Page 1 of 24
Journal for Studies in Management and Planning
Available at
http://edupediapublications.org/journals/index.php/JSMaP/
ISSN: 2395-0463
Volume 04 Issue 05
April 2018
Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 190
Economic and Social Factors of Voluntary Tax Compliance:
Evidence from Bahir Dar city
Manchilot Tilahun
Raya University College of Business and Economics
Maichew, Tigray, Ethiopia
Mobile number: +251918654091
E-mail address: tilahunmanchilot@gmail.com
Abstract
The study was conducted with the aim of identifying economic and social factors of tax
compliance behavior in Bahir Dar city administration business income taxpayers. Voluntary
compliance behavior of the taxpayers is affected by various factors and identifying these factors
in order to maintain voluntary compliance at satisfactory level and treating the factors
accordingly should be the central premises of any tax system. research approach with
explanatory research design is used in the study by employing stratified random sampling to
select the participants. This study was conducted by using 341 business income taxpayers from
which the data was collected from through questionnaires and unstructured interviews. The
results showed that factors such as fairness of the tax system, penalty, tax rate, perceptions of
government spending and compliance cost were found to be the determinant factors that affect
taxpayer’s voluntary compliance. And therefore it is suggested that maintaining tax fairness,
appropriate and moderate levels of penalty, spending the tax revenue on important and social
projects, keeping tax rates to the minimum as much as possible and keeping compliance costs to
the minimum can enhance the voluntary compliance of taxpayers.
Key words: Bahir Dar city administration, determinants of tax compliance, tax compliance
Page 2 of 24
Journal for Studies in Management and Planning
Available at
http://edupediapublications.org/journals/index.php/JSMaP/
ISSN: 2395-0463
Volume 04 Issue 05
April 2018
Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 191
INTRODUCTION
Tax is a mandatory charge imposed by the government without any expectation of quid pro quo.
In other words, tax is a compulsory payment by the people to the government for which there is
no direct return to the taxpayers (Parameswaren, 2005).
Governments impose taxes for a multiple of purposes, but the major is to raise funds in order
to cover public expenditures and on the other hand to properly allocate resources. Tax is
the main source of revenue for the government (Beza, 2014).
According to the federal income tax proclamation no.286/2002 business income taxpayers are
categorized into three categories, namely category “A”, “B”, and “C” based on their volume of
sales and form of business. Category “A” includes any company incorporated under the tax law
of Ethiopia having annual turnover of Birr 500,000 and more. Those who are categorized under
category “A” have to maintain all records and accounts which will enable them to submit a
balance sheet and profit and loss account disclosing the gross profit, general and administrative
expenses, depreciation, and provisions and reserves together with supporting vouchers. Category
‘B’ includes those enterprises having annual turnover of more than Birr 100,000 and less than
Birr 500,000. This category of taxpayers must submit profit and loss statement at the end of the
year. The law requires all entries in the records and accounts to be supported by appropriate
vouchers. Category ‘C’ unless already classified in categories ‘A’ and ‘B’ include those
taxpayers whose annual turnover is estimated by the Tax Authority at Birr 100,000 or less.
Andreoni, Erard and Feinstein (1998) define tax compliance as the willingness of taxpayers
to act in accordance with the tax laws of the country. It means true reporting of income or
asset balance that is used to calculate tax liability, correct computation of the tax liability,
timely filing of returns and timely payment of the amount due.
Roth, Scholz and Witte (1989) defines tax compliance as Compliance with reporting
requirements implying that, timely filing of returns and reporting accurate tax liability in
accordance with the internal revenue code, regulations and court decisions applicable at the time
return filing. This definition assumes that in order to comply with the tax law, one must declare
Page 3 of 24
Journal for Studies in Management and Planning
Available at
http://edupediapublications.org/journals/index.php/JSMaP/
ISSN: 2395-0463
Volume 04 Issue 05
April 2018
Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 192
the correct amount of income, expenses to which one is entitled and subsequently pay the correct
amount of tax by the due date.
Tadesse and Goitom (2014) argue that like other developing countries, Ethiopia faces vaults in
raising revenue to the required level in order to scale up the development endeavors. Ethiopia has
experienced a steadfast expenditure surplus over revenue for a long period of time. Tax
noncompliance is socially harmful, as it can reduce revenue, distort labor market and
weaken state stability by enriching perception of cheating and fraud. Reducing
noncompliance can be effective if the reason for noncompliance by tax payers is known.
Understanding the motivations underlying taxpayers’ attitudes and behaviors toward
voluntary compliance is valuable to the tax authority by providing them information that can
help them which strategy is appropriate and effective to increase compliance (Amina&Saniya,
2015).
1.1 Statement of the Problem
The issue of tax compliance has gained more stress by researchers in the recent couple of
decades because of increasing level of tax non compliance and its consequence on the capacity
of the government to raise revenue. Mckercher and Evans (2009), advocate that taxpayer non
compliance is a continual and growing worldwide issue that is not readily addressed. In most
African countries, the domestic tax bases are undermined by widespread tax avoidance and
evasion (IMF, 2011). According to Samuel and Viswanadham (2013), Ethiopia, one of the
fastest growing economies with a highly authoritative tax authority has failed to finance its
activities by its own means due to non compliance even after a series of tax system reforms.
According to Abreha and Kahase (2014), tax evasion and avoidance are problems faced by every
tax system and the tax system of Amhara National Regional State is not an exception that
taxpayers exploit loopholes of tax provisions to minimize or escape tax liability.
According to Olamide and Segun (n. d), tax compliance can be affected by many factors such as
magnitude of compliance cost, the extent of penalty, perceived fairness of the tax system,
awareness level of taxpayers and perceptions of government spending. A study by Tilahun and
Yidersal (2014) revealed that perception on government spending, perception on equity and
