UGANDA COLLEGE OF COMMERCE, TORORO

THE EFFECT OF VALUE ADDED TAX (VAT) ON FINANCIAL

PERFORMANCE OF SMALL AND MEDIUM SCALE ENTERPRISES IN

UGANDA

CASE STUDY: UGANDA CLAYS LIMITED

BY

CHEBET METRINE

UBBO58/2018/B/D/A/213

RESEARCH REPORT SUBMITTED IN PARTIAL FULFILLMENT OF

THE REQUIREMENT FOR THE AWARD OF THE DIPLOMA IN

BUSINESS STUDIES OF UGANDA BUSINESS AND TECHNICAL

EXAMINATION BOARD

(UBTEB)

DECEMBER 2020
 DECLARATION

I CHEBET METRINE hereby declare that this research report is my original work and has never

been submitted to any institution of higher learning for the award of Degree or Diploma.

Signature

………………………………………………………

CHEBET METRINE

(STUDENT)

Date ……………………………………………

ii
 APPROVAL

The following research report by CHEBET METRINE under the topic “impact of Value Added

Tax (VAT) on Financial Performance of small and medium scale enterprises in Uganda” has

been under my supervision and is now ready for submission for award of Uganda Diploma in

Business Studies of Uganda Business and Technical Examination Board (UBTEB) with my

approval.

Signature ………………………………………………

Mr. KAINJA GODFREY

(SUPERVISOR)

Date…………………………………………

iii
 DEDICATION

This research report was dedicated to the following persons, my father KWEMBOI CHARLES,

and my mother CHEROP ESTHER for the parental care, guide and the resources given to me

during my course of study to this level.

iv
 ACKNOWLEDGEMENT

I am indebted to the all-powerful GOD for all the blessings he showered on me throughout the

study. He is a faithful God and may his name be praised forever.

I am deeply obliged to my supervisor Mr. KAINJA GODFREY for his exemplary guidance and

support throughout the process without whose help this project would not have been a success.

I also acknowledge the efforts of my friend Cherop Reignard, Omong tonny, Kaye Joel, and

Sabeshan Geofrey who helped me a lot in advice and other material extensions I received from

them, may God bless them.

Finally, yet importantly, I take this opportunity to express my deep gratitude to my loving

mother Cherop Esther, father Kwemboi Charles, brothersMutai Godwin, Kiplangat Amos who

are a constant source of motivation and for their never ending support and encouragement during

this project.

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 TABLE OF CONTENTS

DECLARATION........................................................................................................................................ii

APPROVAL..............................................................................................................................................iii

DEDICATION...........................................................................................................................................iv

ACKNOWLEDGEMENT...........................................................................................................................v

TABLE OF CONTENTS...........................................................................................................................vi

LIST OF TABLES.....................................................................................................................................ix

ABSTRACT................................................................................................................................................x

LIST OF ACRONYMS..............................................................................................................................xi

CHAPTER ONE..........................................................................................................................................1

1.0 Introduction...........................................................................................................................................1

1.1 Background of the Study.......................................................................................................................1

1.2 Statement of the Problem.......................................................................................................................3

1.3 Purpose of the Study..............................................................................................................................4

1.4 Objectives of the study..........................................................................................................................4

1.5 Research Questions................................................................................................................................4

1.6.0 Scope of the Study..............................................................................................................................4

1.6.1 Subject Scope.....................................................................................................................................4

1.6.2 Geographical Scope............................................................................................................................5

1.6.3 Time Scope.........................................................................................................................................5

1.7 Significance of the Study.......................................................................................................................5

CHAPTER TWO.........................................................................................................................................6

LITERATURE REVIEW............................................................................................................................6

2.0 Introduction...........................................................................................................................................6

2.1.1 VAT Administrative Practices............................................................................................................9

2.2 Financial Performance.........................................................................................................................14

2.2.1 Determinants Financial Performance of SME’S...............................................................................15

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2.3 Relationships between VAT and Financial Performance of Small and Medium Scale Business
Enterprises.................................................................................................................................................18

2.4 Conclusion...........................................................................................................................................19

CHAPTER THREE...................................................................................................................................20

METHODOLOGY....................................................................................................................................20

3.0 Introduction.........................................................................................................................................20

3.1 Research Design..................................................................................................................................20

3.2 Area of Study.......................................................................................................................................20

3.3 Population of the Study.......................................................................................................................20

3.4 Sample Size.........................................................................................................................................21

3.5 Data Collection....................................................................................................................................21

3.6.1 Primary data......................................................................................................................................21

3.6.2 Secondary Data.................................................................................................................................22

3.7.0 Data Collection Instruments.............................................................................................................22

3.7.1 Questionnaires..................................................................................................................................22

3.8 Data Processing and Analysis..............................................................................................................22

3.9 Limitations of the Study......................................................................................................................23

CHAPTER FOUR.....................................................................................................................................24

DATA ANALYSIS, RESULTS AND DISCUSSIONS............................................................................24

4.1 Introduction.........................................................................................................................................24

CHAPTER FIVE.......................................................................................................................................32

SUMMARY, CONCLUSIONS, RECOMMENDATIONS, LIMITATIONS AND AREAS OF

FURTHER STUDY...................................................................................................................................32

5.1 Introduction.........................................................................................................................................32

5.2 Summary of the Findings.....................................................................................................................32

5.3 Conclusion...........................................................................................................................................32

5.4 Recommendations...............................................................................................................................33

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5.5 Limitations of the Study......................................................................................................................33

5.6 Areas of Further Research...................................................................................................................33

Appendix II: Questionnaire.......................................................................................................................39

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 LIST OF TABLES

Table 4.1: Showing genders of respondents..................................................................................24

Table 4.2: Showing the ages of the respondents............................................................................25
Table 4.3. Showing marital statuses of respondents......................................................................25
Table 4.4: Showing academic qualifications of respondents.........................................................26
Table 4.5. Showing the duration of which respondents have worked in the organization............26
Table4.6: The table below shows the extent to which respondents agreed or disagreed to the
various statements in regard to challenges of VAT administration in Uganda...........27
Table4.7: Showing the extent to which respondents agreed or disagreed to various determinants
of financial performance at Uganda clays limited.......................................................28
Table4.8: Showing computation of the relationship between VAT and financial performance.. .29

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 ABSTRACT

The research study was carried out on the impact of Value Added Tax on financial performance
of small and medium scale enterprises in Uganda a case study of Uganda clays limited.

The backgrounds derive the gap that exists between the dependent and the independent variable.

The main objective of the study was to establish the relationship between Value Added Tax and
financial performance of small and medium scale enterprises in Uganda.

Data from the field was sorted, edited, coded, graded, and presented. The researcher used
Pearson’s’ product moment correlation to establish the relationship between VAT and financial
performance.

The formula used was;

n (∑ xy )−( ∑ x ) (∑ y)
R=
√ [ n ( ∑ x ) −( ∑ x ) ] [n ( ∑ y ) −(∑ y )²]
2 2 2

Where r-correlation coefficient of the two variables

n- Total number of respondents graded according to opinion

x- Dependent variable

y- Independent variable

x
 LIST OF ACRONYMS

VAT- Value Added Tax

URA- Uganda Revenue Authority

OECD- Organization of Economic Co-operation and Development

GST- Goods and Service Tax

ROA- Return on Assets

ROI- Return on Investment

PAT- Profit After Tax

ROE- Return on Equity

EFIRA- Ethiopia Federation of Inland Revenue Authority

EAC-CMA- East African Community Customs Management Act

SME’S- Small and Medium Scale Enterprises

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 CHAPTER ONE

1.0 Introduction

The study was meant to establish the impact of Value Added Tax on financial performance of
small and medium scale business enterprises in Uganda (case study Uganda Clays Limited). This
chapter consists of the background to the study, statement of the problem, purpose of the study,
objectives of the study, research questions, scope and significance of the study.

