Makerere university business school

BBA III; Income tax 2020/2021

TAXATION OF BUSINESS INCOME

Business is defined in the Income Tax Act to include any trade, profession, vocation or
adventure in the nature of trade, but does not include employment. The definition of business is
therefore inclusive rather than specific such that there can be business which does not arise from
trade, profession vocation or adventure in the nature of trade.

Trade
Trade has the same meaning as commerce and it involves buying and selling or bartering of
goods.
Adventure in the Nature of Trade
This refers to transactions where profits arise from activities such as gambling, speculative
dealings in commodities, single or one off transactions or unconventional transaction e.g.
smuggling.

Profession
This is a paid occupation especially one which requires advanced education and training. A
profession usually involves academic training over long periods of time. Take for example
medical Doctors, Lawyers, Engineers, Consultants, Accountants etc providing services other
than in employment are treated as carrying on business.24
Vocation
This is how one passes one’s life when earning a living. More often, it is referred to as a special
calling and qualification for a certain kind of work especially for social or religious work. It can
thus be used to bring within the scope of income tax any form of regular and continuous profit
earning, which does not fall within the categories of trade, business, profession or employment.
Earnings from activities related to religion can fall in this category. A vocation is simply a
calling or something one does because he/she has special fitness for it e.g. Boxing, Football etc.

Badges of trade
• Profit seeking.
• The way in which the asset was acquired.
• The nature of the asset.
• Modification of the asset prior to sale or use.
• Interval between purchase and sale of the asset.
• Way in which the sale is affected.
• Number of transactions.
• Existence of trading interest in the same field.
• Method of financing the transaction.

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BBA III; Income tax 2020/2021

CATEGORIES OF BUSINESS INCOME

Business incomes are gains, rewards, benefits, and returns, compensations earned out of a
business undertaking. Business income means any income derived by a person in carrying on a
business and includes the following amounts, whether of a revenue or capital nature:
1) the amount of any gain, and losses on disposal of assets, derived by a person on the
disposal of a business asset, or on the satisfaction or cancellation of a business debt,
whether or not the asset or debt was on revenue or capital account;
2) Any amount derived by a person as consideration for accepting a restriction on the
person’s capacity to carry on business.
3) The gross proceeds derived by a person from the disposal of trading stock, i.e. sales.
4) Any amount included in the business income of the person under any other section of this
Act
5) The value of any gifts derived by a person in the course of, or by virtue of, a past,
present, or prospective business relationship.

6) Interest derived by a person in respect of trade receivables or by a person engaged in the

business of banking or money lending.

7) The amount of any gain derived by a person on the satisfaction or cancellation of a

business debt.

Aspects to consider when Determining Taxable/chargeable Business Income

 Gross income
 Exempt Income.
 Tax Allowable deductions (expenses recognized in the ITA) including capital deductions
 Non-allowable deductions (expenses not recognized)
 Capital Deductions

NON- ALLOWABLE DEDUCTIONS.

Except as otherwise provided in this Act, no deduction is allowed for;
 Any expenditure or loss incurred by a person to the extent to which it is of a domestic or
private nature
 Any expenditure or loss of a capital nature or any amount included in the cost base of an
asset
 Any expenditure or loss which is recoverable under any insurance, contract, or indemnity
 Any tax payable in Uganda or a foreign country
 Any income carried to a reserve fund or capitalized in any way
 The cost of a gift made directly or indirectly to an individual where the gift is not
included in the individuals gross income

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 Any fine or similar penalty paid to any government or a political subdivision of a

government for breach of any law or subsidiary legislation
 A contribution or similar payment to a retirement fund by the employee either for the
benefit of the employee or for the benefit of any person
 A premium or similar payment made to a person carrying on a life insurance business on
the life of the person making the premium or on the life of some other person
 The amount of a pension paid to any person
 Any alimony or allowance paid under any judicial order or written agreement of
separation

