DILLA UNIVERSITY

COLLEGE OF AGRICULTURE

DEPARTMENT OF AGRI CULTURAL ECONOMICS

IMPACT OF TAXATION ON SMALL BUSINESS IN DILLA TOWN

SENIOR RESEARCH PROJECT REPORT

BY

ADUGNA ALIE

ADVISOR:MOHAMAD AYANO (MSc)

May 2018

DILLA, Ethiopia
Acknowledgement

First of all god (thank for god )for giving us spiritual support. In this world life is just like a ladder once come up
the other down. We have challenged strong resistance when we prepare this senior research project most of the
time when meet a difficult, but we again thank for god . second our deepest gratitude goes to our family for their
unflagging love and support both morally and financially throughout our life: this research project is simply
impossible without them. Third our heartfelt appreciation goes to our advisor Alemayhu.A(Ms) for valuable
comment and suggestion on the paper and encouraged to us work in a better way, our thanks also go to our
coordinator of the research course Lemi.G(Ms). Who teach us this course, give us encouragement, guidance and
support from the initial to the final level enabled us to develop an understanding of the subject. Lastly our thanks
also extend to department of Agriculture Economics and Extension program which facilitate the course of research
method and helps to have god knowledge to do this study and for their service assistance in the preparation of the
research project.

Abbreviation and acronym

CSA Central Statistical Agency

CU Cyclical Unemployment
FU Frict ional Unemployment

GDP Gross Domestic Product

SU Structural Unemployment

TU Total Unemployment

UR Unemployment Rate

LIST OF TABLE

Table........................................,............................Page
Table 1,sex of respondentes...................

Table2,The religion and marital status of respondets........................................................

Table3,The educational status of respondets............

Table4,business area, their responsibility and sectors engagement of respondets....................

Table5,wareness and information about Taxation..................................................

Table6, The impact of tax on small scale business .

Table7,Challenge and opportunities of small business in paying tax.................................

LIST OF FIGURE

Flgures............................................................ .Page

Flgures1; Design of sampling tecnique and sample size............................................................. .......

Flgures2;The age of distribution of respondets........................................................

Abstract

The prevalence of poverty in developing like Ethiopia demands improvising internal revenue generating policies
particularly good fair taxation system to reduce dependence on foreign aid and borrowing are needed to be
prepared. Taxation can have important effects on many parts of the economy, including impacts on firm creation
and on the development of small and medium- sized enterprises (SMEs).

To provide the public service like policy and administration costs all government gets its revenue from taxation.
Imposition of high tax reduces by income and saving. Ability to work depends on the health and efficiency
possessed by the people. The goal of this study is to assess impact of taxation on small business in Debra morose
Town. To achieve this objective, the researchers used interview (questionnaire) schedule with respondents. It has
also employed deep interview with tax officers in Debre markose Town tax revenue authority. In this study it has
mentioned principle and purpose of tax. Types of taxes and tax system structure. It has designed interview and
questionnaire in research design and used purposive sampling method. It was used collection both qualitative and
quantitative from primary and secondary source and analyzed using statistical package for social science.
Descriptive analysis method was employed. The data analyzed were use to put in result and discussion part using
frequency. Percentages and tables. Then the given percentage and tabulation quantities are changed in to their
implication in statement form. Finally it is summarized in conclusion and then gave recommendation.
Key words: Taxation, Small Business,Vat.

TABLE OF CONTENTS
Contents

ABBREVIATION AND ACRONYM ….I

LIST OF FIGURE...............................................................................II

1. INTRODUCTION............................................................................1

1.1. Background of the study.................................................................1

1.2. Statement of the problem................................................................3

1.3. Objective of the study.....................................................................4

 1.3.1. General objective.......................................................................4
1.3.2. Specific objective......................................................................5
1.3.3. Basic research question.............................................................5
1.4. Significance of the study.................................................................5

1.5. Scope of the study...........................................................................5

2. LITERATURE REVIEW...............................................................7

2.1. Theoretical review...........................................................................7

2.1.1. Definition of taxation and related concepts...............................7

2.1.2. The definition of small business................................................8
2.1.3. Principles of taxation.................................................................8
2.1.4. Purpose of taxation....................................................................9
2.1.5. General characteristics of tax..................................................10
2.1.6. Classification of taxes.............................................................10
2.1.7. Tax system structure................................................................11
2.1.8. Importance of taxation reforms...........................................…12
2.1.9. Approaches of taxation............................................................13
2.2. Empirical review...........................................................................14
 2.2.1. Effect of taxation.....................................................................15
2.2.2. Challenges and opportunities on small scale businesses.........16
3. METHODOLOGIES.....................................................................17

3.1. Description of the study area........................................................17

3.2. Sample size and sampling technique............................................17

3.3. Types of data required and data source193.4. Method of data collection

3.5. Method of data analysis....................4.RESULTS AND DISCUSION

 1. INTRODUCTION

1.1. Background of the study

Low – income countries in Saharan Africa (SSA) like Ethiopia are was aware of the positive role that small and
medium sized enterprise (SMES) can play role in their development. SMES can innovate, adopt new technology
and knowhow, create jobs, broaden the tax base, and diversify risk. Its slowly declining share of the state sector in
industrial output, low private job creation, and high unemployment make it akin to a nearly stage transitions
economy. At the time, Ethiopia one of poorest country in the world, with (1) a large and dualistic informal sector
(2) high and almost constants share of agriculture in output (3) labor market frictions, including imperfect
information (4) business environment with heavy regulations and (5) slow adoption of new technologies (Brixioua,
Li, and Yousef (2009).