1.1 Background of the Study

Taxes have existed virtually as long as there have been organized governments. The first formal
tax, the hut tax, was introduced in 1900 (URA taxation hand book). This is when the first
common tariff arrangements were established between Kenya and Uganda. The taxes charged on
business enterprises in Uganda have evolved and include; corporation tax, value added tax,
presumptive tax and exercise duty. The main objective of taxation in Uganda has always been to
mobilize resources needed to meet the aspiration of government. This is because for any
government to be effective, strong, competent and capable of spearheading development,
resources have to be readily available in its treasury so as to be in position to provide goods and
services to the people adequately. The Uganda government has always had to ensure proper
resource mobilization.

Hence taxes have a big negative impact on financial performance of small and medium scale
enterprises, taxes are of two types, indirect taxes and direct taxes.

The researcher focuses on Value Added tax that falls under indirect taxes and its impact on
financial performance of small and medium scale enterprises a case study of Uganda Clays
Limited.

According to Manasseh (2000), a tax is generally referred to as a compulsory levy imposed by

government upon assesses of various categories.

Tax is defined as a monetary charge imposed by the government on persons, entities,

transactions or property to yield public revenue (URA taxation hand book).

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Value Added Tax - VAT (also called Goods and Services Tax - GST) was introduced in Uganda
on July 1, 1996. According to Organization for Economic Co-operation and Development
(OECD) literature on VAT, the tax is currently implemented by about 136 countries including
Uganda and it accounts for one-fifth of total tax revenue.

According to a URA guide to taxation, VAT is an indirect tax that is paid by a person who
consumes or imports goods/services in Uganda. The tax is charged on value added at different
stages of production/supply of goods and services.

Uganda Revenue Authority (URA) administers VAT on behalf of Ministry of Finance, Planning
and Economic Development under legislation regulating taxes in the VAT Act Cap 349(2014 as
amended)

VAT is charged on both local and imported taxable supplies. There are three major categories of
supplies where VAT is applied;

Taxable supply of goods and services made by a person within Uganda. The person liable to the
tax is the taxable person making the supply.

Import of goods other than those classified as exempt by the VAT Act. 2014 (as amended). The
person liable to the VAT is the person making the supply.

Imported services. The person liable is the receiver of the imported services.

The VAT threshold in Uganda is fifty million shillings only; this is the minimum level of taxable
turnover above which a person is required to register for VAT (URA Taxation Hand Book)

According to the business dictionary financial performance involves measuring the results of a
firm’s policies and operations in monetary terms. These results are reflected in the firms return
on investment, return on assets and value added.

Financial performance refers to how well a firm can use assets from its primary mode of business
and generate revenues. Generally financial performance may be used to refer to firm’s overall
financial health over a given period of time, and can be used to compare similar firms across the
same industry or to compare industries or sectors in aggregation. There are many different ways
to measure financial performance, but all measures should be taken into aggregation. Items such

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as operating income, revenue from operations and cash flow from operations can be used, as well
as total sales units (Business Dictionary 2011)

Stoner (2003), as cited in Turyahebya (2013), defines financial performance as the ability to
operate efficiently, profitably, survive, grow and react to the environmental opportunities and
threats. In agreement with this, Sollenberg and Anderson (1995), asserted that, performance is
measured by how efficient the enterprise is in use of resources in achieving its objectives.

Tavitiyan, Zhang and Qu (2012), indicate that return on assets (ROA), average annual occupancy
rate, net profit after tax and return on investments (ROI) are the commonly used financial or
accounting indicators by firms. According to Bagorogoza and Waal (2010), other measures of
performance are profitability, productivity, growth, stakeholder satisfaction, market share and
competitive position. For the purpose of this study profit after tax (PAT) will be used as a
measure of factory’s financial performance.

Since VAT is a consumption tax, it has a negative impact on financial performance of small and
medium scale enterprises in Uganda since it’s directly levied on consumption of the
organization’s goods and services, therefore it probably leads to price increase hence reducing on
consumption levels and by implication reduction in profits.

Uganda Clays Limited is located in Kampala, 14kms Entebbe Road, Kajjansi P.O. Box 3188
Kampala, Uganda

1.2 Statement of the Problem

VAT as an indirect tax is used by the government to generate revenue used to provide services to
the public such as; Health centers, telecommunication, roads, schools and electricity and this
have helped to facilitate the operations of small and medium scale business enterprises. Despite
the services provided, small and medium scale business enterprise’s financial performance in this
case Uganda Clays Limited is still at a decline this could probably be due to high VAT rates on
both imported raw materials and products of the industry (as reflected in the financial statements
of Uganda Clays Limited as at 31 st-December-2015; see attachment in appendix). This could be
due to the increasing tax burden brought about by high VAT rate currently at 18%. These rates
seem to be taking an upward trend (Gordon and Dawson, 1987) which has led to winding up of

3
some small and medium scale business enterprises. This prompted the researcher to investigate
more about the impact of Value added Tax (VAT) on financial performance of small and
medium scale business enterprises.

1.3 Purpose of the Study

The purpose of the study was to evaluate the impact of VAT on financial performance of small
and medium scale business enterprises in Uganda.\

1.4 Objectives of the study

i To find out the challenges of VAT administration in Uganda.

ii To assess the financial performance of small and medium scale business enterprises in
Uganda.
iii To find out the relationship between VAT and financial performance of small and
medium scale enterprises.

1.5 Research Questions

i What are the challenges of VAT administration in Uganda?

ii What is the financial performance of small and medium scale business enterprises in
Uganda?
iii What is the relationship between VAT and financial performance of small and medium
scale business enterprises in Uganda?

1.6.0 Scope of the Study

1.6.1 Subject Scope

The study covered small and medium scale enterprises in Uganda. Specifically, the study

investigated the financial performance of small and medium scale enterprises, the awareness of

the tax payers regarding their VAT obligations, problems faced by the tax payers and the

relationship between the VAT tax paid and the financial performance of the small and medium

scale enterprises.

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 1.6.2 Geographical Scope

The study was carried out in Kampala, Uganda at Uganda Clays Limited. The area was

purposely selected because the researcher was staying near the industry and therefore this eased

data collection.

1.6.3 Time Scope

The study considered a period of three (3) years from 2013 to 2016. This period was selected to

enable the researcher come up with coherent information from the respondents as it would enable

those (Respondents) to give responses that are typical of their opinion from the observations

made over this period.

1.7 Significance of the Study

The findings of the study are significant on the following ways;

i To scholars and researchers, the findings of the study are expected to contribute to the

existing literature about VAT and the effect it causes to any enterprise in Uganda.

ii To the tax authority and government, the study will guide them in adjusting tax policies

so that they suit requirements of small and medium scale businesses.

iii The accomplishment of the study will enable the researcher to acquire hands on skills

about processing of research work and data analysis. This proficiency will enable the

researcher to handle such related work with a lot of precision and proficiency.

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 CHAPTER TWO

LITERATURE REVIEW

2.0 Introduction

This chapter summarizes the information from the available literature in the same field of study.
It will review theories of VAT as well as empirical studies on VAT and financial performance of
small and medium scale enterprises in Uganda.

2.1.0 Challenges of vat administration in Uganda

VAT was introduced in Uganda in 1996 at a rate of 17% (Misrak, 2005) and now VAT rate is
18%. Vat administration

VAT administration pertains to how tax authorities discharge the responsibilities entrusted to
them. According to Jantscher (1990), these responsibilities include a range of related activities
such as taxpayer identification and registration, invoicing, filing and payment requirements,
control of filing and payments, refunds, audits and penalties. Perhaps peripherally, VAT
administration is also concerned with issues of who should administer the tax, what
organizational setup to use and what resources are available.

