This study is designed to investigate the causes for tax evasion in Amhara regional state evidencing Gondar, Bahirdar and Dessie city tax administrations. For the purpose of the study explanatory research designs along with descriptive research design was adopted and a quantitative research approaches was adopted. The study predominantly relied on primary source of data gathered through self-administered survey questionnaire distributed to sample taxpayers. Samples of 387 business income taxpayers were selected using proportionate stratified random sampling technique. Inferential statistical tools are used to analyze data collected through survey questionnaire with the help of Statistical Package for Social Scientists (SPSS) version 22.0. The finding of the study revealed that effectiveness of tax administration and trust in government have Negative and statistically significant influence on the level of tax evasion in the region. Taxpayer Attitude towards tax evasion and corruption in tax administration have Positive and statistically significant influence on the level of tax evasion in the region.
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An Investigation Into the Causes of Tax Evasion in Amhara Region: Evidence from Selected Metropolitan Cities in the Region
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Tax evasion
tax leakages
trust in government
tax administration
corruption
A tax is a compulsory levy and those who are taxed have to pay the sums irrespective of any corresponding return of services or goods by the government. The general objective of taxations is to raise revenue to the government to render various economic and social activities. Taxation is used for many other purposes than raising revenue, as an instrument of economic and social policy, its purpose is often to influence behavior, higher taxes on alcoholic drinks and tobacco would reduce the consumption of these products and lead to improvements in the health of the people (Viscusi, 1994).
According to Chaudhry and Munir, 2010 whether it is in developed or developing nation, taxation is the major and most important source of government revenues to finance its expenditures and effectively discharge its responsibilities. A country’s revenue generation primarily depends upon its sufficient capacity to tax more in both economic and administrative term (Parameswaran, 2005).
In most developing countries, like Ethiopia, revenue generated by the government is quite less than the expenditures spent. This can be attributed to the fact that tax provisions are not properly enforced either on account of the inability of the tax administration or due to the non-compliance behavior of taxpayers. Tax non-compliance is failure of a taxpayer to meet tax reporting requirements whether the act is done intentionally or unintentionally (James & Alley, 2004) and broadly classified as failing to file a tax return, underreporting of taxable income, overstating tax claims such as deductions and exemptions and failing to make timely payment of tax liability (Kirchler, 2007).
Common term used in non-compliance context in this study is tax evasion which refers to a situation that arises when individuals or firms try to reduce their legally due tax liability in illegal way through breaking tax laws.Tax evasion is a phenomenon that is probably as old as taxation itself and is problem that faces every tax system in the world. Wherever and whenever authorities decide to levy taxes, individuals and firms try to avoid paying them. 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. This shows that tax evasion is a problem that suppresses the tax system of the region and needs a defined solution. On this ground, this study is initiated at examining why taxpayers try to evade taxes in Amhara regional state with reference to some selected cities in theregion.
It is customary that many, especially low and middle income countries require significantprogress on domestic resource mobilization if they wish to, for example, meet theSustainable Development Goals (SDGs) or support their economies through the economic falloutfrom the COVID-19 pandemic. But most of the developing countries are confronted with social, political and administrative difficulties in establishing a sound public finance system. As a consequence, developing and emerging countries are particularly vulnerable to tax evasion and avoidance activities of individual and corporate tax payers. This can be considered one of the primary reasons for large differences in the ability to mobilize own resources between developed and developing countries. The average tax-to-GDP ratio in low income countries standsat just 13.1 percent, compared with 23.3 percent in high income countries and the rateof increase is slow in many jurisdictions (UNU-WIDER 2021).
The issue of tax evasion has received a considerable attention from different researchers and policy making institutions such as the International Monetary Fund, United Nation and various organizations involved in the collection of revenue over the past decades and calls for countries to ‘strengthen domestic resource mobilization, includingthrough international support to developing countries, to improve domestic capacity for tax andother revenue collections. The African initiative progress report (2021) on tax transparency in Africa showed that Africa loses around USD 50 to 80 billionevery year because of an illegal act of tax evasion and pointed out that the increase in tax evasion phenomenon adversely affects continents economic development in general and each African countries in particular.
