Assessment of Category “C” Business Tax Payers’ Perception on Tax

Evasion: The Case of Debre Berhan City Administration

Belete Belachew , Abebe Ashenfi, Galgalo Godana, Frihywote Alemu

and Mahlet Girma
Debre Berhan University, Ethiopia
Abstract
Tax evasion is a general term made by individuals, firms and other entities
to evade the payment of tax by breaking the law. The study is focused on
assessment of category “C” business tax payer’s perception on tax evasion a
case of Debre Birhan City Administration. The study is aimed at identifying
whether the tax payers are aware about the tax payment as an obligation
and with tax evasion and what is the opinion and perception towards the
preventing mechanism of tax evasion and knowledge on a tax evasion
transaction. For this study the researchers’ collects primary data through
interview and questionnaire on purposive basis for tax payers of 50
respondents which are interested to provide relevant information. The
collected data were analyzed by using descriptive data analysis method and
make the analysis supported by tables and percentage. The major problem
on perception of tax evasion found in this study is that tax payers lake
awareness towards the tax obligation and knowledge of transaction that
constitute tax evasion.

Introduction

Taxation is a system of raising government’s revenue by imposing tax. It is a

method of collecting funds by a government from tax sources to finance its
operation. Taxation is also a means by which a government, through its law
making body, raises internal income through tax for the use and support of

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the government and to enable it discharge its appropriate functions (Tesfaye,
2011). Some economic development activities of the society such as the
provision of social amenities in the form of education, health and sanitation
facilities, the provision of recreation facilities and infrastructure development
are the major function of governments. These governmental functions
require expenditure so that government support those partly by taking
apportion of the wealth of their citizens through tax (Ibid).

Although countries differ considerably in the amount of taxes they collect

yet the most important source of revenue for modern government remains to
be tax. While the remainder of government revenue comes from charging
fees for services, borrowing and other related sources. (Gebrie, 2006). Taxes
are an important source of public revenue for the production and supply of
public goods and services and the nature of public goods make impossible
for private suppliers to benefit by selling these produce at market prices like
other commodities. Government intervention in the supply of public goods
is, therefore, becomes inevitable and can only be done if the public pays
taxes for the production and supply of such goods. (yohannes and Sisay,
2009).

According to (Yohannes, and Sisay, 2009) tax is a contribution from

individuals out of their property for the maintenance and defense of
government in simpler term tax is financial charge or other levy imposed on
an individual or legal entity by government. In contrast to the payment of tax
to the government different business tax payers start to evade taxes through
under reporting of their income and over deduction of their expense. Tax
evasion is a general term or effort made by individuals, firms and other
entities to evade the payment of tax by breaking the law. Tax evasion usually
entails taxpayers deliberately misleading, representing or concealing the true

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states of affairs to the tax authority to reduce the tax liability including
dishonest tax reporting by tax payers (Ramaswarmi, 2005). Thus, in this
study, effort was made to assess the perception of category “C” business tax
payer’s on tax evasion in Debre Berhan city administration.

Statement of the problem

Tax become a part and parcel of all economic activities of human beings due
to public expenditure is continuously increased with the increase in the
function of modern government. The government finances its expenditure
through the fund acquired from the service it provide to the general public,
tax, loan, and donation. From all source of finance, tax is the major source;
however, in most developing countries, it is a common phenomenon to
notice serious problems in developing adequate tax system that permits a
government to sufficiently finance its expenditures. One of the potential
problems of tax administration is tax evasion. (Ramaswarmi, 2005)
Researchers like (Torgler, 2003) and (Murphy and Hirris, 2007), work on tax
compliance by focusing their attention on the western world and some Asian
countries. On the other hand (Emrata, 2010) investigated about the
underground economy and tax evasion in Ethiopia on his study he found that
the amount of tax evasion in Ethiopia reached 10% of the economy that have
great impact on the implication for tax policy. But as per the researchers
knowledge it needs further investigation on the perception, attitude and
knowledge of business tax payers on the tax evasion moreover since there is
no study conducted by other researchers on such problems in Debre Berhan
city administration the researchers work in this area so as to give appropriate
solutions and recommendation.