There may be weaknesses in how VAT administrators perform their duties. Weaknesses in VAT
administration, in turn, may adversely impact on the salient features of the tax and government’s
policy objectives as a whole. In this regard, Tanziand Pellechio (1995), as cited in Mikesell
(2007), noted that poor tax administration would change the manner in which taxation affects
government’s policy objectives, namely economic stabilization, resource allocation and
redistribution of income. In developing countries the poor performance of taxes is likely to be
due to weak tax administration (i.e., the incapacity of the administration to implement the tax in
practice). This is perhaps caused by such factors as resource constraint and designing the tax
separately from the administration. Concerning the latter, Bird and Gendron (2005), noted that
developing and transitional countries, unlike developed countries, appear to have fragmented
economies, large informal sectors, low tax morale, rampant evasion, and total distrust between
tax administrators and taxpayers. In these countries, thus, simply adopting a successful VAT’s
design attributes of developed countries would not make the tax successful (Bird &Gendron,

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2005). The design ought to consider the tax administration dimension and the socio-economic
realities of the developing country in question. In discussing the importance of tax administration
in general, Bird (1989 and 2004), noted that tax administration dimension ought to be placed at
the centre, not periphery, of tax reform. Jantscher (1990: 179) also stated that “…in developing
countries tax administration is tax policy.”

Considering the significance of tax administration, many studies have been conducted in some
developing and transitional countries with respect to the main VAT administration tasks. These
studies include Jantscher (1990), Edmiston and Bird (2004), Bird and Gendron (2005),
Grandcolas (2005), and Bird (2005). These papers assessed how VAT administrators in
developing and transitional countries perform their duties and how the effective taxpayer
requirements differ from the legislation. More specifically, the analyses focused on practices of
different developing countries with respect to taxpayer identification, invoicing, filing and
payment process, control of filing and payments, refunds, audits and penalties. In addition, the
costs of VAT administration were briefly examined in the case of Jantscher’s (1990) study. The
main conclusion of these studies is that VATs prevailing in developing countries were quite
different from the broad based tax discussed in public finance literature and that administrative
problems have a major contribution to this divergence. Administrative problems, in turn, may be
partly caused by administrative resources constraint.

VAT administrative costs can include costs incurred by tax authorities in performing the tasks
entrusted to them. In developing countries, estimates of VAT administrative costs are scant. In
fact, as a measure of efficiency some governments attempted to develop percentages of
administrative costs to the revenues generated by taxes. In the case of VAT, Jantscher (1990)
indicated that fragmentary data, supplemented by the impressions of administrators, suggest that
administrative costs usually range between one and two percent of the VAT revenues collected.
In addition to the administrative activities and the availability of administrative resources, VAT
administration deals with issues such as administrative organs (who should administer the tax)
and their mode of organization. Of particular importance for this paper is the VAT administrative
organ. It suffices, however, to note that for a successful VAT the significance of appropriate
institutional setup with proper human and material deployment must not be underestimated.

7
In respect of the VAT administrative organs, as Martinez-Vazquez and Timofeev (2005), noted
the assignment of responsibilities ought to be seen as an element that must interact and be
compatible with the rest of the design of a decentralized financial system. The decision (who
should administer VAT) should be made within the framework of the overall fiscal system,
particularly the assignment of VAT. In this context, examination of the theory of fiscal
federalism shows the guidelines for the assignment of functions and fiscal instruments to
different levels of government. According to this theory, the central government should have the
basic responsibility for macroeconomic stabilization, income redistribution and resource
allocation (Musgrave 1959 & Oates 1972 cited in Oates 1999). In view of this conventional
theory and the practical difficulties of implementing the tax, sub-national VATs were considered
to be unfeasible. In this regard, Bird and Gendron (1998) quoted that the usual understanding
was not to assign the VAT to sub-national governments (McClure1993) and that the simplest
practical way to run a federal state sales tax system including VAT was to adopt a revenue
sharing scheme similar to the federal republic of Germany (Tait 1988). As a result, in most
countries that have already introduced VAT, the tax has been assigned to central (federal)
governments.

Following the assignment of VAT revenue, the question would be who should administer VAT?
On this issue there are different possibilities, the extreme ones being central government only
(centralized) or regional governments only (fully decentralized). Between these two extremes
there may be different arrangements. There are arguments, at least conceptually, on the
advantages and disadvantages of centralized and decentralized tax administration in terms of
economies of scale and cost efficiency. Mikesell(2007), noted that innovation of new approaches
and techniques are cited as advantages of decentralized administration while economies of scale
and expertise are for a centralized administration. Martinez-Vazquez and Timofeev (2005), also
indicated that the final decision may depend on how the objectives of the tax administration and
the constraints involved are weighted and also on the nature of the trade-off among them.

Grandcolas (2005), and Jantscher (1990), noted that managing VAT refunds is one of the
challenges of VAT administrations in developing countries. In managing refunds and combating
refund frauds, different countries use schemes including denial of refund claims (except to
exporters), carrying forward of refund claims, demanding a third party certification of the claim,

8
demanding guarantee, requiring taxpayers to have separate VAT bank accounts, zero rating of
supplies to exporters and remission of input VAT on certain goods (mainly capital goods). Some
of these schemes are not only to combat refund frauds, but are also intended to reduce the strain
on business cash-flows.

Looking closely at the practices concerning VAT refunds in developing countries shows that all
developing countries give refunds to exporters and some require other VAT taxpayers to carry
forward their excess credits indefinitely (Jantscher 1990).

2.1.1 VAT Administrative Practices

Before turning to the discussion of the tax administration tasks, it is sensible to briefly review the
major design features and administrative organs of VAT in Uganda. Interms of design VAT is
imposed on the supply of goods and services other than exempted supplies for example supply of
specialized vehicles, plant and machinery, feasibility studies, engineering designs, consultancy
services, and civil works related to hydro-electric power, roads, bridges, public water works,
agriculture, education and health sectors (VAT Act Cap 349, Uganda laws 2000, as amended).
VAT is based on the invoice credit method in which taxpayers are given credit for the VAT paid
on inputs when it is supported by the relevant documents. The tax is also based on the destination
principle in that imports are taxed but not exports. VAT is chargeable at a standard rate of 18 per
cent on all taxable supplies of goods and services other than those zero rated (mainly exports).
VAT registration is required by businesses that have annual turnover of Uganda Shs. 50,000,000
and more. The VAT legislation allows refunds to be made to mainly exporters within one month
from the time applications are lodged beyond which interest accrues in case of monthly returns.
Non-exporting taxpayers are required to carry forward excess credits to the next five accounting
periods; if there are still unused excess credits it is allowed (at least in the legislation) to be
refunded within two months from the time of lodging applications.

VAT is administered by the URA on behave of ministry of finance, planning and economic
development. The URA administers VAT on imports into the country. The URA with its VAT
department, large taxpayers’ office and branch offices administers federal and joint VAT on
domestic transactions, With this overview of the design and administration of VAT in Uganda
the following sections present how the tax authorities perform their responsibilities with respect

9
to the major VAT administration tasks, including taxpayer identification and registration, VAT
filing and payment, control of VAT filing and payment, VAT invoicing, VAT auditing, penalties
and VAT refunds.

Taxpayer identification and registration

As mentioned previously, the VAT legislation requires businesses undertaking taxable activities
in Uganda with an annual turnover of Uganda Shs. 50,000,000 and more to register for VAT
(compulsory registration). After the VAT was operational with such a registration requirement,
the authority devised forced–registration schemes. These schemes include selective registration
requirements that compel all businesses owned by the state or engaged in a specific sector/form
of ownership to register for VAT regardless of the level their annual turnover.

