INTRODUCTION TO TAXATION

Introduction
Tax is among the unpopular words in the English language and one that many people would not
miss if omitted from their vocabulary. To ‘tax’ is synonymous to taking away, depriving or
making demands on a person’s resources, powers, patience and memory.

At a national level, a tax is a government compulsory levy imposed upon the tax assesses
(taxpayers). These may be individual, groups of individuals, or other legal persons. The tax is
paid without corresponding return in terms of goods and services from government to the
particular taxpayers. However one of the reasons for levying tax is to collect revenue to use in
the provision of public goods and services for the benefit of all irrespective of whether one paid
tax or not.

Payment of tax is unique from other forms of payment in that the payment is guided by a specific
law and being compulsory means that the taxpayer has no option but to pay irrespective of the
financial circumstances a taxpayer may find himself in when the obligation to pay is due.
The evolution of taxation is attributed to the development of the modern state, which led to
increased expenditure for infrastructure and public services.

Origin of Taxation
As the saying goes, tax is the price we pay for civilisation and civilisation goes hand in hand
with organised society. For society to be organised it needs an administrative structure and an
administrative structure can only function effectively when it has finances. Therefore taxes in
one form or another have existed as long as the societies had the minimum elements of
Government.
Tax is defined as a monetary charge imposed by the Government on persons, entities,
transactions or property to yield public revenue . (per Blacks Law Dictionary).
Sometimes the payment may not be in money and in that case a more wide embracing definition
has been adopted as;
“Taxes are the enforced proportional contributions from persons and property levied by the State
by virtue of its sovereignty for the support of Government and all for all public needs” (per
Thomas . M. Cooley: The Law of Taxation.

Role of Taxation
a) It raises revenue for government to fund its day to day operations like paying salaries for the
civil servants and also funding for long term projects like construction of schools hospitals
and roads. So the first goal in the development strategy as regards taxation policy is to ensure
that this function is discharged adequately.
b) Fight inflation; taxes may be imposed for the reason of fighting inflation. If direct taxes are
imposed on incomes, there will be less disposable income leading to a fall in the demand for
goods. This consequently will lead to a fall in prices.
c) It encourages development of local industries and protect them against foreign competition
with a view to providing employment and saving foreign exchange, by imposing high duties
on competing imports.
d) It encourages export of goods and services in order to make them more competitive in the
world market, by reducing or removing tax on the exports.
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e) It protects society from undesirable or harmful products and industries, by imposing high
taxes on such products and industries e.g. excise duty on cigarettes and beer and also
environmental levy on second hand vehicles.
f) To achieve greater equality in the distribution of wealth and income, the government may
impose a progressive tax on the incomes and wealth of the rich. Higher rates of income taxes,
capital transfer taxes and wealth taxes are some means adopted for achieving these ends. The
revenue raised is then used to provide social services for the benefit of the society.
g) Discourage dumping; dumping is the selling of a commodity abroad at a cheaper price than
at home. Such goods may discourage the development of local industries since they are
cheaper than the locally produced commodities. To overcome this problem, taxes may be
imposed on the dumped commodities

Principles of Taxation
Principles of taxation are concepts that provide guidelines towards a good tax system.
Since many view it as a necessary evil, tax should be in such form as to create the minimum pain
to the payer. It should like the saying goes, be like the honey bee which collects nectar from the
flower without hurting the flower.
Economists over time have laid down the principles that policy makers should take into account
in making tax laws. They are known as the cannons of taxation.
The most agreed Cannons of taxation are;

1) Equity/Fairness
Taxation is not only an instrument of raising revenue for government, but also a tool for
administering social justice. Tax is a compulsory burden on the taxpayer and this draws
relevancy of equity in the taxation process.
There are various theories taxation seeking to explain equity or just distribution of tax
burden. However, some theories have been considered more relevant given there feasible
application while others have minimal use given there shortfall. This can be further
appreciated by a brief explanation of the basic theories.
a) Cost of service theory: Under this theory, the general assumption taken is that; the cost
incurred by the government in providing certain services to the people must collectively
be met by the people who are the ultimate receivers of the services. This creates a belief
that tax is a price. So, if a person does not utilise the services of the state, he should not
be charged tax. Hence the basis of taxation should be the cost of the different services
rendered by government to the taxpayers
However, we observe that this theory has no place in the modern tax system because it
has the following defects;
 Restricts provision of government services. If this theory is applied, the state will
not undertake welfare activities e.g. free education, medical aid etc.
 Measurement of cost is difficult. It will be very difficult to compute cost per head of
the various services provided by the state.
 The theory is based on an incorrect assumption which against the accepted
definition of the tax.
 Tax is not an optional payment. Tax is not an optional payment but is an obligatory
payment.

