TAXATION

Principles of Taxation DES II
PRINCIPLES OF TAXATION
NATIONAL TEACHERS’ COLLEGE KABALE
DIPLOMA IN EDUCATION SECONDARY
YEAR TWO
LECTURE NOTES
BY
ATUHEIRE GODWIN
TEL. 0787523525/0702920116
atuheired19@gmail.com
PRINCIPLES OF TAXATION
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Course Outline
1. Definitions
2. Introduction to taxation
3. Tax compliance
4. VAT system
5. Employment Income Tax
6. Property Income Tax
7. Business Income tax
Mode of delivery
 Lectures
 Presentations
 Microteaching
 Projects
 Peer teaching
Mode of Assessment
Formative
 Coursework assignments and presentations 15%

 Tests 25%
 Total 40%
Summative assessment  Kyambogo University exams

60%
Reference Materials
• Income Tax Act 1997 Cap 340 as amended. (DTLaws_2017 edition)
• URA (2015).Taxation handbook. A guide to Taxation in Uganda. Kampala: Uganda
Revenue Authority
• Internet address: ura.go.ug for more educational materials
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Definitions
A tax refers to a compulsory payment made by individuals or enterprises to the
government to finance the government activities.
A tax is a legal and compulsory transfer of income from the people to the government.
It is referred to as a non-quid pro quo payment because there is no corresponding return

in terms of goods and services from the government after paying taxes.
Taxation refers to the government policy of raising its revenue by charging different taxes
on incomes, property, profits and services so as to influence economic variables to
achieve set objectives.
It is the legal compulsory transfer of funds from the public to the fiscal authority irrespective
of the exact amount of benefits rendered to the tax payer by the government.
Taxation is a system or process of raising money or revenue by the government from

eligible individuals and companies by law through taxes.
OBJECTIVES/REASONS/NEED FOR TAXATION IN A COUNTRY What
are the reasons why the government imposes taxes.
1. To raise Government revenue: Different taxes are charged for the government to
raise revenue for the development and provision of essential services such as
health, education paying debts etc.
2. To protect local industries against foreign and unfair competition: This is
through charging heavy import duties on goods entering the country.
3. To reduce balance of payment problem: This is through charging import duty so
that the volume of imported goods is reduced leading to reduced import
expenditure.
4. To control inflation: This is through charging high income taxes which reduces
disposable income and aggregate demand for goods and services which helps to
control inflation.
5. To achieve even income distribution: This is through progressive income tax
where high tax rates are imposed on high incomes and low taxes are charged on
low incomes.
6. To discourage production and consumption of harmful goods such as strong
alcoholic spirits, cigarettes: High taxes are levied on such goods thereby making
them expensive and less demanded by the consumers.
7. To control monopoly power. This is through taxing abnormal profits of monopoly
firms using lump sum and specific taxes so as to discourage them from
overexploiting the consumers.
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8. To increase the rate of economic growth: this is through increased taxes on

imported goods so as to promote the growth of manufacturing industry resulting into
increased production and high economic growth.
9. To discourage dumping of goods into the country: This is done through
charging import duty on goods entering the country so that low quality goods are
discouraged.
10. To recover society’s wealth: This is done using some taxes such as inheritance
duty to recover society’s wealth which some individuals obtain not through their
effort but the efforts of others.
11. To promote hard work among the individuals this results into increased
output: This is because tax payers are forced to work hard so as to acquire the
necessary income to pay tax and meet personal requirements.
12. To influence investments: High taxes are levied on certain activities so as to
discourage them while productive activities are given tax holidays or low taxes to
encourage their operations.
13. To reduce dependence on foreign aid: this is because a variety of taxes improves
on government revenue, reduce budgetary deficits and therefore reduce the need
for borrowing.
14. To encourage forced savings for example National Social Security Fund
contributions where individuals are encouraged to save for the future. This is
archived by imposing low taxes on consumers to reduce their expenditure and save
more money for future use.
15. To create employment in the sectors where reduced taxation has been done to
encourage investment in those sectors and also employment to tax collectors.
IMPACT/EFFECTS/IMPLICATIONS OF TAXATION
They are both negative and positive
Positive implications/Importance of taxation
1. It is a source of government revenue: Different taxes are charged for the

government to acquire income to finance its expenditure like paying debts, paying
salaries, provision of health services etc.
2. It ensures even income distribution: This is through progressive income taxes
where high taxes are charged on the rich and low taxes are levied on the incomes
of the poor.
3. Taxation protects local industries from unfair foreign competition: this is
through charging import duty on the goods entering the country which limits
imported goods and hence creating market for local industries.
4. It discourages production and consumption of harmful products. This is done
through charging taxes on such goods thereby making the goods expensive and
less demanded by the consumers e.g. strong alcoholic drinks, cigarettes etc.
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5. Taxation controls inflation in the country: This is through progressive income tax
on incomes which decreases disposable income and hence reduced aggregate
demand for the goods thereby controlling inflation.
6. It controls monopoly power: This is through taxing abnormal profits of monopoly
firms so as to discourage them from over exploiting consumers using specific and
lump sum taxes.
7. It controls dumping of goods into the country. This is through charging import
duty on goods entering the country so that low quality goods are discouraged.
8. Taxation reduces on balance of payment problem: This is through charging
import duty so that the volume of imported goods is reduced leading to reduced
import expenditure and encouraging exports.
9. Taxation influences investment: High taxes are levied on certain activities so as
to discourage their operations while others activities are given tax holidays or
charged low taxes to encourage their operations.
10. Helps to increase the rate of economic growth. This is through increased taxes
on imported gods so as to promote the growth of local manufacturing industries
resulting into increased production and economic growth.
11. Promotes hard work among the individuals which results into increased output.
This is because tax payers are forced to work to acquire necessary income to pay
tax and meet personal requirements.
12. Encourages forced savings for example National Social security fund
contributions where individuals are encouraged to save for the future.
13. Reduces dependence on foreign aid and its effects that is a variety of taxes
improve on government revenue, reduce budgetary deficits and reduce the need for
borrowing.
14. Helps to combat unemployment that is a low tax may be imposed on firms that
use labour techniques of production and this creates employment to people.
15. Helps recover society’s wealth which people have not earned as a result of their
effort but as a result of the efforts of others. This is done using inheritance tax, gift
tax etc.
Negative implications/Effects/Disadvantages of Taxation
1. Discourages savings: This is because taxes reduce the disposable income of the
individuals and lower profit margin of companies thereby limiting savings and capital
accumulation.
2. Discourages investment: This is because taxes on goods and services increase
the cost of production thereby limiting the profits and therefore discouraging
investment.
3. Discourages the effort and initiative to work: High taxes on workers’ wages
discourage the effort to work leading to low labour productivity and low amount of
goods and services produced.
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4. Widens income inequality: This is due to regressive taxes where the poor pay
comparatively more than the rich affecting the poor more than the rich.
5. Encourages evil activities in the country such as smuggling: This is because
producers develop means of dodging taxes for example through smuggling.
6. Taxation worsens inflation rate: This is because taxes on goods and services
increase the cost of production forcing producers to increase the prices of goods
and services and hence increased inflation rate.
7. Causes unemployment; This is because taxation increases the cost of production,
lowers profits and discourages investments in an economy.
8. Leads to low amount of goods and services consumed and increased
consumption of low quality goods and services. This results in low living standards
of the people.
9. Causes resentment among the population making the government unpopular:
This is because taxation reduces the disposable income and the amount of profits of
the producers forcing the people to raise against the government.
10. Reduces the volume and benefits of trade. This is because high taxes on
business reduce the ability of producers to expand their businesses hence limiting
the economies of scale.
11. Causes misallocation of resources/resource diversion.: This is because
resources are diverted from productive activities that are highly taxed by the
government to unproductive activities that are less taxed by the government.
12. Taxation discourages savings: There are some taxes like income tax, inheritance
duty that discourage savings in an economy. This is because people fear that their
savings will be taxed heavily by the government.
13. Causes inefficiency of domestic firms. Those firms that are sheltered from
competition by charging high taxes on imports become less competitive and
efficient.
BENEFITS OF PAYING TAXES TO BUSINESS OWNERS
How do business owners benefit from paying taxes?
1. Paying taxes enable the business proprietor to run business without fear of being
closed down by the government
2. It attracts government support and sympathy for the business in times of need for
example VAT refunds when there is a loss made and government contracts.
3. It creates good reputation/image of the business towards suppliers, customers and
financiers who continue dealing with the business.
4. Government uses tax revenue to provide free education and medical care which
benefits business owners.
5. Government uses the tax revenue to provide infrastructure like roads used by the
business in transporting its products.
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6. Government uses tax revenue to provide social security which benefits the business
by for example paying the police force that provides security.
7. Government used tax revenue to pay its workers hence increasing their purchasing
power to buy business goods and services.
8. Import duties help to safeguard the domestic market for the local industries which
benefits business men.
9. It promotes individual and business responsibility and self-reliance leading to
encouragement of hard work and effort among the entrepreneurs.
10. Government uses the tax revenue collected to provide national security that protects
the country against external enemies and terrorists which affects business.
Activity: Divide the class into two. In form of a debate, students oppose and propose
the motion, “Taxes are necessary in the development of Uganda.”
Note the key words they have used and explain them as you conclude the lesson.
PRICIPLES/CANONS/DOGMAS OF TAXATION
Principles of Taxation refer to the rules or guidelines followed when designing a tax
system. A tax system involves assessment, collecting and administering tax revenue. They
are rules that must be observed when assessing, collecting and administering taxes.
Principles of taxation are concepts that provide guidelines towards a good tax system.
Since many view taxation as a necessary evil, it should be administered in such a way as
to create minimum pain to the payer, just 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; these are referred to as canons of taxation.
Principles or canons of taxation should guide the taxation process. They portray a good tax
system and include;
(a) Adam smith’s Four canons of taxation
1. Equality/Equity: This is the most important principle of taxation; there should be both
horizontal and vertical equity. Adam smith noted “the people of the country should
contribute towards the support of the government as nearly as possible in proportion to
their respective abilities.” The principle calls for equality of sacrifice or ability to pay tax in
proportion with income received. This means that the rich should pay more taxes than the
poor.
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(i) Horizontal equity: This means that people who earn same income Income
same amount of tax.
(ii) Vertical equity: This means that people who earn more income pay more
tax. The contribution in tax should increase as the taxable income increases. The
principle behind vertical equity, which is most applicable in income taxes, is that the
burden among taxpayers should be distributed fairly, taking into account individual
income and personal circumstances.
2. Economy: The principle requires that the administrative cost of collecting