In Uganda, where the awareness of taxpayers, the culture of paying taxes and the capacity of tax
administrators appear to be poor, using sector or ownership specific registration requirements is
sensible. However, caution should be exercised in selecting the sectors that should be covered by
the VAT. The decision ought to be based on a careful examination of sectors’ nature, volume of
operations and the level of keeping records. Limiting the number of sectors to be covered by
VAT under such a requirement at a manageable level is advisable.

Examination of survey responses revealed several problems related to taxpayers registration. For
example, in Ethiopia, 13 per cent of (taxpayer survey) and 62 per cent of (tax practitioner survey)
respondents indicated the prevalence of VAT unregistered businesses and urged the
government’s due attention. The dominance of VAT unregistered businesses, according to
survey respondents, resulted in uneven market competition and a loss of market share and
profitability by registered businesses. Survey respondents identified weaknesses in the tax
administration and exclusion of businesses with annual turnover less than ETB 500,000 the
major causes of the prevailing competition problem (cited in e-journal of tax research by Wollela
Abehodie Yesegat, 2008) and this study can be convectional in Uganda as most businesses are
not VAT registered yet eligible.

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VAT filling and payment

VAT filing practices differ among countries. As Jantscher (1990) noted, in some developing
countries, taxpayers effect provisional payments monthly and file returns annually; while most
developing countries require monthly filing and payment of VAT and do not require taxpayers to
furnish a yearly return. In the case of Uganda, taxpayers are required to file VAT returns
accompanied by the appropriate payments on monthly basis and there is no year-end
reconciliation requirement. Further, the VAT legislation allows taxpayers a 30-day period within
which to file returns and make payments. Nevertheless, in practice, according to the outcomes of
interviews with tax officials, there are three VAT reporting periods depending on whether a
taxpayer is a nil, credit or payment filer. The reporting time from the end of the accounting
period is 10 days for nil filers, 20 days for credit filers and 30 days for payment filers. According
to tax officials, taxpayers that fail to meet the reduced deadlines would not be fined as long as
they report within 30 days from the end of the accounting period. However, such taxpayers
would be given verbal warning that if they do not keep the reduced reporting periods, penalty
would be applied.

The other aspect worth assessing is the return filing process. Return filing could be done by
going to the premises of the tax authority in person, through the post office or electronically. In
Uganda, taxpayers file VAT returns by going to the tax office in person. This is a problem for
taxpayers that reside in remote areas (where the URA does not have branch offices) and are
forced to go to the capital city, Kampala or other, ornear by districts where the tax authority has a
branch office. Generally, the above mentioned practices pertaining to reduced VAT reporting
periods, the method of effecting payments and the return filing process are likely to be translated
into increasing taxpayers’ compliance costs, especially on small businesses. It is therefore
worthwhile to strengthen the administration capacity of the tax authorities and reduce the burden
on taxpayers (because this may, in turn, have an impact on their compliance decisions).

Control of filing and payment

In administering VAT in Uganda, tax authorities use computer programs, namely: block System
340 running VCE Vision Intelligent Operations and EMC VNX Unified Storage with Recover
Point for continuous data protection. The computer programs are used to maintain taxpayer

11
register and process VAT returns. Detection ofnon-filers seems to be carried out mainly
manually. In Uganda, every trader is required to renew business license annually with the
pertinent offices under the Ministry of finance, planning and economic development or regional
governments. To renew business licenses, traders are required to produce evidence from tax
authorities that all taxes have been paid. The tax authorities on their part, before providing the
evidence to taxpayers, check if there are delinquent taxes (including VAT).

In addition, tax authorities Endeavour to follow-up non-filers identified by the computer

programs. However, because of shortage of manpower, such follow-ups are usually carried out
once in a 3 to 6 month period. The above practices pertaining to controlling VAT filing and
payment delay the collection of the tax and jeopardize the government’s revenue. It is, hence,
suggested that to ameliorate the potential impact of non-filers on the revenue performance of the
tax, strengthening the administration capacity of the tax authorities, and effectively using the
computer programs coupled with timely follow-up of non-filing taxpayers are worthwhile to
consider.

VAT invoicing

Jantscher (1990) noted that unlike developed countries most developing countries require some
form of invoicing for all transactions subject to VAT including sales to final consumers. As a
whole, there appear to be various factors contributing to the invoicing problems. These factors
include lack of tax administrators’ follow-up and control, lack of awareness among the society
and the prevalence of poverty. Tomitigate these problems, enhancing tax education and follow–
up programs are worthwhile to consider. Further, as the tax practitioner survey respondents
suggested, designing a strategy that can encourage consumers to ask for VAT invoices could be
helpful although this is likely to increase the administrative costs of the tax.

VAT audit

There appears to be a considerable VAT evasion in developing countries (Pedone1982 cited in

Jantscher 1990). As Edmiston and Bird (2004) noted the only real solution to the evasion
problem is a good tax administration and, especially, a strong VAT audit program. A strong
VAT audit program needs, among other things, an appropriate audit case selection method.

12
Jantscher (1990) noted that cross checking purchases and sales data by various taxpayers would
provide an effective tool for selecting VAT taxpayers for audit and hence improve audit results.

The resource constraint can be assessed in terms of the number of VAT administrative personnel,
auditors in particular, in relation to the number of VAT registrants and also total number of
employees in the tax authorities. Taking the total number of VAT administrative personnel in
relation to the number of VAT registrants in the fiscal year2004−05 showed a ratio of 1:234.
Similarly, the number of auditors to total number of VAT registrants in the same fiscal year
revealed a ratio of 1:786.28 In addition, the proportion of VAT administrative personnel to the
total number of employees at the EFIRA was about 10.4 per cent. (Cited in ejournal of tax
research byWollelaAbehodieYesegat2008)

To examine whether the above ratios are sufficient, it would be worth cautiously comparing
them with similar estimates in other, especially developing, countries. However, similar ratios in
other developing countries appear to be unavailable. Therefore, these ratios would be scrutinized
in light of features which are likely to be prevalent in developing countries, Uganda in particular.
These features include low levels of literacy, low and fragmented economy; small and inefficient
VAT administration experience and poor taxpaying culture. In the context of these problems, the
above estimated ratios are likely to be very small which, in turn, suggests that the tax authorities
are not equipped with sufficient number of personnel.

In general, the quality of auditors (VAT administrators at large) that appears to be poor coupled
with their relatively small number is affecting the effectiveness of the audit program. This is, in
turn, likely to impact on the revenue that could be generated through effective audit programs
and on the use of effective audits as tools of deterring noncompliance. It is, thus, worthwhile for
the government to consider the possibility of recruiting and retaining a sufficient number of
qualified VAT administrators, auditors in particular. This can be achieved mainly through
making revenue authorities autonomous in terms of setting better employee benefits schemes. As
discussed in a later section, the autonomy has to be accompanied by the government’s
commitment to make sufficient resources available for the administration.

13
Penalties

From examination of the practices pertaining to VAT penalties, Jantscher (1990) noted that in
most developing countries the stricter penalties in VAT laws are usually not applied, thus
penalties have little deterrent effects. In Uganda, the VAT legislation proclaims that taxpayers
that fail to fulfill the requirements of VAT are chargeable with penalties ranging from financial
penalties to imprisonment. The tax authority started enforcing the penalty provisions (including
the stricter ones) of the VAT legislation to some extent. For instance, although the legislation in
general stipulates a penalty of 2% per cent of the amount of VAT unreported/underpaid, in
practice (according to the outcomes of the in-depth interviews with tax officials) a late filing
penalty amounting to double the tax from the date the taxable person ought to have been
registered for each accounting period the tax remained un-reported is imposed. In addition, there
are cases where taxpayers convicted of VAT evasion have been fined(both money and
imprisonment).

