How to Cite:

Mekonnen, T. H. (2022). The challenges of tax administration and collection of revenue in

Afar Region, Ethiopia. International Journal of Health Sciences, 6(S2), 10001–10010.
https://doi.org/10.53730/ijhs.v6nS2.7218

The challenges of tax administration and

collection of revenue in Afar Region, Ethiopia

Thomas Haile Mekonnen

Asst. Professor, Salale University, College of Business and Economics,
Department of Management
Corresponding author email: [email protected]

Abstract---The main objective of this study was to identify that the

factors affecting effectiveness of administration and collection of
revenue in afar region in case of samara logia town. The data used in
this study consists of both primary and secondary data. The primary
data was collected through standard questionnaire. The demographics
of the respondents were firstly established in the questionnaire. The
questionnaire was comprised of both closed and open ended
questions. Secondary data was also collected from official documents
and records relating to the case under study; Based on the above
discussion and analysis, the researcher concluded the following facts
in relation to taxpayers in the study area: Most of category ‘’A’’ and
‘’B’’ taxpayers are convinced for the fairness the tax assessment in
Samara-logia town. However, some of the above group taxpayers and
most of category ‘’C’’ taxpayers do not agree with about the fairness of
the tax assessment in Samara-logia town. This might be because
some of category ‘’A’’ and ‘’B’’ taxpayers lack to prepare acceptable and
accurate financial statements and necessary supportive documents
for their transactions, as a result the tax authority will assess their
tax liability by estimation. Regarding to category ‘’C’’ , since they are
not required by the tax law to prepare financial statements for their
transactions, such problem might be occurred either due to lack of
impartiality or independence by the tax authority’s employees with
taxpayers or due to lack of the taxpayers experience in paying tax to
the government. Since it is the time of globalization, taxpayers in
Samara-logia own better update and modernize themselves in relation
to running their business transactions.

Keywords---tax, tax administration, efficiency, tax collection,

effectiveness.

International Journal of Health Sciences ISSN 2550-6978 E-ISSN 2550-696X © 2022.

Manuscript submitted: 27 March 2022, Manuscript revised: 18 April 2022, Accepted for publication: 9 May 2022
10001
10002

Introduction

Taxes are important sources of public revenue. Public goods such as roads,
power, municipal services, and other public infrastructures are normally supplied
by public agencies due to their natures of non-rivalry and non-excludability
(Joseph, 2008). Government intervention in the supply of public goods is
therefore inevitable and can only be done if the public pays taxes for the
production and supply of such goods (Fieldstad, 2004). Taxation is one of the
important elements in managing national income, especially in developed
countries and has played an important role in civilized societies since their birth
thousands years ago (Lymer and Oats, 2009: 1). Tax is defined as „a compulsory
levy, imposed by government or other tax raising body, on income, expenditure, or
capital assets, for which the taxpayer receives nothing specific in return‟ (Lymer
and Oats, 2009).

There were studies on tax components and tax systems for different periods in
different regimes in Ethiopia. Wogene (1983) tried to examine the contribution of
taxation. He argued that taxation and system was used as a tool for establishing
the material basis of socialism. He estimated the buoyancy and built-in elasticity
of the total tax revenue and examined the difference between the two measures to
reflect the impact of the tax reforms on tax revenue for the period 1975-1981. He
used the constant rate structure method to separate the revenue impact of
discretionary tax measure. His result indicated that the tax reforms have
significantly contributed to increasing tax revenue in the country. A study by
Teshome (1979) also tried to see tax elasticity in Ethiopia. The author used built-
in elasticity method to examine the revenue effectiveness of the Ethiopia’s coffee
export taxes. His empirical finding shows that revenue elasticity with respect to
change in volume and value of exports is unity i.e. the revenue was price
inelastic. He thus concluded that the present coffee tax formula requires constant
revisions of tax laws whenever a significant change in the price and Volume of
coffee exports occurs. The study by Wegene (1983) showed that for the period
1975-81 tax reforms had enabled an increase in tax collection. This study
employed the constant rate of adjustment method to estimate elasticity of the tax
system. Likewise, the study by (Eshetu, 2013) compared tax productivity in the
pre revolution, post revolution periods of Ethiopia, and found out that there was
certain improvement in tax collection of the government in post revolution
Ethiopia.