taxes to be as low as possible for both the tax authority and the tax payer. To the
tax authority, the administration should not exceed 5% of the tax revenue. To the
tax payer, the compliance costs should be as low as possible and the tax payer
should be left with enough disposable income.
3. Certainty: Adam smith says that a tax system should always ensure that
both the tax payer and the tax collector are clear on each other’s’ expectations. The
tax payer should know how much, what tax, why, and where the tax should be paid.
This will enhance proper tax planning on the part of the tax payer, and up-to-date
budgeting on the side of the state.
4. Convenience: This principle requires that the tax regime should cause as
little inconvenience as possible to the tax payer. What to pay, when to pay, where to
pay and how much to pay should be convenient to the tax payer.
5. Principle of 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.
6. Ability to Pay: The tax should not take away so much of the income being
taxed as to discourage the performance or participation in the tax base.
7. The principle of elasticity/flexibility: The tax should be able to increase or

decrease according to the changes in the income levels or changes in economic
situations When incomes and profits increase, a tax should also increase but when
the incomes reduce the tax should reduce.
8. The principle of neutrality/impartiality: A good tax is one which does not

discriminate among the tax payers. People should be assessed and pay tax
according to their income without considering the race, tribal, religious or gender
differences.
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9. The principle of comprehensiveness/diversity: A good tax should have a

wide tax base (many sources) to enable the government realize large tax revenue
from a variety of incomes and economic activities.
10. The principle of Productivity: A tax system should bring in large amounts of
revenue that justify the imposition of taxes. This means that focus should be on a
few taxes that generate more revenue than many taxes that bring in less revenue.
11. The principle of political acceptability: A good tax system should be in

relation to the national economic objectives and the revenue received should be put
in activities that benefit the tax payers and should not cause political chaos or
hostility against the government.
12. Avoidance of double taxation: A good tax system is the one where the
same income or activity or tax base is not taxed more than once in the same period.
CHARACTERISTICS OF A GOOD TAX SYSTEM
1. It should be economical
2. It should be certain
3. It should be equal/fair to all tax payers
4. It should be simple to understand by the tax payers and the ta authorities
5. It should be convenient
6. It should be neutral/impartial
7. It should be flexible/elastic
8. It should be comprehensive
9. It should be productive
10. It should not cause political chaos 11. It should avoid double taxation.
CLASSIFICATION/TYPES OF TAXES
Taxes are classified according to:
1. The proportion of one’s income that is paid as tax

2. The method of calculation of tax
3. To the mode of payment of a tax/tax incidence (final resting) of a tax.
Classification of taxes according to one’s Income paid as tax.
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 incomes are taxed at a higher rate. A
progressive tax is based on the principle of vertical equity. The average rate of a tax
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increases with an increase in the tax payers’ Income. An example is personal Income tax.
Illustration of progressive tax
Regressive Tax
This is a tax not based on the ability to pay. A regressive tax is structured that the average
rate of tax decreases as the income increases. The tax burden is proportionately greatest
on low income earners
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. Example Is VAT,
Corporation tax currently 30%.
EFFECTS OF PROGRESSIVE TAX
POSITIVE EFFECTS
 Increases tax revenue
 Reduces income inequality bse the rich pay more compared to the poor
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 Controls demand pull inflation

 Favours low income earners
NEGATIVE EFFECTS
 Discourages savings especially among the rich
 Discourages hard work
 Discourages investment
EFECTS OF REGRESSIVE TAXES

 Widens income inequality
 Encourages tax evasion among low income earners
 Leads to low tax revenue
 Creates social unrests
 Discourages hard work among the poor
 Discourages investment among low income earners
TERMS USED IN TAXATION
1. Taxable income. Is the amount of income which is subjected to Taxation
2. Tax Base. Refers to an economic activity on which taxes are imposed
3. Tax avoidance. Is where the tax payer exploits weaknesses in the taxation
system to pay less or no tax at all and this is legal.
4. Tax evasion. Deliberate refusal by the tax payer to pay taxes assessed on him
and it is illegal
5. Taxable Capacity. Is the ability of the tax payer to pay tax imposed on him and
yet remain with enough disposable income to maintain the usual standard of
living.
6. Tax structure. Is the composition of a tax either according to the mode of
payment, percentage of income paid as tax,direct or indirect tax.
7. Tax shifting. Is the ability of the tax payer to shift the tax burden to someone
else. It can be forward or backward shifting of the tax.
 Backward shifting of a tax. Is where a producer transfers tax burden to the
supplier of raw materials by buying them at low cost.
 Forward shifting of a tax. Is where a producer transfers the tax burden in form
of high prices.
Classification according to mode of payment/Tax incidence
Under This classification, there are two broad categories of taxes i.e. indirect taxes and
direct taxes.
Direct Taxes
Direct Taxes are imposed on income arising from business, employment, property and the
burden of the tax is borne by the individual tax payer or business entity. Examples of direct
taxes include Corporation tax, Individual Income Tax, e.g. Pay As You Earn, capital gains
tax and rental Tax.
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Types of forms of Direct taxes.
1. Income Tax: This is tax levied on peoples’ incomes from employment in form
of Pay as You earn and from business in form of presumptive tax (tax on small
business tax payers)
2. Corporation/Company tax: This is tax levied on the profits of a company. In