Ethiopia, as part of the continent also confronted with social, political and administrative difficulties in establishing sound public finance system which is characterized by low revenue yield of taxation or inability to mobilize sufficient revenues to finance its expenditures. Survey of the Ethiopian tax system (2020) showed that in between 2009/10 and 2014/15 Ethiopia’s tax-to-GDP ratio fell from 12.4% in 2014/15 to approximately 10% in 2018/19, This decline in the tax-to-GDP ratio means that Ethiopia raises relatively less revenue than regional peer economies such as Kenya, Rwanda and Ghana. As a result, its tax-to-GDP ratio (10%) is significantly below the average for both sub-Saharan Africa (14.4%) and other low-income countries (13%) in 2018. Related to this, Ethiopia has been identified to have a fairly weak tax administration system with notable capacity constraints. This lowers collection efficiency and increases the compliance cost for taxpayers with the latter potentially leading to a higher degree of tax evasion and avoidance ( Waiswa, Sebsbie and Asnakech, 2019).
World Bank analysis also shows that Ethiopia has lost at least USD 1.1 Billion that should have been collected from tax in 2012, USD 2.6 Billion in 2013 and USD 3.2 Billion in 2014, which could be attributable to factors including tax evasion practices, illicit financial flows, tax exemptions and informal sector expansion. When compared to the peer countries i.e. Mozambique, Uganda, Burkina Faso, Tanzania & Rwanda, Ethiopia’s tax gap has been widening. The tax gap in Ethiopia increased more than five times between 2006-2014. The tax gap between Ethiopia and peers (taking Mozambique as a benchmark) has increased from 2 percentage points to 12 percentage points between years of 2006 and 2014 and the gap with Tanzania has also rose to 5 percentage points. In general, the analysis taken showed that tax gaps between Ethiopia and peer countries have been significantly increasing from year to year.
The present study aims at developing a deeper understanding of the causes for tax evasion in Amhara regional state, Ethiopia. In Amhara region also tax evasion is a problem that stresses the tax system of the region, tax administration report of the region in 2010/11 to 2011/12 showed that the tax administration has lost a taxable income of more than Br. 39 million and Br. 11.7 Million in tax to be collected from only 13 large (individual and corporate) taxpayers in theregion.
Also, according to a study conducted on the informal sectors in Ethiopia by Asaminew (2010) who suggests that Ethiopia is losing around 10 percent of its GDP in tax evasion, the gap will be much higher. This implies that the ratio of actually evaded tax to official GDP is as high as 10 percent of the economy. Additionally, Ethiopia’s Tax revenue as a % of GDP, average for 2011-2017 remained low at 12.15 percent on average which is below the sub Saharan average of about 18 percent, over 20 percent for emerging economies and above 30 percent for developed economies. This shows that, tax evasion has become a serious challenge slackening the tax administration and revenue performance in Ethiopia, as it does in some other developing countries and resulted in an eroded tax base which in turn widens the national budget deficit. Therefore it is important to understand the possible factors that cause tax evasion so as to curb the problem and improve tax revenue performance of the country.
Crane and Nourzad (1986) try to look at the effect of high inflation on aggregate tax evasion and found that tax evasion is positively related with inflation rate and hence that goes on to say why Zimbabwe experienced high tax evasion in the past decade; that’s because of high inflation rate. Morales (1998) further takes a shot at a model, argues that there is a connection between tax evasion and the pay level at which tax officers ought to be compensated. Uadiale et al. (2010) on the other hand found that trust in government and legal enforcement significantly influences personal income tax evasion. However, religious variables have no significant influence on tax evasion. Alligham&Sandmo (2012) examined an empirical study and found that there is a positive relation between tax rates and level of tax evasion. Their finding is consistent with the discoveries of Soyode who distinguished the causes of tax evasion.
Nangih&Nkemakola (2018) further empirically tested and concluded that income level and tax morale of taxpayers significantly affect tax evasion and gender of the tax payer is also another factor that affect tax evasion in an economy.
