International Journal of Accounting Research

Effect of Tax Audit Practice on Tax Revenue in Jimma City Revenue Administration; A survey on Category “A” and “B” tax Payers

Netsanet Gizaw^1* and Kidist Abebe^{2 1}Lecturer in Economics Department, Mizan –Tepi University, Ethiopia
Lecturer in Department of Economics, Wollega University, Ethiopia
^*Correspondence: Netsanet Gizaw, Lecturer in Economics Department, Mizan –Tepi University, Ethiopia, Email:

Received: 05-Nov-2021 Published: 26-Nov-2021

Introduction

Taxation being a compulsory levy imposed on property by the government to provide security and create conditions for the economic well-being; it is a major player in every economy of the world. As a result, taxes and tax systems are fundamental components to build nations, and this is particularly true in the case of developing or transitional economies. Also for most developing countries, taxation goes hand-in-hand with growth of an economy and taxes are lifeblood for the governments to deliver essential services and to bring about long-term investments in public goods [1]. In relation to this, government revenues sourced from various tax and non-tax receipts and one of the oldest and sustainable source of development finance is taxation. Developing countries are in difficulty to collect tax efficiently, because of many serious problems they face to tax design and administer it and consequently, they are in trouble to provide basic social services from taxation. An efficient tax administration system would enhance a high level of taxpayer voluntary compliance, which in turn would result in high tax revenue [2]. Tax fraud is an intentional discount of tax liability curtailing from real transactions. To Baurer [3], tax fraud is a deliberate hiding actual state of their affairs to tax offices to reduce their tax liability that they are intended to pay.

Tax audit is a detailed examination into activities of a taxpayer to regulate whether taxpayers’ are correctly declaring their tax liabilities [4]. This activity indirectly pushes voluntary tax compliance, and directly generates additional tax revenue. According to Ebrill et al., [5] though many developing and transitional economies adopt audit practice, audit performance is reported as a weak aspect of tax administration, irrespective of whether other aspects are working. The rationale why many developing countries do not have an effective audit programs is; lacking of required highly skilled and appropriately paid audit practitioners, nearly absent sound institutional audit practice, lack of clear political support for the tax administration to induce its applicability. Further, audit system is not a very welcoming procedure for both taxpayers and economy. For this rationale, having effective tax audit program is a key for cost minimization and detection of tax evasion as well as proactively preventing tax frauds. Thus, investigating the effect of tax audit practice on tax revenue in Jimma city revenue administration were the concern of the current study.

Statement of the Problem

Every country in the world collects tax to fulfil the government public expenditure. To meet these needs, the three condition should be fulfilled; tax system should be convenient to tax payers in terms of time and situation, tax amount to be paid should be certain without any ambiguity together with ability to pay and attitude of tax administration should be encouraging, progressive and nonadverse impact on tax payer. Like other counties, Ethiopian tax is not only meant to raise revenue for current expenditures, but aims at directing economic agents to development goals foreseen by the government through the incentive schemes embedded within the prevailing tax laws. In doing so, tax is a mechanism for reduction of income inequalities by reallocating income, upgrading of capital investment, cheering and/or depressing certain industries subject to how suitable for country’s development program they are.

Study by Agumas also shows that tax audit can play a significant role in improving tax administration and overall taxpayer compliance by impacting taxpayer’s behaviour that would help to generate adequate revenue. In addition to raising revenue from auditing activities, efficiently detecting non-compliant taxpayers, applying appropriate sanctions, and publicizing results of audit activity, taxpayers get the message that any attempt to avoid tax presents a high risk of detection and the penalty for non-compliant taxpayers is substantial. Effective tax audit is vital, as it assist government in collecting proper tax revenue necessary for maintaining budget, stabilize economy, ensure strict compliance with tax laws, and improve degree of voluntary compliance. Yet, Yesegat & Fieldstad [6], a study on taxpayers’ views of business taxation in Ethiopia revealed limited capacity of tax administration service resulted in dissatisfaction of taxpayers in turn, leads to low compliance and poor revenue.