In general, considering that VAT is still young (introduced for the first time in the year

1996) in Uganda, focusing on the implementation of strict penalty provisions (like imprisonment
of taxpayers) instead of taxpayers’ education may have negative impact on the attitude of
taxpayers beyond its deterrence effect. Further, the lack of consistency and transparency in
administratively imposing the penalty may open a room for corruption. It is, thus, advisable to
try to implement what is legislated in the law regarding penalties (on the financial penalty
aspect).

2.2 Financial Performance

Financial Performance measurement and reporting is now widespread across the private sector as
well as public sector of many industrialized and industrializing countries (Williams, 2003). The
common tool that is used for this process, key performance indicators (KPIs), has been argued to
provide intelligence in the form of useful information about a public and private agency’s
performance (Williams, 2003). Scholars like Modell (2004), Moynihan (2005), Vakkuri and
Meklin (2006), have maintained that the implementation of performance measurement systems
possess important symbolic value.

14
KPIs are viewed as a good management device and a socially constructed tool that makes sense
(DeKool, 2004). The fact that KPIs tend to be quantitative has helped to promote their image of
objectiveness and rationality. The image of KPIs is further enhanced by their widespread
application across the many sectors of many countries. The importance of performance
measurement is noted by Ingraham (2005), that it is important to expect that citizens see and
understand the results of organizational programs.

Profitability offers clues about the ability of small and medium enterprises to undertake risks and
to expand their activity. The main indicators used in the appreciation of small and medium scale
enterprises’ profitability are: Return on equity, ROE (Net income / Average Equity), Return on
Asset, ROA (Net income /Total assets) and the indicator of financial leverage or Equity / Total
Assets (Dardac&Barbu, 2005). The indicators are subjected to observation over a period of time
in order to detect the tendencies of profitability. The analysis of the modification of the various
indicators in time shows the changes of the policies and strategies of small and medium scale
businesses and/or of its business environment (Greuning&Bratanovic, 2004)

A commonly used measure of small and medium scale enterprises’ financial performance is the
level of organizations’ profits (Ceylan, Emre&Asl, 2008). Small and medium scale enterprises
profitability can be measured by the return on assets (ROA), a ratio of profits to its total assets.
The income statements of small and medium scale businesses report profits before and after
taxes. Another good measure on SME’S performance is the ratio of pre-tax profits to equity
(ROE) rather than total assets since SME’S with higher equity ratio should also have a higher
return on assets (Ceylan, Emre&Asl, 2008).

2.2.1 Determinants Financial Performance of SME’S

This section reviews the determinants of financial performance, those included in this study
include, Size of the Company, Liquidity, Growth, Age of the firm, cost of production, Operating
expenses and Profitability.

Liquidity

Liquidity of the firm is a key determinant of the firm’s financial performance. Liquidity risk can
be measured by two main methods: liquidity gap and liquidity ratios. The liquidity gap is the

15
difference between assets and liabilities at both present and future dates (Pelg, 2006). Liquidity
ratios are various balance sheet ratios which should identify main liquidity trends. These ratios
reflect the fact that a firm should be sure that appropriate, low cost funding is available in a short
time. This might involve holding a portfolio of assets that can be easily sold, cash reserves,
minimum required reserves or government securities (Santalo& Becerra, 2008).Liquidity as
studies done by Shiu (2004), proves that companies with more liquid assets are likely to perform
better as they are able to realize cash at any point of time to meet its obligations and are less
exposed to liquidity risks. By not having sufficient cash or liquid assets, companies may be
forced to sell investment securities at a substantial loss in order to settle claims promptly. This in
effect will affect their financial performance.

Growth

Profitability and growth are the key variables in economic analysis of a firm’s performance.
Growth can occur in many different aspects of a firm’s operations such as its cash flow, net
income, customer base, sales and market share (Murphy et al,1996), to examine the growth of
small and medium-sized British firms. Robson and Bennett, (2000) in their study observed a
positive relationship between both profitability and sales growth. Better growing firms increase
their profitability. If there is an increase in total assets it means it has a high growth and it tends
to be more profitable. We will measure growth as a percentage increase in total assets. Thus we
expect positive relationship between growth rate and profitability of firm (Nousheen & Arshad,
2013).

Age of the Firm

Age is a key determinant of financial performance of the firm. The period of operation that a
firm has been in operation highly determines the financial performance of the firm. Firms that
have a vast experience in the market are able to gain economies of scale from the suppliers and
other stakeholders of the firm as result of good relationships and trust. Such a firm is more likely
to perform better than a firm that is new in an environment. The firm might spend a lot of money
before it gets adapted to the new environment (Santalo & Becerre, 2008).A growing asset (Size)
is related to the age of the organization (Shekhar & Lekshmy, 2007). The quality of assets is a
very important criterion that determines the ability of an Organization to earn consistently. It

16
basically determines the profitability of the Organization. It also explains the suitability and
growth in earnings in the future.

Cost of Production and Operating Expenses

Rivera and Oliva (2003), cite that production costs are expenses, such as materials and labor that
a company incurs in the course of producing the product to sell to consumers. While operating
expenses refer to selling, general and administrative expenses. In general, the lower the costs, the
higher the profit, or the amount left over after subtracting expenses from sales revenue.
However, low production costs do not necessarily guarantee a high profit. A business may have
unsustainably high fixed costs, such as rent, or may cut production costs of producing an inferior
product that nobody wants.

A firm maximizes profit by operating where marginal revenue equal marginal costs. A change in
fixed costs has no effect on the profit maximizing output or price. The firm merely treats short
term fixed costs as sunk costs and continues to operate as before. This can be confirmed
graphically. Using the diagram illustrating the total cost, total revenue perspective, the firm
maximizes profit at the point where the slopes of the total cost line and total revenue line are
equal. An increase in fixed cost would cause the total cost curve to shift up by the amount of the
change. There would be no effect on the total revenue curve or the shape of the total cost curve.
Consequently, the profit maximizing point would remain the same. This point can also be
illustrated using the diagram for the marginal revenue-marginal cost perspective. A change in
fixed cost would have no effect on the position or shape of these curves (Palepu et al, 2000).

Profitability

Profitability is the primary goal of all business ventures. Without profitability the business will
not survive in the long run. Profitability results from the excess of income over expenses. A firm
that is highly profitable has the ability to reward its owners with a large return on investment
(Hovakimian et al, 2004).Firms facing financial constraints are unlikely to meet their investment
obligations. The firm may be paying out more than it is receiving and more likely to go bankrupt
(Stewart, 2011). This implies that in the long run the chances of survival of the firm are low and
this would yield a lower valuation. On the contrary firms with adequate cash flow are likely to
meet their financial obligations on time and hence improved performance.

17
2.3 Relationships between VAT and Financial Performance of Small and Medium Scale
Business Enterprises

Under the Value-Added Tax (VAT), the value added to goods and services is ascertained
conceptually by subtracting the purchase cost of a taxable good from its selling price. That is,
each firm would pay a tax on the increase in the value of an economic good, which it produces.

For administrative convenience, VAT is levied on the basis of the sales value of the good at a
particular stage of economic activity, not directly on the value added at that stage. Specifically,
VAT was designed liberally to be levied on imported goods, locally manufactured goods, hotel
services and bank transactions. In Uganda, VAT is presently charged at a flat rate of 18 percent.
It is not every business that is affected by VAT in Uganda. The Value-Added Tax Act Cap 349
second schedule specified those goods and services that are exempted from VAT or goods
exempt from customs duty under the Fifth Schedule of the East African Community Customs
Management Act (EAC-CMA). These include-medical and pharmaceutical goods and services;
basic food items; books and educational materials; baby products; agricultural equipment and
products; veterinary; medicine; fertilizers, agricultural chemicals, exported goods and services;
religious services; services by community banks (now microfinance banks), peoples banks,
mortgage banks; and plays and performances conducted by educational institutions as part of
learning.