Uganda Corporation tax is 30%.
3. Wealth tax/Property tax: This is tax imposed on property or use of property

or assets of an individual or business entity such as Buildings (Rental tax), land,
shares and other investments.
4. Rental Tax: This is tax levied on rent income earned by individuals or
businesses whose business is not wholly letting out of property. Rental tax is 20%
of the chargeable rental income.
5 Capital gains tax: This is tax imposed on financial assets whose values appreciate or
increase from the time of buying to the time of sale. Examples are sale of property and
investments like stocks, bonds, precious metals etc.
6. Estate duty/death tax: This is tax levied on the property of the deceased
person which has not been inherited.
7. Inheritance tax: This is tax imposed on money or property that has been
inherited from the estate of the deceased person.
8. Gift tax: This is the tax on gifts or property or income given freely to an
individual or other organisation.
9. Capital levy: This is a tax imposed by the government during times of

emergences in form of money or capital contribution. For example a onetime tax on
wealth holders with a goal of paying off public debt.
10. OTT (Over the top tax): This is tax on mobile money transfer services and
use of Social Media in Uganda.
Advantages/Merits of Direct Taxes
1. They are sources of government revenue: Different taxes imposed on peoples’

incomes, property and profits are a source of government revenue to finance its
expenditures.
2. They promote equitable income distribution: This is through progressive income
tax where the rich are taxed more than the poor. This reduces income inequalities
and promote equitable income distribution.
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3. Simple to understand: Direct taxes are simple to understand by both the tax payer
and the tax authorities such as PAYE.
4. They are economical in collection: Direct taxes have low costs of tax collection
especially Corporation tax and Pay as You earn as this is collected by government
from employees.
5. Direct taxes are flexible: They are flexible in that the government can increase or
decrease the tax rates according to the economic conditions and requirements of a
country.
6. They control monopoly power: This is through imposing high corporation tax on
monopoly companies thereby limiting the power of monopoly firms from exploiting
consumers.
7. Help to control inflation in an economy: This is through income tax that reduces
the disposable income of the people leading to reduced purchasing power and
reduced aggregate demand.
8. Easy to estimate tax income: The yield from direct taxes can easily be estimated
before collection and therefore they can easily be relied upon for planning purposes.
This is true with income tax.
9. Direct taxes promote initiative and hard work among the workers: This is
because direct taxes make workers more productive so as to acquire income for
paying the tax and for personal savings thereby leading to increased production.
10. They promote economic growth: This is because direct taxes are not imposed on
goods and services and therefore have less effect on production.
11. Direct taxes influence investments: Low corporation tax attracts more investments
while high corporation tax discourages investments.
12. Direct taxes are simple and easy to understand by tax payers and therefore
people can be willing to pay.
Disadvantages/Demerits of Direct taxes
1. High tax avoidance and tax evasion: Direct taxes are characterised by a lot of tax
evasion and avoidance. Tax payers usually take the advantage of the weaknesses
in the tax system to pay nothing or little tax and this reduces on government
revenue.
2. Direct taxes discourage savings: This is because direct taxes reduce people’s
disposable income thereby limiting investments. Reduction in investments
eventually results into low economic activity and employment in a country.
3. They Inconvenience the tax payers: Direct taxes inconvenience the tax payers as
they are in most cases paid in advance and in lump sum except for PAYE.
4. Result in low standards of living of people: This is because direct taxes reduce
disposable incomes of people thereby reducing the amount of goods and services
consumed by the people.
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5. Result into Wage push inflation: Direct taxes result into wage push inflation as
they reduce disposable income hence making workers demand for higher wages
thereby causing increase in production costs and the general price level.
6. Direct taxes are discriminative in nature: They are not imposed on all income
groups some groups are exempted from paying these taxes such as Policemen,
army, ambassadors do not pay income tax.
7. Discourage the effort and initiative to work: This is because high direct taxes
reduce people’s incomes thereby creating discontent among workers and avoid
working hard to avoid being overtaxed since they are progressive in nature.
8. Direct taxes worsen income inequality: Regressive taxes on essential goods and
services on which the poor spend the greatest percentage of their income tend to
widen the income gap between the rich and the poor.
9. Direct taxes cause resentment thereby making the government unpopular. People
rise against the government when their incomes are taxed.
10. Increase government cost. This is due to high amount of money spent on tax
administration, assessment and collection.
11. Direct taxes cause resource diversion: This is because high taxes on profits of a
company encourage resource diversion from the activities which are highly taxed to
activities which are less taxed but also less productive.
INDIRECT TAXES
These are taxes imposed on goods and services produced or purchased or consumed and
the producer or seller can transfer the tax burden to the consumer.
Indirect taxes are voluntary in a sense that you can pay for them if you opt to buy the
goods or consume the services on which they are imposed. Indirect taxes can be shifted to
consumers in form of high prices of goods and services.
Types/Forms of Indirect Taxes

1. Excise duty/tax: This is a tax imposed on goods produced within the
country. It is a tax imposed on domestically produced goods whether meant for
domestic consumption or export.
2. Import duty: This is a tax imposed on goods (called imports) entering a

country from other countries.
3. Export duty: This is a tax imposed on goods (called exports) leaving the
country exported to other countries.
The above two are referred to as Customs duty/tax. This is a tax on goods that cross
national boarders either as imports or exports.
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4. Octoroi tax: This is a tax imposed on goods in transit through a given

territory of another country.
5. Sumptuary tax: This is a tax levied on specific consumer goods to
discourage their consumption. Such goods are socially undesirable and are harmful
in most cases e.g. cigarettes, spirits/alcohol etc.
6. Turnover/Sales tax: This is a tax imposed on goods sold. It is a percentage
of goods sold (sales made) during a particular period.
7. Advalorem tax: This is a tax imposed according to the value of the products.
8. Specific tax: This is a tax imposed on the per unit of output produced by the
enterprise.
9. Withholding tax: This is a tax on the supply of goods and services to a
government department. In Uganda it is 6% of the Value of the goods exceeding
One million Uganda Shillings. Withholding tax is also charged on the interest earned
by a business or individual from their Bank which is 15% in Uganda.
10. Value Added Tax:

This is a tax imposed on the value added to the commodity at each stage of production. It
is levied on the value added at every stage in the production or distribution of goods and
services.
Advantages of Indirect Taxes
1. Indirect taxes are convenient to pay as they are paid together with the price of a
commodity hence the tax payer does not feel the burden of paying the taxes.
2. There is less tax evasion with indirect taxes since they are included in the prices of
commodities and cover a wide range of commodities.
3. Indirect taxes cover a wide range of taxable commodities and therefore raise more
revenue for the government than direct taxes.
4. Indirect taxes can be used to check on the production and consumption of harmful
goods like cigarettes and alcohol by increasing taxes on such items.
5. Indirect taxes are flexible as they can be adjusted either upwards or downwards
depending on the economic conditions prevailing with in a country.
6. Indirect taxes in particular import duties are a powerful tool for economic
development as it protects domestic industries against competition from foreign
producers and dumping.
7. Indirect taxes promote hardworking among the citizens. This is because people
struggle to work hard to meet the high prices of goods caused by indirect taxes.
8. Indirect taxes influence resource allocation. This is because high indirect taxes are
levied on sectors that are discouraged by the government so that resources are
allocated to sectors where low taxes are charged to encourage their development.
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9. Indirect taxes improve the balance of payment position. Import duty reduces the
amount of imported goods thereby reducing import expenditure which reduces the
balance of payments problem.
10. Indirect taxes limit dumping of poor quality products within the country. This is
through imposing high indirect taxes on such products.
11. Indirect taxes are more economical as they are easy and cheap to collect thereby
minimizing the cost of tax administration, assessment and collection.
12. Indirect taxes do not discriminate among the tax payers. Both the rich and the poor
pay the indirect taxes there by making them neutral.
Disadvantages of Indirect Taxes
1. Indirect taxes are regressive in nature. Therefore they do not satisfy the principle
of equity since the rich and the poor pay the same tax on essential goods
consumed.
2. Indirect taxes are inflationary in nature. They increase the prices of goods and
services hence increasing the costs of production and cost of living.
3. Some indirect taxes are difficult to understand to both the sellers and the buyers
for example VAT and can cause political chaos.
4. Consumers may be exploited by overcharging excessively high prices in the
excuse of high indirect taxes.
5. Indirect taxes result in reduced consumption of goods and services. This is
because they make commodities expensive for the consumers leading to
consumption of low quality goods and services which reduces people’s welfare.
6. Indirect taxes encourage trade malpractices in the economy for example Import
duty encourages smuggling of goods which reduces government revenue.
7. Indirect taxes discourage investments. They increase the cost of production
thereby discouraging both local and foreign investors.
8. Indirect taxes encourage resource diversion. High indirect taxes encourage the
shifting of resources from investment sectors which are highly taxed to sometimes
unproductive activities which are less taxed.
9. Indirect taxes such as import duty encourage retaliation by other countries
resulting into tariff wars between countries.
10. They are uncertain. Revenue from indirect taxes fluctuate a lot hence the amount
of indirect tax revenue cannot easily be predicted.
Reasons why indirect taxes are preferred to direct taxes.
QN. Explain why developing countries rely more on indirect taxes than direct taxes.
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1. Indirect taxes are more comprehensive than direct taxes. They have a wider
coverage and therefore a more reliable source of government revenue than direct
taxes.
2. Indirect taxes are more difficult to evade than direct taxes. This is because it is only
if a customer refuses to buy a given product that he may avoid paying the tax.
3. Indirect taxes help to protect infant industries against foreign competition unlike
direct taxes. This is through imposing high import duties on goods entering a
country.
4. Indirect taxes limit dumping of low quality goods into the country unlike direct taxes.
this is through imposing high import duties on goods entering a country.
5. Indirect taxes help to check on consumption or undesirable or harmful products
unlike direct taxes which are not imposed on goods.
6. Indirect taxes are more neutral than direct taxes. There is less discrimination and
less corruption while collecting indirect taxes than in direct taxes.
7. Indirect taxes are more economical than direct taxes. This is because the cost of
administration and tax collection is lower with indirect taxes unlike direct taxes
where the cost is high.
8. Indirect taxes are more convenient than direct taxes. This is because a consumer
may only pay the tax when he buys a commodity.
9. Indirect taxes are less felt by tax payers and therefore less resented by the people
unlike direct taxes. This is because consumers pay indirect taxes when buying the
goods and services and therefore a tax payer may not feel that he is paying the tax.
10. Indirect taxes have fewer disincentives to work, effort and initiative than direct taxes.
This is because indirect taxes encourage hard work leading to more production
unlike direct taxes.
11. Indirect taxes are more flexible than direct taxes. This is because indirect taxes are
easily adjusted depending on the economic conditions resulting into price
fluctuations.
12. It is through indirect taxes that Balance of payment problem is reduced but not using
direct taxes. This is through high import taxes.
OTHER SOURCES OF GOVERNMNET REVENUE
1. Fees: This is a payment to the government for the services offered to the
people for example court fees, passport fees, licensing fee etc.
2. Fines and Penalties: These are charges imposed on offenders of state laws
as a punishment for having gone against the law for example Court fines, traffic
fines etc.
3. Gifts and donations: These are voluntary contributions made by individuals

and the organisations to the government.
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4. Borrowing: These refer to the loans obtained by the government from within
and outside the country. Borrowing within is in form of issuing treasury bills and
government bonds to the public.
5. Earnings from government/state owned enterprises: These are profits

earned by the government from the sale of goods and offering services by the
government entities such as National water and Sewerage Corporation.
6. Proceeds from National lottery: This is the revenue from sale of tickets
issued by the national lottery for financing specific social projects in the country.
7. Rent and rates: This is money charged by government on buildings or

premises leased to individuals or organisations.
8. Road and Bridge tolls: These refer to revenue collected from users of roads
and bridges to enable government maintain these facilities. For example Entebbe
express Highway Kampala.
TAX COMPLIANCE
This refers to the degree to which the tax paying community meets the tax obligations as
set out in the appropriate legal and regulatory provisions. Compliant tax payers make
timely and accurate declarations to the tax authority and voluntarily settle their tax liability.
Tax payers who are not compliant either evade or avoid the taxes.
LEVELS OF TAX COMPLIANCE
The level of tax compliance depends on the tax payers’ attitude and knowledge of the
taxes. There are four levels of tax compliance.
1. Tax payers who are fully compliant and are willing to fulfill their obligations
voluntarily.
2. Tax payers who reluctantly feel obliged to be compliant. These are tax payers who
know that non-compliance would be expensive and accordingly comply.
3. Tax payers who show slight resistance to compliance. This more often arises from
lack of knowledge. When such tax payers are advised and some pressure put on
them, they simply comply.
4. Tax payers who are non-compliant and exhibit outright resistance to meeting their
tax obligation. This category includes some tax payers who take pride in failing the
tax authority.
FACTORS INFLUENCING TAX COMPLIANCE
1. Extent to which tax system is convenient: Convenient place, period, and

seasons in which tax dues are collected encourage tax compliant while a tax system
which is inconvenient encourages non-tax compliance.
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2. Extent to which a tax system is equitable: A tax system that is fair encourages
high levels of tax compliance while an inequitable tax system discourages tax
compliance as tax payers tend to feel that the distribution of the tax burden is unfair.
3. Tax rates: high tax rates make tax collection costly and force tax payers to avoid
payment of tax while low tax rates encourage compliance.
4. Simplicity of tax laws: Complicates tax laws and long administrative procedures
make compliance costs high, lead to disputes and delays while simple tax laws
which can be understood by both tax payers and collectors encourage tax
compliance.
5. Quality of business management: Unethical business managers are bound to be
non-compliant compared to those who are ethical in their business operations.
6. Quality of tax administration: High levels of professionalism, integrity and
customer care among the tax collectors encourage high levels of tax compliance
while tax payers tend to be non-compliant when tax administration is poor.
7. Consistency of the tax laws: Inconsistent application of the tax laws lead to
noncompliance while consistent application of the tax laws and rules encourages
tax compliance.
8. Extent to which the tax burden is spread to all potential tax payers:
Unproportionally distributed burden of tax makes tax compliance difficult while a
fairly distributed tax burden encourages tax compliance among tax payers.
9. Popularity of the government and quality of governance: If the government is
popular because of good governance exhibited by high quality of honesty and
accountability for tax payers money, compliance will be high than when the
government is unpopular and corrupt.
Causes of Non-Tax Compliance/Factors limiting tax compliance in Uganda
 Limited income levels among the employees and low profitability of the businesses
 Inadequate knowledge about the importance of paying taxes and tax compliance
procedures
 There are many loopholes in the tax system such as threshold and many
exemptions
 Inadequate skilled staff to assess and collect the taxes
 Political sabotage among non-supporters of the government
 Desire by the employees to retain their earnings
 High cost of living that affect employees
 Failure by the management of the enterprise to remit tax deductions from
employees to URA
 Unethical business practices and poor record keeping among entrepreneurs
 Poor service delivery by the government to justify payment of taxes
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 Complicated tax laws and regulatory framework to be understood by the tax paying
public.
 Inequitable tax system among the tax payers which discourages tax compliance.
 Poor enforcement methods of handling tax defaulters and harsh tax administrators
Measures that can be taken to ensure tax compliance in Uganda
1. Providing tax payers and their authorized agents with clear and timely information
about taxes
2. Ensuring that fair treatment is extended unconditionally to all tax payers
3. Through making the tax system equitable where the tax burden is equally
distributed among all eligible tax payers without unnecessary exemptions and using
progressive taxes.
4. Responding efficiently to every tax payer’s inquiry, complaint or request
5. By making the regulatory framework simple and fair for all tax payers to understand.
This reduces the cases of tax evasion and avoidance.
6. Educating the tax payers and the general community about their tax obligations and
rights
7. Ensuring political stability so as to boost economic activities.
8. By ensuring quality service provision out of the tax revenue collected for example;
construction of roads and hospitals.
9. Through ensuring consistency and fairness in the application of tax rules and laws
without discrimination.
10. Through popularizing the government in terms of accountability for the tax payer’s
money.
11. By improving the quality of business management in terms of record keeping
simplifying the tax assessment on business enterprises.
12. Through fighting and reducing the level of corruption among the tax officials to
reduce unfair tax assessment.
13. Through application of the principle of convenience in collecting the taxes. That is
collecting taxes at a time when tax payers get revenue from their activities.
14. Using trained personnel to assess and collect the taxes.
Procedures for tax compliance
 Registration of the tax payer with Uganda Revenue Authority