Taxation can have important effects on many part of the economy, including impact on firm creations and on the
development of small and medium – sized enterprises (SMES). Thus one of the mechanism in which countries
raise revenues to finance government spending on the good and services that most of us demand is taxation. As
compared to the developing countries, there have been able to generate substantial revenue through imposing of tax
one of the reason for this has been the efficient tax system operating in the developing economic which are
characterized by weak monetary and low development of formal sectors. Values added tax (VAT) is a new system
introduced in Ethiopia. Beginning with the adoption of tax sure, lavalieres adopted by finance in 1954 will be
gradually been adoption by other countries (Purhat, 2000).

Taxation is a major tool in resulting the economy by the government; hence the government achieves many
objectives through taxation which include provision of government revenues, wealth and income distribution,
acceleration of economic growth and savings, therefore, taxation if was administrated leads to the good
performance of the economy (Mulooki and Mosisha, 2012:12).

History of Ethiopian’s tax system date back to ancient’s time, for example, in the Axumite kingdom was traditional
taxation system. The traditional taxation provides for taxes, on crops, livestock products such as wool, butter and
milk. In the period of Haile Selassie regime (1942 - 74) the most important feature of the traditional taxation
system continued during the relatively modern administration emperor Haile Selassie. The element of the tax
system in this period comprises personal income tax, land tax, cattle tax and salt tax, tax during the Dergregime
(1975 - 1991). In this period the political up heaves of 1975 bought about the abolitation of the feudal tenure
system and the revoke of land tax. During this period there was an increase in the coverage of tax base and taxes
owing to the need to raise more revenue to support the government (Gebria, 2006).

In the period of traditional government of Ethiopia (1991 - 1995) during this period to implement of the right of
nations, nationalities and peoples to administer their affair the transitional government of Ethiopia issued
proclamation number 7/1992/ providing for the establishment of regional government. Accordingly, regional
government have legislative, executive and judicial power in respect of all maters within their geographical area
except such matters as defense, foreign affairs and economic policy conferring of citizenship declaration of states
of emergency and printing of currency. Therefore, taxes in this period where designed in the right of fiscal
federalism in order to stimulate economic inefficiencies, in equity and all distortions in the economy in line with
the market based economic orientation. According to the federal demographic republic of Ethiopia (current),
adopted in 1994, the federal republic of Ethiopia could comprise a federal state and member of states in which both
organs shall have their respective legislative, executive and judicial power federal and regional government all
collects taxes. The sharing of revenue between the central and national (regional government was set with
proclamation number 33 (1992(Gebriaworku, 2006).

The main purpose of generating revenue from various sources is to finance public expenditures. The government
generates revenue from tax and other non taxable sources. Tax is the only suitable source of government revenue.
Tax can be direct tax on employer income, business income and other incomes. However, limiting the collection of
tax only from direct incomes narrows the tax revenue of the government. As a result of these taxes are collected
from indirect taxes such as value added tax (VAT) to increase the revenue of the government (Gebria, 2006).

1.2. Statement of the problem

One of the financing sources of government expenditure is taxes, on recent year almost all government in the world
funding their needs from revenue generated from taxes. The revenue funded for payment of defense and social
security’s, construction of infrastructures facilities, provision for food aid, shelter, medical care and etc of different
tax type, VAT is the main in generating revenue to government. To collect this main tax (VAT) problems arise
from administration and activities of business enterprise (Hancock, 1998, P. 196).

To provide the public service like administration policy costs all government gets its revenue from taxation..
Ability to work depends on the health and efficiency possessed by the people. A health is related to the level of
consumption which is determined by the money-income of the households. Imposition of higher tax reduces the
purchasing power of tax payers and his/her ability to obtain the necessaries, comforts and luxuries. Based on the
above point the study concentrates on determining weather, there is no cause and effect relationship between
taxation and socio-economic problem of small business in Debre Markose town.

Therefore if the tax structure is not adequately designed to the specific environmental condition, it may create a
greater burden to the tax-paying organization and eventually affecting the final consumer due to the shifter ability
to tax. So the majority of small business will less likely to attain or maintain the growing profitability Mnewa
(2008).

Thus the existence of high taxation conditions continues to rise in such situation ;and also continue charging high
price owning to higher cost of production to remain in the market(Malti,2008).

Impact of taxation involves a serious problem which affect the lack of market, poor record keeping, lack of
professional tax advice, limited understanding of the tax laws, limited access of finance, limited managerial skills,
such problems emanate from government policies like the unfair taxation well even forced some of the
entrepreneur to move out of operation, will be noted that high taxes and poor taxation polices largely affect small
business and entrepreneurial enterprises market Balunywa et al. (2010).

Therefore, existence of high taxation in Debr Markose town has an indirect relationship to ward small business.
The rationality of after assessing various study in Debr markose town include those conduct in Ethiopia is to aim
getting the importance of business, to know how tax corporate will business performance and best policy incentive
of business owner and problem and progresses encountered by small business performers will tax collection period.

1.3. Objective of the study

1.3.1. General objective

The overall objective of this study is to assess the impact of taxation on small business at Debre-Markose town.
1.3.2. Specific objective
 To assess tax payers awareness about taxation and capacity to pay.
 To investigate the impact of tax on small scale business in the study area.
 To identify challenge and opportunities of capacity to pay for small business in the town.

1.4. Significance of the study

The study focused on the assessment impact of taxation on small business. So it may serve as tipping stone for the
other who want to make detail investigation in this sector. This study may also help to the administration of
economic and development bureau to understand and solve the problem of tax collection and tax payers. Capacity
pay since this problem is not only limited in the administration of economic and development burials, but also it
great helps the development of country by dealing. Government revenue and fairness and equality of distribution of
income.
1.5. Scope of the study

The study focus on assessing the impact of taxation on small business in DebreMarkose town.the study was
limited its geographical coverage restricted to DebreMarkose town, because of the limited of time and budget
resource. So this reserchwas focused only in Ethiopia particularly DebreMarkose, East Gojjam zone of tax payer
on small business.

