Ethiopian Direct Tax System: The Reform of 2016 and Perception of Business and Employment Income Taxpayers

The objective of the study was to analyze the Ethiopian direct tax system focusing on the reform of the 2016 and perception of the taxpayers towards the fairness of the direct tax system. To achieve the objective of the study descriptive and inferential research design and mixed research approach was adopted. As data sources, both primary and secondary data sources were collected. Primary data was gathered from 768 employment and business income taxpayers found in Addis Ababa via a standard questionnaire. Besides, secondary data were gathered from the Ministry of Finance and economic cooperation for the period 2007/08 to 2020/2. The collected data were analyzed by using descriptive data analysis tools. In order to compare the perception and the tax collection performance Mann Whitney U test and paired samples t-test test was conducted respectively. The major findings of the study show that there is a significant variation in the perception of employment and business income taxpayers on the fairness of the Ethiopian direct tax system. The employment income taxpayers didn’t believe that the current income tax system of Ethiopia is fair from the different dimensions of fairness while the business income taxpayers agreed to most of the dimensions. The paired samples t-test confirmed that the direct tax revenue shows a significant mean increment after the reform of 2016 than before at a 5% level of significance. The Ethiopian direct tax system needs a major revision or reform to enhance the contribution of business income tax revenue, rental income tax revenue, and other taxes. In addition, the tax authority is recommended to employ sound administration and control systems for the collection of domestic indirect tax.