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Turnover-Based Presumptive Taxation and Taxpayers Perceptions in Ethiopia

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Presentation by Abis Getachew at the second annual meeting of the Ethiopian Tax Research Network, which took place in Addis Ababa on 8th October 2018.

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Turnover-Based Presumptive Taxation and Taxpayers Perceptions in Ethiopia

  1. 1. Turnover Based Presumptive Taxation and Taxpayers Perceptions in Ethiopia By: Abis Getachew
  2. 2. Introduction • Presumptive tax is a way of determining tax liability on the taxpayer using indirect means. • According to IFC (2007) the presumptive system is categorized into 4 types namely: – System based on turnover – Practiced in Ethiopia – System based on indicators – Practiced in Ethiopia – Simple Lump-sum Patents – Systems based on Agreements 2
  3. 3. Introduction • Why Presumptive Taxation? – An application of the standard tax regime requires keeping of an appropriate books and records. – Simplicity – Administrative ease • Why to study perceptions? – Main component of compliance 3
  4. 4. Introduction • Specifically, there are three reasons for studying fairness perceptions among micro taxpayers – Aligns with the democratic process of the country – Allows efficient allocation and collection of taxes – Keeps the well-being of the society with lower income • However it is often hard to define fairness – According to the Institute of Certified Public Accountants (ICPA) there are 7 dimensions of fairness 4
  5. 5. These are fairness on – Exchange Fairness – Process Fairness – Horizontal Fairness – Vertical Fairness – Inter-group Fairness – Time-related fairness – Compliance Fairness 5
  6. 6. Objectives of the Study • To assess taxpayers’ perceptions over the turnover based presumptive regime with respect – Fairness based on the 7 dimensions mentioned, – simplicity and – administrative capacity of the authority. • To check the design and practice of the turnover based presumptive tax system that influenced perceptions among taxpayers. • To identify the main challenges faced during the implementation of the presumptive regime. 6
  7. 7. Literature Review • Meshesha (2015) studied the efficiency of the tax assessment for category ‘C’ taxpayers in Tigray region and found out that the practice ensures inefficiency of the system. It suggests for the system to align with the basic principles of efficiency, equity and administrative ease. • Yesegat and Fjeldstad (2016) studied the causes affecting compliance towards paying taxes in Ethiopia. Some of these causes are found to be perception of probability of audit, corruption, satisfaction with the tax administration, peer influence, gender and education. 7
  8. 8. Research Methods • The study employed survey of 912 taxpayers’ together with in-depth interviews with taxpayers’ and documentary analysis • One-to-one interview with selected woreda level tax officials • The study used descriptive statistics to analyse the collected data from the survey and documentary analysis to assess its design features 8
  9. 9. International Comparisons Country Local Currency Structure of the Presumptive tax Current Exchange Rate for 1 USD Presumptive tax threshold Equivalence in USD Ethiopia Ethiopian Birr 500,000 USD 18,063.5 Indicator based and turnover based 27.68ETB Kenya Kenyan Shilling 500,000 USD 5,000 (approximately) Flat rate of 3% 2% for agri 100.75 KSH Rwanda Rwandan Francs 12,000,000 USD 13,615.16 3% of the minimum income in the bracket 881.37RWF Tanzania Tanzanian Shilling 20,000,000 USD 8,739 Mixed of progressive rate and fixed rate presumptive systems 2288.6TSH 9
  10. 10. Results and Discussions Respondents Profile – Gender 46.2% are Male 53.8% are Female – Operating life of the Business 34.3% Less than 2 years of Operation life 29.1% have operation life between 2 -5 Years 18% have an operation life between 5 – 10 Years 18.5% have an operation life more than 10 years 10
  11. 11. Results and Discussions • Education Level of the Respondents – Below Grade 12 – 28.8% – High School Completed – 51.2% – Diploma Completed – 16.1% – First Degree Completed – 3.8% – Masters and above – 0.1% 11
  12. 12. Results and Discussions Annual Income Frequency Percent 0 - 100,000 501 54.9% 100,001 - 200,000 60 6.6% 200,001 - 300,000 24 2.6% 300,001 - 400,000 10 1.1% 400,001 - 500,000 6 .7% Total 601 65.9 Total 912 100.0 12
