The effect of information technology on the sustainable reduction of tax evasion with mediating role of innovation in Ethiopia

The aim of this study is to examine the effect of information technology in reducing tax evasion and the mediating role of innovation in Ethiopia, with special reference to the Ministry of Revenue. Tax evasion is an ongoing threat to economic sustainability, undermining government revenues, exacerbating inequality, and impeding public investment. Therefore, studying the role of IT and innovation within organizations in the sustainable reduction of tax evasion is one of the current issues in most developing nations. This study employed a cross-sectional survey research design to collect primary data using a simple random sampling technique. Furthermore, it employed Covariance-Based Structural Equation Modelling (CB-SEM) to analyze the data using IBM Amos. In addition to the statistical procedures, the study employed basic scientific methods to enhance analytical rigor. Analysis was applied to break down latent constructs and observed variables for precise evaluation through CFA and SEM. The direct path analysis revealed a significant negative relationship between system quality in information technology and tax evasion (β = − 0.306, C.R = 5.2, P = 0.001). Similarly, a significant negative relationship was found between user quality in information technology and tax evasion (β = − 0.325; C.R = 5.5; P = 0.001). Additionally, the study identified a positive association between system quality and innovation (β = 0.125; C.R = 1.95; p = 0.048); as well as user quality and innovation (β = 0.311; C.R = 5.18; P = 0.001). Moreover, the bootstrapped indirect analysis revealed that innovation partially mediates the indirect relationship between system quality in IT and tax evasion (β = − 0.032; P = 0.048) as well as users’ quality in IT and tax evasion (β = − 0.082; P = 0.01). This finding implies that improvements in IT quality influence tax evasion not only directly but also indirectly through the adoption of innovation. These findings suggest that fostering innovation within tax authorities driven by high-quality IT systems and user proficiency plays a crucial role in curbing tax evasion. Theoretically, this finding supports the DeLone and McLean Information Systems Success framework. To reduce tax evasion in Ethiopia, the study recommends strengthening the quality of IT systems and improving the digital competency of users within the tax authority. Policy implications include the need for digital tax reform legislation mandating technology-driven processes, as well as incentives to encourage IT adoption and innovation within tax agencies. Furthermore, this finding can be useful in advocating the United Nations Development Programme’s (UNDP) tax reforms through innovation and technology, which aim to enhance revenue generation and meet Sustainable Development Goals (SDGs).