Addis Ababa University

Collage of Business and Economics

Department of Economics

The impact of Taxation on the development of small business

In case of ; Gulele Sub city,Addis Ababa

Senior proposal submitted to the department of Economics in

partial fulfillment of the requirement for Bachelor of Art in
Economics

Prepared By: Hagos Mesele

ID No Ugr/8369/12

Advisor: Girma.E

January,
2023AddisAbaba,Ethiopia 2023AddisAbaba,Ethiopia
ABSTRACT

This study was conducted to investigate the impact of taxation on the development of small
business in Gulele sub city. As small business plays the prominent role in the process of
economic development of a country, the negative externality on them should be asses and
identified. Without achieving substantial development on small business, no county has moved
to take off stage of economic growth. To”study the impact of taxation on the development of
small business”, descriptive analysis was carried out and data collection from Gulele sub city
small business owners were selected through stratified random sampling technique. The study
shows that the negative externality of taxation on the development of small business was
improved from time to time in the area.

Table of content

Content Page
Abstract……………………………………………………………………………………
1.Introduction………………………………………………………………………….…… 1

1.1 Background of the Study …………………………………………………………..

…… 1
1.2 Statement of the Problem
……………………………………………………………… 2
1.3 Research Questions ……………………………………………………………..
……… 4
1.4 Objective of the Study
…………………………………………………………………. 4
1.4.1 General Objective ………………………………………………………..……… 4
1.4.2 Specific Objective …………………………………………………………….… 4
1.5 Significance of the Study
……………………………………………………………… 5
1.6 Scope of the study
………………………………………………………………….……5
 1.7 Research Methodology
………………………………………………………………… 5
1.7.1 Research Design ………………………………………………………………… 5
1.7.2 Data Sources and collective instruments ………………………………………… 6
1.7.3 Sampling size and sampling technique …………………………………………… 6
1.7.4 Methods of data Analysis ………………………………………………………… 6
1.8 Limitations of the Study
………………………………………………………………… 6
1.9 Organization of the Study
…………………………………………………………………7
1.10 Work Plan
………………………………………………………………………………. 7

Chapter two

2. Research methodology …………………………………………………………………… 20

2.1 Source and type of
data………………………………………………………………… 20
2.2 Methods of data Collection
……………………………………………………………… 20
2.3 Method of data analyzing and
Presentation……………………………………………… 20
2.4 Sampling Technique
………………………………………………………………….… 21
40
Reference…………………………………………………………………………………….41
VI
CHAPTER ONE

1. Introduction

1.1Background of the Study

Taxation is a system of raising money to finance

government expenditure. All governments requires

payments of money taxes from the people..Since

tax is the main source of government.Government

use tax revenues to pay soldiers and policies to

build dames & roads, to operate schools and

hospitals. It also needs money to provide food to

the poor and medical care to the elderly and for

hundreds of other activities. Without tax to fund

its activities the government would cease to exist

(Gebrie, 2006).

The government has a right to impose taxes on the orating business and collect tax return
from them. The tax collected from operating has a great importance to rise the revenues of
federal government and to improve incentives for certain types of economic area (Gebrie.2006).

Therefore, if the government is want to promote growth, equity, environmental protection, social
security service etc. It should develop an acceptable tax policy that the people seem to be more
willing to pay. If they think that the fund raised for their own benefits and it feel fairly treated
relative to the individuals and groups with whom they compare themselves. A good tax system
will bring equitable economic growth and prevent tax evasion and avoidances shall be develop
(Gebrie.2006)

The tax payers were composed of two groups. The first group is that those tax payers whose
annual turnover for a single year is 500.000 or of Ethiopia irrespective of their annual turnover.
The rational for incorporating companies irrespective of their annual turnover seems to dwell
(taking) upon the idea that give the present local & international business environment by the
time companies are established they must have at least 500.000 as a starting capital (Tesfay abate
2003)

Tax on business profit has complex matter. The profit goes partly to meet the interest liability
and the rest is retained by the employer as a surplus. When a tax is imposed on profit the
employer tries to shift its incidence. If the capital invested is in agriculture he/she would reduce
the rent, which is to be paid to the land owner & the incidence will lie upon land rent. But if the
capital employed is in trade, the employer would rise the price to compensate himself for the fax
liability of the incidence will fall up on the consumer.

If non of those two avenues is a viable to the producer, he/she would reduce the interest to be
paid to the supplier of capital funds. In the same way if a direct tax is imposed up in interest like
a tax on land rent it sticks where it is levied and cannot be shifted one possible effect of a tax on
interest. However, is that it is not easy to administer it. It is not a very suitable subject for
taxation since it might cause capital out flow from the taming country. In general “Smith” is
against taking profits since that discourages investment employment and therefore economic
growth of the country. (H.L Bhatia, 2006)

VI

1.2 Statement of the Problem

The significance of small business in their contribution to job creation and output generation now
a day is being widely accepted in the world. Small businesses are found in the economy of
advanced as well as developing countries. The contribution of those enterprises to income and
employment are very much considerable particularly in the economy of many developing
countries. Because the success of an economy especially for developing countries start from the
indigenous knowledge and resources base of a countries since small business play great role in
mobilizing these resources.

The tax assessment on the small business organization or enterprises in

Gulele sub city as common throughout the country, are assess through
estimation technique. This method of assessment may result in personas as
business, which is expected to be creating the problem of under or over
estimation of

2
 their capital accumulation; more over this estimation is based on the past
performance of those small business enterprises, rather than to refract the
prevailing performance of the assessment.