  13. 13. Perceptions on Exchange Fairness N = 912, Min = 1, Max = 5, Missing value = 0 Strongly Disagree Disagree Neutral Agree Strongly Agree Mean & Std Taxes paid for the government in the form of presumptive tax are used for the benefit of the general public 48 (5.3%) 144 (15.8%) 90 (9.9%) 475 (52%) 156 (17.1%) 3.59 (1.1) Services provided by the government to the business community worth the amount of tax they pay 229 (25.1%) 479 (52.5%) 95 (10.4%) 99 10.9% 10 (1.1%) 2.1 (0.93) Property rights and patent rights of tax payers are protected 201 (22%) 387 (42.4%) 109 (12%) 170 18.6% 45 (4.9%) 2.42 (1.16) If taxpayers compliance improves, government provision of public services will also increase 60 (6.6%) 145 (15.9%) 96 (10.5%) 460 50.4% 151 (16.6%) 3.54 (1.13) Low perception of exchange fairness among the sample taxpayers. 13
  14. 14. Perceptions on Process Fairness N = 912, Min = 1, Max = 5, Missing value = 0 Strongly Disagree Disagre e Neutral Agre e Strongl y Agree Mean & Std. Category ‘C’ tax payers were represented in the implementation of the presumptive regime 245 (26.9%) 445 (48.8%) 104 (11.4%) 107 (11.7 ) 11 (1.2%) 2.11 (0.97) When tax laws are developed, the business community is well consulted to keep the interests of the business community 260 (28.5%) 374 (41%) 114 (12.5%) 139 15.2 % 25 (2.7%) 2.22 (1.1) Low perception of Process fairness among the sample taxpayers. 14
  15. 15. Perceptions on Horizontal Fairness N = 912, Min = 1, Max = 5, Missing value = 0 Strongly Disagree Disagree Neutral Agree Strongly Agree Mean & Std Micro businesses who earn same level of income pay more or less similar amount of tax 195 (21.4%) 471 (51.6%) 102 (11.2%) 115 (12.6) 29 (3.2%) 2.24 (1.02) Tax payers in a similar situation (business location, living standard, personal expenses, property they acquire, family size … etc) pay similar amount of tax 158 (17.3%) 446 (48.9%) 191 (20.9%) 81 8.9% 36 (3.9%) 2.33 (0.99) Low perception of Horizontal fairness among the sample taxpayers. 15
  16. 16. Perceptions on Vertical Fairness N = 912, Min = 1, Max = 5, Missing value = 0 Strongly Disagree Disagree Neutral Agree Strongly Agree Mean & Std There is no significant difference in the amount of tax that is paid by small businesses and big ones 116 (12.7%) 398 (43.6%) 241 (26.4%) 127 (13.9) 30 (3.3%) 2.5 (0.99) Micro businesses are paying identical amount of tax irrespective of their income level. 139 (15.2%) 461 (50.5%) 209 (22.9%) 94 10.3% 9 (1%) 2.31 (0.88) Unlike other forms of perceptions, that there is high perception of Vertical fairness among the sample taxpayers both within the presumptive regime and in the general tax system. 16
  17. 17. Perceptions on Time Related Fairness N = 912, Min = 1, Max = 5, Missing value = 0 Strongly Disagree Disagre e Neutral Agre e Strongly Agree Mean & Std The income estimated on micro businesses considers the amount of income they earn/lose across time 333 (36.5%) 436 (47.8%) 81 (8.9%) 59 (6.5) 3 (0.3%) 1.86 (0.85) The daily sales estimation only considers the good seasons of business activities and ignores seasons with low business activities 101 (11.1%) 92 (10.1%) 65 (7.1%) 381 41.8 % 273 (29.9%) 3.69 (1.29) The daily sales estimated considers the average income of my business across time 461 (50.5%) 351 (38.5%) 43 (4.7%) 53 5.7% 5 (0.5%) 1.67 (0.85) Low perception of time-related fairness among the sample taxpayers. 17
  18. 18. Perceptions on Inter-Group Fairness N = 912, Min = 1, Max = 5, Missing value = 0 Strongl y Disagre e Disagre e Neutral Agre e Strongly Agree Mean & Std Certain groups of micro business were favoured than others in the implementation of presumptive taxes 97 (10.6%) 350 (38.4%) 234 (25.7%) 206 (22.6 ) 25 (2.7%) 2.68 (1.02) The results show that there is high perceptions on inter-group fairness, based on the statement given. 18
  19. 19. Perceptions on Compliance Fairness N = 912, Min = 1, Max = 5, Missing value = 0 Strongl y Disagre e Disagre e Neutral Agre e Strongly Agree Mean & Std Category ‘C’ taxpayers pay all their tax due on time 23 (2.5%) 136 (14.9%) 177 (19.4%) 408 (44.7 ) 108 (18.4%) 3.6 (1.02) Some taxpayers pay less taxes by hiding stocks during the estimation of daily sales 97 (7.9%) 123 (13.5%) 319 (35%) 261 (28.6 ) 137 (15%) 3.29 (1.11) Mixed results in the two statements 19