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Research Questions
• What is the awareness of business tax payers towards the payment of
tax obligation?
• What is the tax payers’ knowledge on tax evasion transactions?
• Why most business tax payers want to evade taxes?
• How is perception the most effective method to prevent tax evasion?
• What is the perception of tax payers towards tax evasion?
Objectives of the study

General objective
The main objective of the study is to assess category “C” business tax
payer’s perception on tax evasion in Debre Berhan City Administration.
Specific objectives
The specific objectives are:
• To assess the awareness of tax payers towards the payment of tax
obligation
• To assess the tax payers knowledge on tax evasion transaction
• To assess the tax payers perception as to the most effective method to
prevent tax evasion
• To assess why some business tax payers evade tax
• To assess the perception of tax payer towards tax evasion
Scope of study

In light of the availability of data, finance and time consideration, the study
is confined to assess category “C” business tax payer’s perception on tax
evasion in Debre Berhan city administration and the exclusion of A and B
tax payers were due to small number of population. Therefore, the
researchers initiated to assess the perception, attitude and knowledge of

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category C business tax payers. Business income tax is selected because of it
is categorized under direct tax, which is highly exposed to tax evasion.

Significance of the study

The results of the study would be a good source of information for policy
makers on how to minimize tax evasion and what appropriate action to take
for tax evaders. It may also help in creating greater awareness to the business
tax payers and would be used as source of information for those who would
interest in conducting a research on similar topics and issues relate to it.

Limitation of the study

The study has a number of limitations. The main limitation of the study is
some tax payers lacked openness and voluntariness in reacting to some
questions forwarded to them through the questionnaires; lack of sufficient
knowledge besides, the study faces lack of time and budget constraints.
These limitation bear effect on the paper as good as it could be.

Research Methodology
Research design

The study used descriptive research design the major purpose of descriptive
research design is describing the state of affairs as it exists at present. This
study describes and critically finds out the potential perception, attitude of
business tax payers on category C. In this study quantitative approach of
doing research was employed, in order to express the respondent opinion and
perception in terms of percentage.

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Population and sample size
According to ERCA (2014) there were 2734 category “C” business tax
payers in various sectors. From merchandise 1223, service sector 1454 and
the manufacturing sector 57. Therefore, the target population of the study
includes merchandise, service and manufacturing sector. The researchers
used 50 business tax payers as sample.
Sampling design
The sample design is crucial to generate representative statistical data about
population under study. In the case of how well a sample represents a
population depends on sample frame, the sample size and the specific
procedures of selecting potential respondents. In this study purposive
sampling technique was used to get responses from different sector of
category C tax payers in Debre Berhan city administration.

Data sources
The study used primary data sources to know the tax payers perception and
attitude towards tax evasion. This data were collected through questionnaire
and interview that were distributed and conduced to business tax payers and
tax auditors respectively.
Data collection technique
In order to collect data through questionnaire the researchers distributed only
closed ended questions to category “C” taxpayers while interview was
conducted through structured interview and unstructured method to those tax
auditors.
Data Analysis and Interpretation
Questionnaire was distributed to interested category “C” business tax payers
while interview were conducted to tax auditors. The collected data were
integrated and presented in a well verified manner. The researchers analyze

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and interpreted the collected information through tabulation and percentage.
50 respondents have completed and submitted the questionnaire and all are
returned and further analyzed and interpreted below.

Table 1: Demographic Characteristic of Respondents

No Description No Percentage
1 Sex distribution
Male 26 52%
Female 24 48%
Total 50 100%
2 Service life to organization
Less than 3 years 19 38%
3-6 years 13 26%
6-9 years 8 16%
Above 9 years 10 20%
Total 50 100%
3 Educational status
Below certificate 8 16%
Certificate 17 34%
Diploma 19 38%
First degree 4 8%
Above first degree 2 4%
Total 50 100%

As we can see from table 1, the sex compositions of the respondents were
52% and 48% for male and female respectively. From which majority of the
survey respondents are males. With regard to tax payer in relation to service
life to the organization, 38% of the survey respondents suggested that their
service life to the organization are less than 3 years, 26% of the respondents
are experienced with the organization 3-6 years, while 16% of the
respondents are experienced to the organization for 6-9 years and 20% of the
respondents are above 9 years. From this majority of the respondent are
experienced with the organization from less than 3 years. Regarding the
educational background 16% of the survey respondents are below certificate,
34% are certificate holders, 38% are diploma holder, 8% are first degree

