic purpose only and will be
treated with strict confidentiality. The student who is a researcher appreciates in advance for
your cooperation and spending your valuable time in filling and to participate in the study. In
case you want to contact him, Fitsum Abegaz can be reached at 09-21-53-23-13 mobile number.

Kindly requesting you to give genuine response to all the questions hereunder, I am grateful to
your cooperation.

Section I-Background Information

Please tick (√) on your choice

Age

1.Less than thirty 4. 50 to 59

2. 30 to 39 5. 60 years or more

3. 40 to 49

Gender: Male Female

Marital Status: Single Married Divorced

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Level of education

1.Below 12 grade 4. Bachelor degree

2.12 grade completed 5.Masters or above

3.Diploma 6.If other please specify..........................

Type of business: .....................................

What is your position in the company?

1.Owner 3.Manager

2.Employee 4.Other responsibilities, please specify........................

Section II- Factors influencing taxpayers tax Compliance

Please provide your responses by marking a tick (√) on your choice

Statements regarding Awareness level

Statements Strongly Disagree Neutral Agree Strongly
Disagree Agree
I have a clear awareness regarding the
laws guiding payments of business
1 income tax.
I clearly know the procedure for
2 appeal.
I know how to calculate my taxable
3 income
4 I believe having an awareness of the
penalties for non-compliance
encourages compliance with tax laws.
5 It is easy to understand the tax laws
i.e. rates of tax; filing and paying
dates etc.
6 I know all what is required from
me in respect of my tax
obligations
Statements regarding Fairness or Equity
Statements Strongly Disagree Neutral Agree Strongly
Disagree Agree
7 I believe that my tax obligation is
reasonably fair compared to my
business income.

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8 I believe that my tax obligation is
fair relative to others.
9 I believe that the business tax
system is not equitable.
10 The tax assessors' committee is
unbiased in determining business
income tax liability.
11 I believe that tax authorities
provide sufficient and equitable
information to all taxpayers.
12 Unreasonable, intrusive audits and
unfair penalties of tax assessors
lead towards stress and
dissatisfaction.
13 The business income tax burden
imposed upon category “C” tax
payers is fair.

Statements regarding Influences of Peer Groups

Statements Strongly Disagree Neutral Agree Strongly
Disagree Agree
14 I believe my competitors and
business colleagues are paying tax
honestly.
15 My business colleagues are
reporting and paying tax honestly,
that encourages me to report and
pay the correct amount of taxes.
16 Trophy for best tax payers
encourages me to pay my tax
obligation properly.
17 My business colleagues evade tax
and their business income is
growing this encourages me to
evade.
18 Paying taxes are my obligation and
I didn’t see any reference groups
from my business colleagues.
19 I will not evade taxes because I see
evaders are guilt and loss self-
respect.

83
Statements regarding Attitude of tax payers towards the government
Statements Strongly Disagree Neutral Agree Strongly
Disagree Agree
20 I believe that the government
spends the collected taxes wisely.
21 The government doesn’t provide
enough information about how it
utilizes the taxpayer’s money.
22 Government spending on basic
infrastructures encourages me to
pay my tax obligation.
23 Corrupt and fraudulent tax assessors
encourage me to be non-compliant
with the tax system.
24 My compliance behavior is affected
by satisfaction or lack of
satisfaction with the government.
25 I believe that paying taxes are my
obligation whether the government
spends wisely or not.

Statements regarding Income Level

Statements Strongly Disagree Neutral Agree Strongly
Disagree Agree
26 If my business income becomes
low tax evasion is an economic
necessity for me to survive.
27 The prevailing inflation level of
the country discourages positive
tax compliance.
28 The applicable tax rate is very
high and deteriorates the income
earning capability of businesses.
29 Paying taxes hinders sustainable
growth of my businesses.
30 The business income generated
from my business encourages me
to comply with the tax system.
31 I believe the current business tax
system doesn’t consider taxpayers
ability to pay.

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Statements regarding Detection and punishment
Statements Strongly Disagree Neutral Agree Strongly
Disagree Agree
32 I believe Penalty or legal
enforcement increase positive tax
compliance.
33 There is a high degree of being
detected for nonpayment of the
taxes.
34 I will pay my tax obligations
because of fear of being caught and
penalized.
35 The severity of sanctions and
penalties of the revenue office is
high and these ensure tax
compliance.
36 Tax assessors make continuous
audits as a result there is no room to
non-compliance.
37 The current tax system is complex
and leads towards penalty.