However, most of the previous studies conducted were in developing countries in general, literature shows that studies that have been done particularly Ethiopia and specifically in Amhara regional state are scanty or limited and those studies have also methodological gaps since most of the rely on secondary data’s they lack data gathered particularly from primarily sources the current study by taking this gap considers and investigates factors associated with the tax administration and the tax payers though data’s gathered from the taxpayers at hand. To the best of researcher’s knowledge, factors such as compliance cost of taxation, tax administration effectiveness, attitudes of taxpayer towards tax evasion and trust in government and on tax officials were not simultaneously considered and adequately addressed by the earlierstudies.
The main objective of the study is to investigate the possible reasons for tax evasion in metropolitan cities of Amhara national regional state. Specifically to:
- Examine the influence of attitude towards tax evasion and tax compliance cost on taxevasion
- Examine the influence of effectiveness of tax administration on taxevasion
- Examine the influence of corruption in the tax administration and taxpayer trust in government on taxevasion
Attitude of taxpayers towards tax evasion
Attitudes represent the positive and negative evaluations that an individual holds of objects. It is assumed that attitudes encourage individuals to act accordingly. Thus, a taxpayer with positive attitude towards tax evasion is expected to be less compliant than a taxpayer with negative attitudes. Attitudes towards tax evasion are often found to be quite positive (Alabede etal, 2011)). Taxpayers’ attitudes and beliefs about the tax system can affect their propensity to evade tax which led them to involve in aggressive tax planning schemes.
Anna et al, (2008) stated that tax payers’ attitude towards fairness of tax system is important because fairness of the tax system will encourage compliance and lessen tax evasion. Attitudes about the tax system and perceptions of fairness are naturally influenced by what the public actually knows about it. A tax system that is complex, that is poorly understood by both tax administrators and taxpayers, that creates numerous opportunities for corrupt behavior, and that involves coercion in the collection of taxes from reluctant citizens provides a poor basis upon which to build trust between citizens and the government. Hence, complexity of tax system and weak data compilation system are believed to affect the amount of tax to be collected (Anna, et al 2008). Perceived fairness of the tax system will be measured by asking (designated likert scale questionnaires) taxpayers whether they thought the tax they paid was fair given the goods and services they received from the government and when compared to other taxpayers in the same tax bracket. Therefore we can say that taxpayers with positive perception on fairness of the tax system will have fewer tendencies toward tax evasion thereof otherwise (Abera, 2019). Kirchler et.al, (2008) who found that taxpayers attitude towards tax evasion is quite positive and significantly matters the level of tax evasion in an economy. And study conducted by Mulye T. (2015), also found that there is a widespread ethical support for tax evasion in general and concluded that tax evasion is sometimes ethical revealing that taxpayers’ perception towards tax evasion is high when everyone is doing it and the tax system lacks fairness.
Tax compliance cost
Legal factors such as xax compliance cost refers to all the costs borne by businesses and individual taxpayer’s for complying with tax regulation, excluding the costs of the taxes themselves. Therefore high compliance cost may convince taxpayers to evade rather than paying taxes. Complexity of tax system and tax code would results in high tax compliance cost as more time and resources are spent dealing with tax regulations due to taxpayer’s lack of relevant knowledge of tax system (Abera, 2019). Also if taxpayer’s encounter inconveniences, partly from misconduct of the tax officers such as impersonal, insensitive and heartless bureaucratic, this may results in lengthy procedures in paying taxes, creating anxiety and stress, which in turn increases taxpayer’s tax compliance costs (Saxunova and Szarkova, 2018). High compliance cost convinces taxpayers to evade rather than paying taxes. High compliance cost to be incurred for the tax administration purpose would discourage taxpayers to fully comply with tax laws, which convinces taxpayers to opt to evade payment of tax (Abdul etal 2008).
Mary Wairimu, (2015), Ketema T., (2013), Pope and Abdul (2008) found that tax compliance cost is significantly and positively correlated with tax evasion and incurrence of high compliance cost in the form of fees charged by tax consultants and other costs that arise from the complexity of the tax laws convinces taxpayers to evade rather than paying proper taxes to the government.