1.6. Limitation of the study

The study was encounter on different problem from these some of them include: shortage of time, budget
constraint, limited experience, distance and limited facilities. The impact of taxation (particularly) in under
developing country has so many impact of living standard and economic but due to the above constraints and
difficulty to get all information about some of these impact, the study tied to assess some of them. Also
respondents are not willing to give answer for each question because of was afrading for their future influence,
higher government officials may not get at exact time. But finally after making many times of giving respondents
an introduction of who we are, where we from our aim and their role, we get objective to ward collecting data.
2. LITERATURE REVIEW

2.1. Theoretical review

2.1.1. Definition of taxation and related concepts

Tax is contribution to state revenue legally levied on person property and business. Different authors have defined
tax differently, according to professor selling man tax is compulsory payment contribution from the person to the
government to defray the expensive incurred in the common interest of all without ton special benefit. The means
of taxation and the use to which common interest of without ton special benefit. The means of taxation and the use
to which the funds raised through taxation should be put are a matter of hot dispute in politics and economics. A
good tax system should not affect the ability and willingness of the people to work, save and invest, if not, it will
affect the development of trade and industry and the economy as a whole. Thus a sound tax system should
contribute on the economic development of accouter (Misrak, 2008).

Tax is also defined as a compulsory of required payment to government associated with a certain activities, the
revenue collected through taxation is used to redistributed purchasing power among citizens and too many other
operations, tax is a financial change of levy imposed on individual or legal entity by government, taxation is a
system of raising money finance government tax from people. Government use tax revenue to pay soldiers and
police to build domes and reads, to operate school and hospital, to provide food to poor and medical care the
elderly and for many other purposes. Throughout history, people have debated in the amount and kind of taxes that
government should impose, as well as on how it should distribute the burden of those taxes across society
unpopular taxes have caused public protests, riots and even revolution. For instance in Ethiopia there was the
Gojjam religion was the introduction of any agricultural income tax, which peasants opposed (Gebria, 2006).

2.1.2. The definition of small business

Specifying any size standard to define small business in necessarily arbitrary because people who adapt to different
standard for different purpose, for example most people would classify independently owned gas a line stations,
neighborhood restaurants and local retail shops as small business, similarly most would agree that the major auto
mobile manufactures are being business are firms of in between size would classify large or small on the basis of
individual view point. There are two approaches to define small business. They are: - by some measure of size and
using economic control definition, small business would include individuals and firms managing a business enter
price established mainly for the purpose of providing any service other than professionally (Hutechion P. 1991).

2.1.3. Principles of taxation

Ddumba – ssentamu (2004: 396) indentifies for principles of taxation: convenience, certainty, economy and
equality or equity. According to Omagor and Mubiru (2008: 119) principles of taxation are rules and regulation
which should be observed in tax assessment collection and administration, the principle of good tax system
include: -

Fairness: if should be faire to the tax payer, the tax payers should pay according to the ability and the tax burden
should be matched with the benefits that tax payers receive.
Convenient: the time and manner of paying taxes should be convenient to the tax payers. This means that every
tax ought to believe at a time or in the manner in which it is most likely to be convenient.

Economic growth: a good tax system should serve as an instrumental towards economic growth with the capacity
of increasing saving and investment in order to create economic development.

Economical: it should be economical so that the work of collection is done as cheaply as possible, it should not
hamper the development of trade and industry.

Certainty: the tax which the tax payer is meant to pay should be certain and clear where the time of payment and
the amount to be paid ought to be clear and known.

Equity: the tax liability should match with the tax payers income and expenditure levels.

2.1.4. Purpose of taxation

According to Omagor and Mubiru (2008: 119) suggests that government impose taxes for reasons as explained
below.

Collecting Revenue: it is a source of government income for financing public activities.

Promote domestic industries: taxes can be used to protect domestic industries from competition of dumped cheap
commodities from other countries.

Collecting Externalities: Taxes are levied to address negative external internalities.

Controlling monopoly power: government can impose taxes of either lump sum type or specific type to reduce on
the profit levels of a monopolist.

Checking income inflation: this is done by imposing high taxation on people’s income so as to reduce disposable
income and reduce on the aggregate demand.

Checking income inequality: this means the transfer of wealthy from the rich to the poor. It is widely accepted in
the most economies, although the extent to which this should happen is always controversial.

Balance of payment position: this is through imposing high taxes on imports so as to control the importation of
commodities and reduce foreign exchange out flow and

Savings: it also encourages the public to develop the savings culture although it remains a challenge.

2.1.5. General characteristics of tax

Tax is a compulsory contribution by tax payers to the government. The people whom the tax is levied cannot refuse
to pay tax; once it is levied they have to pay it for the payment of tax, there is no expect any return in benefit for
the amount of tax paid by the people and the service rendered by the government to the tax payer, tax impose is a
personal obligation on the tax payer when a person becomes liable to pay the tax is the duties of him to pay it and
no way can be escape from it. The amount of tax received from the people is used for general and common benefit
of the people as a whole.
Tax is the legal collection, it can be levied by the government both central and regional state. The payment of tax is
regular and periodical in nature. It is levied for a fixed period usually a year or a month. Tax is levied on all
peoples without any discrimination of caste, creed etc, but according to their ability to pay (SisayAyakaw, 1995).

2.1.6. Classification of taxes

Taxes can be classified according to the administrative arrangements for its collection, the tax base or behavior of
the tax rates, thus they can be classified as direct or indirect, progressive, regressive and proportional (Omagor and
Mubiru 2008: 20). Direct taxes are those that affect the individual or firm directly through deduction from earnings
(Omagor and Mubiru 2008: 20).

A proportional tax is one with a constant tax liability as income increase, progressive tax is one whose tax liability
increase as income increase while a regressive tax is one whose tax rate falls with an increase in income (Omagor
and Mubiru 2008: 20; Ddumba – Ssentamu, 2004: 402).