Statements regarding the services delivery of revenue authority.

Strongly Disagree Neutral Agree Strongly
Disagree Agree
38 The services rendered by the
revenue office are fast and clear.
39 The revenue office provides
information, advice and training
about tax to tax payers.
40 Employees working in the tax office
are positive.
41 The knowledge of staff working in
the tax office is adequate for
effective service

Thanks for your cooperation.

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Appendices 2- Business Taxpayers survey instrument
(Amharic version)
ደብረ ብርሃን ዩኒቨርሲቲ
የቢዝነስና ኢኮኖሚክስ ኮሌጅ
የአካውንቲንግና ፋይናንስ ድፓርትመንት

የተከበራችሁ የጥናቱ ተሳታፊዎች፡-

የዚህ መጠይቅ ዋና አላማ የንግድ ግብር ከፋዮች ለግብር ህግ ተገዥ እና በንግድ ህግና ደንቡ መሰረት ግብርን እንድከፍሉና
እንዳይከፍሉ የሚያደርጉ ነገሮችን ለማጥናት ጠቃሚ እና ተገቢ የሆነውን የመጀመሪያ ደረጃ መረጃን ለመሰብሰብ ነው፡፡ይህ
ጥናት የሚካሄደው በአቶ ፍፁም አበጋዝ ሲሆን በደብረ ብርሃን ዩኒቨርሲቲ በአካውንቲንግና ፋይናንስ የትምህርት ዘርፍ
የሁለተኛ ድግሪ ተማሪ ነው፡፡እርስዎ የሚሰጡት መረጃ ለዚህ ጥናት መሳካት ከፍተኛ የሆነ ዋጋ ሲኖረው የሚሰጡትን መረጃ
የምንጠቀመው ለትምህርታዊ አላማ ብቻ ሲሆን ሚስጢራዊነቱ በጥብቅ የተጠበቀ ነው፡፡ በመጠይቁ ላይ ስምዎንም ሆነ
የእርስዎን ማንነት የሚገልፅ ማንኛውንም አይነት ምልክት ማስቀመጥ የለብዎትም፡፡ ውድ የሆነ ጊዜዎን ሰውተው ይህን
መጠይቅ ለመሙላት በሚያደርጉት ትብብር አጥኝው በቅድሚያ ታላቅ የሆነ ምስጋና ያቀርባል፡፡መጠይቁን በተመለከተ
ማንኛውንም አይነት ጥያቄ ካለዎት አጥኝውን በስልክ ቁጥር 09-21-53-53-13 ማግኘት ይችላሉ፡፡

ከስር ለተዘረዘሩት ጥያቄዎች ትክክለኛ መልስ እንድሰጡ በአክብሮት እጠይቃለሁ፡፡

ለትብብርዎ አመሰግናለሁ፡፡
ክፍል አንድ፡ አጠቃላይ መረጃዎች
በሚፈልጉት ላይ ምልክት ያድርጉ

እድሜ
1. ከሰላሳ በታች 4. ከ 50 እስከ 59

2. ከ 30 እስከ39 5.ከ 60በላይ

3.ከ 40 እስከ 49

ጾታ: ወንድ ሴት

የጋብቻ ሁኔታ: ያላገባ ያገባ በፍች የተለየ

86
የትምህርት ደረጃ
1.ከ 12 ክፍል በታች 4. ድግሪ

2.12ኛ ክፍል ያጠናቀቀ 5.ማስተርስና ከዚያ በላይ

3.ድፕሎማ 6.ሌላ ካለ ይግለፁ...................................

የተሰማሩበት የንግድ አይነት: .....................................

በድርጅቱ ውስጥ ያለወት የስራ ዘርፍ

1.ባለቤት 3.ስራ አስኪያጅ

2.ሰራተኛ 4.ሌላ ካለ ይግለፁ........................