The tax administration in Ethiopia is divided on two levels as Federal and

Regional. At the lowest level are a number of woredas in different regions. The
tasks of woredas are assessment and collection of taxes and other liabilities of
Category “C”. the others are the different sub cities that are in charge of tax
assessment, collection and control of veracity of the tax bases declared by
category “A” and “B” taxpayers in their jurisdiction. At the Federal level ERCA is
in charge of collecting revenues, both tax and none tax, from different
organizations owned by federal government and from customs duties. The study
focus here is the afar regional revenue agency.

Taxation in developing countries is a challenging topic and has attracted

increasing attention in the last two decades. Many problems observed like poor
 10003

administration, failing to collect sufficient tax revenues, tax structures where tax
horizontal and vertical equity considerations are not integrated, lack of
government and economic stability. In many developing countries it is observed
that there is low capacity of tax administration to monitor compliance among
taxpayers (Tanzi, 2000). Ethiopia, like any other developing countries, faces
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. To address this
problem, the government introduced the imposition of tax (direct and indirect),
among others; as major and important sources of public revenue. However, this
imposition of tax couldn’t still bring the required result due to a number of
reasons such as lack of clear understanding about the tax system by the
taxpayers, taxpayers don’t comply with their tax obligation, hostility between the
taxpayers and tax officials, negative attitude of taxpayer towards the tax system,
that is, understating their taxable income by significant amount. For these
reasons, the actual amount of tax couldn’t be collected properly (Tadele, 2010).

The key precondition for efficient tax administration is tax structure with
minimizing distortions, strictly tax exemptions and elimination of the differences
in tax treatment of particular parts of economy. Badly conceived or unnecessarily
complicated tax structure greatly complicates the operating function of the tax
administration, while simple and transparent tax structure could affect it in the
opposite way. So, the increase of efficiency of the tax administration could be
attributed mainly to the simplification of the tax system (Mansfield, 1990). In
developing countries, tax administration can be organized respecting the
functional principle (collecting, recording, auditing, and enforcement) according to
the type of taxpayers; the type of taxes; and type of enterprises in economy. Tax
administration should develop around activities (such as recording or auditing)
rather than according to the type of tax and taxpayers. More generally, tax
payment needs to be assessed, collected and recorded more efficiently.

The efficiency of a tax system is not determined only by appropriate legal

regulation but also by the efficiency and integrity of the tax administration. In
many countries, especially in developing countries, small amounts of collected
public revenue can be explained by either incapability of the tax administration in
realization of its duty, or with some degree of corruption. Regardless of how
carefully tax laws have been made, they could not eliminate conflict between tax
administration and tax payers. Tax administration with a skilled and responsible
staff is almost the most important precondition for realization of “tax potential” of
the state. It is generally known that tax laws and tax policy are as good as the tax
administration (Kaldor, 1980).

Therefore, in the afar revue agency is poor in terms of collecting sufficient tax
revenues, due to various reasons like in adequate infrastructure, corruption,
heavy burden on agency due to lack of intermediate between regional agency and
woredas entirely and lack training and education for skilled human and
responsible staff, which is increases the productivity of workers so that is why
study need to assess the factors affected tax administration and collection of
revenue in afar agency in case of samara-logia town.
10004

Research Methodology

The data used in this study consists of both primary and secondary data. The
primary data was collected through standard questionnaire. The demographics of
the respondents were firstly established in the questionnaire. The questionnaire
was comprised of both closed and open ended questions to allow the respondents
to write their opinions without restrictions. Secondary data was also collected
from official documents and records relating to the case under study;
proclamations about the taxes, policies and procedures of the taxes and other
taxing systems magazines, brochures that have been approved and issued by
ERCA.