Total tax revenue performance has been relatively poor that accounts an average of 10.9 % of GDP during 1990-94 and 12.9% during 2000-06. This is due to lack of awareness about taxes by taxpayers, low tax Collection and administration system. To solve the problem, efforts were made by government to ensure effective tax audit program which is capable to investigate, detect and prevent loss of tax revenue, monitor tax payers in complying with tax procedures so as to reduce tax evasion and then to increase the revenue generation through tax by creating good tax administration. Though, there is an effort by the government there has been tax evasion and tax fraud from tax payers apart from not paying their duties on the right time that the authority scheduled. Irrespective of any sanctions some tax payers are ignorant to pay their tax on time and at the same time they even don’t need to provide information necessary for auditing their business profit and evade part of it [7]. So, this study is important to see the how existing audit practice is apt for revenue generation in Jimma city tax revenue office.

Amina et al., studied determinants of tax compliance in Jimma zone among category ‘A’ taxpayers and the author did not measured tax audit practice and its effect on revenue. However, the current study bridged the existing methodology gaps by considering the effect of audit practice on city’s revenue by including category “A’’ and “B’’ apart from including the variables that were previously omitted. Studies by Tadesse and Goitom in Mekele city empirically examined factors influencing taxpayers’ compliance among category “C” taxpayers. Further, Tesfaye studied tax audit practices and its challenges in Oromia revenue authority by considering the whole tax payers, while this study will be limited to city administration on category “A” and “B”. Besides, the issue of tax audit practices and its effect on revenue did not get proper focuses by many researchers. Particularly effects of tax audit practice on revenue were not studied at Jimma city. Thus, the researchers adopted cross sectional study design and it is based on information that was collected from taxpayers’ and officers of revenue office. The study tried to answer the following basic research questions about tax audit practice and its effect on tax revenue in city administration among category “A” and “B” tax payers.

• What is the current performance of tax revenue in Jimma city administration?

• What is the effect of tax audit practice on revenue in Jimma city revenue administration?

• What are the other determinants of tax revenue in the study area?

Objective of the study

The general objective of this study was investigating tax audit practice and its effect on tax revenue in Jimma city administration revenue among category “A” and “B” tax payers. Specifically, the study seeks understand current performances of tax revenue in Jimma city, to examine tax audit practice and its effect on tax revenue in Jimma city revenue and to examine determinants of tax revenue in study area.

Scope of the study

Though, Jimma zone is vast having a number of woreda tax authority and one tax office under city administration, this study was limited to Jimma city tax revenue office alone and attempt were made to consider category “A” and “B” tax payers under revenue office. For this rationale, all tax payers under Jimma city administration were not considered. Thus, this study focus on tax audits practice and its effect on revenue. Hence, tax audit practice and its effects on revenue generating were critically investigated by this study.

Literature Review

Meaning and Concepts of Tax

Various authorities and professionals in several ways have defined tax. Conceptually, taxes are a compulsory contribution made by individuals and corporate bodies to the government of a given country with a view to complementing and/or providing income for the government. Taxes are a form of compulsory levy imposed by the government or other tax raising body, on income, expenditure, or capital assets for which the taxpayer receives nothing in return. Taxes consist of direct tax or indirect tax, and may be paid in money or as its labour equivalent. All legal entities are required to register their financial activities in the books of journal and ledger as prescribed in the Commercial Law and are obliged to keep their accounting books and the relevant supporting documents in accordance with the accepted accounting principles and Standards. According to Ethiopian proclamation number 285/2002, taxpayers are classified into three major categories based on the type of their legal obligations for records keeping: Category “A”, “B” and “C” taxpayers.

As of Ethiopian tax proclamation, 979/2016 “category A” taxpayers as any company incorporated under laws of Ethiopia or in a foreign country and any business having an annual turnover of Birr 1,000,000 or more, have the obligations to recording their business activities in the books of journal & ledger and keeping the supporting documents. They are required to submit Balance sheet, profit and loss statement by incorporating gross profit. Unless not classified in category “A”, any business having an annual turnover of over Birr 500,000 would be classified under category “B” taxpayers. This category of taxpayers should submit profit and loss statement at the end of the fiscal year similar to category ‘A’ taxpayers.