ክፍል ሁለት

ግብርን በወቅቱ ለመክፈል ወይም ላለመክፈል አስተዋፅኦ የሚያደርጉ ምክንያቶች፡-

ከዚህ በታች ለተዘረዘሩት ዓረፍተ ነገሮች መስማማት አለመስማማትዎን ምልክት በማድረግ ይግለፁ፤

ግብር ከፋዮች ስለ ግብር ያላቸው አመለካከት

ዓረፍተ ነገሮች በጣም አልስማማም ገለልተኛ እስማማለሁ በጣም
አልስማማም እስማማለሁ

የንግድ ገቢ ግብርን ህጎች በተመለከተ በቂ ሆን

1 ግንዛቤ አለኝ
የይግባኝ ስርዓቱን በተመለከተ በቂ ግንዛቤ
2 አለኝ
ስለ ግብር አሰላል በቂ የእውቀት ደረጃ አለኝ
3

4 እንደኔ እምነት ለንግድ ህጉ አለመገዛት

ስለሚያስከትለው ቅጣት ግንዛቤ መኖር
የንግድ ህጉን ለማክበር ያበረታታል
5 የግብር ህጉን ለመረዳት በጣም ቀላል ነው
6 የግብር ግደታየን በተመለከተ ሁሉንም
ጠንቅቄ አውቃለሁ
የግብር ፍትሀዊነት ወይም እኩልነት
ዓረፍተ ነገሮች በጣም አልስማማም ገለልተኛ እስማማለሁ በጣም
አልስማማም እስማማለሁ
7 የግብር ግደታየ በንግድ ከማገኘው ገቢ ጋር ሲነፃፀር
በአንፃሩ ፍትሀዊ ነው

8 የግብር ግደታየ ከሌሎች የንግድ ግብር ከፋዮች ጋር

ሲነፃፀር ፍትሀዊ ነው

87
9 እንደኔ እምነት የንግድ ግብር ስርዓቱ ፍትሀዊ አይደለም
10 የግብር ተማኝ ኮሞቴዎች የንግድ ግብር ዕዳ ሲተምኑ
አያዳሉም

11 እንደኔ እምነት የግብር ባለስልጣን መስሪያ ቤቱ በቂ

መረጃ ለሁሉም ግብር ከፋዮች በእኩልነት ይሰጣሉ

12 እንደኔ እምነት ድንገተኛና አስፈላጊ ያልሆነ ኦድት

እንድሁም ተመጣጣኝ ያልሆነ ቅጣት ግብር ከፋዩን
ለጭንቀትና በስርዓቱ ላይ ዕምነት ማጣትን ያስከትላል

13 በደረጃ ሐ
ግብርከፋዮችላይየተጣለውየገቢግብርፍትሀዊነው

በዙሪያችን ያሉ ግለሰቦች አስተዋፅኦ

ዓረፍተ ነገሮች በጣም አልስማማም ገለልተኛ እስማማለሁ በጣም
አልስማማም እስማማለሁ
14 እንደኔ እምነት የእኔ ተፎካካሪዎች እና የንግድ
ጓደኞቸ ግብርን በታማኝነት ይከፍላሉ
15 የንግድ ጓደኞቸ ግብርን በታማኝነት አሳውቀው
ስለሚከፍሉ እኔም ትክክለኛውን ግብር በታማኝነት
እንዳሳውቅና እንድከፍል አበረታተውኛል
16 ለመልካም ግብር ከፋዮች የሚሰጠው ሽልማት እኔም
የግብር ግደታየን በአግባቡ እንድወጣ አበረታቶኛል

17 የንግድ ጓደኞቸ ግብርን አጭበርብረው ንግዳቸው

ስላደገ እኔም እንዳጭበረብር አበረታቶኛል
18 ግብርን መክፈል ግደታየ ሲሆን በዙሪያየ ያሉ
ግለሰቦችንም እንደምክንያት አልመለከትም

19 ግብር አጭበርባሪዎች የጥፋተኝነት ስሜት እና የራስ

የሆነ ክብርን ስለሚያጡ እኔ ግብርን አላጭበረብርም

ግብር ከፋዮች ለመንግስት ያላቸው አመለካከት

ዓረፍተ ነገሮች በጣም አልስማማም ገለልተኛ እስማማለሁ በጣም
አልስማማም እስማማለሁ
20 እንደኔ እምነት መንግስት የሰበሰበውን ግብር
በአግባቡ ስራ ላይ ያውላል
21 መንግስት የሰበሰበውን ግብር እንደት እንደሚጠቀም
ምንም አይነት መረጃ አይሰጥም
22 መሰረታዊ ለሆኑ የህዝብ አገልግሎቶች ግብርን ማዋል
የግብር ግደታየን በአግባቡ እንድወጣ አበረታቶኛል
23 ሙሰኛና አጭበርባሪ የሆኑ ግብር ሰብሳቢዎች የግብር
ግደታየን በአግባቡ እንዳልወጣ አድርገውኛል