Now a day complaining for unfair payment of taxation in Gulele sub city is
reveling tax payer’s awareness to tax evasion

With this background the study was made use of data from the taxable small
business enterprise in Gulele sub city and also tries to find remedies for the
biasness of estimation technique.

As it is explained before, the study focus on the taxation and its impact on the
growth of small business, such as shops, metal works cafeterias, wood works,
and restaurants.

There may be academic researchers that exeunt a number of works to identify

the impact of taxation on the small business. In some studies taxation's was
tested as the duty for the owner of small business enterprise and revenue for
the government itself those are mostly focus on the mere of data collection and
interpretations, rather than give solution for the drawbacks of taxation system.
But in this study, the researcher was tried to give essential solution for the
draw backs of tax levying system.

Generally the study was try to provide better knowledge for the owners of
small business about the benefits of taxation on their business operations and
also it could give information to the government about the drawbacks of the tax
levying system.

1.3 Research Questions

The researcher would wants to answer the following questions which have relations with
taxation system
- How tax is estimated and imposes on small business?
- How taxation affects small business and eventually leads them to shut down?
- How does taxation influences the performance of small business
- Is proper tax can be impose on small business?
- Why income tax is need on small business?
1.4 Objective of the Study
1.4.1 General Objective

The general objective of the study is to explore the impact of taxation on the growth of small
business in Gulele,sub-city.

1.4.2Specific Objective

- To identify the implication of taxation on the owners of small business, such as metal work

, wood work, cafeteria etc

- To identify the impact of taxation on the development and expansion of small business in
Gulele city
- To identify the implication of the government action on the specify problem, such as credit,
work place& other facilities.
- To recommend feasible solution for the improvement of small business, tax estimation on
small business etc.
To -To expose related problems to this area in the light of contemporary researches, which
means the issue that is not cover before n ow. 1.5
Significance of the Study .

The focus of the study would be on taxation and its impact o n small business. Therefore, the
study would have the following benefits.

- It provides information for small business owners about the impact of taxation on their
business operation.
- It informs concerned government body about the drawback of the system on their policy of
expansion of small business to reduce unemployment and poverties. Therefore, the
researcher would obligate or encourage to conduct this research and to search effectively
through the impact of taxation on small business development. The main significance of this
research is to get BA degree in Economics and also serve as a review for future researchers.
1.6 Scope of the study

The study would be limit to only the impact of taxation imposes on small business with the
particular area of Gulele sub city. Means it would not focus on the other determinants of the
growth of small business.
1.7 Methodology

1.7.1 Research Design

To undertake this study the researcher would be used both quantitative and qualitative data but
the researcher mostly use descriptive expression of the information that would be obtain from the
written documents.

1.7.2 Data Sources and collective instruments

To attain the expecting objectives of the study the researcher would be used both primary and
secondary sources of data. From primary data sources the researcher would be used close ended
questionnaires because it requires less time and less cost to conduct the study. From secondary
data sources the researcher would be used the written documents like internet down lodes, Gulele
revenue authority bureau.
 1.7.3 Sampling size and sampling technique

Since Mekelle is wide cities which have 7(seven) sub city and 14339 category “C” business

Profit tax payers, it is difficult to conduct research questionnaires. Because of this the researcher
would be used 63 respondents. To use this amount of sampling size, the researcher would be
used a probability stratified sampling technique and judgment random sampling. The researcher
would be used this sampling technique since it is important to identify the types of arena
(activity) like shop, metal and wood work etc.

1.7.4 Methods of data Analysis

The data that will be collect from primary and secondary sources are analysis by using different
data analysis techniques like table, percentage, graphs and pie charts.

1.8 Limitations of the Study

There were many limitations to conduct this research among them financial constraints were the
difficult one through the study and lack of experience and lack of qualified knowledge.

Chapter TWO

2 Research methodology

2.1Source and type of data

The study was mainly depending on the information that would be gathered during several trips
including field survey as well as from review of relevant documents. Both primary and
secondary data would be collected from the sample of people that exist and own small business
in Gulele sub city. Secondary data would be collect from official documents and records that
relate to the case to be study.

2.2Methods of data Collection

Different methods of data collection would be used in this research. Such as questionnaire,
written documents proclamations about taxes policies and procedures of the taxes which are
experience by the authority.

2.3 Sampling Technique

Out of total population that the small business employees, the sample that would be selected for
this study were 63 peoples. This sample size was believed to be sufficient and representation of
the total population and stratified probability sampling technique would be use by the researcher
to select the expect sample size. This method was selected by the researcher since the population
under consideration is not homogeneous in various aspects. To make them more homogeneous,
they have to be sub divided into their respective groups and they become homogeneous that the
total population and then random sampling method was being applied for each sub groups to
obtain the representatives from each group. Therefore, this method employee would enable the
research or to generalize about those participants of small business in Gulele sub-city.

20

2.4Method of data analyzing and Presentation

Having complete process of data collection from both sources the researcher was planned to use
mixed type of data analyze to draw conclusion and inferences. This data analysis embodies
frequencies, percentages and the likes. The researcher would be used percentages to facilitate
comparison and inferences more easily and finding would be computed manually using pocket
calculate or and also tabulation would be used in order to facilitate easy.

Reference
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