BY GETACHEW MINAS
Taxes are major sources of government revenue that are collected periodically. Evasion is an illegal act that impedes mobilization of tax. It is pervasive in the tax collection process in Ethiopia during the T-TPLF rule. Using data gathered from various sources, studies have assessed and analyzed the level of tax evasion during the rule of the junta. Researchers applied relevant techniques for analyzing and interpreting these data and arrived at the conclusion that there is tax evasion at all levels.
These tax evaders failed to declare their income for the purpose of cheating. They also under report income, overstate business expense, exaggerate deductions, overstate or understate trading stocks. Illicit traders that were associated with the junta also deducted personal expenses as business expenses to hide their tax liability. Such individuals cheated both the government and the consumer. They overcharged consumers to achieve high margin of profit while they depressed the income they reported to the tax authorities.
Experts in the field recommend latest computerization of the database at all levels of the tax authority for the purpose of effective and efficient tax administration. It is also proposed to assign highly trained and experienced personnel with the required qualifications. There is a need for capacity building for tax officers on a continuous basis. These officers have to be inculcated, instilled and couched on how to handle taxpayers. Quick and courteous service delivery and continuous education for taxpayers to inform them that the tax collected is used judiciously for the socioeconomic development of Ethiopia.
Also, the tax office should adopt scientific procedures in collecting data and selecting taxpayers for further audit. All those engaged in affairs related to tax collection, audit, revenue and expenditure need to be efficient in the use of the latest tech available at the global level. They have to be well versed in resource generation for the purpose of economic development and poverty eradication.
Enterprises engaged in industrial, commercial or other businesses react to taxes in different ways. They organize their activities and where they carry them out. In practice, customers worry about them, complain about their operations and, if possible, figure out how to dodge them when they are in contact. The way customers and businessmen interacted during the T-TPLF rule affected the level and structure of taxation.
The interaction of enterprises attached to the junta had a negative impact on the level of tax collected. If both had a deep understanding of the purpose of tax revenues generated, they would have tended to exchange goods and services as sincerely as possible without any cheating. This might have helped to generate sufficient revenues to finance socioeconomic development of the country.
Taxes are important sources of revenues for conducting public infrastructure and government services for economic development. The discriminatory public services of the junta had slowed down economic growth and development in regions other than Tigray. This undermined efforts to improve the living standard of the Ethiopian people.
There are reasons for the failure of some governments in developing countries to provide effective and efficient services to the people. Studies indicate that the taxing system in Ethiopia can be divided into three broad categories: taxes on income and profits; taxes on goods and services; and taxes on international trade. It is not, however, immune from tax avoidance and tax evasion. These are believed to be important factors limiting revenue mobilization and generation.
Tax avoidance, which was rampant among the TPLF enterprises, implied a situation in which the taxpayer reduced the tax liability by taking advantage of the loop-holes and ambiguities in the legal provisions. In the case of tax evasion, facts were deliberately misinterpreted by the junta and the tax liability was understated. In theory, tax evasion was illegal and carried penalties and prosecutions under the tax laws. Studies show that the illegal economic operation comprised all the various methods of tax evasion. As it reduced the revenue, it should have been checked to the greatest extent possible.
The debate on development finance and development aid has underscored that tax avoidance and tax evasion may undermine the ability of developing countries to finance development programs and projects. This view is based on the perception that the shadow economy in these countries, including Ethiopia, is larger than in the developed world. Information plays an important role in assisting the country to increase revenue and at the same time reduce audit costs.
It is indicated that when a taxpayer decided to underreport income to the tax authority, he faces audit and a penalty for cheating, but this did not apply to the junta firms. It is argued that compliance levels can only be explained by cultural aspects such as tax morale, patriotism, guilt and shame. In other words, taxpayers, despite being able to cheat, are unwilling to do so for non-economic reasons.
Tax specialists advise that developing countries should give emphasis to proper and modern tax administration. The issue is “not” the feasibility of certain taxes, but the favorability of its administrative structures. In many developing countries, for example, an income tax that relies on “self-reporting” cannot be administered at all. In a developed country the question is to what extent optimal tax design should reflect the reality of evasion, the necessity of enforcement, and the costs of collection. Ethiopia, like most countries in Africa, has been making considerable efforts in recent years to restructure its tax system. It is believed that this may increase tax revenue as well as reduce distortions in the Ethiopian economy.
A review of the impact of such reforms on the poor is of considerable importance to policymakers. The poor and the vulnerable constitute a significant majority of the population in Ethiopia. However, the analysis of the distributive impact of the tax system should be clear. The reasons for this are: first, tax evasion, which is considered to be substantial in Ethiopia.