88
24 ለግብር ህጉ የመገዛት ባህሪየ በመንግስት እርካታ
ማግኘትና ማጣት ላይ ይወሰናል
25 መንግስት የሰበሰበውን ግብር በአግባቡ ስራ ላይ አዋለ
አላዋለ ግብር መክፈል ግደታየ ነው

የግብር ከፋዮች የገቢ መጠን

ዓረፍተ ነገሮች በጣም አልስማማም ገለልተኛ እስማማለሁ በጣም
አልስማማም እስማማለሁ
26 የንግድ ገቢየ ከቀነሰ ለመኖር ሲባል ግብር
ማጭበርበርን እንደ አማራጭ እወስዳለሁ
27 የሀገሪቱ የወቅቱ የዋጋ ግሽበት መጠን ለግብር
ህጉ ተገዢነትን አያበረታታም
28 በስራ ላይ ያለው የግብር ተመን በጣም ከፍ
ያለ ስለሆነ የንግድ ድርጅቶችን የገቢ አቅም
ይቀንሳል
29 ግብር መክፈል የድርጅቴን የእድገት ሁኔታ
ይገታል.
30 ከንግድ የማገኘው የገቢ መጠን ለንግድ ህጉ
ተገዥ እንድሆን አድርጎኛል
31 እንደኔ እምነት አሁን ያለው የንግድ ስርዓት
የግብር ከፋዮችን የመክፈል አቅም ያገናዘበ
አይደለም

በግብር ባለሙያዎች ተመርምሮ መያዝ እና እቀጣለሁ ብሎ ማሰብ

ዓረፍተ ነገሮች በጣም አልስማማም ገለልተኛ እስማማለሁ በጣም
አልስማማም እስማማለሁ
32 እንደኔ እምነት ቅጣትና በወንጀል መጠየቅ
ለንግድ ህጉ ተገዥነትን ይጨምራል
33 ግብር ሳይከፈል ቢቀር በግብር ባለሙያዎች
ተመርምሮ የመያዝ ዕድል ከፍተኛ ነው
34 የግብር ግደታየን የምከፍለው በወንጀል
እጠየቃለሁና እቀጣለሁ ብየ ስለምፈራ ነው
35 የገቢ ግብር ተቋማት የእገዳና የቅጣት ክብደት
መጠን ከፍተኛ መሆን ለግብር ህጉ ተገዥነትን
ያረጋግጣል
36 የግብር ባለሙያዎች ተከታታይ ቁጥጥር
ስለሚያደርጉ ግብር እንዳይከፈል የሚያደርግ
ምንም ምክንያት የለም
37 አሁን ያለው የግብር ስርዓት ለመረዳት
የሚያስቸግርና ግብር ከፋዮችን ለቅጣት
የሚዳርግ ነው

89
የግብር ባለስልጣን መስሪያ ቤቱ ያለውን የአልግሎት አሰጣጥ በተመለከተ
በጣም አልስማማም ገለልተኛ እስማማለሁ በጣም
አልስማማም እስማማለሁ
38 በግብር ባለስልጣን መስሪያ ቤቱ የሚሰጠው
አገልግሎት ፈጣን እና ግልፅ ነው
39 የግብር ባለስልጣን መስሪያ ቤቱ የንግድ ግብርን
በተመለከተ መረጃን፣ ምክርና ስልጠናወችን ለግብር
ከፋዮች ይሰጣል
40 የግብር ባለስልጣን መስሪያ ቤቱ ሰራተኞች ቅን ናቸው
41 የግብር ባለስልጣን መስሪያ ቤቱ ሰራተኞች ያላቸው
እውቀት ለሚሰጠው አገልግሎት ውጤታማነት በቂ
ነው

ስለ ትብብርዎ በጣም አመሰግናለሁ፡፡

90
Appendices 3-Results of STATA Software Analysis
Tests of Normality using skewness/kurtosis tests

Skewness/Kurtosis tests for Normality

joint
Variable Obs Pr(Skewness) Pr(Kurtosis) adj chi2(2) Prob>chi2

residuals 312 1.0000 0.8414 0.04 0.9802

residual

Percentiles Smallest
1% -.1286428 -.1756094
5% -.0932006 -.147132
10% -.0722206 -.1354972 Obs 312
25% -.0381917 -.1286428 Sum of Wgt. 312