Tax audit is an activity or a set of activities performed by tax auditors to determine at taxpayer’s to correct tax liabilities for a particular accounting or tax period. It involves examination of financial statements, books of accounts and vouchers of a taxpayer by tax auditors to ascertain whether the taxpayer has accurately considered revenues and expenses when determining taxes shown in the declarations as per the requirements of the tax laws. It also involves approaches like observation, direct monitoring of receipts in cash businesses, use of mark-up techniques and analysis of key ratios. Tax audit is a key as it assists government in collecting appropriate tax revenue necessary for budget, to maintain economic and financial order, ensures that the taxpayers submit satisfactory returns. Most taxpayers’ report their tax liabilities more accurately if they believe that tax administration has the capacity to detect any unreported liabilities and that heavy penalty might be applied when they are detected [8]. Thus, tax audit results in increased tax revenue in two ways: directly through assessment of additional taxes; and indirectly by discouraging underreporting of liabilities by all taxpayers. Besides, Barreca and Ramachandran [9] noted the purpose of tax audit is to check evasion of tax and ensure compliance in accordance with the laws. Modern tax administrations have developed a range of audit “products” to provide a more tailored response to the risk being addressed through the audit activity. Various terminologies have evolved to describe different types of tax audit activity; Audits can differ in their scope and level of intensity. As forwarded typical range tax audit program based administration includes desk audit or verification, field audit, registration check, advisory audit, record keeping audit, refund audit, issue-oriented audit, comprehensive or full audit and fraud investigation.

A number of empirical studies examined tax administration in both developed and developing countries, tax audit program in particular. For instance, Mesfin [10] examined the effects of tax audit on revenue in federal inland revenue service experience from Abuja. The data collected through questionnaire and review of several publications that are relevant to the study, was presented using tables and percentages; for the test of hypotheses and analysis of variance. The study revealed that tax audit has significant effects on revenue generation and it has a positive relationship with the revenue. An increase in tax audit increases tax bases for the government and an increase in tax audit reduce tax fraud in the tax system. Abinet [11] also studied on the basic concepts of tax audit, and analyze the significance and role of tax audit in increasing tax revenue and in strengthening tax administration capacity. The results of the study revealed that, tax audit practice as seen in Addis Ababa city administration carried out mainly based on internal documents produced by taxpayers.

Tax knowledge is a critical element in a voluntary compliance within tax system. If the taxpayer knows the purpose and how it will be used for the government to intended public expenditures, this improves tax revenue collected without compliance cost. According to Gitaru education is necessary to increase public awareness especially in areas concerning taxation laws, the role of tax in national development, and especially to explain how and where the money collected is spent by the government. Generally, knowledge of the taxpayers will create civic mindedness [12]. Optimistic assessment of taxpayers to the application of state functions by the government will mobilize taxpayers to meet their tax duties by paying taxes according to their ability to contribute without externally influenced by other parties [13]. Clifford et al., studied the effect of taxpayer education on voluntary tax compliance, among small and micro-enterprises in Mwanza city in Tanzania. The result of the study revealed that provision of tax education has influence on compliance decision. Chan et. al. found that there is a positive relation between educational level and tax compliance. Kirchler et al., stated that higher knowledge concerning tax leads to higher compliance [14].

The relationship between gender and tax compliance is toward the argument that female tax payers are more compliant than male counterpart. In the findings of Tadesse and Goitom the female taxpayers were more compliant than male taxpayer. Also, the finding of Mohani and Amina and Saniya, were consistent with Tadesse [15]. Yet, this factor still not comes in to common conclusion as Richardson suggests that gender has no significant impacts on compliance [16]. Tax knowledge is a critical element in a voluntary compliance within tax system. If the taxpayer knows the purpose and how it will be used for the government to intended public expenditures, this improves the amount of tax revenue that would be collected without compliance cost. Optimistic assessment of taxpayers to the application of state will mobilize the taxpayers to meet their tax duties by paying taxes according to their ability to contribute without external influence [13]. Nugroho describes consciousness of paying taxes as a form of moral attitude which gives a contribution to the state to support the development of the country economy and attempt to comply with all rules, regulation and directives set by the governments and to pay the amount assessed voluntarily without any pressure externally [17]. Tesfaye, conducted a study to assess the practices and challenges of tax audit in Oromia revenue authority. The finding of the study shows tax auditors were not made sufficient efforts to create taxpayers’ awareness. Study by Agumas reaveled that most tax payers were not voluntarily disclose their views freely due to lack of knowledge, lack of awareness.