The determination of sample size is resolved by means of Slovenes sampling

formula with 90 percent confidence level. Tax payers will first stratify into three
strata according to their categories: Category “A”, ‘B’, and ‘C’ tax payers. Then, a
proportional random sampling method was employed to select the sample tax
payers from each stratum. According to 2009 E.C record of Samara-Logia town
Trade and Transport Office, there are a total of 7530 tax payers out of which 553
under category of tax payer A, 1350 under category taxpayer B and 5627 under
category taxpayers C. The sample size was 316 and formula to calculate as follow
below.

Where n is the sample size, N is the population size, and e is the level of precision.
By using this formula at 90% confidence level and 10% level of precision the
sample size was obtained as follows:

The research used descriptive statistics to analyze the collected data with the aid
of Statistical Package for Social Scientists (SPSS) version 16.0. Accordingly,
frequencies, percentages, mean and standard deviation were used to analyze the
quantitative data. Flick (2002) argues that quantitative and qualitative methods of
analysis should be viewed as complementary rather than mutually exclusive.
Supporting this, in this research the qualitative information from open ended
questioners was also narrated.

Discussions

Table 1 Awareness/Knowledge about taxation

No RESPONSE NUMBER %
1 In the anticipation of public services 151 47.7
2 To avoid disturbances (penalties, 127 40.2
sanctions,)
3 There is no opportunity to evade 35 11
4 Do not know 3 1.1
Total 316 100
Source: Survey result, (2019)
 10005

The following table shows the response of the respondents regarding their reason
of paying taxes. As it is summarized above, most respondents (47.7%) replied that
they pay tax because it is compulsory payment and it will be used for provision of
public services by the government. However, significant number of respondents
(40.2%) also replied that they pay taxes in order to avoid disturbances (penalties
and sanctions). Hence, from this result it is possible to conclude that there is lack
of willingness to be abided by the tax rules and concepts in some taxpayers.
Though not that much significant (11%), some respondents also replied that they
pay taxes because they don’t have opportunities to evade. This response is also an
indication of respondents’ tendencies to engage in tax evasion activities. Lastly,
very few respondents (1.1%) don’t know why they pay taxes.

Table 2: Fairness tax liability determination

Response Category of tax payers

A B C TOTAL
Yes 16(69.5%) 32(61%) 48(20%) 96 (30.5%)
NO 7(30.5%) 22(39%) 191(80%) 220(69.6%)
TOTAL 23(100%) 54(100%) 239(100%) 316(100%)
Source: Survey result, (2019)

As summarized above in table 2, majority of the respondents (69.6%) believe that

the tax they are paying is not fair and not based on their ability to pay. Majority of
the respondents/taxpayers that provide this information are from category “C”
taxpayers (80% of them). This category provided many reasons for this situation.
Among the reasons they provide include their tax liability is based on presumptive
estimation, the tax estimation standard committee members being only from the
tax collecting authority, inconvenient and tiresome complaint procedure.

Categories “A” and “B” taxpayers were not 100% free of complain regarding the
fairness of the procedure; there were some respondents from categories “A” and
“B” (30.5%, and 39%, respectively) who believe that the tax they are paying is not
fair and not based on their ability. In explaining the unfairness of the procedure,
some category “A” and “B” taxpayers claimed that the authority rejected some of
the expenses they included in their expenditure summary reports such as loading
and unloading expenses, expenditures related to daily laborers, etc. Key
informants from the Afar Chamber of commerce and sectorial association have
also asserted that the actual practice of tax assessment by Tax and Revenue
Authority is very hard to tolerate and practically very difficult to fulfill mainly by
the taxpayers of category ‘C’. In their defense, key informants from the tax
authority have firmly stated that category ‘C’ tax payers have never been honest
to the tax assessment officers. They also added that most of the business
communities are not even willing to declare their daily sales when they are told to
do so. Category ‘A’ and ‘B’ tax payers, who are legally obliged to keep accounting
record, were also asked whether they are facing problems while keeping records.
In their responses, though not severe as category C, they faced problems in
keeping records.
 10006

Administration factors

The respondents were asked to evaluate the tax authority with respect to certain
parameters. The following table shows their response to these questions in
percentages.

