DEFINITATION

Tax; is the price we pay for civilization, which goes hand in hand with organized society.

A tax is a compulsory financial charge or some other type of levy imposed on a tax payer by a
government organization in order to fund a government spending and various public expenditures.

Example of tax

 General and selective sales taxes

 Value added tax (vat), taxes on any aspect of manufacturing or production.
 Taxes on legal transaction
 Custom and import duties
 General sales taxes are levies that applied to a substantial portion of consumer expenditure

Taxation; refers to the act of levying or imposing a tax by a taxing authority. Taxes include income,
capital gains or estate.

Taxation can also be defined as the practice of collecting taxes (money) from citizens based on their
earning and property.

Characteristics of taxes

In complying with the canon of taxation taxes may be characterized as proportional, regressive,
progressive.

1. Progressive tax
This tax is structured in such a way that the tax rate increases as the income increases. most
income taxes are progressive so that higher income are taxed at a higher rate. A progressive tax is
based on the principles of vertical equity.

2. Regressive tax
This a tax not based on to pay. A regressive tax is structured in a way that the effective tax
decrease as the income increases.

3. Proportional tax
This a tax whose rate remains fixed regardless of the amount of 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.

Classification of taxes
Taxes are classified as either direct or indirect tax.

Direct taxes; these are imposed on income arising from business, employment, property and the
burden of the tax is borne by the individual or business entity. Examples of direct taxes include;
corporation tax, individual income taxes e.g. pay as you earn capital gains tax and rental tax.
Examples of direct taxes
  Income tax (individual, corporation)
 Corporation tax
 Wealth tax
 Employment tax (PAYE), tax on income from employment.
 Taxes on property
 Taxes on financial/ capital expenditure.
Indirect taxes; these are taxes levied on the consumption of good and service. Notable indirect
taxes include value added tax (VAT), exercise duty and import duty.
Examples of indirect taxes
 Customs duty (i.e. tax on import or export of goods and services, are referred to as import
duty export duty respectively).
 Exercise duty (tax imposed on production of local commodities)
 Value added tax (VAT). This is a consumption tax which is imposed at each stage of
distribution on the value added at each of those stages. The recognized stages are;
importation, manufacturing, wholesale, retail and consumer.

Roles of taxation
 To finance the government re-current and development expenditure i.e. paying salaries
for civil servants and funding a long term projects such as construction of roads, schools
and hospitals.

 It can be used to regulate demand and supply in the economy in times of inflation.

 It encourages development of local industries with a view of providing employment and

saving foreign exchange, by imposing high duties on computing imports.

 It encourages export of good and service by reducing or removing taxes on export in

order to make them more competitive in the world market.

 It protects society from undesirable or harmful products and industries by imposing high
taxes on them to minimize their consumption for instance exercise duty on cigarettes and
beer as well as environment levy on used vehicles.

 To achieve greater equality in distribution of wealthy and income, the government may
impose a progressive tax on the incomes and wealth of the rich. The revenue raised is
then used to provide social services for the benefit of the society.

I that the burden among taxpayers should be distributed fairly, taking into account
individual income and personal circumstance. Vertical equity is to be taxed proportionate
to the income one earns. The strongest shoulders should carry the heaviest burden.
Illustration
B and C in illustration 1were taxed at 10% because they both earned 10,000,000; if D
earned shillings 15,000,000 this person may be taxed at 15%.
Convenience
Under normal circumstance, a taxpayer should not undergo undue difficulty to pay tax.
Therefore, the place, medium, mode, manner and time of payment should not be a burden
to the taxpayer.
Illustration
A person doing business in tororo should not be inconvenienced to travel to Kampala to
pay his/her taxes. An office an office should be created nearby to ease the process.

Certainty
A good tax system is one where the taxes are well understood by the tax payers and tax
collectors. The time and reason of payment as well as the amount to be paid by an
individual should well documented and certain or known. The tax should be based on
laws passed by parliament.
Economical
The administrative cost of collecting taxes should be kept as low as possible to both the
collecting agent and the tax payer. The general principle is that the cost 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.
Illustration
Uganda revenue authority (URA) collected about shillings 16tn in the financial year of
2018/19. By the principle of economy; the cost of collecting and administrating taxes
should not exceed 5% of the shillings 16tn.

Simplicity
The type of tax and the method of assessment and collection must be simple enough to be
understood by both the tax payers and the collectors. Complicated taxes led to dispute,
delay, corruption, avoidance and high costs of collection in terms of time and resources.

Ability to pay
The tax levied should not exceed the taxable income of a person. This is to avoid
discouraging the person’s performance or participation in the tax base other canons of
taxation include; diversity, productivity, and elasticity.