However, for those businesses affected by VAT, previous studies have shown that the burden is
usually shifted to the final consumer. Considering the living standard of an average Ugandan,
VAT is often seen as an enemy to the individual and industrial consumers. This is why Ugandans
vehemently refused to accept the increase in VAT to 18 percent. However, for those businesses
affected by VAT, previous studies have shown that the effect is unpalatable. Businesses usually
pay VAT on goods and services they purchase (input VAT) and charge VAT on goods and
services they supply (output VAT (Adedeji, 2004). Invkovic, Poterba and Weisbenner (2004), in
their empirical work on “tax-motivated trading by individual investors” found that value- added
tax reduces the sales volume of companies and consequently wealth maximization. In a related
development, Olabisi (2004); Bradford (2000); Joulfaian and Rider (1996), in their empirical
research concluded that increase in VAT rate on vatable goods and services has a negative
significant effect on corporate performance. More so, Akinmayowa (2006), conducted a study

18
among 18 banks in Nigeria on the impact of increases in value-added tax on banks’
effectiveness. His study revealed that increase in VAT has a negative significant effect on bank’s
efficiency in the same way as in banks; SME’S would face the same problem.

2.4 Conclusion

This chapter looked at the challenges of VAT administration in Uganda and financial
performance of SME’S. Section 2.3 shows evidence of negative relationship between VAT and
performance of SME’s

However, contextual gap exist where none of the research has focused on the sensitivity of the
effects of VAT to contextual factors that determine firm’s financial performance. To improve on
the studies, the basic models should control for the contextual effects that include; the effect of
taxes on return on asset, how tax affect size of firm, the effect of taxes on age of firm, how taxes
affect the firm's liquidity as well as how taxes affect firm’s growth.

In summary, there are no detailed studies investigating the effect of VAT on determinants of
financial position to support their findings, in particular, the effect of taxes on return on asset,
how VAT affect size of firm, the effect of VAT on age of firm, how VAT affect the firm’s
liquidity as well as how VAT affects firm’s growth. This literature has ignored applicability of
accounting measures in determining firm’s financial performance. Additional research should be
carried out; therefore the proposed study will bridge this gap in empirical study. Though the
study considers Impact of VAT, it will be expanded to incorporate various financial
performances determinants that are expected to influence firm’s performance.

19
 CHAPTER THREE

METHODOLOGY

3.0 Introduction

This chapter sets out various stages and phases that were followed in completing the study. It
involves a blueprint for the collection, measurement and analysis of data. This section is an
overall scheme, plan or structure conceived to aid the researcher in answering the raised research
question. This stage is about how research was executed and how respondents were approached,
as well as how the research was completed. Therefore in this section the research identifies the
procedures and techniques that were used in the collection, processing and analysis of data.
Specifically the following subsections are included; research design, data collection instruments,
data collection procedures and finally data analysis.

3.1 Research Design

The study adopted a descriptive survey design. Descriptive research is used to obtain information
concerning the current status of the phenomena to describe "what exists" with respect to
variables or conditions in a situation. The technique was appropriate as it involved a careful in
depth study and analysis on the impact of VAT on financial performance of SME’S.

3.2 Area of Study

The study was carried out at Uganda Clays limited, Kampala Uganda.

3.3 Population of the Study

Lavrakas (2008) defines a population as any finite or infinite collection of individual elements.
Hyndman (2008) describes a population as the entire collection of ‘things’ in which we are
interested. According to Zikmund et al. (2010) and Kothari (2004), a population refers to all
items in any field of inquiry and is also known as the ‘universe’.

The population of study consisted of 100 respondents who consisted of the senior management
of Uganda clays limited, and employees of the various departments.

20
3.4 Sample Size

The population considered consisted of 100 respondents, out of this 40 respondents were selected
for the study,4 respondents were selected for the study; 10 from the senior management, 3 from
the Human resource department, 4 from the stores department, 5 from the accounts department, 3
secretaries, 4 from the marketing department, 5 from the production unit and 6 from research and
development.

Table 1.0 showing the response rate of respondents

Category Number of respondents Percentages (%)

Senior management 10 25
Human resource department 3 7.5
Stores department 4 10
Accounts department 5 12.5
Secretaries 3 7.5
Tax experts 4 10
Production unit 5 12.5
Research and development. 6 15
Total 40 100
Source: Primary data

3.5 Data Collection

The researcher used two types of data collection during the study and they include primary and
secondary data.

3.6.1 Primary data

The data was collected from respondents from Uganda Clays Limited. This gave firsthand
information that was reliable and accurate using questionnaires that were given to the
management and employees in there different departments.

21
3.6.2 Secondary Data

Secondary data was collected from annual reports and financial statements on record as at 31 st
December 2015.

The secondary data from the financial statements included the after tax profit, total assets,
written off debt, and value of loans outstanding. This was aimed at supplementing secondary
data.

3.7.0 Data Collection Instruments

In the process of data collection, the researcher used the following instruments;

3.7.1 Questionnaires

The researcher used self-administered questionnaires to collect data from the management and
employees of Uganda Clays Limited.

Kothari (2004) terms the questionnaire as the most appropriate instrument due to its ability to
collect a large amount of information in a reasonably quick span of time.

The questionnaire was carefully designed and tested with a few members of the population for
further improvements. This was done in order to enhance validity and accuracy of data collected
for the study.

3.8 Data Processing and Analysis

Ordinarily, the amount of data collected in a study is rather extensive and research questions and
hypotheses cannot be answered by a simple perusal of numeric information and therefore data
need to be processed and analyzed in an orderly and coherent fashion. Statistical analyses cover a
broad range of techniques, from simple procedures that we all use regularly like computing an
average to complex and sophisticated methods. Although some methods are computationally
formidable, the underlying logic of statistical tests is relatively easy to grasp, and computers have
eliminated the need to get bogged down with detailed mathematical operations (Polit and Beck,
2003).

22
The data collected was sorted, scrutinized, coded, and presented using frequency tables and
graphs showing the relationship between the two variables.

Quantitative information is usually analyzed through statistical procedures and in this research,
Pearson’s product moment correlation coefficient as a statistical method was used to establish
the relationship between VAT and financial performance of Uganda Clays Limited.

Spearman’s rank correlation coefficient method is expressed by the formulae as below;

n (∑ xy )−( ∑ x ) (∑ y)
R=
√ [ n ( ∑ x 2 ) −( ∑ x ) ] [n ( ∑ y 2 ) −(∑ y )²]
2

Where; r=Pearson’s product moment correlation coefficient.

=Number of items observed.

X=dependent variable

Y=independent variable

3.9 Limitations of the Study

In the course of the study, the researcher was likely to be limited by the following;

The researcher faced financial challenge in terms of transport, typesetting, printing, and binding
the research proposal. Here the researcher would have to ask for the financial support from the
parents’ in order to overcome the above problem.

The researcher was not in position to get enough information from the respondents which
sometimes may be confidential however, to overcome this problem the researcher should turn to
other sources of information like text books, newspapers among others.

Some respondent gave biased responses which lowered the accuracy of finding, its validity and
reliability. However, the researcher explained the aim of carrying out research so as to collect
accurate information.

23
Time allowed for research was not enough to allow the researcher cover all the study activities.
Therefore, this limits the total quantity of data to be collected. The researcher would however
work within given stipulated time to collect the data.