Table 3: Evaluation of the tax authority by respondents

Variables Excellent Good Fair Poor

No % No % No % No %
1 Awareness creation 10 3.17 38 12.03 54 17.09 215 68.04
2 Convenience of manner of 42 13.3 95 30.1 118 37.4 61 19.2
payment
3 Convenience of time of 117 37 145 46 35 11 19 6
payment
4 Law enforcement 6 2 23 8 69 22 215 68
5 Honest collectors 22 6.4 53 17 86 27.4 155 49.2
6 Impartiality of review 29 9.2 43 13.7 39 12.3 205 64.8
committees
7 Timely response of tax review 33 10.4 158 50.1 101 32 24 7.5
Committees
8 Treatment of taxpayers with 73 23.2 114 36.1 72 22.6 57 18.1
due respect
Source: Survey result, (2019)

From the above table, only 3.17% of the respondents from all categories rated the
authority excellent in its initiation to create awareness among its taxpayers.
Similarly, still few respondents (12.03% and 17.09%) rated the authority good and
fair, respectively. However, majority of the respondents from all categories
(68.04%) rated the authority as poor in awareness creation. Regarding tax
collection effectiveness, which refers to the ability of the Authority in establishing
trustworthy tax system (honest collectors and impartiality of review committees),
law enforcement and fairness of the taxing system, respondents from all
categories, on average rated excellent (5.33%), good (13%), fair (20.57%), and poor
(61.10%). These results clearly indicate that the tax authority is not relatively
being effective in providing satisfactory service for all categories taxpayers. Most
respondents (80.8% and 94%, respectively) rated the manner of payment and time
of payments adopted by the authority fair and above fair. This indicates that there
was not severe problem observed in the authority’s manner of payment and tax
payment schedule convenience. From the table it is clear that the majority of the
respondents rated the tax authority from excellent to fair except for awareness
creation where 68% of them rate the authority poor. In most parameters, most of
the respondents rated the authority’s effort as fair and below that. This clearly
shows that the tax authority is not effective and not providing satisfying service
for taxpayers. On the other hand, the effort of the authority in creating awareness
was rated by far poor (68%). This can be cited as the root cause for all the
problems as far as voluntary compliance is concerned.
 10007

Behavioural/cultural factors

Attitude of taxpayers toward taxation and its administration is the other key
factor that has been considered and analyzed duly. Accordingly, the respondents
were asked for various questions to know their attitude and their responses are
summarized as follows.

Table 4: Reason for evading the taxable income/tax

No Frequency Percent
1 Lack of awareness 50 15.82
2 It is unfair/ beyond my ability 207 65.5
3 Intentional 24 7.7
4 Negligence 10 3
5 Poor and tiresome collection procedure 15 8
Total 316 100
Source: Survey result (2019)

As generalized above, majority of respondents (65.5%) hide their taxable income

because they feel that the tax amount levied on them is unfair and beyond their
ability/capacity. The above table also provides information that 15.82% of the
respondents evade their taxable income because of lack of awareness of the
taxable income, deductions and tax calculations. 8% of the respondents replied
that they evade their taxable amount because of the poor and tiresome collection
procedures of the authority. 7.7% of the respondents replied that they
intentionally hide their taxable income because they looked their neighbor
taxpayers doing so. Insignificant numbers (3%) of respondents are found
negligent towards payment of tax.

The above result strengthens previous respondents results discussed earlier. i.e.
unfair tax burden distribution by tax authority is the prominent reason for them
to hide/evade their taxable amounts. Furthermore, as discussed earlier, majority
of the respondents rated the tax collecting authority poor in awareness creation to
its taxpayers. Here in this question also significant number of taxpayers
responded that they evade/reduce their taxable income because the lack skills for
calculating the taxable income and related deductions.