Effectiveness of tax administration
Tax administration refers to the identification of tax liability based on the existing tax law, the assessment of tax liability, and the collection, prosecution and penalties imposed on reluctant taxpayers. The ultimate role of the tax administration is to render quality taxpayer services and to encourage voluntary compliance of tax laws, and also to detect and penalize non-compliance taxpayers. The extent and success of the Tax Administration in its role should be reflected through a higher level of tax compliance and a lower level of tax evasion. Existence of Corrupt practices by tax officials, shortage of qualified tax personnel’s, lack of competent tax auditors discovering tax evasion in the tax authority weakens the efficiency of tax administration which becomes reason for extensive tax evasion practice.
The first systematic theoretical analysis of tax evasion was done by Allingham and Sandmo (1972), where individuals pays taxes because they are afraid of getting caught and penalized if they do not report all income. The probability of getting caught is higher with a more efficient tax administration. Furthermore, according to Escobari (2012), a more efficient tax administration yields higher tax compliance levels and lower level of tax evasion. Lower tax evasion can be achieved by increasing the number of tax auditors and improving their skills in discovering tax evasion. Both of these theories have shown that the capacity of tax administration is a vital element for fighting against tax evasion. Wilks and Pacheco (2014) also indicated that intentions of taxpayers to comply with tax laws is high and intentions to evade taxes is low when the tax authorities and Administration are perceived as fair and trustworthy as well as deterrence power of the tax authority is high.
Trust in government
Trust in government deals with the level of trust that individual taxpayers and firms have on the government, trust on the utilization of public money collected as tax. Taxpayer’s decision for non- compliance is influenced by the extent that citizens trust their government that means when government organizations that interact directly with citizens in the delivery of public goods and services treat individuals with fairness and impartiality taxpayers are less inclined towards evading taxes. If the authorities cascade different training for taxpayers about tax evasion, taxpayers become reluctant to engage in tax evasion (Rantelangi & Majid, 2018).
Evidences show that people who feel that they have been treated fairly and impartially by an organization will be more likely to trust that organization and be inclined to accept its decisions and follow its directions (Murphy, 2004). As a result, citizens may be willing to finance the state through taxes, and decide not to evade these liabilities.
On the other hand, if a government and tax officials are perceived as corrupt, taxpayers will not trust them and become more inclined towards evading tax (Cummings, Martinez-Vazquez, McKee, &Torgler, 2004). If taxpayers do not have trust in the tax administration to collect taxes fairly, this will increase non-compliance. In addition, if the public lacks trust in the broader government to spend tax revenues collected wisely (lack of rightfulness in the government) and transparency and accountability on tax budget, this will also leads to tax non-compliance. Perception of fairness and trust are important tools for a tax administration in attempting to reduce evasions. The key in establishing trust is to outline the collection of taxes to the population in transparent and responsible manner and emphasize on the perceived fairness of the approaches taken.
Corruption in tax administration
Corruption can be defined as the abuse of public power by government or tax officials for private benefit which includes receiving bribes in exchange for making a benefit available to a member of the public (e.g., a taxpayer) (Patrick &Davina, 2007). Corruption in this study refers to the possibility that bribes taken by tax officials or tax collectors in a way that creates or increases the possibilities of tax evasion. Corruption can be measured by the possibility to which bribes are generally expected by tax officials and/or tax auditors in relation to tax assessment (standard or estimated), trade licenses, and exchange controls (Tanzi, 1998). Opportunities for corruption in revenue administration are affected by the demand from companies and individuals for corrupt actions and the supply by tax officials of corrupt acts. When it is complex and cumbersome to pay taxes, taxpayer’s temptation for corruption as a short cut could arise, to save both time and reduce uncertainty about how much tax to pay. A complex tax system can facilitate corruption in which tax auditors may obtain bribes or inducements from taxpayers by taking advantage of complex rules or exercising the excessive discretion or judgment theyhave because of unclear laws, regulations, and procedures. In the area of taxation, regulations are often so complex that tax payers have great incentives to indulge in corruption. When it is time-consuming and costly to appeal, the taxpayer might resort to corrupt behavior simply to get things done. The higher the probability of being inspected by a corrupt tax auditor reduces declared income and increases deductions and exemptions while increasing tax evasions. If penalties or sanctions imposed by the tax administration on corrupt officials or tax auditors are not sufficiently severe (immediate dismissal and/or criminal charges of corrupt officials) or rarely imposed, this will increase the likelihood of corruption and opens door for extensive corruption. The complexity in the tax laws and procedures increases the magnitude of corruption in the tax system. Tax evasion is more likely to occur in a highly corrupt environment. Lack of requisite information makes taxpayers unaware of their rights and more exposed to discretionary treatment and exploitation.