CHAPTER FOUR

DATA ANALYSIS, RESULTS AND DISCUSSIONS

4.1 Introduction

This chapter discusses the interpretation and presentation of the findings obtained from the field
on the effect of VAT on the financial performance of small and medium scale enterprises in
Uganda. Descriptive and inferential statistics were used to discuss the findings of the study. The
study targeted a population size of 49 respondents from which 40 filled in and returned the
questionnaires making a response rate of 81.6%. This response rate was satisfactory to make
conclusions for the study.

4.2 Data Analysis

4.2.1 Gender of the Respondents

Most of the respondents were male as shown in the table below

Table 4.1: Showing genders of respondents.

Gender Frequency Percentage

Male 25 62.5
Female 15 37.5
Source: Primary data

From the table above, it revealed that most of the respondents at Uganda clays limited were male
represented by 62.5% as compared to the female respondents who comprised of 37.5% of the
total respondents.

Therefore this explains that most of the workers at Uganda clays limited are male due to the fact
that the work done needs energetic and strong work force to deal with the tough work load in the
factory.

24
4.2.2 Age of the Respondents

Table 4.2: Showing the ages of the respondents

Age Frequency Percentage

Less than 25 years 7 17.5
25-34 years 18 45
35-44 years 10 25
45 years and above 5 12.5
Total 40 100
Source: primary data

From the above table, it shows that 17.5% of the respondents were less than 25 years, 45% of the
respondents were between 25-34 years of age, those between the ages of 35-44 were 25% while
those above 45 years of age were represented by 12.5%.

From the above data, it shows that most of the respondents were between the ages of 25-34
(45%) and those between 35-44 years represented by 25% implying that most of the employees
of the company were still young and energetic to handle the work load in the company.

4.2.3 Marital Status of the Respondents

This shows the proportion of the married respondents to the unmarried as shown in the table
below;

Table 4.3. Showing marital statuses of respondents

Status Frequency Percentage

Married 30 75
Single 9 22.5
Widow 1 2.5
Total 40 100
Source: Primary data

25
The frequency tables above shows that most of the respondents are married comprising of 75%
of the respondents, 22.5% were not married whereas only 2.5% were widowed.

4.2.4 Academic Qualifications of the Respondents

This was explained as shown in the table below.

Table 4.4: Showing academic qualifications of respondents

Academic qualification Frequency Percentage

Masters 3 7.5
Degree 15 37.5
Diploma 16 40
Certificate 6 15
Source: primary data

From the above tables, it showed that most of the respondents had Diploma comprising of 40%
of the respondents, followed by those who had Degrees comprising of 37.5%, certificate holders
comprised of 15% and Masters Holders at 7.5% of the respondents.

4.2.5 Duration of which the respondents have worked in the Company

This was explained as shown in the table below

Table 4.5. Showing the duration of which respondents have worked in the organization

Duration Frequency Percentage

Less than 1 year 30 75
1-5 years 6 15
Above 5 years 4 10
Total 40 100
Source: Primary data

From the above table, most of the respondents hard worked in the organization for a period less
than one year represented by a percentage of 75%, those who had worked for a period of
between 1-5 years were represented by 15% and those who had worked for more than 5 years
were 10%.

26
This shows that there is a high labor turnover possibly which can be due poor working
conditions, low pay, and many others.

4.3 Challenges of VAT Administration in Uganda

Table 4.6: The table below shows the extent to which respondents agreed or disagreed to
the various statements in regard to challenges of VAT administration in Uganda.

Statement Strongly Agree Disagree Strongly Not Total

agree disagree sure
a) VAT administration is very (8)20% 62.5% 12.5% 5% 100%
easy
b) VAT administration is 37.5% 35% 15% 12.5 100%
centralized
c) VAT administration is 25% 12.5% 42.5% 5% 15% 100%
decentralized
d) Tax administration is a 62.5% 25% 12.5 100%
policy
e) Tax policy affects economic 35% 15% 22.5% 20% 100%
stability
Source: primary data

From the above table, most of the respondents strongly agreed and agreed with percentages of
20% and 62.5% respectively, 12.5% of the respondents disagreed while 5% were not sure
whether VAT administration is easy or not. It can be summarized that most of the respondents
seconded VAT administration as an easy process.

From the above table in the second row, it was realized that 37.5% of the respondents strongly
agreed , 35% of the respondents agreed, 15% disagreed while 15% disagreed with the statement
that VAT administration is Centralized, 12.5 % were not sure. From the above, it shows that Vat
administration in Uganda is centralized supported by the highest number of respondents
compared to those who disagreed and those who were not sure.

Regarding the statement that VAT administration is decentralized, most of the respondents
disagreed with the statement represented by 42.5% and those who strongly disagreed were 5%

27
compared to those who agreed and strongly agreed represented by 25% and 12.5% respectively.
15% of the respondents were not sure whether VAT is decentralized or not.

Regarding the statement that tax administration is policy, most of the respondents strongly
agreed and agreed to the statement represented by 62.5% and 25% respectively while 12.5% of
the respondents were not sure.

Regarding the statement tax policy affects economic stability, 35% of the respondents strongly
agreed, 22.5% agreed, 22.5% disagreed while 20% of the respondents were not sure whether tax
policy affects economic stability.

In general, in the table above most of the respondents strongly agreed with an average percentage
of 36% while those who agreed were averaged at 31.5% implying that there are challenges while
administering VAT in Uganda.

4.4 Determinants of Financial Performance

Table 4.7: Showing the extent to which respondents agreed or disagreed to various
determinants of financial performance at Uganda clays limited.

Statements Strongly Agree Disagree Strongly Not Total

agree (%) (%) disagree sure

(%) (%) (%)

Expenses reduce on the net profit of 51.3 38.5 10.3 2.6 97.5

the company

High VAT rates increase price 62.5 17.5 7.5 12.5 100

High prices reduces sales volume 75 12.5 5 7.5 100

High return on equity is an indicator 62.5 25 7.5 5 100

of profitability

Source: Primary data.

From the above table, respondents had different views regarding the financial performance of
Uganda clays limited and seconded the above statements as seen below.

28
Regarding the statement ‘expenses reduce on net profit’, the number of respondents was 39
representing 97.5% of the sample population. 51.3% of the respondents strongly agreed, 38.5%
of the respondents agreed while 10.3% of the respondents disagreed. Hence it can be concluded
that most of the respondents strongly agreed and agreed respectively.

From the above table, regarding the statement that high vat rates increase price, 62.5% of the
respondents strongly agreed, 17.5% agreed, 7.5% disagreed while 12.5% were not sure.

Regarding the statement that high prices reduces sales volume, most of the respondents strongly
agreed and agreed represented by 76.9% and 16.7% respectively while 5.1% and 5.1% disagreed
and were not sure respectively.

Regarding the statement that high return on equity is an indicator of profitability, most f the
respondents strongly agreed and agreed with respective percentages of 62.5% and 25%, 7.5%
disagreed while 5% were not sure.

4.5 Relationship between VAT and Financial Performance

Table 4.8: Showing computation of the relationship between VAT and financial
performance.

Opinion VAT (X) Financial XY X2 Y2

Table performance
1.6(a) (Y) Table1.7
Strongly agree 8 62.8% 2260.8% 1296% 3943.84%
Agree 31.5% 23.4% 737.1% 992.25% 547.56%
Disagree 23.1% 7.6% 178.6% 552.25% 57.76%
Strongly disagree 5% 0% 0% 25% 0%
Not sure 13% 6.9% 89.7% 169% 47.61%
∑X=109% ∑Y=100.7% ∑XY=3266.2% ∑X2=3034.5% ∑Y2=4596.77%
Using Pearson’s product moment correlation coefficient formula;

r= n (∑x y)-[(∑x) (∑y)]

√ [(n∑x2-(∑x) 2) (n∑y2-(∑y) 2)]
R=0.825

29
There is a relationship between value added tax and financial performance of Uganda

4.6 Secondary Data

Table 1.9 Secondary data was got from audited financial statements of Uganda clays as at 31 st
December 2015.