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  False theory. This is a false theory because it believes in voluntary membership of
the state.
b) The benefit theory: This theory is a modified form of cost of service theory. According
to this theory, the burden of taxation should fall on the people according to the benefit
received by them from the state. The people should share the burden the burden of
taxation in proportion to the benefits received by them. Adam Smith writes, “the subjects
of every state ought to contribute towards the support of the government as nearly as
possible in proportion to the revenue which they respectively enjoy under the protection
of the state. This makes taxation justified.
The benefit theory has the following merits:
 Incentive. This theory may be used as an incentive to produce more and more and
more by providing benefits to those who are the taxpayer.
 Just basis. This theory is based on the assumption that the benefits received by the
government services justify the imposition of taxes to pay for them.
 Assists in price determination. It may be helpful in determining the price of certain
government services.
 Vast applicability. The benefit theory is highly applicable especially where the
benefit received by individuals can be measured.
The benefit theory has the following demerits:
 Benefit is not quantitative. Benefit is a subjective thing and cannot easily be
measured directly.
 Unrealistic assumption. The assumption of this theory that varied and complex
activities of government can and should be calculated and assessed against each
person on the basis of the individual benefit derived is highly unrealistic.
 Unrealistic theory. It assumes a quid pro quo relation between the state and the
taxpayers, while no such relation exists in modern times, governments have to
undertake various administrative and social welfare activities also.
 Difficult in application. It is difficult to know how much benefit an individual is
receiving and how much tax he should pay in return.
 Limitation in government services. It cannot be applied to social services.
 Neglects equity concept. This theory does not recognise the objective of equity in
taxation.
c) Ability to pay theory: This theory proposes that those who possess income or wealth
should contribute to the support of public functions according to their relative ability to
pay. Those who have means to pay should pay and those who have not, need not to pay.
According to Adam Smith, “ the subjects of every state ought to contribute towards the
support of the government, as nearly as possible in proportion to their respective
abilities.”
In advancing this theory, the problem is how to measure the ability to pay of a taxpayer.
There may be two approaches to this problem: subjective approach and objective
approach. The subjective approach is not practicable because it mainly emphasises on
the emotions and feelings of the taxpayers which is difficult to measure. Therefore,
majority of the tax economies have adopted the objective approach for determining the
ability to pay.
According to this approach, the criteria for determining the ability to pay of an
individual taxpayer are;
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  Property or wealth
 Income
 Consumption expenditure.
Adam Smith stated that “the subjects of every state ought to contribute towards the support
of the government as nearly as possible in proportion to their respective abilities i.e. in
proportion to the revenues which they respectively enjoy under the under the protection of
the state”. He made it clear that by equality, he implies equality of sacrifice and not equality
in cash payment. That tax should be levied fairly so that;
i) The same amount should be paid by persons, entities that are equal in earnings, wealth or
other source of tax (horizontal equity)
Illustration:
If B is a shopkeeper and makes a profit of Shs.10,000,000= in a year and is taxed at 10%
- 1,000,000=, C who is cattle trader and makes a profit of shs 10,000,000= in a year
should also be taxed at 10%. So should any other earner.
ii) That the contribution in tax should increase as the taxable item increases (vertical equity).
The principle behind vertical equity, which is most applicable in income Taxes, is that the
burden among taxpayers should be distributed fairly, taking into individual income and
personal circumstances. The strongest shoulders carry the heaviest burden
Illustration:
From the example of vertical equity, B and C earned 10 million as profit in a year and
they may manage to live on the balance of 9,000,000=. However, D made 100,000,000=
profit and even if he lived the same way as B and C he could still have 90 million
shillings. Vertical equity is to the effect that you can tax D at 30% and still collect the tax
without undue pain to him.
It is because of these principles that earnings below 1,560,000= per year for individuals
are not taxed.
It is for the same reason that there are tax rates of 10%, 20%, and 30% for individuals
corresponding with rising incomes.

2) Convenience
A taxpayer should not undergo undue difficulty to pay tax under normal circumstances. The
place, medium, mode, manner and time of payment should not be an extra burden to the
taxpayer.
Example:
A person doing business in Tororo should not have to travel to Kampala to pay tax for
business done in Tororo. An office should be created nearby.
3) Certainty
A good tax system is one where the taxes are well understood by the payers and collectors.
Time of payment, reason for payment amount to be paid should be well documented and
certain or known.
The tax should be based on a law passed by parliament after a careful scrutiny. Article 152 of
the Constitution provides that no tax shall be imposed except under the authority of an Act of
Parliament.
4) Economical
This principle aims at ensuring that the administrative cost of collecting taxes is kept as low
as possible to both the collecting agent and the taxpayer. The general principle is that the cost

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 of collection and administration of taxes to the collecting agent should not exceed 5% of the
tax revenue. Likewise the cost of compliance to the taxpayer should be as low as possible
and must not be seen to hinder voluntary compliance.
5) Simplicity
The type of tax and the method of assessment and collection must be simple enough to be
understood by both the taxpayers and the collectors.
Complicated taxes lead to disputes, delays, corruption, avoidance and high costs of collection
in terms of time and resources. Because taxation has to cope with an increasingly complex
business environment including many tax avoidance schemes, this canon can only be attained
in relative terms.
6) Productivity (adequacy)
It should bring in a lot of revenue. It is now widely believed that a tax must produce
sufficient revenue to justify its imposition.
7) Elasticity
The tax system should be income-elastic i.e. as national income increases, the share of
taxation in national income should rise more than proportionately.
8) Multiple taxes (diversity)
A good tax system should have multiple taxes rather than a single tax. The will help to
charge tax on all the available tax bases.
9) Flexibility
A tax system should be flexible depending on the economic circumstances and according to
the requirements of the state.
10) Neutrality
Tax neutrality is sometimes used to describe a tax system that does not create bias that could
influence a taxpayer to choose one investment or course of action over another. For example,
if the tax on the income from rental royalties is less than the tax on the same amount of
income from bonds the tax law will distort the market choice between investing in rayalties
or in bonds.
As used in this context, a tax neutral provision is one that permits the choice between the
choice of investment or action to be made on the basis of market or personal considerations
without influence from the tax laws.
11) Political acceptability
12) Implementable

Incidence of tax
Incidence of a tax involves the process of transfer from the person on whom the tax is imposed
initially to the ultimate taxpayer who bears the money burden of the tax.
The process of transfer of a tax is known as shifting of the tax, while the settlement of the burden
on the ultimate taxpayer is called the incidence of the tax.