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holder and 4% are above first degree. Therefore majority of the selected
respondents are Diploma holders. This information tells us tax payers are not
more experienced with the payment of tax obligation as well as they do not
take taxation course in diploma level and below diploma level.
Table 2: Taxation

Do you take any formal course for taxation Respondent

Number Percentage
Yes 15 30%
No 35 70%
Total 50 100%

As it clearly shown from table 2, 70% of the survey respondent do not took
any formal course for taxation while the remaining 30% of the respondents
took formal course for taxation. Most of the tax payers were unaware
regarding the benefit of tax to the economy of a country. Therefore,
education is necessary in creating awareness regarding the benefits of tax to
economy of the country.
Table 3: Awareness of tax payers in relation to the payment of tax obligation

No Are you awareness of the following thing Percentage

Yes No Yes No
1 To pay taxable income with in a period specified 47 3 94% 6%
under the law
2 To pay final tax payment up on submission of tax 32 18 64% 36%
return form
3 To inform to the revenue authority about the 12 38 24% 76%
commencement and cessation of staff
4 Business tax payers are subjected to monthly tax 18 32 36% 64%
deduction

Table 3 shows 94% of the survey respondents knew that business tax payers
are obligated to pay taxes to the government on the income specified under
the law, but 6% of tax payers were not aware of this obligation, this implies
that majority of tax payers are aware.

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On the ground of payment of tax obligation for final payment up on
submission of tax return form, 64% of the respondents were awarded to pay
final tax payment upon submission of tax return form and the remaining 36%
of the respondents do not have any awareness to pay final tax up on
submission of tax return. This indicates that most tax payers were aware for
pay final payment. The result is consistent with the theory, which is by rule
and regulation any tax payer pay final tax payment.

Also the above table show that, only 24% of the survey respondents were
aware that business tax payers are needed to inform to the revenue authority
about the commencement and cessation of staff while the remaining 75% of
the respondents do not have awareness as needed to inform to the revenue
authority about commencement and cessation of Staffs’. What the result
indicates that most tax payers are not aware. The result is inconsistent with
the theory, which is every tax payers can inform to revenue authority about
commencement and cessation of staff when the business man is withdrawn.
Lastly 36% of the survey respondents are aware on the ground that business
tax payers are subjected to monthly tax deduction while the remaining 64%
were unaware that business tax payers are subjected to monthly tax
deduction, which indicates most tax payers unaware. The result is not
consistent with the theory explained in the literature, which are category “C”
tax payers subject to monthly tax deduction.
Table 4: Does the following transaction constitutes Tax evasion (to measure
knowledge of tax payers)

No Percentage
Yes No Yes No
1 Use personnel consumption expense as business expense 20 30 40% 60%
2 Under reporting of business income 15 30 40% 60%
3 Submitted tax return on tax to revenue authority without tax 47 3 94% 6%
payment

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As in table 4 40% of the respondents have knowledge on tax evasion using
personnel consumption expense as business expense. But 60% of survey
respondents are unaware on the ground that this activity is a tax evasion.
This tells us the majority of tax payers are unaware about this tax evasion
type. The result is not consistent with the theory explained in the literature,
which is deduction of personnel consumption expense is a technique for tax
evasion. With respective to under reporting of business income, 40% of
survey respondents have knowledge for which the under reporting of
business income is a tax evasion. But 60% of the survey respondents have no
knowledge on this activity, which tell as majority were unaware on such
activity. The result is inconsistent with the theory, which is under reporting
of income is a tax evasion.

Lastly 94% of the respondents have knowledge on that submission of tax

return to revenue authority without tax payment; this indicates the tax payers
have knowledge. But 6% of the respondents have no knowledge that this
activity is a tax evasion activity. As per interview of tax auditor most of the
time tax evasion occurs on business income tax payers that they evade taxes
through under reporting of business income and over overestimation of
expense and the tax payers consider that all expenses incurred for his/her
family for consumptions or other parent maintenance expense as an expense
incurred for major operation of the business.