 Obtaining Tax Identification Number (TIN)
 Preparation of tax records like sales records an income statement
 Getting assessed by the tax authorities
 Submitting timely tax returns like periodical incomes and expenses
 Payment of taxes by the tax payer e.g. through the bank or online filing.
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 Receiving feedback from the Tax Authorities like a tax certificate or a receipt.
Penalties for non-tax compliance/Dangers on non-tax compliance (Penalties for tax

evasion)
 Business is made to pay heavy penalties on all outstanding tax dues i.e. penal tax
 Temporary or permanent closure of the business by the government hence loss of
business income.
 Forceful payment of tax arrears and interest by the enterprise from personal
resources or business profits.
 Denial of government support such as contracts if required
 Bad image exhibited by the business in the public in case it is blacklisted by the
government.
 Taking court action that may lead to imprisonment of the entrepreneur
 In extreme cases, smuggling can lead to loss of lives
 Denial to access public tenders after being blacklisted
 Confiscation of smuggled goods by the law enforcing agencies which leads to
losses.
NB: Noncompliance results in either Tax evasion or tax avoidance
TAX AVOIDANCE
This is an attempt by the tax payer to dodge paying tax by taking advantage of
weaknesses or loopholes in the tax system.
Tax avoidance refers to the deliberate and legal exploitation of the loopholes in the tax
laws to reduce one’s tax liability.
It is a situation where the consumer refuses to buy a given product whose price has been
increased due to the increase in tax on the product.
TAX EVASION
This refers to the deliberate and complete refusal to pay tax by the potential tax payers.
It is the deliberate refusal by a tax-paying unit to pay taxes imposed on it.
FORMS OF TAX EVASION IN UGANDA
 Smuggling of goods into or outside the country

 Under declaring the value of goods sold and services provided
 Under declaring income earned that is business income or personal employment
income.
 Overstating the Private of business expenses to declare less profits.
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 Refusal to register the business for VAT

 Capitalization of the profits so as to pay less on the profits i.e. super profits tax,
Corporation tax
 Hiding from tax collectors
 Corrupting tax officials
 Giving lower value of goods imported or exported by the business.
REASONS FOR TAX EVASION
Why do people evade taxes in Uganda?
1. The desire by the tax payers to retain all the income earned.
2. Ignorance of the tax payers of the advantages of paying the taxes
3. High level of corruption during tax administration, tax assessment and tax collection
4. Limited services provided to the people by the government
5. High and unfair tax rates imposed by the government
6. Unfair tax assessment by the tax administrators
7. Weak tax administration by the responsible tax body i.e. URA and the Local
government
8. Progressive taxation where the tax rate increases with an increase in the level of
income
9. Double taxation especially on the companies (corporation tax) and the shareholders
dividends (withholding tax)
10. Political sabotage/unpopularity of the government to some tax payers
11. Others simply follow their friends who have the behaviour of not paying the taxes
Measures that cab be taken by the Business to minimize tax evasion/Increase

compliance
1. Advocating for fair tax rates through business associations

2. Obtaining tax education by attending workshops on taxes organized by URA.
3. Resisting corrupt officials to avoid bribe and pay little or zero tax.
4. Filing monthly tax returns to the relevant tax authorities
5. Maintaining proper business records by employing skilled labour.
6. Ensuring prompt payment of taxes to the tax authorities.
7. Registering the business for tax assessment.
8. Reporting corrupt officials and resisting them.
Penalties for Tax evasion
(Read the penalties for non-tax compliance)
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TAX BASE
Tax base refers to any item or economic activity on which tax is imposed. It refers to any
property, personal income, profit or economic activity on which tax can be imposed or
levied.
Tax base can include:
i. Income earned from economic activities like manufacturing, agriculture and trade ii.
Income earned from employment iii. Income earned from Property or assets like
houses, land or other investments iv. Consumption of goods which are subject to
taxation i.e. taxable supplies.
Reasons for a low/small tax base in Uganda
1. Existence of a large subsistence sector or the limited commercialization of the

economy where most services are not paid for and there is production for own
consumption.
2. Under developed infrastructure and under developed transport network that limits
mobility of tax officials.
3. Political instability which creates fear in tax officials about loss of their lives
4. Limited economic activities in developing countries where to levy taxes
5. There is an underdeveloped industrial sector where taxes can be levied
6. High levels of unemployment in the country where income tax can be levied
7. Tax exemptions granted to some individuals and business
8. Numerous tax holidays given to investors
9. High level of corruption in the tax system
10. High government ownership of enterprises and resources that are not taxed
11. Limited skilled personnel for tax administration, assessment and tax collection
12. High levels of non-compliance and resentment from the general public in terms of
strikes against certain taxes e.g. the OTT.
Measures taken to increase tax base in Uganda
1. Promoting monetization of the economy to reduce on the subsistence

sector/production for home consumption and unpaid services
2. Developing infrastructure for easy movement of tax officials
3. Maintaining political stability so as to create confidence in the tax officials about
safety of their lives
4. Encouraging economic diversification so as to increase investment activities
5. Promoting industrial development by encouraging innovations within the country
6. Creating more employment opportunities so as to increase tax income
7. Minimizing tax holidays and exemptions given to the investors
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8. Fight against corruption by tax officials within the tax system

9. Promoting privatization of public enterprises so as to reduce on government
ownership of enterprises
10. Developing labour skills for efficient tax administration, assessment and tax
collection
11. Promoting economic liberalization so as to increase the number of investment
activities
TAXABLE CAPACITY
Taxable capacity refers to the extent to which a tax payer is able to pay the tax assessed
on him and remain with enough disposable income to afford his needs and the needs of
his family as before the tax.
It is the extent to which a tax payer is able to pay the tax assessed on him and yet remain
with enough disposable income to sustain himself and his family to maintain a given
standard of living.
Business taxable capacity refers to the extent to which a firm can pay the taxes
assessed without affecting its productivity or output.
TAX ADMINISTRATION IN UGANDA
The principal players in the Uganda tax administration system are: The Ministry
Responsible for Finance and the Parliament of Uganda, Uganda Revenue authority,
Local government administration (Districts and urban councils), the tax appeal
tribunal and the tax payers.
Ministry of Finance, Planning and economic Development: This represents the
executive arm of the government on the tax administration function.
Parliament: Parliament is responsible for the enactment of laws that guide Uganda
Revenue Authority in its operations. It is responsible for monitoring the performance of all
government ministries and departments. In this regard, Uganda Revenue Authority is
accountable to parliament for its performance. Uganda revenue authority submits annual
reports to parliament to indicate its revenue performance and resource management.
Tax payers: The tax payer is the individual, company or partnership on which tax is
assessed. A tax payer is a core stakeholder in tax administration.
Roles/Responsibilities of a tax payer