Tax have been classified by various economists in various ways from different angles they classify taxes according
to whose pays them who bears the ultimate burden of them, the extent to which the burden can be shifted and
various other criteria. The following are the common dimension to classify taxes. Based on impact and incidence
of tax, based on tax base, based on tax determination, based on number of tax and based on source of tax. On the
basis of impact (immediate burdened) and incidence (ultimate burden of tax) taxes are classified into two broad
categories.
2.1.6.1. Direct taxes
Direct taxes revenue in Ethiopia consists of tax on income from employment, business profit tax, rental income tax,
tax on interest income on deposits, dividend income tax, tax on income from royalties, tax on income from games
of chance, tax on gains of transfer of certain investment property, rendering of technical services outside Ethiopia
and agricultural income tax are discussed detail (Tilahun A, 2014).

2.1.6.2. Indirect tax

Indirect tax is those taxes whose impact and incidence fall on different persons. That is the impact of the taxes fall
on the person who pay it to the government in the first instance but the incidence of tax falls on the important duty
on vehicles in paid in the first instance by the importer of cars but ultimately the importer transfer the burden of
these duty (tax) to the purchaser of the vehicle in the form of pice (Gebria, 2006).

2.1.7. Tax system structure

Virtually all tax structures are compromised of two basic parts: - the tax base and the tax rate. The tax base is the
amount of which the tax rate is applied to determine the tax liability. Taxable income, the value of property, the
value of supply etc are example of tax base. The tax rate is merely the percentage rate applied to the base. On the
base of degree of progression or distribution of tax burden on the tax payers. There are four commonly used tax
rate structures, namely progressive tax, proportional, regressive and digressive tax structure (Bekure, 2004).

In proportional tax structure every tax payer (higher, middle or lower groups) with the same flat rate. This implies
that the tax rate remain constant as the tax base (income) increase. In this system, all income is taxed at a single
uniform related it does not matter if the tax payers income is higher or low. Pay roll taxes and most customer duties
are also lived on proportional rate, in progressive tax structure taxes lived from the higher income group (rich)
more amount of tax and the lower income group (poor) are exempted, this implies that the effective tax rate
increases as the value of the tax base increase. If the income of the tax payer increases the rate of tax also increased
and vice versa. In developed countries they use progressive income tax, for example the USA income tax is the
most progressive tax (Bekure, 2004).

In regressive tax structure the highest income groups pay more amount of tax. This implies that the effective tax
rate declines as the value of tax base increases. It is the opposite of progressive tax structure because the rate of tax
diminishes as the tax base structure, but in digressive tax structure is similar to progressive tax structure, but in
digressive tax the rate of progression is not in the same proportion as the income. In digressive tax system the
marginal tax rate declines with each incremental tax base. I.e. the tax rate increase but at decreasing rate (Bekure,
2004).

2.1.8. Importance of taxation reforms

The dominant motivation of taxation in developing countries is to finance public administration and the public
provision of economic and social services, secondary motivation is the redistribution. Although some correction of
market imperfection is necessary to achieve, the goals station and indirect costs associated with misallocation or
resource and with consequence for the distribution of income. According to World Bank the rational for tax reform
is twofold.
According to World Bank the rational for tax reform is twofold. First as a part of structural adjustment tax reform
is designed to reduce serve distortions in economic and the resulting inefficiencies and inequalities in the allocation
of resources.

Second as part of efforts to stabilize the economy, tax reform in transform with costs in public expenditure, may be
needed to generate public revenue in a reasonable, non distorting, equitable and sustainable manner (national
commission, 1996).

2.1.9. Approaches of taxation

It is also called theories of taxation. It deals with the justification for imposing tax as duty in a given country.
These justifications are broadly classified in three. The cost of survive approach states that the basis for taxation
should be the cost incurred by a government to provide services for the individual tax payers. The main limitation
of this approach is it is unrealistic because it is difficult to measure the cost of service incurred by the government
to each individual tax payers. In the benefit received approach the burden of taxation should be divided among the
people in proportional the benefit recovered from the government.

According to World Bank the rational for tax reform is twofold; first as a part of structure adjustment tax reform is
designed to reduce sever distortions in economic and the resulting inefficiencies

Ability to pay approach is the most realistic and generally accepted theory. It state that tax payer should be taxed
based on their ability to pay every legislative and every authority is pressurized by taxation policy in certain
direction, every group tries to change that goes against its interest. The authority in many cases, have to adopt a
certain policies simply because there are pressure to that effect and have many times (Misrak, 2008).

2.2. Empirical review

According to Dossantosan ideal VAT should be applied to the sales of all goods and services. Exemptions should
be kept to a minimum to broaden the tax base and to facilitate compliance by tax payer and control by the tax
administration. There are should be only one positive rate multiple rates make more complicated and encourage
evasion. Arguments used against the introduction of VAT (value added tax) are: - weakness of the tax
administration; absence of “culture” of issuing invoices by businesses and low adult literacy rate. This later factor
can certainly complicated the introduction of taxes such as VAT. Value added tax is a transaction based on tax and
consequently should be reported and controlled on regular bases many countries (of which Ethiopia is one) require
monthly filling and payment.

However, this results in large number of returns and payments. Which the tax administration may struggle to
processes and which involve significant work for tax payers. Thus, some tax administrations have adopted a system
of quarterly returns and payment for most tax payers (Dos Santos, 2002).

(Dos Santos, 2002) argue that although Vat is consumption in practice some of the cost is likely to fall directly on
business. It is a tax purely on consumption only when businesses are able to shift the tax fully on to the final
consumes in the price of their products. If businesses are unable to do this, it reduces their profit margins and in
consequence, this may hinder the grown of the private sector. Recently, however some (Desai and Hines, 2004)
have suggested that VAT may actually contribute to deferring rather than facilitating trade in developing and
transition economies.

