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Where the Gap Lay: Presumptive Income Tax Assessment for Micro and Small Enterprises a Case Study in Addis Ababa City Administration

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Presentation by Amanuel Mekonnen and Endalkachew Mulugeta 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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Where the Gap Lay: Presumptive Income Tax Assessment for Micro and Small Enterprises a Case Study in Addis Ababa City Administration

  1. 1. Research Title Where the Gap Lay: Presumptive Income Tax Assessment for Micro and Small Enterprises a Case Study in Addis Ababa City Administration
  2. 2. By: Amanuel Mekonnen (MSC, MPP) Endalkachew Mulugeta (MSC)
  3. 3.  Rationale of the study  Objective of the study  Methodology  Major Findings  Policy Recommendation
  4. 4.  In 2017 Addis Ababa city Administration Revenues Authority reassessed the income of 148,514 businesses of which 60,116 business categorized under category “C" tax payers’ bracket.  After notices were issued on the results of the estimates and taxes imposed there on, there was tremendous uproar by tax payers.
  5. 5.  Meanwhile, ERCA stated that the estimations were made fairly and meticulously.  This clearly shows the existence of conflicting views between the concerned authorities and the tax payers regarding the issue.  It is this conflicting views that prompted the researchers to conduct a research on the issue to understand where the gap lay.
  6. 6.  The overall objective of this study is:  To assess the over all presumptive tax assessment processes and Procedures.  To describe the perception of the tax payers on Tax Payment and on fairness and equitability of tax imposed.  To investigate underlying causes for tax payers’ complaints.  To describe the appropriateness of the remedial action taken by the tax authority.
  7. 7.  Descriptive survey design was used.  The required data for the study was acquired using survey method and in-depth interviews with tax officials. • Given the available time and resources, a sample of 1,980 micro and small business taxpayers was selected from a population of 60,116. • The close ended questionnaires response were analyzed by using SPSS version 20 and summary of open ended and in-depth interview results were also presented in alignment with the SPSS output.
  8. 8. Assessment of Average Daily Sales Estimation Processes and Procedures
  9. 9. Selection of committee members Training Conducting average daily sales Estimation Assessment of Average Daily Sales Estimation Processes and Procedures
  10. 10. S.No Branch Office From Category “C” to “A” From Category “C” to “B” From Category “B” to “A” Total 1 Arada 199 741 363 1303 2 Addis Ketema 204 1048 493 1745 3 Nefas Silk Laphto 1933 2622 595 5150 4 Gulelle 1077 2084 572 3733 5 Bole 2298 3862 2227 8387 6 Yekka 878 2226 233 3337 7 Kirkos 89 1459 897 2445 8 Lideta 581 706 512 1799 9 A/Kality 862 935 1002 2799 10 Kolfe 935 862 183 1980 11 Merkato#1 803 897 3277 4977 12 Merkato#2 54 197 604 855 Total 9,913 17,639 10,958 38,510
  11. 11. S.N o. Branch Office New Entrants Not Assessed Based on the Previous Presumptive Income Tax Assessment 1 Arada 302 2 Addis Ketema 482 3 Nefas Silk Laphto 1732 4 Gulelle 529 5 Bole 1668 6 Yekka 871 7 Kirkos 185 8 Lideta 102 9 A/Kality 571 10 Kolfe 975 11 Merkato#1 971 12 Merkato#2 42
  12. 12. Gaps Before Conducting the Assessment  Most selection criteria of the average daily sales estimation committee lack objectivity and concreteness.  Members lack technical knowledge and experience to assess all type of businesses.  The training given was not sufficient to make the committee confident enough for the task.  There was no guiding principle or written manual given to them which clearly states as to how to make average daily sales estimate and how to solve possible problems encountered during average daily sales estimation.
  13. 13.  No practical demonstration or pilot test conducted before the implementation of the actual assessment.  The authority did not make any market assessment before the estimation.  City administration was rushed in to average daily sales estimation before creating sufficient awareness among tax payers about average daily sales estimate and the tax imposed there on.  53.8 % of respondents replied that they didn‘t receive explanation from the tax authority as to how their respective average daily revenue was estimated and the tax imposed there on is calculated.
  14. 14. Gaps While Conducting the Assessment  The members of the committee are not fully aware of indicators and only few of them were used in the process. Predominantly these include condition of the business, location of the business, information provided by tax payer and items available for sale /services available to customers.  65.2% of the tax payers replied that the indicators are not enough to capture data on daily sales estimate. This is because, tax payers believed that:  Indicators were not exhaustively identified; and objective indicators were not included.
  15. 15.  Power fluctuation was not considered in the process of calculating average daily sales.  Seasonality of the product they sell to the market was not included as a factor.  The delay caused during the supply of the input was not taken into account
  16. 16.  Direction was given by high officials to implement the Pyramid concept.  The time allotted for daily sales estimation was not enough. Initially order was given by the tax authority to a committee to estimate average daily sales of 40 businesses per day, Later on, 15-20 businesses per day which still are unattainable. To attain this, some members believed that there were committee members who estimated the average daily sales carelessly or recklessly to meet the minimum threshold.
  17. 17.  Identified Gaps caused by tax payers during the course of the assessment.  Merchandises were removed and hidden from shopping shelves  Inaccurate and inappropriate information was provided  Businesses were purposely closed to avoid assessment  Placing inappropriate person in the shop who is unable and inappropriate to provide the required information
  18. 18. Perception on Fairness of Average Daily Sales Estimates and the Tax Imposed There On