1. Registering with URA as a tax payer so as to obtain a Tax Identification Number
(TIN)
2. Paying all the due taxes as properly assessed by URA in the right time and place.
3. Filing correct tax returns, customs entries and other notices at the right time and
place
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4. Cooperating with the Authority authorized staff while handling tax matters
5. Disclosure or declaration of all information and correct declaration of all transactions
at all times like quoting the firm’s TIN in all dealings with URA.
6. Complying with customs, wildlife, currency and passenger concession requirements
while travelling
7. Keeping necessary records as a basis for assessment of tax by URA
Rights of the tax payers

1. Right to equity i.e. paying the right tax subject to uniform tax laws and procedures.
2. Right to secrecy/confidentiality i.e. the tax payer’s affairs should be kept a secret.
3. Right to excellent customer care by URA, receiving and acting oh his complaints.
4. Right to facilitation of tax compliance for instance through sensitization about his
obligations.
5. Right to objections and appeals i.e. tax payer’s objections and appeals being
attended to in accordance with relevant tax procedures and laws.
6. Right to prior notice whenever his premises are to be inspected or audit is to be
conducted.
7. Right to accountability for any tax paid
8. Right to receive refunds where the tax refund is due which should be processed
within the prescribed time and limits under the laws.
9. Right to immediate attention concerning processing returns, customs entries and
other documents.
Tax Appeal Tribunal: This is a body where dissatisfied tax payers seek review and
resolution of any tax matter. If a tax payer is dissatisfied with a decision of the URA
Commissioner General, he has a right to appeal to the Tax Appeal Tribunal for a review of
the resolution of the matter.
Uganda Revenue authority: This is responsible for the collection of central government
revenue.
Roles of Uganda Revenue authority

1. Assessing taxes in accordance with the law
2. Collecting taxes from eligible tax payers in accordance with the law
3. Accounting for the taxes collected to the ministry responsible for Finance
4. Advising the government on matters of policy related to tax and revenue
administration
5. Managing both local (such as corporation tax, individual income tax, rental tax,
Value added tax, Excise duty, gaming tax) and foreign taxes (such as Import duty,
VAT on imports, WHT on imports, environmental levy etc)
6. Facilitating trade and investments through working with other government bodies
like the Ministry of Trade, Uganda Investment Authority etc.
7. Protecting domestic firms against foreign competition by imposing heavy taxes on
imported products.
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8. Redistributing income and wealth among individuals through taxation.

9. Increasing government revenue through coming up with different taxes
Local government (District and Municipal Councils

This is responsible for collection of local government revenue and this includes;
1. Property tax and ground rent in urban centres

2. Fees and dues like licence, approval plans, market dues, park fees, street parking
fees etc.
CHALLENGES OF TAXATION IN UGANDA/ CHALLENGES FACING URA

1. High rate of corruption. Many tax officials are corrupt and this makes the
government to lose a lot of revenue which is needed in the development process of
Uganda.
2. High level of tax evasion and avoidance: This is mainly due to lack of knowledge
by tax payers and commitment by tax officials and the existence of loopholes within
the tax law which greatly reduces government revenue.
3. Underdeveloped infrastructure: This limits accessibility to some parts for proper
tax assessment and collection.
4. Political insecurity in some parts of the country: This limits tax officials from
assessing and collecting taxes from the potential tax payers.
5. Limited skilled manpower to manage, assess and administer taxes. Some tax
officials are incompetent and therefore they cannot effectively assess and
administer taxes.
6. Limited information/records by tax payers: This makes tax assessment difficult
especially on people’s incomes and profits.
7. Narrow tax base in the country: This is due to widespread poverty and
unemployment and the existence of a large subsistence sector in the country.
8. Low taxable capacity: this is due to low levels of income among the people.
9. Difficulty in identifying taxable persons: This is due to many businesses and
other income generating activities that are not registered which leads to a low tax
base and tax revenue.
10. Resistance from the public against some taxes: Tax paying public resist paying
some taxes due to inadequate information and poor tax assessment.
11. Frequent changes in employment contracts and residence: This makes it hard
for the tax administrators to keep track of the tax payers.
12. Political interference: Politicians interfere in tax assessment and the lax laws to
give more tax holidays to the potential tax payers which lower the tax base and tax
revenue.
Ways to improve tax collection in Uganda