50% 0 Mean 0
Largest Std. Dev. .0567048
75% .0381917 .1286428
90% .0722206 .1354972 Variance .0032154
95% .0932006 .147132 Skewness 2.64e-16
99% .1286428 .1756094 Kurtosis 3.000787

Tests for multicollinearity using variance inflation factor

Variable VIF 1/VIF

dp 1.99 0.503370
ipg 1.69 0.592059
al 1.44 0.692650
il 1.35 0.742655
fe 1.25 0.798673
atpg 1.22 0.819179

Mean VIF 1.49

91
Tests of hetroskedaticity using Breush-pagan test

Breusch-Pagan / Cook-Weisberg test for heteroskedasticity

Ho: Constant variance
Variables: residuals

chi2(1) = 1.42
Prob > chi2 = 0.2328

Correlation analysis using Pearson Correlations

. pwcorr tcom al fe ipg atpg il dp, star(1)

tcom al fe ipg atpg il dp

tcom 1.0000
al 0.3647* 1.0000
fe 0.4113* -0.0900 1.0000
ipg 0.3489* 0.4719* -0.0068 1.0000
atpg -0.0437 -0.1299 0.2717* -0.0144 1.0000
il 0.3161* 0.1868* 0.1677* -0.0597 -0.1727* 1.0000
dp 0.2989* 0.1598* 0.3040* 0.3229* 0.6023* -0.1489* 1.0000

OLS regression output

Source SS df MS Number of obs = 312

F( 6, 305) = 70.82
Model 229.041354 6 38.173559 Prob > F = 0.0000
Residual 164.411659 305 .539054619 R-squared = 0.5821
Adj R-squared = 0.5739
Total 393.453013 311 1.26512223 Root MSE = .7342

tcom Coef. Std. Err. t P>|t| [95% Conf. Interval]

al .1799905 .0355189 5.07 0.000 .1100974 .2498837

fe .4188324 .0436803 9.59 0.000 .3328795 .5047852
ipg .0926193 .0423718 2.19 0.030 .0092412 .1759974
atpg -.2446168 .04544 -5.38 0.000 -.3340323 -.1552013
il .2786699 .0496128 5.62 0.000 .1810433 .3762966
dp .3007184 .0470948 6.39 0.000 .2080466 .3933902
_cons .1259487 .2960304 0.43 0.671 -.4565718 .7084691

92
Cronbach alpha Coefficient for Fairness/ Equity

. alpha q1 q2 q3 q4 q5 q6

Test scale = mean(unstandardized items)

Average interitem covariance: 1.291045

Number of items in the scale: 6
Scale reliability coefficient: 0.9827

Cronbach alpha Coefficient for Awareness Level

. alpha q1 q2 q3 q4 q5

Test scale = mean(unstandardized items)

Average interitem covariance: 1.506016

Number of items in the scale: 5
Scale reliability coefficient: 0.9828

Cronbach alpha coefficient for Influence of peer groups

. alpha q1 q2 q3 q4 q5

Test scale = mean(unstandardized items)

Average interitem covariance: 1.346328

Number of items in the scale: 5
Scale reliability coefficient: 0.9866

Cronbach alpha coefficient for Income level

. alpha q1 q2 q3 q4 q5

Test scale = mean(unstandardized items)

Average interitem covariance: .9705468

Number of items in the scale: 5
Scale reliability coefficient: 0.9707

93
Cronbach alpha coefficient for Attitude of taxpayers towards government

. alpha q1 q2 q3 q3 q4 q5

Test scale = mean(unstandardized items)

Average interitem covariance: 1.123294

Number of items in the scale: 5
Scale reliability coefficient: 0.9751

Cronbach alpha coefficient for Detection and Punishment

. alpha q1 q2 q3 q4 q5

Test scale = mean(unstandardized items)

Average interitem covariance: 1.055214

Number of items in the scale: 5
Scale reliability coefficient: 0.9676

Cronbach alpha coefficient for Tax compliance

. alpha q1 q2 q3 q4 q5 q6

Test scale = mean(unstandardized items)

Average interitem covariance: 1.186609

Number of items in the scale: 6
Scale reliability coefficient: 0.9791

94