Issues Related to the Tax Authority

Table 5: Evaluation of the tax authority by respondents

Parameters Excellent Good Poor Fair

No % No % No % No %
Reduction of tax payers complain 3 15 4 20 8 40 5 25
Service delivery 3 15 4 20 8 40 5 25
Tax collection efficiency 3 15 5 25 6 30 6 30
Law enforcement 2 10 4 20 8 45 6 30
Awareness creation 1 5 3 15 5 25 11 25
Source: Survey result, 2019
10008

From the table it is observed that the respondents rated reduction of tax payers
complain and service delivery by the tax authority as excellent (15%), good 20%),
fair (40%), and poor (25%). Regarding tax collection efficiency, they responded
excellent (10%), good (25%), fair (35%), and poor (30%). Similarly, they rated the
authority with respect to law enforcement activity as an excellent (15%), good
(25%), fair (30%) and poor (30%). On the other hand, concerning awareness
creation, they said excellent (5%), well (15%), fair (25%) and poor (55%). From the
table it is clear that the majority of the respondents rated the tax authority from
excellent to fair except for awareness creation where 55% of them said poor. In all
the parameters most of the respondents rated the authority’s effort as fair and
below that. This clearly shows the tax authority is not effective and not providing
satisfying service for taxpayers. On the other hand, the effort of the authority in
creating awareness was rated poor (55%). This can be cited as the root cause for
all the problems as far as voluntary compliance is concerned.

On other question, 55% of the respondents said that the tax authority and the
city administration are jointly responsible for tax payers turn over for another and
poor tax compliance and only 30% of the respondents said taxpayers are
responsible. This can be directly related to the authority’s strength and
effectiveness in reduction of tax payers complain, providing services, information,
and creating awareness. Five respondents additionally commented on this issue
and they reasoned out that both the tax authority and the town government
didn’t play their role well in improving the tax administration, reduction of tax
payers complain, creating awareness, providing social services, and other
information regarding taxes and other activities of the town government.

Conclusions

Based on the above discussion and analysis, the researcher concluded the
following facts in relation to taxpayers in the study area:

 Most of category ‘’A’’ and ‘’B’’ taxpayers are convinced for the fairness the
tax assessment in Samara-logia town. However, some of the above group
taxpayers and most of category ‘’C’’ taxpayers do not agree with about the
fairness of the tax assessment in Samara-logia town. This might be because
some of category ‘’A’’ and ‘’B’’ taxpayers lack to prepare acceptable and
accurate financial statements and necessary supportive documents for their
transactions, as a result the tax authority will assess their tax liability by
estimation. Regarding to category ‘’C’’ , since they are not required by the
tax law to prepare financial statements for their transactions, such problem
might be occurred either due to lack of impartiality or independence by the
tax authority’s employees with taxpayers or due to lack of the taxpayers
experience in paying tax to the government.
 Regarding to the relationship of the taxpayers and the tax authority
employees, the researchers identified and summarized facts below:
 There is no strong effort by the tax authority to create tax awareness to
taxpayers.
 The manner of tax payment is not fully convenient to taxpayers
specifically for low taxpayers or category ‘’C’’ taxpayers.
 10009

 There are many citizens in Samara-logia town that are running their
business without legal trade license and the tax authority has poor law
enforcement on such type of business persons.
 The tax authority’s employees lack integrity, honesties, and professional
ethics at the time of tax assessment.
 The tax appeal committee has partiality problem. This might be the
improper composition of the appeal committee from different government
office.
 Even though the tax authority in Samara-logia town improved the quality
of customer handling, still there are problems in relation to treating each
and every taxpayers equally and fairly.
 The researcher also identified behavioral or cultural problems of the
taxpayers such as great resistance to take or attend the tax awareness
training or panel discussion arranged by the tax authority, hiding their
actual taxable income intentionally and not to pay the true amount of tax to
the government, lack of understanding the tax authority’s employees work
burden at the time of taking the tax authority’s service, gossiping, running
their business illegally.
 Further, it can be noted that the key challenges and their causes identified
among both tax authority and tax payers revolve around one and pivotal
variable, which is lack of tax education. It is lack of tax education that
entails poor tax payers’ perception on the relevance of tax payment, the
taxpayers’ culture to evade and avoid taxes and social disapproval among
taxpayers against tax offences. It is in this regard that strategies to
overcome these challenges should build on boosting tax payers’ morality,
and this explains the necessity to develop tax education policies including
reach out programs.

Acknowledgment

The researcher would like to thank office administration of employee and manager
who provide me with different useful data for my research paper. At last not least
the researcher would like to thank all university staffs and higher official who are
helping me in idea and finance.

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