  19. 19.  The majority of respondents (79.9%) replied that the average daily sale estimates and taxes imposed thereon lack fairness.  The average daily sales estimation committee also confirmed that the initially assessed average daily sales estimation results were high and beyond the ability of the tax payers to pay. This is because:
  20. 20.  Indicators that the committee used were not adequate enough and are difficult to apply consistently across all business;  Rejection of information provided by the tax payer regardless of its reliability.  A clear interference from high officials by giving direction to the committee to put most of category ‘C’ tax payers in to Category ‘B’ tax payers .  The number of days assigned to carry out the assessment was not enough.
  21. 21. Perception on Tax Payment, Equitability of Average Daily Sales Estimation and Tax imposed there on among tax Payers
  22. 22.  66.9% of the respondents replied that paying tax is an honor.  67.8% of respondents believe that the tax imposed on them is not equitable compared to other similar businesses as theirs.  Tax officials also confirmed that , since business engaged in the same operation, in the same geographical area were assessed by different committees , different assessment amounts were reached.
  23. 23. S.no. Tax Branch Offices Total No. of Tax Payers Assesed Total No. of Complainers Complain Rate Decisin by Reducing Intial Assesement Decisin by Maintaing Intial Assesement Complainers Received Decision Decion Rate 1 Arada 3,882.00 2,250.00 58% 1,188.00 1,062.00 2,250.00 100% 2 A/ketema 4,540.00 2,668.00 59% 1,634.00 1,034.00 2,668.00 100% 3 Lideta 2,529.00 1,096.00 43% 652.00 444.00 1,096.00 100% 4 Kolfe keranyo 12,639.00 5,681.00 45% 3,120.00 2,561.00 5,681.00 100% 5 Akaki Kality 5,817.00 2,939.00 51% 1,561.00 1,378.00 2,939.00 100% 6 Kirkos 3,843.00 1,628.00 42% 726.00 897.00 1,623.00 100% 7 Bole 7,615.00 4,784.00 63% 1,355.00 3,400.00 4,755.00 101% 8 Yeka 7,225.00 2,848.00 39% 867.00 1,978.00 2,845.00 100% 9 N/Lafto 8,001.00 5,200.00 65% 776.00 4,424.00 5,200.00 100% 10 Gullele 2,842.00 1,443.00 51% 711.00 732.00 1,443.00 100% 11 Merkato#1 471.00 389.00 83% 169.00 220.00 389.00 100% 12 Merkato#2 712.00 385.00 54% 203.00 182.00 385.00 100% Total 60,116.00 31,311.00 0.52 12,962.00 18,312.00 31,274.00 100%
  24. 24.  52% (31, 311) have lodged complaint application to the Authority up to Tikimit 30,2010 E.C(Nov. 9/2017).  99.91% of the complaints have received decisions.  18,312 [58.55%] of the complaints were settled by maintaining the previous assessment  12,962[41.45%] of the complaints were settled by improving the previous assessment based on relevant evidences.
  25. 25. Statements Yes No Total Did you get appropriate and timely response from the Compliant Hearing committee at different levels? 380 (26.1%) 1077 (73.9%) 1457 (100%) Do you believe that the response given by the Compliant Hearing committee is sufficient or satisfactory? 246 (16.9%) 1211 (83..1) 1457 (100%) Is there tax deduction given to you after the appeal? 900 (61.8) 557 (38.2%) 1457 (100%) If the deduction were given to you, was it satisfactory? 205 (22.8%) 695 (77.2) 900 (100%)
  26. 26. Underlying causes of complain
  27. 27.  From the tax payers perspective:  Fairness and Equitability  From the tax Officials perspective  Lack of awareness, confusion among tax payers , a tendency of considering yearly revenue as taxes.  Attitude or behavior of tax payers in sticking to pay tax based on the previous assessment.  Limitless or extreme willingness of tax authority to entertain complaints without costing the tax payers.  Resistance from tax payers to change their category from category C to A or B because of tax compliance cost.
  28. 28.  Business engaged in the same operation , in the same location were assessed by difference committees with different amounts.  Since many traders have been running the business by leasing license from others, operators and license owners (actual tax payers) are different. Complain was presented by license owners whose tax and trade literacy is low.
  29. 29. Policy Recommendations
  30. 30.  These recommendations are meant to initiate actions which could improve the situation for both tax payers and Ethiopian Revenue and Customs Authority include:  If the currently implemented average daily sales estimation method which is turnover base standard assessment or indictor based estimated assessment is to be implemented in the future it has to be supported by long-term, coordinated and comprehensive plan.  The authority should implement Permanent Presumptive income tax assessment as required by the law (every three years) in order to avoid the mentality of compensating lost tax by the tax authority by imposing higher turnover growth rate on tax payers which resulted in frustration of tax payers.
  31. 31.  If the Authority is unable to undertake the daily sales estimation (on timely basis) on every three years, it should change to tax imposed in the previous years by making upward increase for inflation rate, economic growth rate and other economic factors.  The directive should incorporate objective and concrete parameters that indicate average daily sales  The authority should design and implement effective tax payer’s education and training sessions before implementation of new legislation, regulations and directive .
  32. 32.  Assessors’ team needs to be composed peoples having technical knowledge and ample experience and incorporate individual from the authority and business society.  The team has to be well trained and conduct practical demonstration or pilot test before the implementation of average daily sales estimate.  The presumptive tax assessment needs to be more equitable and fair. Thus businesses engaged in the same operation and in the same location should be assessed by same committee.
  33. 33.  The authority needs to be Install appropriate independent administrative tax complaint process . This is because: Cost of Complaint hearing process extremely expensive. It allows taxpayers to challenge assessment or decisions made by tax officials where they believe a mistake has been made. Complaints should be considered by persons independent of the tax officials
  34. 34.  In the process of resolving tax complaints of tax payers, mandate should be given to complain hearing committee to increase over and above initial assessment during the time of re- assessment if the average daily sales estimate is over and above the initial estimate.
  35. 35. Comments and Questions Thank you.

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