The researcher identified the variables and presented the relationship between independent and dependent variables as follows:
For the purpose of the study explanatory research designs along with descriptive research design was adopted and a quantitative research approaches was adopted. The study predominantly relied on primary source of data gathered through self-administered survey questionnaire distributed to sample taxpayers. Samples of 387 business income taxpayers were selected using proportionate stratified random sampling technique. Both descriptive and inferential statistics tools are used to analyze data collected through survey questionnaire with the help of Statistical Package for Social Scientists (SPSS) version 22.0 and. The sample size for this study is determined by using Yamane’s formula (1967)as cited in Esay S.,(2014 ) based on 95% confidence level and at 5% precision level as follows:
Where: n= sample size; N= number of population size; and e = allowable error (0.05).
Table 1: Sample size selection procedures using proportionate stratified sampling technique
|
Cluster |
Category (Strata) |
Population |
Sample |
|
|
Frequency |
Proportion |
Frequency |
||
|
Gondar |
"A" |
1,947 |
15.56% |
60 |
|
"B" |
2,078 |
16.61% |
64 |
|
|
Bahirdar |
"A" |
2,221 |
17.75% |
69 |
|
"B" |
2,338 |
18.69% |
72 |
|
|
Dessie |
"A" |
1,826 |
14.59% |
57 |
|
"B" |
2,102 |
16.80% |
65 |
|
|
Total |
|
12,512 |
100% |
387 |
Source: Amhara regional state tax administration report and researchers own computation, 2021
In order to capture factors that correlate with tax evasion and to test the research hypothesis formulated for the study, the researcher used multiple regression models. Multiple regressions is used because the aim of the study is prediction of a dependent variable from several likert scale independent variables.
Y = α+ β2ATTE + β3TCC + β4ETA + β5TIG+ Β6CRP+ ε
At Where: Y = Causes/Reasons for Tax evasion, ATTE = Attitude of taxpayers toward Tax Evasion, TCC = Tax Compliance Cost, ETA = Effectiveness of Tax Administration, TIG = Trust in Government and CRTA = Corruption in tax administration
According to Coakes and Steed (2007), a multiple regression is an extension of bivariate correlation. They state that the result of regression is an equation that represents the best prediction of a dependent variable from several independent variables. Regression analysis is used when independent variables are correlated with one another and with the dependent variable.
Inferential analysis
Table 2: Regression model summary
Source: SPSS Data set, 2021
Table 2 above it is shown that the value of R= 0.907 and the coefficient of determination (R-square) of 0.823. This implies the notion that tax evasion (dependent variable) is 82.3% explained by the independent variables identified in the study and the remaining (100.0% - 82.3% = 17.7%) will be explained by other explanatory variables which are not included in this study.
Table 3: Regression Coefficient output
Source: SPSS Data set, 2021
Table 3 above shows that Effectiveness of tax administration and taxpayer Trust in government found that negatively and significantly influences level of tax non-compliance practices in the region having Sig. value of Sig. value of 0.000 < 0.05 (ETA) and Sig. value of 0.000 < 0.05 (TIG) respectively.
Tax compliance cost on the other hand as shown above positively but insignificantly influences the level of tax evasion practices in the region (Sig. value 0.611 > 0.05). This implies when compliance cost of taxation increases taxpayers inclination to evade tax also increases but at an insignificant rate.
Finally Attitude of taxpayers towards tax evasion and corruption in the tax administration positively and significantly influences taxpayer’s tax non-compliance practices having Sig. value of 0.000 < 0.05 (ATTE) and Sig.valueof 0.000<0.05(CRTA)respectively.Thisimpliesthatwhentaxpayershavepositiveattitudetoward evasion and perceive that tax administration is highly corrupt their inclination towards tax non-compliance increases significantly.