Samuel and Viswanadham conducted research on assessment of business income taxpayers’ tax knowledge, tax complexity and tax compliance in Amhara Regional State of Ethiopia [18]. And taxpayers who have low income did not know reasons why they pay and tax information as well their low awareness indicates that it has significant impact on compliance on a tax administration. Verboon and Goslinga investigated the relation between fairness consideration and tax compliance attitude, intentions that distributive fairness positively affects both tax compliance [19]. According to Chau and Leung taxpayers can perceive tax system as unfair if they believe that they are paying more than they receive from government and or in relation to what other taxpayers are paying [20]. In addition, Mesele and Tesfahun concluded that some of the category “A’’ and “B” tax payers and many of category “C” tax payers don’t agree with fairness in tax assessments in Dessie town [21]. They suggested that such problems might occurred either due to lack of fairness or liberation of tax authority employees in the town.

A tax system may be complex and thus with greater compliance costs for many reasons and in many ways. The immediate costs of complexity cannot be measured by looking solely at the existing tax rules and regulation themselves. The main basis of compliance cost involves taxpayers’ performance, often involving recordkeeping, so estimates of incremental paperwork costs are usually more validity than the counts of the number of pages of rules [22]. Sawyer agreed that there have been some improvements in tax simplification, but it needs continuous improvements to change the legislation in the part postponed to the rewrite program that can benefit the legislation duty by improving these easily understandability of the laws [23]. On the other hand Saw and Sawyer (2010) examined readability of a sample of the selected sections of the Income Tax Act 2007, TIBs and binding rulings by using previous measures of Pau et al., they reach on similar conclusion [24]. Thus, even fundamental tax reforms in tax laws can be analysed as an indication of changing greatly complexity, raising the trade-off between compliance costs and accuracy of assessment to collect tax revenue [22]. Tax ccomplexity resulted in to rise to higher administrative and compliance costs [25].

OECD stated that complexity of tax laws coupled with the relatively large populations of taxpayers to be administered mean that all revenue bodies must rely substantially on taxpayers’ voluntary compliance to achieve the outcomes expected of them [26]. Thus, a quality taxpayer service program ensures timely handling of taxpayer complaints and the tax officials have empathy and are competent. Security of taxpayers' documents and tax affairs should be of paramount. The physical appearance of equipment, facilities and layout should facilitate taxpayers' services. The taxpayers are likely to be responsive to tax laws and practice by complying in voluntary registration, filing and payment [27]. Generally, an effective and efficient program of taxpayers’ activities is a critical objective of all revenue bodies. Tax audit is one of the extensive standing and accepted compliance strategies in tax administration. It provides visibility to compliance and enforcement arm of tax administration. It also helps tax agencies to achieve revenue objectives that ensure health of the economy and individual states. It derives voluntary compliance and generates additional tax collections, helps tax agencies to reduce tax gap between taxes due and amount collected [9]. Getaneh studied tax audit practice in Ethiopia in federal government confirmed that tax audit program is mainly directed to specific segments having large tax potential with less emphasis to medium and small category of taxpayers community.

Research Methodology

The researchers made use of both primary and secondary data to achieve objectives of the study. The primary data was collected from category “A” and “B” tax payers. Among the secondary data annual tax report that was prepared by the city tax office and materials that regional tax bureau has published on tax area. The study used a cross sectional study design.

Sample size and Sampling Design

According to Income tax proclamation number 979/2016 category “A” tax payers has a business having an annual revenue of Birr 1,000,000 (One million Birr) or more. And category “B” tax payers have a business having annual revenue of Birr 500,000(five hundred thousand) and above. Hence, the tax payers under these categories in Jimma city were considered as a target population for this study. Appropriate sample size depends on various factors relating to the subject under investigation including time, cost, data and degree of accuracy. In the first stage, Jimma city was selected purposively owning to the existence of large numbers of category “A” and “B” tax payers as compared to the other woredas in Jimma zone. Besides, a stratified random sampling technique was used to collect data from sample respondents. The selections of respondents from sample population were based on stratified random sampling. Stratified random sampling used because the total population of the study is heterogeneous. This method involves the division of a population into smaller groups known as strata which formed based on members' shared attributes. The main advantage with stratified sampling is how it captures key population characteristics in the sample and Stratified random sampling is unbiased sampling method of grouping heterogeneous population into homogenous subsets then making a selection within the individual subset to ensure representativeness. This method of sampling produces characteristics in the sample that are proportional to the overall population.

The total tax payers under category “A” and “B” in Jimma city were 1352 (Jimma city Revenues Office, 2012). Out of which 397 were category “A” and the rest 955 were category “B”. Sample size was determined by using Krejcie &

s = required sample size.

= chi-square for a degree of freedom at desired confidence level (3.841).