Indeed one study by Hines (2002) concludes that increasing consumption taxes definitely fosters the expansion of
the hidden economy if (seems plausible) the labor intensity of production in that sector is greater that the formal
sector. Yet another study suggests that even government aware of such problem may have none the less chosen to
impose higher taxes including VAT, one the formal sector of the economy because with their relatively weak tax
administrations the best way for them to raise revenue may be to increase barriers to entry to the formal sector thus
creating “rents” that may then be taxed (Auriol and Walters, 2003).

Aborat (2011) investigated the fairness perceptions of Addis Ababa city business profit tax payers and its impacts
in their perceptions. The survey used self-developed questioner and in-depth interview to collect both qualitative
and quantitative data. The survey found that Addis Ababa city business profit tax payers did not perceive positively
in respect of general, vertical, personal, exchange and administration fairness except horizontal fairness on the
prevailing business profit tax system. With regard to tax knowledge and complexity, the finding of this survey
shows that the tax payers did not have sufficient knowledge and there were no easily understandable and vague
procedures of the business profit tax system.
Finally, the survey suggests that a series of measures should be taken by government in general, and tax authorities
in particular; to improving policy and administration issue, educating the tax payers and conducting awareness
creation, and maintain tax system fair and equitable.

2.2.1. Effect of taxation

Now a day revenue rising is not the only purpose of taxation. In a welfare state, taxation has also been used as a
tool of monetary police to achieve socio-economic objectives. It uses to promote economic growth by controlling
the effect of trade cycles and regulation. The production inequalities income and wealth (national commission,
1996).

2.2.2. Challenges and opportunities on small scale businesses

2.2.2.1. Challenges of small scale business

In the global world for the performance of small business have been facing many obstacles, thus this section out
lines five major challenges that small business owners will face in the coming years.

These are:

- Strengthening the overall economy

- Tax and regulation
- The cost and availability of health insurance
- Attracting and retaining a quality work force
- Global competition
Considering the main problems of the enterprises in different sectors this proposal reviles that, startup capital, high
interests rates, skilled supp or from government, working capital or lack of credit facilities, lack of access for
training were among the major impediments for operator/ manager at the grass root level of MSEs activities
Ephrem(2010).

2.2.2.2. Opportunities of small scale business

In the performance of any activities having an obstacle alternatively it has also opportunity in other hand.
Therefore this section out lines five opportunities that small business will hope fully pursue in the next decade.

These are: -

- Increasing investment in technology and innovation

- Grooming local entrepreneurs for growth
- Pursuing new markets overseas
- Promoting entrepreneurship among women, minorities, veterans and immigrants.
- Advancing education and training (U2 or 2014).

3ndents

Religion Frequency Percentage%

Orthodox 60 92.3%
Muslim 1 1.5%
 Protestant 4 6.2%
Total 65 100.00
Marital status Frequency Percentage%
Married 42 64.6%
Divorced 9 13.8%
Single 13 20.0%
Widowed 1 1.5%
Total 65 100.00
Source: Own Survey result 2018 G.C

As indicated in the table above among the respondents 60(92.3%) are Orthodox, 1(1.5%) Muslims and 4(6.2%) are
protestant. This indicated that most of the respondents are orthodox because more than half of dwellers in Debra
markose are orthodox. The data in table 2 also demonstrates that 42(64.6%) are Married, 9(13.8%) are Divorced,
13(20.0%) are Single and finally 1(1.5%) are widowed. This indicates that most of the respondents that participate
in small business activities are married peoples.

4.1.5 The Educational Status of Respondents

Table3.The educational status of respondents

Educational status Frequency Percentage%

Literate 63 92.9%
 illiterate 2 3.1%
Total 65 100.00
If literate Frequency Percentage%
Elementary 11 16.9%
Secondary 11 16.9%
Certificate 26 40.0%
Diploma 13 20.0%
1st Degree and above 4 6.2%
Total 65 100.00
Source: Own Survey result 2018 G.C

The data in table3 shows that 63(96.9%), and 2(3.1%) respondents are literate and illiterate in that order
(respectively). Among the literate respondents 11(16.9%) 11(16.9%), 26(40.0%), 13(20.0%), and 4(6.2%) are In
Elementary, Secondary, Certificate, Diploma and 1st degree level respectively.

4.1.6 The Distribution of Business Area, Responsibility and Sectors Engagement of Respondents.

Table4. business area, their responsibility and sectors engagement of respondents.

Do you own the business area ? Frequency Percent%

Yes 56 86.2%
No 9 13.8%
Total 65 100.00
 Do the business Area Good For Business Activity Frequency Percent%
Yes 59 90.8%
No 6 9.2%
What is your Responsibility In The Business Frequency Percent%
Auditor 2 3.1%
Owner 51 78.5%
Manager 8 12.3%
Public Relation Officer 4 6.5%
Total 65 100.00
Which business sectors do you Engaged Frequency Percent%
Manufacture 4 6.5%
Wholesaler 16 24.6%
Retailer 37 56.9%
Service provider 8 12.3%
Total 65 100.00
Source: Own Survey result 2018G.C

According to the table 4 above illustrates that out of 65 respondents 56 (86.2%) were answered yes and 9(13.8%)
where responded no, this shows those who have responded yes have own the business area while the others are
own. This implies most of small business participants access their business by their own area, which motivates
their business activity.

Again this table farther tells us that 59(90.8%), 6(9.2%) are responded yes and no respectively, which means
those said yes have a good area of accessing business activity while others aren’t this brings about to have more
 customers and earning high income which in turn increases government revenue in terms of tax. At the same time
for the household’s responsibility in the business were distributes as flows 2(3.1%), 51(78.5%), 8(12.3%), 4(6.2%)
of respondents were answered that they are Auditor, Owner, Manager, and public Relation Officer in that order.
That implies most participants on small scale business are owners of the business. Finally the business sector
engaged by the household is out of 65 respondents 4(6.5%), 16(24.6%. 37(56.9), 8(12.3%) have answered that they
are Manufacturer, Wholesaler, Retailer, and Service Provider Respectively. This illustrates most participant of
small business are Retailer.