Categorises of taxes
Taxes are of several forms based on their characteristics and modalities of charging them. This
variety of taxes enhances the fulfilment of the different cannons/principles of taxation. They can
majorly be categorised into three forms based on;
a) Tax burden/incidence and tax collection

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Classification of taxes in this category is based on who holds the ultimate economic burden
of the tax and the responsibility to collect and remit the tax to the tax authorities.
Incidence/burden of tax is related to the important question: who bears the money burden of
a tax? The incidence of a tax sometimes involves the process of transfer from the person on
whom the tax is imposed initially to the ultimate taxpayer who bears the money burden of the
tax. The process of transfer of a tax is known as the shifting of the tax, while the settlement
of the burden on the ultimate taxpayer is called the incidence of the tax.
Taxes in this category are majorly classified as either direct or indirect. The difference
between these forms of taxes arises due to who bears the obligation to pay and the incidence
of the tax. These taxes can further be explained as below;
i. Direct Taxes
This refers to a tax where the taxpayer bears the responsibility to remit tax to government
in addition to holding the ultimate economic burden of the tax (majorly explained by a
reduction in the taxpayer’s disposable income) remitted. Such taxes are commonly
imposed on income arising from business, employment, property and the burden of the tax
is borne by the individual or business entity. e.g. Employment Tax (Pay As You
Earn),Corporation Tax, Capital Gains Tax and Rental Tax.
Charging tax as direct tax has advantage and disadvantages that arise out it and this is
expounded here below.
Advantages / Merits of Direct Taxes
 Equitable; There is social justice in the allocation of tax burden in case of direct taxes
as they are based on the principle of ability to pay. Persons in a similar economic
situation are taxed at the same rate. Persons with different economic standing are
taxed at a different rate. Hence, there is both horizontal and vertical equity under
direct taxation. Progressive direct taxation can reduce income inequalities and bring
about adequate social & economic justice.
 Certainty; As far as direct taxes are concerned, the tax payer is certain as to how
much he is expected to pay, as the tax rates are decided in advance. The Government
can also estimate the tax revenue from direct taxes with a fair accuracy. Accordingly,
the Government can make adjustments in its income and expenditure.
 Relatively Elastic: The direct taxes are relatively elastic. With an increase in income
and wealth of individuals and companies, the yield from direct taxes will also
increase. Elasticity also implies that the government's revenue can be increased by
raising the rates of taxation.
 Creates Public Consciousness; they have educative value. In the case of direct taxes,
the taxpayers are made to feel directly the burden of taxes and hence take keen
interest in how public funds are spent. The taxpayers are likely to be more aware
about their rights and responsibilities as citizens of the state.
 Economical; Direct taxes are generally economical to collect. For instances, in the
case of personal income tax, the tax can be deducted at source from the income or
salaries of the individuals. Therefore, the government does not have to spend much in
tax collection as far as personal income tax is concerned.
 Anti-inflationary; the direct taxes can help to control inflation. During inflationary
periods, the government may increase the tax rate. With an increase in tax rate, the
consumption demand may decline, which in turn may reduce inflation.
Disadvantages / Demerits of Direct Taxes

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 Though direct taxes possess above mentioned merits, they have been criticised on the
following grounds;
 Tax Evasion; there is good amount of tax evasion. The tax evasion is due to High tax
rates, documentation and formalities, Poor and corrupt tax administration. It is easier
for the businessmen to evade direct taxes. They invariable suppress correct
information about their incomes by manipulating their accounts and evade tax on it.
 Inconvenient; Direct taxes are inconvenient in the sense that they involve several
procedures and formalities in filing of returns. When people are required to pay a
sizeable part of their income as a tax to the state, they feel very much hurt and their
propensity to evade tax remains high. Further everyone who is required to pay a
direct tax has to furnish appropriate evidence in support of the statement of his
income & wealth & for this he has to maintain his accounts in proper form.
 Narrow Coverage; Due to low coverage, the government does not get enough funds
for public expenditure.
 Affects Capital Formation; Direct taxes can affect savings and investment. Due to
taxes, the net income of the people gets reduced. This in turn reduces savings.
Reduction in savings results in low investment. The low investment affects capital
formation in the country.
 Effect on Willingness and Ability to Work; highly progressive direct taxes reduce
people's ability and willingness to work and save. This in turn may have a negative
impact on investment and productive capacity in the economy. If tax burden is high,
people's consumption level gets adversely affected and this has an impact on their
ability to work and save. High taxes also discourage people from working harder in
order to earn and save more.
 Sectoral Imbalance; Sectoral imbalance as far as direct taxes are concerned. Certain
sectors like the corporate sector is heavily taxed, whereas, the agricultural sector is
taxed less.
In direct tax, the burden of tax cannot be shifted. The disadvantages of direct taxation are
mainly due to administrative difficulties and inefficiencies. The extent of direct taxation
should depend on the economic state of the country. A rich country has greater scope for
direct taxation than a poor country. However, direct taxation is an important aspect of the
modern financial system.

ii. Indirect Taxes

This refers to a tax were the tax is collected by an intermediary from the person who
bears the ultimate economic burden of the tax. Taxes are paid by one entity designated by
Government but the burden may be borne by the person or entity who purchases or
consumes or benefits from goods or services. The taxpayer is normally a collection
agency who passes on the tax to the Government. Notable indirect taxes are VAT, Excise
duty, Import & export duty.
Taxes charged as indirect give the following accruing advantages and disadvantages.

