Tax Reform and Tax Revenue Collection Performance in Ethiopia (From 2005 to 2013 EFY)

Abstract

The objective of this study was to evaluate the effects of tax policy reforms on revenue generation in Ethiopia, using different tax revenue sources as a proxy for the federally collected tax revenue. To carry out this exercise, quarterly time-series data for the years (2005 - 2013 EFY) was employed. Data were gathered from both primary and secondary sources. Primary data was collected through interviews with relevant Ministry officials and experts from selected departments, and secondary data was gathered from performance reports of the Ministry. The analysis showed that the reform of the tax policy since the 2009 fiscal year has not had a positive impact on tax revenue. The tax authority's eight-year tax collection efficiency was assessed by the tax buoyancy, which was 0.76 percent between 2005 and 2012, the tax buoyancy rate was 0.9 before the tax policy reform, and 0.6 after the reform. This shows that tax collection is low after the policy reform and that the tax policy reform has an impact on revenue collection. The regression result showed that reform in Value Added Tax and Excise tax has a significant positive effect on revenue collection within the period under review; while reform in non-tax recorded a negative and insignificant effect on revenue collection. The Johansen cointegration test showed that a long-run meaningful relationship exists between tax reform and revenue collection (TR) in Ethiopia. To encourage taxpayers to comply with the law, the study suggests that the tax system should be reviewed on a regular basis, and that tax policy formulation should be carried out after proper consultation with all executives and relevant stakeholders.