This study assessed presumptive income tax assessments of micro and small businesses in Addis Ababa, Ethiopia. In 2017, 148,514 businesses were reassessed, with 60,116 categorized as "C" taxpayers. After notices of estimated taxes, taxpayers protested assessments. The study aimed to understand the gaps in the assessment process and taxpayers' perceptions. Key findings include gaps in committee selection/training, indicators used, and taxpayers hiding information. Over half of taxpayers perceived assessments as unfair. The majority of complaints were resolved by maintaining or reducing initial assessments. Recommendations focus on improving assessment procedures, training, and establishing independent complaint processes.

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. By: Amanuel Mekonnen (MSC, MPP)
Endalkachew Mulugeta (MSC)

3.  Rationale of the study
 Objective of the study
 Methodology
 Major Findings
 Policy Recommendation

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.  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.  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.  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. Assessment of Average Daily Sales
Estimation Processes and Procedures

9. Selection of committee
members
Training
Conducting average daily
sales Estimation
Assessment of Average Daily Sales Estimation
Processes and Procedures

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. 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. 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.  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. 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.  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.  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.  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. Perception on Fairness of Average Daily Sales
Estimates and the Tax Imposed There On

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.  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. Perception on Tax Payment, Equitability of
Average Daily Sales Estimation and Tax imposed
there on among tax Payers

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. 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.  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. 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. Underlying causes of complain

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.  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. Policy Recommendations

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.  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.  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.  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.  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. Comments and Questions
Thank you.