Advantages / Merits of Indirect Taxes

 Convenient; Indirect taxes are imposed on production, sale and movements of goods
and services. These are imposed on manufacturers, sellers and traders, but their
burden may be shifted to consumers of goods and services who are the final

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 taxpayers. Such taxes, in the form of higher prices, are paid only on purchase of a
commodity or the enjoyment of a service. So taxpayers do not feel the burden of these
taxes. Besides, money burden of indirect taxes is not completely felt since the tax
amount is actually hidden in the price of the commodity bought. They are also
convenient because generally they are paid in small amounts and at intervals and are
not in one lump sum. They are convenient from the point of view of the government
also, since the tax amount is collected generally as a lump sum from manufacturers or
traders.
 Difficult to evade; Indirect taxes have in built safeguards against tax evasion. The
indirect taxes are paid by customers, and the sellers have to collect it and remit it to
the Government. In the case of many products, the selling price is inclusive of
indirect taxes. Therefore, the customer has no option to evade the indirect taxes.
 Wide Coverage; Unlike direct taxes, the indirect taxes have a wide coverage.
Majority of the products or services are subject to indirect taxes. The consumers or
users of such products and services have to pay them.
 Elastic; Some of the indirect taxes are elastic in nature. When government feels it
necessary to increase its revenues, it increases these taxes. In times of prosperity
indirect taxes produce huge revenues to the government.
 Universality; Indirect taxes are paid by all classes of people and so they are broad
based. Poor people may be out of the net of the income tax, but they pay indirect
taxes while buying goods.
 May not affect motivation to work and save; The indirect taxes may not affect the
motivation to work and to save. Since, most of the indirect taxes are not progressive
in nature, individuals may not mind to pay them. In other words, indirect taxes are
generally regressive in nature. Therefore, individuals would not be demotivated to
work and to save, which may increase investment.
 Flexibility and Buoyancy; The indirect taxes are more flexible and buoyant.
Flexibility is the ability of the tax system to generate proportionately higher tax
revenue with a change in tax base, and buoyancy is a wider concept, as it involves the
ability of the tax system to generate proportionately higher tax revenue with a change
in tax base, as well as tax rates.

Disadvantages / Demerits of Indirect Taxes

Although indirect taxes have become quite popular in both developed & Under developed
countries alike, they suffer from various demerits, of which the following are important.
 High Cost of Collection; Indirect tax fails to satisfy the principle of economy. The
government has to set up elaborate machinery to administer indirect taxes. Therefore,
cost of tax collection per unit of revenue raised is generally higher in the case of most
of the indirect taxes.
 Increase income inequalities; Generally, the indirect taxes are regressive in nature.
The rich and the poor have to pay the same rate of indirect taxes on certain
commodities of mass consumption. This may further increase income disparities
among the rich and the poor.
 Affects Consumption; Indirect taxes affect consumption of certain products. For
instance, a high rate of duty on certain products such as consumer durables may
restrict the use of such products. Consumers belonging to the middle class group may

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 delay their purchases, or they may not buy at all. The reduction in consumption
affects the investment and production activities, which in turn hampers economic
growth.
 Lack of Social Consciousness; Indirect taxes do not create any social consciousness
as the taxpayers do not feel the burden of the taxes they pay.
 Uncertainty; Indirect taxes are often rather uncertain. Taxes on commodities with
elastic demand are particularly uncertain, since quantity demanded will greatly affect
as prices go up due to the imposition of tax. In fact a higher rate of tax on a particular
commodity may not bring in more revenue.
 Inflationary; The indirect taxes are inflationary in nature. The tax charged on goods
and services increase their prices. Therefore, to reduce inflationary pressure, the
government may reduce the tax rates, especially, on essential items.
 Possibility of tax evasion; There is a possibility of evasion of indirect taxes as some
customers may not pay indirect taxes with the support of sellers. For instance,
individuals may purchase items without a bill, and therefore, may not pay Sales tax or
VAT (Value Added Tax), or may obtain the services without a bill, and therefore,
may evade the service tax.
Elaborate analysis of merits and demerits of direct and indirect taxes makes it clear that
whereas the direct taxes are generally progressive, and the nature of most indirect taxes is
regressive. The scope of raising revenue through direct taxation is however limited and
there is no escape from indirect taxation in spite of attendant problems. There is common
agreement amongst economists that direct & indirect taxes are complementary and
therefore in any rational tax structure both types of taxes must find a place.

b) Tax rate and base structure

In complying with the cannons of taxation, taxes may be characterized as proportional,
progressive or regressive.
1) Progressive tax
This tax is structured such that the effective tax rate increases more than proportionately
as the tax base increases. Most Income Taxes are progressive so that higher incomes are
taxed at a higher rate. A progressive tax is based on the principle of vertical equity.
2) Regressive tax
A regressive tax is structured so that the effective tax rate decreases as the tax base
increases.
3) Proportional tax
This is a tax whose rate remains fixed regardless of the amount of the tax base. A
proportional tax, may be considered regressive despite its constant rate when it is more
burdensome for low income payers than to high income payers.

Note:
Exercise: Identify the probable merits and demerits of charging a tax characteristic of
any of the above.

c) Expression of the tax rate.

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This category seeks to identify forms of taxes based on way the tax rates are expressed. Its
common with indirect taxes that are charged of consumption or expenditure i.e. customs
duty, excise duty, stamp duty and value added tax. These are majorly categorised into
advalorem and specific duties.