Statement of Profit or Loss

2015 2014
Notes Shs‘000 Shs '000
Revenue 1 24,111,965 22,112,617
Cost of sales (16,366,799) (17,883,442)
Gross profit 7,745,166 4,229,175
Other Incomes
Compensation on Land 3,113,471
Rent and other incomes 103,364 112,690
Total income 10,962,001 4,341,865
Administrative expenses (1,913,708) (2,001,033)
Distribution expenses (753,527) (1,040,942)
Other operating expenses (3,208,859) (3,042,903)
Loss of Excavated Clay (1,883,520) -
Total expenses (7,759,614) (6,084,878)
Operating profit (/loss) 3,202,387 (1,743,013)
Net finance costs (4,237,765) (4,545,885)
Loss before tax (1,035,378) (6,288,898)
Tax (Charge)/Credit (171,876) 1,109,592
Total comprehensive loss for the year (1,207,254) (5,179,306)
Ushs/share Ushs/share
Basic and diluted gain/(loss) (1.34) (5.75)
per share
Source: Secondary data
From the above statement of profit and loss, it practically shows that Uganda Clays Limited is
doing very bad that is to say operating at a loss which has led to a reduction in the price of shares
seen above; this could be due to high prices of the company products coupled by high VAT rates
30
of up to 18% which increases the price, in the statement of trade and other payables, there is
critical evidence that there is outstanding VAT as seen in page 28 of the Audited financial
statements as at 31st –December-2015.

Trade and other payables 2014 2015

Shs.‘000’ Shs.‘000’

Trade deposits 1,946,002 1,686,449

Trade payables 817,614 1,380,912

Vat payable 258,835 593,095

Accrued expenses 347,722 120,763

Unpaid dividends 376,170 376,170

National social Security Fund 84,110 344,357

contributions payable

Pay-As-You-Earn 151,248 591,155

Other payables 27,771 9,880

Totals 4,009,472 5,102,781

Source: Secondary data.

From the above statement of trade payables, almost all are taxes outstanding (not paid) and this
shows the low financial performance at Uganda clays limited.

31
 CHAPTER FIVE

SUMMARY, CONCLUSIONS, RECOMMENDATIONS, LIMITATIONS AND AREAS

OF FURTHER STUDY

5.1 Introduction

The chapter presents the findings of the study, conclusions, and recommendations by the
researcher, limitations of the study and possible areas of further research.

5.2 Summary of the Findings

From table 1.6, it gave evidence that there are some challenges encountered while administering
VAT in Uganda with a small percentage of 12.5%, according to some respondents, they
acknowledged that to administer VAT, policy must be observed, i.e. there is a criterion observed
while administering VAT in Uganda.

There was also clear evidence that tax policy affects economic stability in Uganda. This is as a
result of increasing prices for goods and services to cater for VAT because it is consumer
destined.

Uganda being a decentralized economy, most respondents opposed this saying that VAT
administration is centralized and managed from the centralized government through URA.

The study revealed that profitability is a key indicator of financial performance at Uganda clays
limited coupled with other key performance indicators like return on equity.

The study also revealed that high prices are a key reason for reduced sales volume at Uganda
clays limited, citing that VAT could be the reason for high prices according to this study.

5.3 Conclusion

The study revealed that there is a very high relationship between VAT and financial
performance.

This revealed that any slight increase in the VAT rate will lead to increase in price of goods and
services coupled with a reduction in sales volume hence leading to low return on assets
(profitability).

32
5.4 Recommendations

The researcher recommends that Uganda Clays limited should employ experienced and qualified
tax experts who can properly interpret tax policies

The researcher recommends that the government should consider giving tax holidays to such
companies whose financial performance is as low as evident at Uganda clays limited so they may
be able to resume to suite the competitive environment.

Uganda clays limited should embrace persuasive advertisement and promotion to attract more
customers, employ good customer care to retain existing customers so they may create a good
customer base to realize more sales hence cold boost their financial performance

5.5 Limitations of the Study

The respondents approached were likely to be reluctant in giving information fearing that the
information sought would be used to intimidate them or print a negative image about them or
their company. Some respondents may even turn down the request to fill questionnaires.

Employees operate on tight schedules; respondents are not able to complete the questionnaire in
good time and this might overstretch the data collection period.

The researcher also encountered problems in eliciting information from the respondents as some
of the information required was subject to areas of feelings, emotions, attitudes and perceptions,
which cannot be accurately quantified and/or verified objectively. This might lead to lack of
response due to the veil of confidentiality surrounding the company.

5.6 Areas of Further Research

The researcher suggests further research on the following areas in relation to financial
performance of Uganda Clays limited.

i Relationship between advertising and customer retention.

ii Impact of taxation on financial performance.

iii Relationship between tax administration and revenue realization.

33
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 APPENDIX 1

Budget for Research Study

Item Amount

Supervision fee 130,000

Stationary 25,000

Typing, photocopying and binding 70,000

Transport 45,000

Meals & refreshments 100,000

Totals 370,000

38
Appendix II: Questionnaire

QUESTIONNAIRE

I am a student of Uganda College of Commerce, Tororo pursuing a Diploma in Business Studies

(UDBS) accounting option.

Am carrying out a research study on VAT and financial performance of Uganda clays limited,
you have been selected to volunteer in the study as respondents. Your views will be respected
and kept confidential in line with the study.

I will appreciate every contribution that you will make in furthering this research endeavors.

Thank you for the time and co-operation

SECTION A

1. Gender; Male Female

2. Age group

Under 25 years 25-34 years 35-44 years 45 years and above

3. Position held in the company

…………………………………………………………………………………………….

4. Marital status

Married……………. Single……………………………

5. Academic Qualifications

Masters………….. Degree ……………………. Diploma……………

Others…………………………………..

39
Others specify………………………………………………………

For how long have you worked in the company?

Less than 1 year 1-5 years Above 5 years

SECTION B: CHALLENGES OF VAT ADMINISTRATION ON UGANDA

To what extend do you agree with the following statements?

Statement Strongly Agree Disagree Strongly Not

agree disagree sure

VAT administration is very easy

VAT administration is centralized

VAT administration is decentralized

Tax administration is a policy

Tax policy affects economic stability

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SECTION C: DETERMINANTS OF FINANCIAL PERFORMANCE

To what extend do you agree with the following statements in regard to financial performance of

Uganda clays Limited?

Statements Strongly Agree Disagre Strongly Not

agree e disagree sure
Expenses reduce on the net profit of the
company
High VAT rates increase price
High prices reduces sales volume
High return on equity is an indicator of
profitability

SECTION D: RELATIONSHIP BETWEEN VAT AND FINANCIAL PERFORMANCE

OF THE COMPANY

The relationship between VAT and financial performance of Uganda clays limited can be
calculated using the parsons’ product moment coefficient
Opinion Dependent Independent XY X2 Y2
variable(X) variable(Y)
Strongly agree
Agree
Disagree
Strongly disagree
Not sure

THANKS FOR YOUR CO-OPERATION

41
 APPENDIX III

TIME TABLE FOR THE STUDY

NO_ ACTIVITY DURATION (MONTH)

1 Selecting of the research topic September 2019

2 Approval of the research topic by quality assurance October 2019

3 Writing of the research proposal for the study November 2019

4 November December UBTEB examinations December 2019

5 Approval of the research proposal by the research March 2020

supervisor

6 Designing of the questionnaire for the study and April 2020

disbursement of the questionnaires

7 Collection of the filled questionnaires and recording May 2020

of the findings

8 Drawing of the conclusions from the findings and May 2020

compilation of the report

9 Printing, binding and submission to UBTEB June 2020

42