This leads to unexpected consequences on income distribution. Second, a substantial portion of tax revenue comes from commodity taxes whose effect on income distribution is essentially determined by household consumption patterns and the market structure.Tax experts believe that studies are not fully conducted with the objective of investigating the level of tax evasion and avoidance in Ethiopia.
There is no scientific evidence if tax payers declare their true income. Similarly, there is no evidence if the true income generated originated from their business. There is also doubt that the taxpayers reported the exact tax liability. To arrive at the true liability, it is necessary to conduct research on the degree of tax evasion and avoidance. The specific objective of the research should be analysis of the controlling mechanisms of tax evasion and tax avoidance.
Specifically, it is necessary to assess whether there is reliable report of income by tax payers to the tax office. It is useful to study whether the tax payers report the exact tax liability. The assessment of the tax administration environment is also critical. The main outcome of the study may provide policy makers and the tax authority an opportunity to redesign mechanisms for promoting better tax system. This will help increase tax revenue.
Tax is a compulsory payment or contribution by the people to the government for which there is no direct return to the taxpayers. Tax imposes a personal obligation on the people to pay the tax if they are liable to pay it. The general public shall be taxed according to their ability to pay, which is considered as their fair share and the people in the same financial position should be taxed equally without any differentiation. Generally, tax has the following characteristics. It is a compulsory contribution by the taxpayers.
The taxpayers cannot refuse to pay the tax. Any refusal in this regard leads to punishments. For the payment of tax, there is no direct return to the taxpayers. They cannot expect any return in benefit for the amount of tax they paid, because there is no relation between the amount of tax paid by the people and the services rendered by the government to the taxpayers.
Tax imposes a personal obligation on the taxpayers. When a person becomes liable to pay the tax, it is his duty to pay it and in no way he can escape from it. The amount of tax received from the people is used for the general and common benefit of all. In return, the government has to render a range of social activities, which incur heavy expenditure. A part of the expense is sought to be raised through taxation of various types.
Thus, taxes are said to be the sharing of common burden by the people. Taxes are legal collections. They can be levied only by the government. Since the tax is paid without any return in benefit, it can be said that there is the prevalence of sacrifice in the payment of tax. The payment of tax is regular and periodical in nature. It is levied for a fixed period usually a year. Thus, almost all the taxes are annual paid.
Tax is levied on all people without any discrimination of caste, creed etc. Tax is levied not only on income but also on property and commodities. To enhance the revenue and to bring all the people under the tax net, the government imposes various kinds of tax. Taxes are classified into direct and indirect. Direct taxes are taxes levied on incomes, to which the persons concerned make direct payment to the revenue authorities.
These include income tax, taxes levied on total spending, company taxes, capital taxes where they apply, and local rates. Indirect taxes are those taxes levied on goods and services, so called because the authority does not usually collect them from the consumers directly but from importers, manufacturers and intermediaries. The duty paid by these people is reflected in the prices that consumers subsequently pay.
Direct taxes are the major types of taxes, which includes tax on income from employment/personal income tax, business profit tax, tax on income. These also include income from rental of buildings, 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, tax on income from rental of property, rendering of technical services outside Ethiopia, agricultural income tax and land use tax. Indirect taxes include turnover tax, excise tax, value added tax (vat), custom duty and stamp duty. Though taxpayers are required by law to pay tax, they tend to evade, and evasion is illegal. This results in losses in the tax revenue.
Tax evasion is associated with breaking the law. It is a gap developed due to the taxpayers’ real conduct that is contradicting fiscal law. Experts think that tax avoidance does “not”result in the breaking of the law. Yet, it is the circumvention of the law. Taxpayers that avoid tax attack what can be seen as the reliability of law.
Tax “evasion” may be defined as any action that results in the concealment of all or part of a person’s legitimate or illegal economic activities from the tax authorities. It is an intentional and illegal avoidance of paying mandatory taxes to the tax authority. Tax “avoidance” is used to describe tax reductions achieved through artificial but permissible arrangements of personal or business affairs. It refers to the legitimate use of loopholes in the tax laws in order to minimize one’s tax burden. All the above presentation indicates the difficult task of the tax authority in Ethiopia, particularly during the T-TPLF regime. It should, therefore, be strengthened with new technologies and expertise to fight tax evasion in the country whatever the regime may be.
Editor’s Note: The views entertained in this article do not necessarily reflect the stance of The Ethiopian Herald
The Ethiopian Herald October 27/2022