Advalorem duty;
An ad valorem duty is a fixed percentage of the value of the good that is being imported e.g.
10% of value X. Assessment of indirect taxes on an advalorem basis makes the declaration of
taxable values a very important element in the assessment and collection of tax revenue. This
compounds the problems associated with the valuation of goods.
Advantages
 Automatic adjustment for inflation: since the tax is tied to the product price, the tax
automatically adjusts with inflation. This is the main advantage of an ad valorem basis as
it is buoyant in relation to the fluctuations in exchange rate adjustments and inflation.
 Higher profit margins are taxed: Ad valorem tax reduces the industry profit margin since
a part of any price/profit increase goes to the government as tax revenue.
Disadvantages
 Less predictable revenue stream. As ad valorem taxes are based on value, it is difficult to
predict tax revenue over time.
 Difficult to determine value. As opposed to specific taxes, which can easily be applied to
products merely by determining the quantity, ad valorem taxes require more effort to
calculate the payment.
 Low prices; there is an incentive for manufacturers to produce low-priced products
because ad valorem taxes are tied to product prices
 Leads to large price differences between products. Ad valorem taxation widens the gap in
prices between cheap products and more expensive products. Consumers may purchase
cheap products or switch from the more expensive products to cheaper ones and this may
reduce the impact of higher tax on consumption.

Specific duty;
A specific duty is a duty of a specific amount of money that does not vary with the price of
the good but with its weight, volume, surface, etc. The specific duty stipulates how many
units of currency are to be levied per unit of quantity (e.g. fuel could be charged at a specific
duty of UGX 600 per litre. If this were ad valorem it would be say 10 percent of a CIF value
which would be determined from time to time.
Advantages
 Easier to administer; costs of administering specific taxes are low because it is easier to
count the number of products than to estimate their value. It is widely believed that unit
taxes appear to be easier to administer.
 Predictable; because the tax is not sensitive to changes in price, tax revenues do not
change when manufacturers change prices. The government revenue is therefore
protected against industry’s price wars or price manipulations
 Raises all product prices. Specific taxes are fixed and do not depend on industry pricing
strategies. In addition, since the tax is in most cases applied to all products at the same
rate, a higher tax usually results in similar price increases across the board, regardless of
the product.

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  Easy to determine value. It only requires a precise definition of what constitutes one unit
or quantity.
Disadvantages
 Inflation erodes its value; because the tax rate is not tied to the product price, it does not
automatically adjust with inflation. Instead the government must periodically implement
additional rate increases or add into the tax law that the specific tax rate will automatically
adjust with inflation.
 Can be reduced by changing product characteristics. Manufacturers can reduce the impact
of specific taxes on consumption by, for example, producing bigger or longer size items of
the tax is applied per given pack or by increasing the size of a pack if the tax is per pack.

TAXATION IN UGANDA

Evolution of taxation in Uganda

Taxation as understood today was introduced in East Africa by the early British colonial
administrators through the institution of the system of compulsory public works like road
construction, building of administrative headquarters and schools, forest clearance and other
similar works. The first formal tax introduced in 1900 was hut tax.

In 1900, the first common tariff arrangements were established between Kenya and Uganda and
through this, Ugandans started paying customs duty as an indirect tax. This involved imposition
of an ad valorem import duty at a rate of 5% on all goods entering East Africa through the port
of Mombasa and destined for Uganda. A similar arrangement was subsequently made with
German East Africa (Tanganyika) for goods that entered East Africa through Dar-es-Salaam and
Tanga ports and destined for Uganda. This gave rise to revenue which was remitted to Uganda.

The Protectorate government was heavily relying on customs duties for the funding of its
programs and the indigenous Africans were not engaging in activities that would propel the
growth of the monetary economy. Accordingly government introduced a flat rate, poll tax that
was imposed on all male adults. The requirement to pay tax forced the indigenous Ugandans to
enter the market sector of the economy through either selling their agricultural produce or hiring
out their services. The tax burden was also increased by the introduction of an additional tax on
top of the poll tax to finance local governments. This culminated into the first tax legislation in
1919 under the Local Authorities’ Ordinance.

In 1953 following recommendation by a committee headed by Mr. C.A.G Wallis, graduated

personal tax was introduced to finance local governments.

Income tax was introduced in Uganda in 1940 by a Protectorate ordinance. It was mainly payable
by the Europeans and Asians and was later on extended to Africans. In 1952, the ordinances
were replaced by the East African Income Tax Management Act. This Act of the then East
African High Commission laid down the basic legal provisions found in the current income tax
law. The East African Income Tax Management Act of 1952 was repealed and replaced by the
East African Income Tax Management Act of 1958. The administration of both income tax and

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customs duty was done by departments of the East African Community (EAC) until its break up.
Under the EAC dispensation, there were regional taxing statutes and uniform administration but
the national governments (or partner states, as they were called) retained the right to define tax
rates.

The collection of the tax on Employment income through the Pay As You Earn (PAYE) system
was introduced in Uganda in 1967.
After the break up, the tax departments were transferred to the Ministry of Finance with the
transfer of the Income tax department taking effect in 1974, while that of the Customs
department was effected in 1977.
The East Africa Community (EAC) is the regional Intergovernmental Organisation of the
Republics of Kenya, Uganda, Tanzania, Rwanda and Burundi. The three East African Heads of
state signed the treaty for the establishment of the EAC in Arusha on 30th November, 1999.
The East Africa Community Customs Union was established under Article 2 of the East African
Community customs Protocol.
The East African Legislative Assembly enacted the East African Community Customs
Management Act, 2004 on 16th December 2004, and was to apply uniformly in East Africa. The
Act governs the administration of the Customs Union, including legal, administrative and
operational matters.