Table5 Tax payers’ awareness about tax and its impact

The impact of tax on small business

Number of respondents
Awarene Reduces Reduces Reduce No Total X2 Asymp.S
ss/ annual ppp s saving impact ig.
capacity income
Have Yes 36(55.4) 5(7.7) 17(26.2 4(6.2) 62(95.4)
awarenes )
s 3.64 0.303
No 2(3.1) 0 0 1(1.5) 3(4.6)
Source From tax office 16(24.6) 2(3.1) 5(7.7) 3(4.6) 26(40)
of Town 2(3.1) 0 7(10.8) 2(3.1) 11(16.9)
awarenes administration 18.6** 0.028
s’ Small business 6(9.2) 1(1.5) 1(1.5) 0 8(12.3)
office
 Friends and 14(21.5) 2(3.1) 4(6.2) 0 20(30.8)
neighbors
Amount <=100 10(15.4) 0 2(3.1) 1(1.5) 13(20)
of tax (100-200] 3(4.6) 1(1.5) 9(13.8) 1(1.5) 14(21.5) 17.2** 0.046
paid per (200-400] 10(15.4) 1(1.5) 3(4.6) 2(3.1) 16(24.6)
month(bi >400 15(23.1) 3(4.6) 3(4.6) 1(1.5) 22(33.8)
rr)
NB: Figures in parenthesis indicate percentage out of total,*=significant at 10% level of significance,
**=significant at 5% level of significance, and ***= significant at 1% level of significance.
Source: “Own survey, 2010 E.C”

This shows most participants get information about taxation, which makes strong the capacity of awareness. And
from those said yes (we get information) out of 65 participants 26(40.0%), 11(16.9%), 8(12.3%),and 20(30.8%) get
information from tax office, from town administration. from small business office and from my friends and my
family respectively. This implies most small scale participants get information about taxation on tax office of the
town. This in turn tell us having more awareness and information about tax creates high willing to pay tax and
consume less time of orientation about taxation.

According to table5 Among this 13(20.0%) pay <100, 14(21.5%) pay 100-200, 16( 24.6%) pay 200-400, and
22(33.8%) pay >400. Which indicate most tax payers paid above 400 birr 22(33.8%).

In generally this table illustrate in large parte of the respondets are paying tax. With above 400birr are happy with
their offering and belive the importance of paying it.
 4.3 The impact of tax on small scale business in the study area.

Table6, The impact of tax on small scale business

The impact of tax on small business

Number of respondents
Factors Reduces annual Reduces Reduce No Total X2 Asymp.S
income ppp s saving impact ig.
Saving Yes 27(41.5) 5(7.7) 13(20) 3(4.6) 48(73.8) 3.64 0.303
No 11(16.9) 0 4(6.2) 2(3.1) 17(26.2)
Access Yes 26(40) 3(4.6) 15(23.1 4(6.2) 48(73.8)
to credit )
No 12(18.5) 2(3.1) 2(3.1) 1(1.5) 17(26.2) 3.3 0.353
Tax is Agree 8(12.3) 1(1.5) 10(15.4 2(3.1) 21(32.3) 7.91** 0.048
useful )
(attitude)
Disagree 30(46.2) 4(6.2) 7(10.8) 3(4.6) 44(67.7)
NB: Figures in parenthesis indicate percentage out of total,*=significant at 10% level of significance,
**=significant at 5% level of significance, and ***= significant at 1% level of significance.
Source: “Own survey, 2010 E.C”

This table 6 shows us household’s saving and ways they use to save their money,65 out of 65 respondents have
respond that they save their money. Among this participants 48(73.8%),17(26.2%) save their money in cash and
kind respectively. This implies as there is saving there is investment, as there is investment there is infra structure,
as there is infrastructure there is development ,as there is development small scale business grows up. Finally there
is tax from business to the government. So saving mechanism is one of the facilities for the growing up of small
business and raising tax to the business.

As table above sketched show us(48(73.8%),17(26.2%) respondents are responded Yes( we access credit facility)
and no (we don’t access credit facility) respectively.

As the table above demonstrates 21(32.3%) of respondents answered agree, that means there is lack of positive
attitude on the part of employees, and 44(67.7%) have responded no, which means there is disagree lack of positive
attitude on employees of the tax revenues office. this indicates that majority of the respondents have agreed that
there is positive attitude.

4.4 Challenge and opportunities of small business in paying tax.

Table7 Challenge and opportunities of small business in paying tax

The impact of tax on small business

Number of respondents
Challenge Reduces annual Reduces Reduce No Total X2 Asymp.S
s/ income ppp s saving impact ig.
opportunit
y
Challenge Bureaucrat 11(16.9) 1(1.5) 14(21.5 3(4.6) 29(44.6) 3.64 0.303
s ic )
procedures
waste 16(24.6) 2(3.1) 1(1.5) 1(1.5) 20(30.8) 16.9** 0.010
work time
inappropri
ate time 11(16.9) 2(3.1) 2(3.1) 1(1.5) 16(24.6)
opportunit credit 9(13.8) 2(3.1) 0 0 11(16.9)
ies access
Access to
training on
business 9(13.8) 0 2(3.1) 1(1.5) 12(18.5) 20.8 0.014
Access to
new
market 11(16.9) 2(3.1) 7(10.8) 0 20(30.8)
NB: Figures in parenthesis indicate percentage out of total,*=significant at 10% level of significance,
**=significant at 5% level of significance, and ***= significant at 1% level of significance.
Source: “Own survey, 2010 E.C”

As far as the sex of sample respondents is concerned, about 7 respondents ( out of which 7.5% male and 10%
female) replied the consequences of migration to be lack of housing services. And, 6 respondents(out of which 5%
male and 10% female) stated migration results in lack of food. Again, … Similarly,
 Among these 65 respondents said 29(44.6%), 20(30.8%). 16(24.6%) face challenge form Bureaucratic
procedures. Wastes working time and the time required to pay tax obligation is not the right time respectively. And
they have claimed that 47(72.3%), 18(27.7%) of respondents agreed that tax revenue office and we business men
are responsible to tackle these challenges respectively. This implies majority of small business participant
encounter challenge form bureaucratic procedure and believe that tax revenue office is accountable for undertaking
this challenge.

