Abstract

Tax is the principal and most dependable foundation of government revenue used to fund public projects and provide services. Therefore, in order to raise tax revenue, policymakers are expected to develop and put into effect strategies that effectively govern tax revenue and expand the tax base. The central aim of this study is to estimate the actual impact of a risk-based tax audit program on tax revenue. To achieve this aim, we use panel data (spanning from 2010 to the 2018 year). The data were obtained from the Ministry of Revenue’s SIGTAS database on self-declared business profit tax for both audited and non-audited taxpayers. The study employs the difference-in-differences method to estimate the impact of a risk-based tax audit on self-declared tax revenue and address the dynamic nature of the variables under investigation. The findings hold up well to a range of difference-in-differences estimation strategies. The study finds that a risk-based tax audit has an adverse impact on tax revenue. More precisely, the findings indicate that a risk-based tax audit program reduced tax income by 1,545,706 birr on average, suggesting that audited taxpayers’ tax revenue is lower relative to if they had not been audited. It is concluded that a risk-based tax audit program does not achieve its aim of increasing tax revenue. Therefore, the Ethiopian Ministry of Revenue needs to establish a collaborative and trust-based relationship, adopt a proactive strategy for detecting tax evasion, and alleviate the practices that create a tax burden on taxpayers.

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