The Taxation structure in Uganda

Taxation is a preserve of government and it has the ultimate mandate to administer/collect all
taxes. A government is commonly considered to be the system by which a state or community is
governed.
In Uganda, government is made up of three arms which include the legislature (parliament),
executive and the judiciary. Each of them has a specific role to play in the governance of the
country. The legislature enacts, amends and repeals public policy/laws while the executive
administers/implements those policies and the judiciary arbitrates in situations of inconsistencies
in policy administration.
The different arms of government each has a contribution to taxation in Uganda given their
mandate and obligation they owe to the public. These roles are in line to their specific mandate
as specified above. Their specific contributions to taxation
Legislature: Making the laws that govern tax administration in Uganda
Judiciary: Arbitrating tax policy inconsistencies that arise in the process administering taxes
Executive: implementing the tax administration processes
Tax administration is aligned to the two governance levels within the executive. The two
administrative governance levels that handle taxation are namely; local government and central
government.
1) The local government (authorities)
Local government refers to local councils established under the local government act. The
local councils established are listed in Sec 3(2)-(5) which include; district councils, sub-
county councils, city councils, city division councils, municipal councils, municipal division
councils and town councils. The system of local government is based on the district as a unit
under which there are lower local governments and administrative units. Under this
arrangement, a city is equivalent to a district.
The local government Act (cap 243 sec 80) gives local governments institutions powers to
levy taxes. The major taxes administered by local government institution are local service tax
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 and hotel tax. In addition to those taxes, local governments levy, charge and collect fees
which include; rates, rents, royalties, stamp duties, registration fees, and license fees. These
can be in the form of, fees for services offered by local authorities, trading licenses, market
fees, annual bicycle license, parking fees, advertising fees, user charges, fishing licenses,
agency fees, charcoal burning license, and any other revenue prescribed by the local
government and approved by the minister.
It can also be noted further that local governments may collect taxes on behalf of the central
government as its agent.
2) The central government through Uganda Revenue Authority (URA)
Central government refers to the composition of different ministries which are in charge of
implementing and overseeing government activities in there line of duty throughout the
country. Tax administration being a revenue earning activity is under the ministry of finance,
planning and economic development. It was administered under mere departments until 1991
when Uganda Revenue Authority (URA) was constituted with the purpose of administering
taxes on behalf of the central government throughout the country.
Ministry of finance represents the executive arm in the tax administration affairs and it takes
charge to oversee the operations of URA, draft government tax policies and fund the
operations of the authority.
URA is administered by a board of directors and it is the policy making body entrusted with
general oversight of the organisation. The management is headed by the commissioner
general who is charged with the overall oversight of the general operations of the authority.
Taxes collected by URA fall into two categories i.e. direct and indirect taxes. In addition
URA collects revenues that are not technically tax revenue and are normally referred to as
non tax revenue (NTR)
Indirect taxes/other revenues: these are largely transactional, expenditure or consumption
based taxes and revenues.

Note:
Exercise: -Explain Uganda Revenue Authority’s administration structure?
-What challenges does Uganda Revenue Authority (URA) face in the process
of administering taxes?
-How has URA addressed the challenges identified above?

The legality of Taxes collected

The basis and authority to collect taxes is enshrined in the constitution of Uganda. Its worthy
noting that article 2(1) in the constitution of Uganda emphasises its supremacy indicating that the
constitution is the supreme law of Uganda and it has binding force over all authorities and
persons throughout Uganda. Therefore all institutions in the legal system subscribe to the
authority of the constitution. The constitution under Art 79(1) mandates the parliament to enact
laws. Parliament indeed exercised its mandate enshrined in article 79 (1) to enact several acts.
Parliament imposed the taxes under the authority of given acts of parliament. This emphasised
art 152(1) which states that, “no tax shall be imposed except under the authority of an act of
parliament.” The president assents to legislations passed by parliament before they become
laws. Each minister is responsible for the legislation that falls under their portfolio.
In the case of the taxes, the minister responsible for finance is mandated to make regulations for
the better carrying into effect the various provisions of the tax laws.
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Judiciary is an arm of democratic governance that is interposed between the taxpayer and the
state represented by URA to resolve tax disputes. In exercising its mandate, the judiciary
interprets the words of a statute passed by parliament.
It is evident that tax administration is guided by the laws and regulations that have been enacted
by parliament and this is no exception to any tax administration procedures.

Sources of tax law

Tax law can be categorised into the following.

1. Primary legislations
These are statutes or acts passed by parliament. There are quite a number of primary
legislations that are relevant for taxation in Uganda. Such legislations regulating taxes
include;
 Income tax act Cap 340
 Customs Tariff Act. Cap 337
 East African Community Customs Management Act.
 Excise Tariff Act. Cap 338
 Excise duty Act. 2014
 Stamps duty Act Cap 342
 Traffic and Road Safety Act Cap 361
 Value Added Tax Act. Cap 349
 The Finance Acts.
 Local government act
 Etc…….
Note: refer to the constitution of Uganda for other primary legislations that are
relevant for taxation.

2. Subordinate legislation
These are regulations, rules, decrees, ordinances, by-laws etc. The ITA S.164 empowers the
minister responsible for finance to make rules that carry into effect various provisions of the
act. The following examples are relevant to income tax.
 The income tax (withholding tax) regulations 2000.
 The income tax (approved industrial buildings) regulations 2003
 Etc….
Note: refer to the different primary legislations (relevant to taxation) for other specific
subordinate legislations.

3. Case law
The results of a court proceeding in effect becomes law (case law) and therefore binds tax
authorities while reading the various provisions of the tax legislations.
As stipulated above, case law refers to the precedents/rules set by court (court decisions on
matters of dispute or uncertainty) and bind tax authorities on understanding of the various
sections of the law.

General overview of the taxes administered in Uganda.

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In Uganda to date, the principle of multiplicity of taxes has been embraced. This is evident with
the several taxes being administered at the different levels of governance. The local governments
have the jurisdiction to collect local hotel tax and local service tax in addition to property tax and
other fees/levies. Central government has quite a number of tax heads it administers through
URA and these include;
 Income tax
 Value added tax
 Customs duty
 Excise duty
 Stamp duty
 Gaming and pool betting tax
 Non-tax revenues.