As table 7 shows the participants of small scale business have opportunities after they their tax obligation.
Therefore out of 65 participants 57(87.7%) have responded yes (we have market, opportunity from government
incentives) and only 8(12.3%) said no we do not have market opportunity respectively. From those participants
said yes 11(16.9%). 22(33.8%), 12(18.5%).,and 20(30.8%) have answered that they have the opportunity of credit
access, reduction in tax rates, access to training on business, and access to new markets respectively.

This implies most participants have market opportunity among the 22(33.8%) would like to have reduction in tax
rates. this indicates having opportunity in the market creates high income which increases capacity of paying tax.
So small scale opportunity corresponds commitment of paying tax.

5 Conclusion and recommendation

5.1. Conclusion
• Age of distribution of respondets is indicated that moste respondents are matured age interval 35-45, which
implies that the people which participate in small scale business are matured.

• sex of respondets in table This specifies that most of the participants in small business are males.

• The religios of table2 indicated that most of the respondents are orthodox because more than half of dwellers in
Debra markose are orthodox.The marital status of respondets in table2 indicates that most of the respondents that
participate in small business activities are married peoples.

• The Educational status of respondits in table4 indicates that most of small business owners are literate and if the
level of education increases the number of small business increases. Because of that they are literate they use their
knowledge in the business activity and easy to perform their activities. This finally point out this small business
increase generates government revenue in terms of taxation.
This shows most participants get information about taxation, which makes strong the capacity of awareness.his
implies most small scale participants get information about taxation on tax office of the town. This implies most
small scale participants get information about taxation on tax office of the town.This in turn tell us having more
awareness and information about tax creates high willing to pay tax and consume less time of orientation about
taxation.

In generally this table5 illustrate in large parte of the respondets are paying tax. With above 400birr are happy with
their offering and belive the importance of paying it. So saving mechanism is one of the facilities for the growing
up of small business and raising tax to the business.
• lack of positive attitude on the part of employees, and 44(67.7%) have responded no, which means there is
disagree lack of positive attitude on employees of the tax revenues office. this indicates that majority of the
respondent have agreed lack of positive attitude.

• This implies majority of small business participant encounter challenge form bureaucratic procedure(44.6%),
and believe that tax revenue office is accountable for undertaking this challenge.

This implies most participants have market opportunity among the 22(33.8%) would like to have reduction in tax
rates. this indicates having opportunity in the market creates high income which increases capacity of paying tax.
So small scale opportunity corresponds commitment of paying tax.
 5.2 Recommendation

This study was focused on identifying impact of taxes on small business which is generally helpful I in having
some images about the problem of the current taxation system. Here, an attempt is made to give recommendation
that help to have an efficient and powerful assessment and collection with prevalence of clear and transparent rule
and regulation and alleviate problems associate with tax assessment and collection procedure.

Recommendation regarding problem and weakness of tax payers, assessment and collection are given below

 Man Power is the most important resource, so it will be better if it has given special attention. The man power
structure of revenue agency and sub city should be occupied by competent personnel. In the case of shortage of
competent personnel/lack of employee with required qualification and experience / the tax office may assign
some employees who do not pass the requirement. Therefore, to enhance their capability and improve their
effectiveness, the employee should get short or long term training.
 It would be best if the government gives special care for tax payers, so as to motive the business owner like
organization credit institutions and government should impose the right amount of tax which is proportional
based on their income statement.
 Effective and good tax assessment and collection measure should be taken to revise and update the existing tax
laws. To correct such crucial policy failures, government should adopt serious of tax reform measures, focusing
on removing undesired taxes, improving and modernizing the revenue collecting institution, the tax assessment
system which means the present tax assessment system assigned the assessment group.
 To create fairness in the imposition of tax the government official should get information about the exact
income of the small business from the owners before the imposition of tax and should get information about the
current market condition.
 It would be nice if the taxation office prepare a better producer and distribute tax payers to receive clear,
concise and up to date information on describing what is to be taxable, how to calculate tax liabilities and
 procedure for calculating paying taxes, who and where they pay taxes, form and procedures for calculating and
paying taxes should be a simple and possible.

6, REFERENCE

Aborat, W, 2011. ‘Tax Payers’ Perception towards Fairness: Personal Business Profit Tax Payers in Addis Ababa,
Msc Thesis, Addis Ababa University

Auriol And Walters, 2003, as Quoted In Richard M. Bird (2005) Value Added Tax in Developing Countries.

Balunywa, W. Namatovu, R. Kyejjusa, S. (2010). Global Entrepreneurship Monitor (GEM) Uganda.

Bekure Herouy, 2004, the Value Added Tax Regime under Ethiopia Law with Special Emphasis on Tax
Exemption; Addis Ababa, CRAD.

Brixiova Z, Li, W and Yousef, T, (2009). Skill Shortage and Labor Market Outcomes in Central Europe, Economic
Systems, Vol 33(1) 45-59.

Ddumba – Ssentamu, J, (2004). Basic Economics for East Africa: Concepts, Analysis and Applications Fountain.

