A Study on Determinants of Voluntary Tax Compliance in Bahir Dar, Ethiopia

Abate Gashaw Ayele

doi:10.7176/rjfa/10-23-04

Abstract

In Ethiopia, as in some other developing countries, tax noncompliance is a serious challenge facing income tax administration and hindering tax revenue performance. Hence, this study focused on the relationship between the perceptions of equity/fairness, strength of tax authority, lack of ability to pay, perceptions of government spending, enforcement of tax law, tax knowledge, complexity of tax system, and compliance costs are investigated to examine the effect of these independent variables on dependent variable (income tax compliance) in Bahir Dar City Administration of Amhara National Regional State taxpayers. Quantitative research design is used, primary data are collected using structured questionnaire from a sample of 125 taxpayers of the city dwellers, selected using purposive and random sampling. For data analysis descriptive statistics, correlation, and regression analysis techniques are employed. The result of the study indicated that perceptions of equity/fairness, lack of ability to pay, Perceptions of government spending, tax knowledge, complexity of tax system, and compliance costs have a direct and significant effect on income tax compliance while organizational strength of tax authorities and appropriate enforcement of tax law have a direct but insignificant effect on income tax compliance. Out of these variables lack of ability to pay, compliance costs and complexity of the tax system are related negatively with the income tax compliance. Considering the findings of the study, maintaining tax fairness and equity, building capacity of the tax authority, conducting extensive awareness creation programs, and providing social services to the general public is suggested. Keywords: Tax compliance, perceptions of fairness, ability to pay, government spending, tax knowledge, complexity of tax system, and compliance costs. DOI : 10.7176/RJFA/10-23-04 Publication date: December 31 st 2019

Highlights

With regard to the extent of tax knowledge and its effect on tax compliance behavior, which the www.iiste.org respondents feel that they have limited knowledge, the results indicated that, 66.32 % of the respondents have no tax knowledge in order to comply with income tax while 14.62 % of them said that they are familiar on income tax laws and regulations and the rest 19.06 % is neutral
The correlation result shown in table 4.5 is that except for tax rate are all independent variables are more significant, those are perceptions of equity/fairness (r = .229*, p = < 0.05), organizational strength of tax authority (r = .222*, p < 0.05), appropriate enforcement of tax law (r = .214*, p < 0.05), and tax knowledge (r = .313**, p < 0.01) positively related with income tax compliance while lack of ability to pay (r = -.217*, p < 0.05), and complexity of the tax system (r = -.225**, p < 0.01) are significant but negatively related with income tax compliance
The positive relationship means as the independent variables increases, taxpayers are more compliant to income tax

Summary

Introduction

Background of the study In many under developed countries like Ethiopia, the low revenue yield of taxation can only be attributed to the fact that the tax provisions are not properly enforced, either on account of the inability of the administration to cope with them, or on account of straight forward corruption. Factors on the other side of the system get little attention, i.e. minor attention is given to the cultural background of tax payers, their awareness level, compliance behavior and its determinants when designing a given tax system. If the feeling becomes widespread that the tax system is a collection of loopholes and evasions, if people see their prosperous neighbors paying substantially less or enjoying tax- free expense account living, taxpayer morale declines. Eckstein (1979) stated that the tax system must be fair, both to promote the objective of an equitable distribution of income and to assure continued voluntary compliance by the taxpayer

Objectives

Methods

Findings

Conclusion