An overview of the taxes administered by local government institutions

It is within the jurisdiction of local governments to levy charge and collect fees, rates, taxes,
royalties etc. The key taxes collected include hotel tax and local service tax.

Local government hotel tax

This is tax charged on all hotel and lodge room occupants. It’s collected by the hotel owners who
remit it to the local government institutions in charge of administering the areas where the hotels
and lodges are located.
Hotel tax is levied on hotel and lodge accommodation per room per night on the room occupants.
Management of the hotel collects the tax and remits the tax to the relevant local council on a
monthly basis. It’s levied on the room occupants at the rates indicated below;
Hotel category Rate per room occupied
Five and four star hotel US$ 2 per room or its equivalent
in shillings
Three & two star hotel and other hotels charging UShs 2,000 per room
Above UShs 50,000 per room
Hotels, lodges & guest houses charging UShs 10,000 up to UShs 1,000 per room
UShs 50,000 per room
Hotels, lodges and guest houses charging less than UShs UShs 500 per room
10,000 per room

Note: refer to Sec. 80 and the fifth schedule of the local government act Cap. 243 for the
rates and administrative procedures of hotel tax

Local service tax

This is tax levied on several categories of people. These include;
 Persons in gainful employment
 Self employed and practising professionals
 Self employed artisans
 Businessmen and businesswomen
 Commercial farmers
The basis of charging local service tax is the taxpayer’s wealth or income. Payment of this tax is
exempt on the following persons:
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  Members of the Uganda people’s defence force
 Members of the Uganda police force
 Members of the Uganda prisons services
 Members of the local defence forces
 Members of the diplomatic missions accredited to Uganda.
 Unemployed persons and peasants
 A person engaged in subsistence or occasional economic activities
 Petty food vendors
 Boda-boda cyclists
 Sole petty artisans and jua kalis, who are not fully established and are not business entities.
 People living in poverty who are unable to earn a minimum income to access basic
necessities of life.
The local service tax rates are structured as absolute amounts for given tax brackets in a
progressive form. These are categorised into four rate structures based on form of activity carried
out to earn. The rates are categorised into;
 Rates of local service tax in respect of persons in gainful employment and earning a monthly
take home salary.
 Rates of local service tax in respect of self employed professionals.
 Rates of local service tax in respect of self employed artisans.
 Rates of local service tax in respect of businessmen and business women.
The districts and urban local councils levy local service tax on every person in gainful
employment, practising professionals, business persons and commercial farmers.
The salaried employees pay the tax in four equal instalments during the financial year. It is
collected by the employer and remits it to the respective local governments.
Taxpayers other than the salaried employees pay the tax once in full. It should be noted that
payment of the tax is expected to be completed within the first four months of the financial year
for which it is assessed.
However, businessmen and businesswomen are expected to pay the tax at the time of paying for
their annual trading and operational licenses at their respective local governments.
Note: refer to Sec. 80 and the fifth schedule of the local government act Cap. 243 for the
rates and administrative procedures of local service tax.

An overview of taxes and non tax revenues administered under central government
(specifically by URA).

Excise duty
Excise duty refers to a duty charged on specified goods and services manufactured or imported
in Uganda. It is levied, collected and paid in accordance with the Excise duty Act. 2014 and the
Excise Tariff Act Cap 338.
The goods and services on which the duty is charged, are those listed in the second schedule of
the excise tariff Act and they include; cigarettes, beer, spirits, wine, non-alcoholic beverages,
mineral water, cement, fuel, cane or beet sugar, sacks and bags of polymer of ethylene, cosmetics
& perfumes and telecommunication services (refer to the excise tariff act).

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Given that excise duty is an indirect tax; its payment is the responsibility of the local
manufacturers and importers of the excisable goods and services. Those obliged to make
payment of excise duty to the tax authorities have the right of recovery through price charges or
tax refunds.
Charging excise duty
Excise duty is charged as either an advelorem tax or specific tax at the rates stipulated for given
goods or services in the second schedule of the excise tariff act.

Calculation of excise duty when charged as specific tax

A specific rate is an absolute amount of money that does not vary with the price of the good but
with its weight, volume or surface area. The specific rate stipulates how many units of currency
are to be levied per unit of quantity. For example; excise duty on cement is UShs 500 per 50kgs.
How much excise duty is charged on 1 tonne of cement worth UShs 26,000,000.
Charge per 50kgs = 500/=
Number of chargeable units = 1000/50 = 20 units
Excise duty = 20 x 500 = 10,000/=

Calculation of excise duty when charged as advelorem tax

Charging the duty as advelorem implies that the tax rate is expressed as a percentage and the
excise duty is calculated using the formula below.
AxB
Where;
A = is the value of the excisable goods or service;
&
B = is the rate of excise duty applicable to the goods or services.
Valuation of local excisable goods and services
 The value of manufactured goods is the normal ex-factory price of the goods exclusive
of any tax on that good.
In this case, the normal ex-factory price of the good includes raw material costs,
manufacturing costs, labour costs, profit margin, bank charges and interest and all other
costs, charges and expenses incidental to the factory, production and sale.

 The excisable value service is the price paid or payable by the consumer of the service
excluding value added tax chargeable under the value added tax act and excise duty
chargeable.