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Table 5: Most effective method to combat tax evasion (to measure
perception of tax payers)

No

Not most

Not most
Effective
effective

effective

effective

effective

effective

effective

effective
Most

Most
Not

Not
1 Create an 6 30 9 5 12 60 18 10
environment to
facilitate tax
payment for tax
payers
2 Imprisonment 5 5 25 15 10 10 50 30
3 Monetary penalty 25 1 19 5 50 2 28 10
4 Public exposure 7 7 13 23 14 14 26 46
for those who
under report their
income or
overstate
deduction
5 Increase qualified 20 21 14 13 40 26 28 26
tax auditor

Table 5 clearly shows that 60% of the survey respondents revealed that
creating suitable environment to facilitate tax payment for tax payers is the
most effective method to prevent tax evasion and 12% of say it is an
effective method to prevent tax evasion, but 18% and 10% of the survey
respondents say not effective and not most effective method to prevent tax
evasion respectively, this indicates that majority of tax payers better option
to compliance tax evasion. Next to the above preventing mechanism to tax
evasion, if a business tax payers are not escaped from tax evasion on the
condition that the environment created for tax payer facilitate the tax
payment the survey respondents reveals that increasing the auditors to check
the tax collected from tax payer and collected by the tax collector and to
make opinion on the collected tax whether the tax payer as well as the tax
collector are fair in reporting and collection of tax to the government is the

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effective method since 40% of the survey respondents reveals that this
method is effective method and 26% of survey respondents said that
increasing qualified auditor is most effective method. But 28% and 26% of
the survey respondents it is not effective and not most effective method to
increase qualified auditor. This tells as a majority of tax payers perceived
that increasing tax qualified auditor means of preventing tax evasion.

On the other hand, 50% of the respondents said that monetary penalty was
effective method and 2% of the survey respondent’s most effective method.
But 10% and 20% of the survey respondents revealed that not the most
effective and effective method to prevent tax evasion, which tell us most tax
payers select an option of preventive tax evasion. The result is consistent
with the law and regulation of the country. Most of tax payers (50% of the
respondents said that imprisonment is not effective to prevent tax evasion
and 30% of the respondents said that imprisonment not the most effective
method. But 10%respondents said that imprisonment is the effective and the
most effective method to prevent tax evasion. This indicates that not the best
method rather discouraging of the business.

In addition14% of the respondents revealed that those methods were

effective by providing public exposure and 14% respondent said that those
methods were the most effective method. But 26% not effective and 46% not
most effective method provide public exposure to prevent tax evasion, this
implies that majority were not accept rather conflicting with each other. But
as per tax auditor responses that to control tax evasion the licensed
professional accountants plays an important role to record and controls those
amounts that the business person actually gets from his/ her major operation
of the business.

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Table 6: Reason for tax evasion (To measure attitude)

No Number Percentage
1 Government doesn’t use the tax collection properly 27 22%
2 Tax payment is not paid by business 4 8%
3 I evade as my friend does it he/she is not caught 11 16%
4 Punishment for tax evasion in D/B in terms of monetary term 8 54%
is insufficient
Total 7 100%

As indicated in table 6 22% of the respondents attitude suggested that

people evade taxes since the government does not use the collected tax and
16% of the survey respondents said that people evade tax since their friend
does it and are not caught, as a result, they evade taxes. 54% of survey
respondent revealed that people engaged in tax evasion because punishment
is not sufficient for tax evader, but 8% of the respondent respond that tax
payment is not paid by business activity, from this one can understand that
tax payer evade tax due to lack of knowledge about tax uses for government.
This indicate that most tax payer believes the government does not use
properly of the revenue collected from tax.

But as per tax auditor response the government doesn’t apply the
punishment for tax payers, but this rule is applied for the purpose to increase
frustration not to evade taxes as a result punishment do not occur regularly
for tax evaders when they evade taxes and on the ground of tax auditor
perspective tax payers evade taxes since thus people have no willingness and
a motivator to pay tax to the government in addition people want to evade
taxes when no much profit is obtained as a result evasion which occurs
mostly in business tax payer through under reporting their income or
overstating their expense to the government.