N = population size=1352

P = population proportion (assumed to be 50 as this would provide maximum sample size).

d = degree of accuracy expressed as a proportion (.05).

Data collection tools that were used for this study was structured questionnaires in such a way to address each research objectives, and semi-structured guide for in-depth interview. The study used both quantitative and qualitative approach to identify factors that influencing performance of tax revenue apart from tax auditing system. Both descriptive statistics and binary logistic regression method of analysis were used by the study, while statistical software package STATA_13 version was employed.

Binary Logistic Regression

When the dependent variable in a regression model is binary (0, 1), the analysis could be conducted using either linear probability or log it/Probit models. But, the linear probability model may generate predicted values less than 0 or greater than 1, which violate the basic principles of probability and the coefficient of determination (R2) is likely to be much lower than one. For this reason, it is questionable to use R2 as a measure of model fitness [29]. The other problem with the linear probability model is the partial effect of any explanatory variable is constant. On the other hand, the choice of log it or probit model is depending on the assumption of the distribution of the error term (ε) [29]. Hence, this study used binary log it model to identify the factors that influence tax revenue among category “A” and “B” in Jimma city administration. Amina and Saniya, study on tax compliance and its determinant in Jimma zone. They found out that tax fairness, tax system complexity, tax audit and level of education have influence on tax compliance. On the other hand Endale have explored that tax system complexity, service delivery of tax authority and knowledge of tax payer have challenges on tax administration on category “B” tax payer, were binary logistic regression was used in the study. Hence, following the worked carried out by Amina and Saniya and Endale this study was used binary logistic regression model to see the effect of tax audit on tax revenue in Jimma city. The dependent variables take

a value of “1” when tax audit practice generates high revenue and “0” otherwise. Empirically logistic regression express as Y= 1 if tax audit practice generate high revenue and 0= Otherwise. P: is the probability of tax audit practice generate high revenue given 1-p: is the probability of tax audit practice not generate revenue given

Z: is the linear combination and is given

refers to the coefficient of the parameter. … Are independent variables is disturbance error term. There for Odds (event) Since p is the probability generating high tax revenue, not directly observable, a dichotomous (0 or 1) variable constructed, it takes the value of “1” when tax audit generate high revenue and “0” otherwise. i.e. = 1 with the probability of p = 0 with the probability of 1-p.

Then from logistic probability equation (1) the following regression equation was derived.

The equation that account for individual explanatory variables specified for this particular study is given as follows. Accordingly, the dependent variables as measured by tax revenue (TR) and the independent variables including = Education level (EL), = Age of tax payers(AGE), = knowledge of taxpayer (KT), = Tax system complicity (TSC), = Service delivery of tax authority(SDTA), = Tax audit practice (TAP), = Social and Economic instability(SEI), = Tax payer personal and financial ability(TPPFA) and = Tax fairness (TF).

Measurement of Variables and their expected signs are summarized in table -2 as follow:

Based on description of variables, the operational model for estimation can be formulated as. TR= f (EL, AGE, SDTA, INFA, TSC, TAP, LTF, SEI, PFC, is error term showing other factors not included in the model)

Results and Discussion

Descriptive Statistics

Description of the socio–demographic characteristics of the sample give some basic information about gender, marital status of taxpayers, types of business they are engaged in, and category of taxpayers. The study revealed that out of 223 sample respondents, 48 (21.32%) of them were female while 175 (78.48%) of were male taxpayers, from these 160 responds that tax audit practice generate higher revenue while the remaining 63 responds that tax audit practice dos not generate higher revenue. This shows that there is awareness difference between tax payers about the importance of tax audits.Business types that taxpayers are being engaged in the city indicated about 117 taxpayers (52.47%) are engaged in service delivery (service business). Whereas about 46 taxpayers (20.63%) were engaged in manufacturing business. The remaining taxpayers 39 (17.49%), 21 (9.41%) worked in merchandise and others mixed business type respectively. The study revealed that out of the 223 target respondents, 157 (70.40%) of them were category “B” tax payer and the rest of 66(29.60%) of them are category “A” tax payer. Therefore, the respondents’ responses show that more than 50% of tax payers are on category “B”.

