Determinants of tax compliance: the case of Jimma Town

Abstract

This study was conducted with the aim of identifying the determinants of tax compliance in Jimma town. The target population of the study was category B tax payers of Jimma town which were 1143in number. A sample of 288 category B tax payer was taken using stratified sampling followed by random samplingfrom each strata. The category B taxpayers were stratified into trade (retailer and wholesaler), service sector and manufacturing (process) according to their field of work. By distributing a total of288 questionnaires to Category B sample taxpayers of the town, the study tried to explore the main determinants of tax compliance and how these determinants are related with tax compliance. Tables, graphs and charts were used to present the result of the analysis. Pearson correlation matrix and Logistic regression model was used to identify the main factors that determine tax compliance. The findings of the study shows that tax rate, probability of detection, penalty rate, reference group and tax knowledge are the determinants of tax compliance. When tax rate is perceived as higher and inequitable, tax compliance will decrease: the higher the probability of detection, the lower the compliance: when taxpayers perceived there is high penalty rate for any non-compliance, the level of compliance will decrease: negative perception on friends and relatives result in low compliance. Lastly, taxpayers with high tax knowledge will not comply. In general, it is recommended that the tax authority and other responsible bodies; to increase taxpayers' awareness, study about detection methods and try to be exhaustive in conducting detection and use trained and ethical personals, to remove misconception of taxpayers in which the amount of tax to be paid by the taxpayers is aimed at not harming them and is based on their ability to pay, should prevent the cause of penalty by making the taxpayers know what results in penalty and how can it be prevented, cultivate personal awareness of compliance and educating the whole society about benefit and importance of voluntary compliance and conduct scientific assessment of the taxation system to investigate any loopholes. This will help to enhance the level of compliance which helps taxpayers to comply voluntarily through all possible ways.