1. Reducing corruption: the corrupt officials should be prosecuted in courts of law
and even dismiss them from service for public interest.
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2. Sensitizing the masses on the role of taxation. This enables the masses to pay
taxes willingly thereby increasing the amount of tax revenue collected.
3. Developing a tax payer friendly system of taxation for example handling tax
defaulters with due respect than locking up their shops and confiscating their
properties. This helps to reduce tax evasion.
4. Adopting the principle of fairness/equity in the assessment of taxes. This
helps to raise appropriate revenue from the rich and the poor.
5. Using trained personnel to assess and collect the taxes. This improves tax
collection through the skills possessed.
6. Developing infrastructure especially roads in rural areas. This increases
accessibility to the tax payers by the tax collectors.
7. Ensuring political stability in all parts of the country. This encourages
production and also enables tax collectors to get access to the tax payers.
8. Ensuring proper and efficient allocation of tax revenue. This enables tax payers
to see the benefits of paying taxes which may reduce resistance by the tax payers.
9. Putting in place facilities required to facilitate tax assessment and collection
like computers and other facilities. This can help to improve on tax administration
and collection.
10. Improving implementation of the tax laws. Tis may take the form of fighting the
loopholes in the tax laws by reviewing the existing laws and ensuring that the laws
are fully implemented in order to reduce tax evasion.
11. Putting in place the anti-smuggling unit. This can reduce on the smuggling of
goods in and outside the country hence increasing the revenue from imports and
exports.
12. Expanding the industrial sector. This is because industries have the potential to
increase tax revenue as compared to other sectors like agriculture.
VALUE ADDED TAX
Value Added Tax (VAT) is an indirect tax that is paid by the person who consumes or imports
goods and or services in Uganda. The tax is charged on the Value added at different stages of
production or supply of goods and services.
VAT was introduced in Uganda in July 1996 to replace Sales Tax and Commercial Transaction
Levy (CTL). VAT is administered under the Value Added Tax Act Cap 349 of the Laws of Uganda.
Reasons for Introducing VAT in Uganda
i. To broaden the tax base so that more government revenue can be generated. VAT is the
biggest tax revenue earner for the government. It brings more than the total of the direct
taxes.
ii. To remove the cost cascading effect associated with sales tax and CTL. Sales tax would
become part of the cost base on which further sales tax was calculated i.e. a tax was
charged on another tax.
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iii. To improve the tax administration by reducing the costs associated with the collection of the
Sales Tax and CTL. This is because VAT is self-policing.
iv. VAT is a neutral tax and therefore less harmful to economic growth. The majority of the tax
payers do not notice when they are paying tax.
v. VAT is based on ability to pay approach. Those who cannot pay can postpone consumption
of such commodity. vi. In the wake of economic integration, VAT was seen as one of the
means of harmonizing the operations of regional economies. vii. VAT is cheaper than the
sum of the two taxes it replaced. Sales tax rates ranged between 15% to 25%, while CTL
was 15%.
viii. To encourage exports i.e. No VAT on exports
ix. VAT is difficult to evade. If the firm understates its output, it will be caught by disclosures of
the firm buying inputs from it. This type of cross auditing enables authorities to plug the tax
leakages.
Advantages of VAT
1. It has a wider coverage hence leading to high revenue realized by the government.
2. It is difficult to evade and avoid leading to high government revenue.
3. It is economical in terms of tax administration and collection.
4. It minimizes corruption since the tax is paid directly by the sellers/producers.
5. It encourages proper record keeping by the traders hence promoting efficiency.
6. It is easy to compute resulting into proper tax assessment.
7. It is convenient to the tax payer in terms of amount of tax to be paid.
8. It enables the tax payer to use government revenue before paying it to the tax authority.
9. A tax payer can claim the tax overpaid in case of theft or selling them below the purchase
price.
10. It helps to influence resource allocation. Some investments are exempted from paying VAT
thereby attracting more resource allocation to encourage more production.
Disadvantages of VAT
i. VAT is a complicated system which needs an honest and efficient government machinery to
do the cross checking and link up various production activities and the recent tax liabilities
for each firm.
ii. Unless the rates of VAT are extraordinarily high, the state will end up with smaller tax
revenue than was during the Sales tax regime.
iii. There are difficulties in maintaining accounts, crosschecking and preventing tax evasion
especially where there are exemptions and different tax rates.
iv. VAT forces tax payers to maintain elaborate and costly accounts.
v. VAT is regressive at high income a level which is a characteristic of most indirect taxes.
TERMS USED IN RELATION TO VAT
1. Output Tax: This is the VAT (tax) a taxable person charges upon making taxable supplies
i.e. tax charged on selling taxable goods and services.
Output Tax = Tax Rate X Selling Price (Sales)
2. Input Tax: This is the VAT a taxable person is charged on taxable purchases and expenses
incurred for business purposes. The purchases could be from a local source or imported.
Input tax = Tax Rate X Purchase price (Purchases)
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3. Taxable supply: This is the supply of goods and/or services other than exempt supply by a
taxable person for a consideration. VAT is charged on a taxable supply either at Zero rate or
standard rate.
4. Taxable Person: For VAT purposes, a taxable person is a person who is either registered
for VAT or one who is not yet registered but is required to register. Such a person may be; an
individual, a partnership, a company, a trust, government as well as public or local authority e.g. a
Town Council.
5. Taxable value: This is the total consideration or price for a particular supply. This could be
money or in Kind. It is the base upon which the VAT rate is applied to compute VAT.
6. Consideration: This is the total amount paid or payable in money or in kind or both for a
supply of goods or services.
7. Exempt supply: This is a non-taxable supply of goods or services that does not attract
VAT. i.e. It is neither Zero rated nor at Standard rate. These supplies are specified in the Second
Schedule of the VAT Act Cap 349.
They include:
• Supply of livestock, unprocessed food stuffs except wheat
• Supply of postage stamps
• Supply of financial services
• Supply of insurance services e.g. life, health, re-insurance
• Supply of unimproved land
• Supply of educational services
• Supply of social welfare services
• Supply of burial and cremation services
• The supply of veterinary, medical, dental and nursing services
• The supply of social welfare services
• The supply of gaming, lotteries and games of chance
• The supply of precious metals and other valuables to the bank of Uganda for the state
treasury. Etc.
8. Zero-Rated Supply: This is a taxable supply of goods or services that attracts VAT at 0%.
These supplies are specified in the Third schedule of the VAT Act Cap 349.
Examples include:
• Supply of goods and services where goods and services are exported from Uganda as part
of the supply.
• Supply of international transport of goods or passengers and tickets for their transport.
• Supply of drugs and medicine
• Supply of educational materials
• Supply of seeds, pesticides and hoes
• The supply of sanitary towels and tampons and inputs for their manufacture  The
supply of cereals where cereals are grown and milled in Uganda.
• The supply of handling services where services are provided by the National Medical
Stores in respect of some medical supplies funded by donors.
9. Exempt Import: An import of goods and services is an exempt import if the goods are
either exempt from Customs duty under the Fifth schedule of the East African Customs
Management Act or would be exempt had they been supplied locally in Uganda as specified under
Second Schedule of the VAT Act Cap 349.
SCOPE OF VAT
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VAT is chargeable on both Local and Imported taxable supplies (goods and services) There
are three major categories of supplies where VAT is applied.
(i). Taxable supply of goods and services made by a taxable person within Uganda. The person
liable to tax is the taxable person making the supply.
(ii). Import of goods other than those classified as exempt. The person liable to tax is the person
making the importation.
(ii). Imported services; The person liable to tax is the receiver of the imported service.
VAT REGISTRATION
This is either voluntary registration or compulsory registration.
Compulsory Registration
There are two categories of persons who are required to register for VAT under the VAT Act.
(i). Persons who make taxable supplies in excess of 37.5 million in any three consecutive calendar
months i.e. (150 Million a year).
(ii). Public bodies that engage business activities. These include; Government Ministries,
departments, Parastatals, Town Councils and District. The business activities include; hall hire,
tendering services, markets, street parking, toilet management, street bill Board adverts and
disposal of assets among others.
Voluntary Registration
Persons whose taxable turnover is below VAT Threshold are eligible to register if they wish to do
so provided they meet the requirements.
REQUIREMENTS FOR VAT REGISTRATION

i. The applicant must have a fixed place of abode or business ii. The
applicant should be able to keep proper books of accounts iii. The
applicant should be able to submit regular and reliable tax returns.
iv. The applicant should be a fit and a proper person in the opinion of the Commissioner
General URA.
VAT THRESHOLD
This refers to the minimum level of taxable turnover above which a person is required to register for
VAT. The current (2019) annual threshold is 150 Million shillings per annum. However for
registration purposes, this is determined on a quarterly basis i.e. Shs. 37.5 Million in any three
consecutive calendar months.
CALCULATION OF VAT
Computation of VAT occurs at two levels;
(i). VAT on a transaction
(ii). VAT payable or claimable by the tax payer or VAT collectable or Refundable by URA.
VAT Tax Rate and VAT tax Fraction

Tax rate is the Percentage that is applied to the consideration for a transaction or taxable value
which is VAT exclusive. In Uganda it is 18%.
Example: If the consideration or taxable value is Shs. 2,000,000 and Vat rate is 18%, Then VAT is;
X 2,000,000 = Shs. 360,000
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Tax Fraction Refers to the ratio used to determine the amount of Vat where the consideration is
inclusive of VAT. The fraction is given by the formula; where; r is the VAT rate. That is
X Consideration (Value of goods)
Example: If the VAT rate is 18%, then the tax fraction is;
If a consideration (VAT Inclusive) is 2,000,000, then VAT
= 2,000,000 X
= Shs. 305,085
Computation of VAT on a Transaction

VAT = Taxable Value X VAT rate (Where taxable Value excludes VAT or is VAT exclusive) OR:
VAT = Taxable Value X VAT ratio (Where taxable Value is VAT inclusive)
COMPUTATION OF VAT PAYABLE TO OR REFUNDABLE BY URA

Where output tax is greater than input tax, the tax payer pays the difference. Where the Input tax is
greater than Output tax, the tax payer claims the difference. Where Output tax = Tax on Sales
Value Input Tax = Tax on Purchases value.
Example 1: A trader bought goods worth Shs. 100,000,000 inclusive of Value Added Tax.
He then makes a Markup of 10%. Assuming that VAT is 17%. Determine the VAT payable
to URA.
Step 1: Calculate input tax
= 100,000,000 X = Shs. 14,529,915.
Step 2: Calculate Output tax