Logistic Regression Model Result

In addition to descriptive analysis econometric model was used to examine the effect of tax audit practice revenue on the study area. As the dependent variable has a dichotomous nature, a binary logistic regression was used where the estimated probabilities lay between logical limits of 0 and 1. In this model the dependent variable is categorized as tax audit practice generates high revenue and otherwise. Among the model diagnostic tools applied for the current study, variance inflation factor (VIF) was employed to test the presence of multi-collinearity among independent variables. In this study the results of variance inflation factor (VIF) test confirmed the non-existence of multi-collinearity between the variables i.e. mean VIF = 1.06. Then the inclusion and exclusion of irrelevant and relevant variables respectively were tested by OV (Omitted Variable) tests. Ramsey Reset test using the powers of the fitted value of dependent variable. The result of ovtest and linktest from the Stata show that there is no omitted variable effect in the model. And heteroskedasticity problem was tested by whited test and finally goodness of fit test was tested by Hosmer-Lemeshow test for goodness-of-fit, the problem of hetroskedastcity in the model were eliminated using robusting mechanisms of standard errors. From the Hosmer–Lemeshow goodness-of-fit test this study result shows that the model is fit i.e. Number of observation = 223, Hosmer- Lemeshow chi2 (8) = 9.55 and prob > chi2 = 0.2981 [30].

In logit model, a more meaningful interpretation in terms of odds and marginal effects are obtained by taking anti log of the various slope coefficients and marginal effect is the effect on dependent variable that results from changing independent variable by a small amount. The results were presented in Table 3.

The results from table 3 shows that out of 9 explanatory variables included in the regression five variables generated positively significant value at 5% significant level. The variables include, age (Age), education level (EL), tax audit practice (TA), tax fairness (TF) and tax payers knowledge (TPK) and two of independent variables, namely socio-economic instability (SEI) and tax system complicity (TSC) had negatively significant value at 5% level of significance. However, other personal & financial constraint of tax payers (PFC) and service delivery of tax authority (SDTA) had no any significant effect on revenue among category “A” and “B” in the study area. There are two basic outputs that we can see from the table. The first output includes the coefficient and standard errors of logit model while the second output is marginal effects of log it model.

The coefficient of log it model does not show marginal effect of independent variable on the variation of the dependent variables; rather it tells us only sign of each independent variable. On the other hand, in order to infer the effect of each explanatory variable on the likelihood marginal effect of each independent variable was taken. Accordingly, Age (Age) of tax payer is positively related with tax audit practice and statistically significant at 5% level. Other thing remains constant as age of tax payers increase by one year, the probability in which that particular taxpayer responds to tax audit practice would increase by 5.05%. This shows that as age of tax payers increase their willingness to tax audit will increase and it causes positive effect on tax revenue. Besides, the study indicates that tax payers with higher age group are more responsive and willing to tax audit than lower age group. This finding is line with the work of Dubin and Wilde, and the study revealed that there is a positive relationship between age and tax compliance. Education level (EL): The log it estimation result reveals that, the effect of education on tax audit were found positively significant at 5% level of confidence. Keeping other factors constant, as education level of taxpayer increase by one year the probability of tax revenue will increase by 8.15% as they will be more responsive to tax laws. This shows education is important to create awareness about tax audit that again generates higher revenue. Similar results were obtained by Clifford.

The coefficient of tax system complicity (TSC) revealed a negative relationship with tax audit and it is statistically significant at 5% level of significance. The marginal effect of this variable indicates that as information accesses of tax payer decrease tax system became more complex and it would leads to reduction tax of revenue by 14.3%. This finding shows that to make tax system simple, information is essential factor as tax payer who gets information about tax audit has a higher tendency to audit their business than those who do not have information on the issue. This finding is consistent with the result obtained by Shaw et al., which show that tax system ccomplexity rise higher administrative as well compliance costs and reduce tax revenue [25]. Besides to the work of by Shaw et al., George Drogalas et al., has obtained a result that high degree of tax law complexity negatively affects tax infringements tracking [25].

Theoretically the fairness of the tax system is one of the very important aspects of a tax system which determine the behaviour of taxpayers. If the tax payers perceive the tax system as a fair, it will be easy for them to comply with it. In this study tax fairness (TF) variable have a predictable significant positive effect on tax revenue in the study area. This positive relationship indicates that tax fairness increase the probability of tax audit increase, this cause’s a positive effect on revenue to be generated. In terms of the marginal effect, it implies that a one per cent increase in tax fairness increases the probability of tax revenue to be collected by 14.4%. According to the survey data, the researchers understand that lack of tax fairness is a cause to reduction of tax revenue in the study area. This finding is consistent with the result obtained by Mesele and Tesfahun as they concluded that some of the category “A’ and “B” tax payers and many of category “C” tax payers don’t agree with fairness in tax assessments by the revenue offices and this would likely decrease the performance of tax revenue to be generated [21].