Valuation of imported excisable goods and services

 The value of an imported excisable good is the sum of the value of the good ascertained
for the purposes of import duty under the laws relating to customs and the amount of
import duty payable on that good.
Example for valuing an imported good:
Assume a cosmetic product of your choice was imported with a CIF valuation of US$ 20
and it attracts an import duty rate of 25%. The exchange rate was 1US$ = UGX 2500
then. Determine the excise valuation of that product.
Note:
Excise value = CIF valuation + Import Duty

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 Where;
CIF valuation = US$ 20
Exchange rate = UGX 2500
Import duty rate = 25%
Therefore;
Excise value = (20 x 2500) + ((20 x 2500) x 25%)
Excise value = UGX 62,500

Note further:
The excise duty thereon is got by applying the formula;
AxB
Where;
A = UGX 62,500
B = excise duty rate of 10% on cosmetic products
Excise duty = 62,500 x 10%
Excise duty = UGX 6,250

 The value of an excisable service is the amount exclusive of any tax and duty, paid or
payable by the final consumer in consideration for the service.
Note: refer to the excise duty act for rates charged on given goods and the valuation of
some of the excisable goods.

Licensing
It is a requirement that all persons dealing in excisable goods should get annual licence from
URA for the purpose of local excise management and regulation.

Returns and payment

Dealers in excisable goods and services are required to file monthly returns of excisable
goods manufactured and sold or excisable services provided and paid for by the 21 st day of
the following month and pay the declared excise duty. Failure to comply with requirement
will lead to penalties as specified in the Act.

Stamp Duty
The law applicable is the Stamps Act Cap 342 and amended by the Stamps amendment Act
2002.
This is a duty payable on all instruments in the schedule to the Stamps Act, executed (signed) or
received in Uganda. The documents liable to stamp duty are termed instruments. Instruments are
defined to include “every document by which any right or liability is or purports to be created,
transferred, limited, extended, extinguished or recorded”. There are 64 instruments in the
schedule to the Stamps (Amendment) Act 2002 and their proper duty rates.
The common instruments received in URA Stamp duty office are transfers of immovable
property (Land & buildings), Mortgages and Agreements.

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Stamp duty on transfer of immovable property is chargeable at a rate of 1% of the value given by
the Chief Government Valour in Ministry of Lands.

Gaming tax
Gaming tax is paid by persons who operate casinos, gaming, betting, and lottery and pool
activities. Gaming tax is administered under the Lotteries and Gaming Act of 2016.
The scope of this tax is aimed at being charged on the earnings from the following activities:
a) Lottery; This includes any game, scheme or arrangement, system, plan, promotional
competition or device for distributing prizes or property by lot or chance whether by
throwing or casting of dice, tickets, cards, lots, numbers or figures.
b) Gaming; this is playing a game of chance for winnings in money or money’s worth as well
as gambling.
c) Betting; It means making or accepting a bet on;
 The outcome of a race, competition or any other event
 The likelihood of anything occurring or not occurring.
 Whether anything is or is not true.
d) Pool; This refers to any competition organised for gain in which for monetary or other
material regard, the public is invited to forecast or tell the result of any game, race or event
and includes a pool operated on the system known as fixed odds betting on the results of that
game, race or event.
Gaming tax is charged on the total amount of money staked less the pay outs (winnings) for the
period of filing returns and the rate applied to such an amount is 20%.
The tax period that is considered for this kind of tax is one month. The taxable person is
obligated to lodge a tax return by the 15th day of the following month. Such a return submitted
by the taxpayer is considered to be self-assessment.

Non tax revenue (NTR):

These include duties, fees and fines collected by Uganda Revenue Authority. The NTR collected
by URA are Stamp duty, License fees and Other Government Non Tax Revenues.

1) Registration of Motor Vehicles:

The law applicable is the Traffic Control and Road Safety Act Cap 361.
This involves; allocation of number plates to motor vehicles and Registration book.
Registration of motor vehicles is currently carried out in Kampala at the MVRU (Motor
Vehicle Registration Unit) within Customs Business Centre -Nakawa and Malaba.
Registration of Motor vehicles is done after confirmation that customs duties due are paid
and the vehicles is legally imported into the country
2) Re- Registration
Re-registration means registering a motor vehicle, trailer or engineering plant bearing
Ugandan registration plate with new series of registration plates.
There two types of registration:
 Changing from Old number plates to new number plates.
 Changing from duty free to ordinary number plates.
3) Transfer of Ownership of a Motor

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 This refers to change of ownership of a motor vehicle from one party to another. This
function is centralized in Kampala Licensing Office where the motor vehicle files are
kept.
The Traffic and Road Safety Act 1998 provides for the transfer of ownership of a motor
vehicle within fourteen (14) days from the date of sale.
Requirements for Transfer
a. Dully completed transfer forms in quadruplicate.
b. Where one of the parties is a Corporate Body the official stamp/seal must be
affixed and a letter of consent to transfer or sell.
c. Both the Transferor and the Transferee must present themselves to the
Licensing Officer for identification.
d. The Transferor and Transferee must indicate their TINs on the Transfer Forms.
e. Assessments for Transfer fees are made and issued to the applicant.

Note: The department guideline requires the Licensing Officer to check and ascertain that
the particulars on the vehicle file are correct and that there is no dispute on ownership.
4) Other Non Tax Revenues: (NTR)
These refer to fees, fines and penalties assessed by Government Ministries Departments
and Agencies (MDAs) that are collected and accounted for by URA.
The 2001 statutory instrument from Ministry of Finance gave URA the powers to collect
and account for the NTR. URA started collecting NTR in 2002 with passport fees from
Immigration department where it performed very well and encouraged government to
pass on more items from MDAs for URA to collect.
By June 2008 URA had 125 NTR items from the different MDAs from which it collects
the fees, fines and penalties on behalf of Government.
URA supplies the MDAs with BPAFs on which assessments are raised and the clients are
directed to the Banks to pay. The clients are issued with the URA receipts which they
take to the originating MDAs and are offered a service.
URA prepares the provisional and final collection reports which are submitted to all the
MDAs copied to the Accountant General by 7th and 15th day of following months
respectively.

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