Desai, Mihir A, C. Fritz Foley and James R Hines Jr, 2004 “For Eign Direct Investment in a World of Multiple
Taxes” Journal of Public Economics 88 (12): 2727 – 2744.
Dos Santos, Paulo, Value Added Tax, Introduction Administrative Issues, Paper Prepared For Car Bean Regional
Technical Assistance Center, 2002).
Ephrem Setegn (2010), the Role of Micro and Small Enterprises in Poverty Alleviation
Gebria Worku, 2006, Tax Accounting in Ethiopia Context 1st Edition
Gulele Sub City, Addis Ababa Ethiopia MA Thesis in Public Administration, Addis Ababa.
Hines Jr, 2002, “International Taxation” In Alan J. Averbach and Martin Feldestein, Eds,. Hand Book of Public
Economics (Amstredam: North – Holand), Pp. 1935 – 1995.

Huteching, P, (1991) Issues in Small Business Finance and Accounting Working Number 1-6 Department of
Accounting and Financial Management University of New England, Kampala (Viewd: 2014 – 03-15).

Misrak Tesfaye Abate, 2008, Ethiopia Tax Accounting Theory and World Book Encyclopedia Volume 181, 2001.

Mnewa, R, Maliti, E “The Role of Small Business in Poverty Alleviation the Cause of Daresalaam, Tanzania”
Research Report No 0.82 Daresallam, Re Poa, 2008.
Mulooki, A. E. and Mugisha, I (2012), Business Taxation, 1 st Edition Swamp Publishers, Kampala (Viewed: 2014
– 03 – 18 National Commission on Economic Growth And Tax Reform, 1996).

Omagor, C and Mubiru, M. (2008), Entrepreneurship: An Integrated Approach, 1 st Ed. Kabala and Business Books,
Publishers, Kampala.

PHCE (2007), Population and Housing Census of Ethiopia; Results for Amhara Region.

Purhat, Mahesh, 2008 Value Added Tax: The Need of the New Millennium 9 th Edition. Report, 2010 (Viewed
2014- 03-21).

Sisay Ayalew, Addis Ababa University,

Addis Ababa 1995 the Taxation on Direct Income in Ethiopia.

Tilahun A, (2014) Determinates of Tax Compliance Behavior in Ethiopia: The Cause of Bahar Dar University Tax
Payers, Jolnal of Economics and Sustainable Development Vols, No, 15, 2014 University.

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Nigeria” Institve for World Economics and International Management.

7. APPENDIX

WOLAITA SODO UNVERSITY

COLLAGE OF AGRICULTURE AND VETERINARY MEDICINE

Department of Agriculture Economics and Program of Rural Development and Agricultural Extension
Dear Respondent:

I am student from Wolaita Sodo university and I here to collect data for my research purpose. The purpose of this
questionnaire is to collect information about impact of taxation on small scale business for research purpose and
hence the questionnaire is prepared to secure relevant data which is believed to come up with valuable
recommendation for problems observed. The information you provide will be used for academic research only and
all your response will be secret. Therefore you are kindly requested to give response this questionnaire that is given
each question. We thank you for your kind cooperation in advance!!

Part one –Back ground information

1). Age of HH in year

A. below 24 B.24-34 C. 35-45 D. 46-56 E. 57-67 F.68-78

2). Keble of HH

3). Sex: A. male B. female

4). Religion:

A. orthodox B. Muslim C. protestant

5). Marital status:

A. married B. divorced C. Single D. widowed

6). Education status

A. literate B. illiterate
7). If literate at what level?

A. Elementary B. secondary C. Certificate D. Diploma E. 1st Degree & above

Part two- questions concerning to taxation

8). The business area is it your own?

A. yes B. No

9). If the questions number 8 is no specify

10). Is your business area good for business activity?

A. yes B. No

11). What responsibility you have in the business?

A. Auditor B. owner C. manager D. public relation officer E. other

12). In which business sector you engaged?

A. manufacturer B. whole seller C. retailer D. service provider E. other

13). Do you have awareness about taxation?

A. yes B. No

14). Do you get information about taxation?

A. yes B. No
15). If you say yes for question 14 from where?

A. from tax office C. from small business offices

A. from own administration D. from my friends and my family

16). Do you pay tax?

A. yes B. No

17). If no what is the reason?

18). If you say yes for the question number 16 how much birr you pay in month?

A. <100 Birr B. 100-200 birr C. 200-400 birr D. >400 Birr

19) Are you happy with the amount you are currently paying?

A. yes B. No

20). If no to question 19, what is your reason?

A. I don’t want to pay at all

B. The amount is beyond my paying capacity

C. The amount I am currently paying does not much with the income I am earning

D. other reason (specify)

21). Do you believe in the importance of paying tax?

A. yes B. No

22). If your answer for question 21 is yes, how is it important?

23). Do you think taxation have impact on your business?

A. yes B. No

24). If your answer is yes for question 23, what is the impact on your business?

A. it does reduces my income

B. it reduces my saving power

C. it reduces my purchasing power of goods

D. others (specify)

25). Are you volunteer to tell your income?

A. yes B. No

26). If yes to question 25, how much is your monthly income from the business? Birr

27). Are you volunteer to pay your tax liability?

A. yes B. No

28). If no to question number 8, why not?

29). is your tax liability based on your income? A. yes B. No

30). If yes, what benefits you get by paying tax volunteer?

31). Do you save your money? A. yes B. No

32). If you say yes for question 31 in what way? A. In cash B. In kind

33). Do you face any challenges in paying tax? A. yes B. No

34). If yes to question number 33, what challenge do you face?

A. Beurocratic procedures

B. it wastes my time (working time)

C. the time we are required to pay our tax obligation is not at the right time

D. others (specify)

35). who do you think is responsible to tackle these challenges? A. tax revenue office

B. we the business men

C. others (specify)

36). Is there lack of positive attitude on the part of the employees of the tax revenue office?

A. yes B. No

37). Did you get credit facility? A. yes B. No

38). Do you have market opportunities from government incentives after you pay tax?

A. yes B. No

39). What opportunities are there for you to expand your business in the future?

A. credit access B. Reduction in tax rates

C. access to training on business D. access to new markets

E. others (specify)

Thank you very much for your precious time and honest response!!!!