The regression equation has been established by taking the determination coefficient of all variables in the study as follows:
Y = 3.325 + .345ATTE + .028TCC + -.191ETA + -.591TIG+ .336CRTA + e
The equation implies that taking all other independent variables zero, A unit change in taxpayer’s attitude towards tax evasion results in a 34.5% change in tax evasion in the same direction, A unit change in tax compliance cost results in a 2.8% change in tax evasion in the same direction, A unit change in tax administration effectiveness results in a 19.1% change in tax evasion in the opposite direction, A unit change in the level of trust in government results in a 59.1% change in tax evasion in opposite direction and a unit change in level of corruption results in a 33.6% change in tax evasion in the same direction.
Conclusion
The finding of the study revealed that taxpayer’s perceive that majority of taxpayers are tax evaders and are positively influenced by their peers, the tax system is unfair and are unfairly charged by the tax system when compared with their colleagues, thus reducing their willingness to support the government through paying fair share of taxes and engage in tax evasion activities.
Taxpayers also felt that they are incurring high cost to comply tax regulations due to complexity of tax laws which results them to incur additional fees (i.e. for external tax assistants or consultants) to accompany annual returns with audited accounts but are entitled them as allowable deductions. Tax compliance cost of taxation has positively correlated with tax evasion practice in the region but have an insignificant influence.
The finding of the study showed that the tax administration is ineffective in encouraging voluntary compliance and in detecting and properly penalizing tax evaders in the tax office. The office is also weak in adopting and using modern technologies to speed up service delivery.
Finally the study also found that there is a general feeling that taxes that taxpayers pay does not translated in to goods and services rendered to the public by the government and high level of corruption in tax administration erodes their trust in the tax administration and the general government and taxpayers are uncertain that their paid taxes are used to finance public goods and services or not this in turn increases their inclination to engage in tax evasion practice.
Recommendation
The following recommendations are forwarded to ERCA of the region and other responsible bodies based on the conclusion drawn above in the study:
- In order to improve the taxpayer’s willingness to pay tax and their trust in the government, the tax administration should ensure and visualize that the government is acting in transparent, accountable and efficient manner with the ultimate objective of providing quality public services to the citizens.
- Moreover, the tax office should provide continuous awareness creation programs to improve taxpayer’s awareness and attitude towards taxation and build a “service and client” attitude on the mind of taxpayers to create perception that tax officials conduct their duty for the benefits of the citizens.
- In promoting voluntary tax compliance, the tax administration should concentrate on measures that reduce taxpayers’ costs of fulfilling tax liabilities such as simplifying and improving understandability of tax regulations, improve administrative conveniences and provide fair and timely response to taxpayer complains.
- To improve its effectiveness, the tax administration should equip with new and modern technologies and should increase the number of tax audit staffs in each tax office to investigate considerable amount of revenue earned by individuals or businesses to determine the right amount of tax to be paid by.
- The office should also continuously train auditors on specific subjects to improve their skills in detecting possibilities of tax evasion. The government as well as the tax administration should control and fight against corruption in tax administration though imposing sufficient sanctions or penalties on corrupted tax official or tax auditors (immediate dismissal and/or criminal charges of corrupt officials) and take effective steps to counteract corruption and tax evasions.
Acknowledgements
Not Applicable
Funding
This study is not financed by anyone else. So, there is no conflict of interest to disclose, and there has been no significant financial support for this work that could have influenced its outcome.
Author Affiliations
Department of Accounting & Finance, College of Business and Economics, Dire-Dawa University, Ethiopia.
Contribution
Principal Author: Tsegaye Wondwosen Belayneh
Lecturer at Department of Accounting & Finance, College of Business and Economics, Dire-Dawa University, Ethiopia.
Email Address: [email protected]
Co-Author: Mesfin Yemer Yasin
Assistant Professor of Accounting & Finance, College of Business and Economics, Dire-Dawa University, Ethiopia
Email Address: [email protected]
Corresponding author
Correspondence to Tsegaye Wondwosen Belayneh
Conflicts of interest
The authors declares no competing interests
Availability of data and material
The datasets generated during and/or analyzed for the current study are included in the article, and the raw datasets are available from the corresponding author on reasonable request.
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