  20. 20. • Some of the reasons for the low perceptions of fairness can be attributed to – Late revisions on estimation of average daily sales that led sharp increase . – The research committee of estimating the average daily sales does not include the representatives from the business forum, though the directive mentions they should be represented. – Lack of awareness by the taxpayers on how they calculate their tax and confusion of the tax dues and estimation of the daily sales. 20
  21. 21. Perceptions on Simplicity N = 912, Min = 1, Max = 5, Missing value = 0 Strongl y Disagre e Disagre e Neutral Agre e Strongly Agree Mean & Std The presumptive tax regime is a simplified tax system compared to other regimes 144 (15.8%) 422 (46.3%) 192 (21.1%) 141 15.5 % 13 (1.4%) 2.4 (0.97) It is better for high earning micro businesses to graduate to the standard tax regime than to be under presumptive tax regime 55 (6%) 122 (13.4%) 254 (27.9%) 391 42.9 % 90 (9.9%) 3.37 (1.03) After the daily sales is estimated the way the tax is calculated is complicated 69 (7.6%) 95 (10.4%) 76 (8.3%) 469 51.4 % 203 (22.3%) 3.7 (1.14) There is adequate education campaign on tax issues 154 (16.9%) 369 (40.5%) 171 (18.8%) 184 20.2 % 34 (3.7%) 2.53 (1.1) Micro taxpayers can get any information through a free phone service (8199) or website without going to the office of the Authority 187 (20.5%) 357 (39.1%) 264 (28.9%) 85 9.3% 19 (2.1%) 2.33 (0.97) 21 There is low perception of the tax simplicity of the regime amongst the sample.
  22. 22. • According to the Ethiopian Income Tax Regulation 410/2017 lists 99 business activities with 19 turnover bands – This leads to setting of 19 X 99 = 1,881 tax rates – This makes the system too complicated though the system was designed to be simplified system. – Given that the collection of micro taxes is at the lowest level of administration (the woreda) there is high administration burden. – Though several studies have criticised this, including IFC (2007), the 2017 revised regulations and directives have not changed. 22
  23. 23. Perceptions on Administrative CapacityN = 912, Min = 1, Max = 5, Missing value = 0 Strongly Disagre e Disagre e Neutral Agree Strongly Agree Mean & Std The appeal process is fair and just 270 (29.6%) 367 (40.2%) 96 (10.5%) 139 15.2 % 40 (4.4%) 2.4 (0.97) The daily sales estimating team members that visit your working premises are polite in making conversation 80 (8.8%) 158 (17.3%) 101 (11.1%) 383 42.0 % 190 (20.8%) 3.37 (1.03) The tax authority has an organizational structure that can address tax issues arising from micro business taxpayers 196 (21.5%) 398 (43.6%) 150 (16.4%) 132 14.5 % 36 (3.9%) 3.7 (1.14) The presumptive tax regime motivates and encourages taxpayers to keep books and records 195 (16.9%) 390 (42.8%) 118 (12.9%) 169 18.5 % 40 (4.4%) 2.53 (1.1) The presumptive tax system motivates and encourage category ‘C’ tax payers to graduate to the standard tax regime 269 (20.5%) 350 (38.4%) 154 (16.9%) 118 12.9 % 21 (2.3%) 2.33 (0.97) 23 There is low perception on the Administrative capacity of the regime amongst the sample.
  24. 24. • The main goal of to presumptive regime is to smoothen the transition to the standard regime – Administrative measures that could be taken are • encouraging micro firms to keep full records to pay less tax than those who do not (Lesson from Tanzania) • Raising public interest to demand proof of purchases through the invoice lottery systems (Lesson from Taiwan) *It has to be noted that the sales registered machine ( has difficulties in the implementation: such as fake invoices) • Modernizing the payment system in the economy reduces the chance of underreporting of income These measures are likely to increase the transition to the standard regime 24
  25. 25. Conclusion • In general taxpayers have negative perceptions on fairness, simplicity and administrative capacity on turnover-based presumptive regime. • The tax authority should work on building a positive perception in order to reduce non- compliance attitudes that affect the transition to he standard regime. • Create awareness 25
  26. 26. Conclusion • Hence, the tax authority should – Assess the estimation of the daily sales at least every 3 years as per the law – Again as per the law, the business community should be represented in the daily sales estimation research team – Keep the regime simple as Kenya (flat rate system) and Rwanda (3% of the minimum income in the bracket) – Promote natural transition to the standard regime than the forced graduation. – Create awareness on how to calculate tax rather than polarizing on the amount of the daily estimation 26
  27. 27. Thank You 27

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