Factors Affecting Presumptive Tax Collection in Ethiopia: Evidence from Category "C" Taxpayers in Bahir Dar City

Abstract

The Ethiopian government has set itself long-term goals of eradicating poverty, ensuring sustainable economic growth, and becoming a middle-income country by 2025. These goals are impossible to achieve without tackling tax challenges, improving the tax administration, and generating sufficient revenue. This paper attempts to reveal major factors that influence presumptive tax collection in Ethiopia. To achieve this objective, the researcher used a cross-sectional survey design. As a result, the quantitative research approach was employed. A total of 391 self-administered, closed-ended questionnaires were distributed to category “C” taxpayers found in Bahir Dar City Administration. Given the dichotomous nature of the dependent variable (presumptive tax collection), the study employed a binary logistic regression model. As part of the process, the Statistical Package for Social Science (SPSS) Version 20 was used. The descriptive statistics reveal that the following issues were major challenges for presumptive tax collection in Ethiopia: lack of equity and fairness in presumptive tax assessment; complexity of tax rules; taxpayers’ poor perceptions of tax evasion; the existence of unethical and corrupt tax officials; taxpayers’ negative attitudes toward the government; and poor social norms between taxpayers and the Ethiopian Revenues and Customs Authority (ERCA). The binary logistic regression results show the following to be significantly associated with presumptive income tax collection in Ethiopia: the equity and fairness of the tax system; corrupt behavior of tax officials; the organizational strength of the tax authority; the participatory tax system; taxpayers’ knowledge of tax rules and regulations; and the attitudes of taxpayers toward the government. However, social norms, mode of tax payment, and perception of tax evasion had positive but insignificant relationships with presumptive tax collection. The findings of this paper will help policymakers and other stakeholders to identify determinants of presumptive tax collection, and thereby to design and implement appropriate presumptive tax systems for small and medium-sized businesses in Ethiopia. In addition, this paper contributes to the tax literature on determinants of presumptive tax collection issues in developing countries.

Keywords: Binary Logistic Regression, Category “C” Taxpayers, Ethiopia, Presumptive Tax, Tax collection.