Tax audit practice (TA) has generated a positively significant effect on tax revenue at 5% level of confidence. The positive relationship indicates that tax audit practice increase tax revenue. The marginal effect of tax audit show that a one per cent increases in tax audit would increase the probability of tax revenue to be generated by 3%. This indicates that tax audit is very important factor to produce higher tax revenue. This means that the more the tax audit being conducted there would be more tax revenue to be collected. Thus, it is right to say that tax audit is directly related to collection of tax revenue. All the tax audits are important because they add something to revenue and thus, should be encouraged as it assists the government in collecting appropriate tax revenue. This finding is in line with the study conducted by Barreca and Ramachandran that they found tax audit practice helps tax agencies to achieve revenue objectives that ensure the fiscal health of the economy and individual states as well [9]. It derives voluntary compliance and generates additional tax collections, both of which help tax agencies to reduce existing between the taxes due and the amount to be collected.

The log it estimation result reveals that, the effect of socio-economic instability (SEI) on tax revenue is negative and statistically significant at 5%. Keeping all other factors constant, the influence of socioeconomic decrease tax revenue to be collected by 11.86%. This shows that any socio-economic instability inhabit the performance of tax revenue. This finding is in line with the work of Endale (2019) where he has conducted on tax challenges.

Tax payer knowledge (TPK) is positively related with tax audit and statistically significant at 5% level of significance. Other thing remains constant, as tax payers’ knowledge increase by one level the performance of tax revenue would increase by 4%. This shows tax payers with a good awareness about tax audit practice would have more willingness to audit their business than who do not have knowledge about the importance of auditing. This shows that tax payer knowledge is an important factor in influencing the performance of tax revenue. This finding is consistent with the findings of Kasippilai that his study has revealed tax knowledge is a critical element in a voluntary compliance within tax system. If the taxpayers know the purpose and how the collected taxes would be re-used for the public expenditures, then this would improves the amount of tax revenue that has to be collected without compliance cost.

Conclusion and Recommendation

Conclusion

This study was conducted with the objective to investigate tax audit practice and its effect on revenue in Jimma city revenue administration among category “A” and “B” tax payers. The study made use of cross sectional survey on 223 tax payers. Both descriptive statistics and a binary logistic regression model were employed as an econometric tool to analyse the collected data. so as to meet its objective. The logistic regression result revealed that tax revenue is significantly influenced by age, education level, tax audit practice, tax fairness, tax payers’ knowledge, social and economic instability and tax system complexity. In addition to this socio-demographic characteristics of the respondent have their own influence. Yet, tax payer personal financial constraint and service delivery of tax authority generated insignificant effect on revenue. As age of tax payers’ increase their willingness to tax audit will increase and it causes positive effect on revenue. Similarly, education levels of the respondent were found positively significant in influencing tax revenue in the study area. Showing that it is central to create awareness about tax audit so as to generate high revenue. Further, complexity of tax system was also the challenges in revenue generation and fairness of tax system is one of the factors that determine the behaviour of tax revenue. This positive linkage specifies that as tax fairness increase probability of tax audit and revenue will also increase. The finding further revealed that social and economic instability limit revenue collection. Likewise, tax payers having awareness about tax audit have more willingness to permit audit practice to their business than those who don’t have knowledge about the apt of audit implying that tax payers knowledge is an important factor in influencing revenue.

Recommendations

Based on finding of this study the following policy recommendations were put forwarded by the researchers and believed to improve tax revenue in the study area, Jimma city.

• The revenue authority has to implement pertinent tax laws being faithful, equitable and faire regardless of their personal status and nature of organizations managed. This can be possible through formal way of information distribution and awareness creations to taxpayers.

• Some tax payers have lack of awareness regarding tax rules, regulation directives and procedures and directives in the study area. This is due to level of awareness is dependent on taxpayers educational background and exposures. To increase the awareness level Jimma City revenue administration better give great attention to awareness creation for taxpayers through different techniques like mass-media, preparing broacher using different structures etc. Besides, audit practice in cooperation with intelligence agent has to be made properly.

• The city revenue authority has to develop an appropriate technique to increase audit quality and coverage to increase revenue in the study area.

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