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Table 7: Perception of tax payer towards tax evasion

No Distribution SA A U DA SD Total
1 Punishment for in D/B is the same for 15 4 20 7 4 50
different business with the same level of 20% 8% 40% 14% 8% 100%
tax evasion
2 Tax evasion has an adverse effect on the 32 2 7 4 5 50
government revenue 64% 4% 14% 8% 10% 100%
3 Tax evasion provides a long term benefit 20 2 15 6 7 50
to continue a business 40% 4% 30% 12% 14% 100%
4 Of the tax rate is reduced more peoples 26 9 4 10 1 50
are encouraged to pay their tax 52% 18% 14% 20% 2% 100%

As shown from table 7, 20% of the respondents strongly agrees 8% of them

agrees, 40% undecided that punishment for tax payer in D/B is the same for
different business with the same level of tax evasion while the remaining
14% and 8% of the survey respondents disagree and strongly disagree with
the issue of punishment for tax payer in D/B is the same for different
business with the same level of tax evasion respectively. In addition tax
payers asked were tax evasion has an adverse effect on the government
revenue 64% survey respondent strongly agree, this tell us that their
perception towards tax evasion are high which have a great impact on the
economy of the country, this is consistent with the theory. 4% agree, 14%
undecided 8% disagree on tax evasion has an adverse effect on government
rest of 10% survey respondents strongly disagree that the tax evasion has an
adverse effect on the government revenue, This implies that majority
perceived an effect for the government. The result is in consistent with the
theory, which is tax are the main source for it. 40% the survey respondent
revealed that tax evasion provides a long term benefit to continue a business
and 4% agree 30% undecided, 12% disagree and 14% survey respondents
strongly disagree that tax evasion provides a long term benefit to continue a
business. This tell us the tax payer perceive that tax evasion provide a good
benefit for our business, this is not consistent with the theory

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Lastly 52% of the survey respondents strongly agree, 18% agree, 14%
undecided, 20% disagree and 2% strongly disagree that the tax payer
perceive that if the tax rate is reduced more peoples are encouraged to pay
taxes, this indicate people who evade taxes was reduced. The result is
consistent with the theory explained under the literature.

Conclusion and Recommendation

Conclusion
The study result shows that respondents know paying tax is an obligation but
tax payers are unaware to inform to revenue authority about commencement
and cessations of staff on such activity tax evasion occurs, and also unaware
of such activity is tax evasion. Tax payers do not tell the expense of the
business or the income that generates from when the employee of tax payer
is withdrawn which leads for the government not to collect proper tax from
the tax payers. The tax payer have no knowledge on the reporting of
personnel consumption expense as business expense and under reporting of
business income are tax evasion, therefore tax evasion occur because the tax
payers do not have knowledge about those activities are tax evasion.
According to tax payers, creating a suitable environment to facilitate
payment for tax are the most effective method to prevent tax evasion in
addition increase tax auditors and monetary penalty is also an effective
method to prevent tax evasion. While the tax auditors revealed that licensed
professional accountant plays an important role to prevent the tax evaders
since the professional accountant have close contact with tax payers.
Insufficient monetary penalty is the main reason that motivates people to
evade taxes; tax payer also perceives that people also evade taxes since the
government does not appropriately use the tax to facilitate the basic

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infrastructures like construction of roads. Lastly the finding show that the tax
payers perceived tax evasion provides a long term benefit.

Recommendation

Based on the end points of the findings, the following recommendations are
forwarded.
• The tax authority should teach at least semiannually for tax payers
about the payment of tax obligation and the kind of tax evasion in
context of their day to day business operation.
• The revenue authority should create suitable environment for tax
payers through training of tax officers to be more approachable and
friendly in helping tax payers, providing clear information about the
tax payments, organizing free public tax meeting and forum to create
awareness for tax payers to prevent tax evasion.
• The revenue authority should also employee skilled and qualified
auditors as well as licensed professional accountant to prevent tax
evasion.
• The government should also apply the punishment for tax evaders
based on the rules and regulations as per articles 960 of the income
tax proclamation number 286/2002 mainly in monetary value and
• The revenue authority should improve the attitude of the business tax
payers about the importance of taxation and its effect for economy
development
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Harris, (2007). Work on tax compliance focused in western world and some
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Negarit Gazeta of the Federal Democratic Republic of Ethiopia 8th year,

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Ramaswarmi,P. (2005). Public finance and taxation, Addis Ababa.

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