Sales = 100,000,000 + (Markup)
= 100,000,000 + 10/100(100,000,000)
= 100,000,000 + 10,000,000
= Shs. 110,000,000
VAT = 110,000,0 = Shs. 15,982,906
VAT payable is =Output tax – Input tax
= 15,982,906 – 14,529,915 = Shs. 1,452,991
Example 2: A trader bought goods worth Shs. 100,000,000 exclusive of Value Added
Tax. He then makes a Markup of 10%. Assuming that VAT is 17%. Determine the VAT
payable to URA.
Step 1: Calculate input tax

= 100,000,000 X = Shs. 17,000,000.
Step 2: Calculate Output tax

Sales = 100,000,000 + (Markup)
= 100,000,000 + 10/100(100,000,000)
= 100,000,000 + 10,000,000
= Shs. 110,000,000
VAT = 110,000,000 X = Shs. 18,700,000
Step 3: Compute VAT Payable
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VAT payable is =Output tax – Input tax

= 18,700,000 – 17,000,000 = Shs. 1,700,000
To understand it better:
(a). If the output tax is Shs. 1,000,000 and Input Tax is 770,000, Then VAT Payable to URA is Shs.
1,000,000 – 770,000 = Shs. 230,000.
(b). If Output tax is Shs. 1,000,000 and Input tax is 1,400,000, then VAT claimable from URA is;
Shs. 1400,000 – 1,000,000 = Shs. 400,000.
To claim Input tax, there should be documentary evidence such as;
(a). For local purchases/expenses, there should be an original Tax invoice.
(b). For imports, there should be a Customs Bill entry, URA Tax Receipt or other forms of payment,
airway bill, bill of lading and other documents prescribed under the Customs Management Act.
(c). The purchases (inputs) must be for business purposes.
Tax Invoice
This is a document that is required to be issued by a Taxable person upon making a taxable
supply. A tax invoice must include the following.
i. The Commercial Name, address, Place of business and Tax Identification

Number (TIN) of the taxable person making the supply.
ii. The words “Taxable invoice” written in a prominent place. iii. The individualized
Serial Number and the date on which the tax invoice is issued.
iv. The description of the goods and or services supplied and the date on which the
supply is made.
v. The quantity and volume of then goods or services supplied vi. The commercial Name,
address, place of business of the recipient of a taxable supply.
vii. The rate of tax for each category of goods and services described in the invoice.
viii. Either, the total amount of the tax charged; the consideration for the supply exclusive of
VAT and the consideration exclusive of VAT.
ix. OR; Where the amount of tax charged is calculated under Section 24(2), the consideration
for the supply a statement that includes a charge in respect of the tax and the rate at which
the tax was charged.
Due date for Payment/Submitting VAT return

A return should be filed within fifteen (15) days after the end of a tax period. For example in respect
of March 2021, a return should be submitted within 15 days after 31st March i.e. 15th April 2021.
Penalty for late submission of VAT

Where a taxable person fails to submit a return by due date is liable to a penalty whichever is
greater;
(a). Shs. 200,000 or
(b). 2% per month compounded of the amount of the return for the period a return is outstanding.
VAT refund
A VAT refund occurs in two ways
(a). Cash
(b). An offset
32
A cash refund is applied when the amount claimable is greater than Shs. 5,000,000 or where a tax
payer deals in mostly Zero rated supplies.
Circumstances under which VAT is refundable

i. When input tax is greater than Output tax
ii. When a tax payer pays more than what he was supposed to pay, the excess is refunded iii.
Where there is a proven bad debt. A bad debt for VAT refund considers that, It should have
been outstanding for a period of two Years and that all the necessary steps were taken to
recover the money but in vain.
iv. When one loses stock through fire, burglary and any other proven methods
v. VAT refund to privileged persons e.g. Diplomats, Diplomatic Missions, embassies etc.
Records for VAT purposes

The VAT Act and VAT registration define records that a Vat registered person must keep.
i. All business correspondences ii. Orders and delivery notes iii. Appointment and job
books/cards iv. Annual accounts including Trading account, Profit and Loss account and the
balance sheet. v. Bank statements and paying in records
vi. Original Tax invoices including simplified invoices as well as original debit and credit notes
received from suppliers.
vii. Customs and export entries
viii. Sales records ix. Transit documents x. Contracts xi. Computer generated records.
Reasons why VAT was resisted by traders

i. Low levels of tax education to the traders ii.
Illiteracy amongst traders
iii. Political peddling i.e. the opposition used VAT to decampaign the government in power iv.
Low level of VAT threshold
v. VAT required books of accounts to be kept. This was seen as expensive to the traders
vi. Mode of Vat collection was projected to be Harsh vii. Desire to evade the tax since VAT
threatened smuggling.
33

TAXATION

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TAXATION

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Principles of Taxation DES II

NATIONAL TEACHERS’ COLLEGE KABALE

DIPLOMA IN EDUCATION SECONDARY

 Coursework assignments and presentations 15%

Summative assessment  Kyambogo University exams

It is referred to as a non-quid pro quo payment because there is no corresponding return

Taxation is a system or process of raising money or revenue by the government from

OBJECTIVES/REASONS/NEED FOR TAXATION IN A COUNTRY What

are the reasons why the government imposes taxes.

8. To increase the rate of economic growth: this is through increased taxes on

They are both negative and positive

Positive implications/Importance of taxation

1. It is a source of government revenue: Different taxes are charged for the

Negative implications/Effects/Disadvantages of Taxation

BENEFITS OF PAYING TAXES TO BUSINESS OWNERS

How do business owners benefit from paying taxes?

(a) Adam smith’s Four canons of taxation

2. Economy: The principle requires that the administrative cost of collecting

7. The principle of elasticity/flexibility: The tax should be able to increase or

8. The principle of neutrality/impartiality: A good tax is one which does not

9. The principle of comprehensiveness/diversity: A good tax should have a

11. The principle of political acceptability: A good tax system should be in

Taxes are classified according to:

1. The proportion of one’s income that is paid as tax

Classification of taxes according to one’s Income paid as tax.

EFFECTS OF PROGRESSIVE TAX

 Controls demand pull inflation

EFECTS OF REGRESSIVE TAXES

Classification according to mode of payment/Tax incidence

Types of forms of Direct taxes.

2. Corporation/Company tax: This is tax levied on the profits of a company. In

3. Wealth tax/Property tax: This is tax imposed on property or use of property

9. Capital levy: This is a tax imposed by the government during times of

Advantages/Merits of Direct Taxes

1. They are sources of government revenue: Different taxes imposed on peoples’

Disadvantages/Demerits of Direct taxes

Types/Forms of Indirect Taxes

2. Import duty: This is a tax imposed on goods (called imports) entering a

4. Octoroi tax: This is a tax imposed on goods in transit through a given

10. Value Added Tax:

Advantages of Indirect Taxes

Disadvantages of Indirect Taxes

Reasons why indirect taxes are preferred to direct taxes.

OTHER SOURCES OF GOVERNMNET REVENUE

3. Gifts and donations: These are voluntary contributions made by individuals

5. Earnings from government/state owned enterprises: These are profits

7. Rent and rates: This is money charged by government on buildings or

LEVELS OF TAX COMPLIANCE

FACTORS INFLUENCING TAX COMPLIANCE

1. Extent to which tax system is convenient: Convenient place, period, and

Causes of Non-Tax Compliance/Factors limiting tax compliance in Uganda

Measures that can be taken to ensure tax compliance in Uganda

Procedures for tax compliance

 Registration of the tax payer with Uganda Revenue Authority

Penalties for non-tax compliance/Dangers on non-tax compliance (Penalties for tax

NB: Noncompliance results in either Tax evasion or tax avoidance

It is the deliberate refusal by a tax-paying unit to pay taxes imposed on it.

FORMS OF TAX EVASION IN UGANDA

 Smuggling of goods into or outside the country

 Refusal to register the business for VAT

REASONS FOR TAX EVASION

Why do people evade taxes in Uganda?

Measures that cab be taken by the Business to minimize tax evasion/Increase