ALLOWABLE DEDUCTIONS
These are expenses incurred in the production of income that are allowable for income tax
purposes. General principles of deduction of an expense include;
 The expenditure or loss must be revenue in nature and not capital
 The expenditure or loss must have been incurred by the person during the year of
income
 The expenditure or loss directly relates to the income included in gross income for
the year of income
 Where the expenditure or loss is only partly incurred in the production of income
included in the gross income, a deduction is allowed to the extent to which it was
incurred.
Section 22 Of the ITA gives the general rule of allowing a deduction for the purpose of
ascertaining the chargeable income of a person for a year of income as follows.
a) All expenditures and losses incurred by the person during the year to the extent to which
the expenditures or losses were incurred in the production of income included in the gross
income
b) The amount of any loss on disposal of assets incurred by the person on the disposal of a
business asset during the year whether or not the asset was on revenue or capital account
c) In the case of rental income, 20% of the rental income as expenditures and losses
incurred by the individual in the production of such income
d) Local service tax paid by an individual
e) 2% of income tax payable by private employers who prove to URA that 5% of their
employees on full time basis is persons with disabilities.
The following expenses are specifically allowed under the Income Tax Act
i. Meals, refreshment and entertainment;
A deduction is allowed for expenditure incurred by a person in providing meals, refreshment, or
entertainment in the production of income included in the gross income, but only where,
a) The value is included in the employment income of an employee as a benefit in kind or
excluded from employment income for having been provided to all employees on equal
term basis.

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b) The person’s business includes the provision of meals, refreshment and entertainment and
the person to whom the meals, refreshment or entertainment have been provided have
paid an arm’s length consideration for them.

ii. Bad debts

A person is allowed a deduction for the amount of a bad debt written off in the person’s accounts
during the year of income. Section 24 (3) explains a bad debt as a debt claim of which the
taxpayer has taken all reasonable steps to pursue payment but has failed and reasonably believes
he/she will not be satisfied. Thus only specific bad debts written off can be allowed of deduction.
However a deduction for bad debts is allowed only if-
 Amount of the debt claim was included in the person’s gross income in any year of
income
 Amount of the debt claim was in respect of money lent in the ordinary course of a
business carried on by a financial institution in the production of income included in the
gross income
 Amount of the debt claim was in respect of a loan granted to any person by a financial
institution for the purpose of farming, forestry, fish farming, bee keeping, animal
husbandry or similar operations

iii. Interest expense

These are finance cost incurred on debt obligation acquired for generating income included in
Gross income. A person is allowed a deduction for interest incurred during the year of income in
respect of a debt obligation to the extent that the debt obligation has been incurred by the person
in the production of income included in gross income. A “debt obligation” includes an obligation
to make a swap payment arising under a swap agreement and shares in a building society.

iv. Repairs and Minor Capital Equipment

A person is allowed a deduction for expenditure incurred during the year of income for the
acquisition of a minor capital equipment and repair of property occupied or used by the person in
the production of income included in the gross income. Minor capital equipment refers to a
depreciable asset with a cost base of less than fifty currency points (One currency point is
equivalent to twenty thousand Uganda shillings) i.e a depreciable asset that cost less than Shs
1,000,000. However the asset must be in position to function in its own right and is not an
individual item which forms part of a set.

v. Scientific Research Expenditure

A person is allowed a deduction for scientific research expenditure incurred during the year of
income in the course of carrying on a business, the income from which is included in the gross
income. Scientific research expenditure, in relation to a person carrying on business, means the
cost of scientific research undertaken for the purposes of developing the person’s business,

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BBA III; Income tax 2020/2021

including any contribution to a scientific research institution which is used by the institution in
undertaking research for the purposes of developing the person’s business, excluding –
expenditure incurred for the acquisition of a depreciable or intangible asset, acquisition of land
or buildings and expenditure incurred for the purpose of ascertaining the existence, location,
extent, or quality of a natural deposit. Scientific research institution means an association,
institute, college, or university which undertakes scientific research. Scientific research refers to
any activities in the fields of natural or applied science for the development of human
knowledge.

vi. Training Expenditure

An employer is allowed a deduction for expenditure incurred during the year for the training or
tertiary education, not exceeding in the aggregate five years, of a citizen or permanent resident of
Uganda, other than an associate of the employer, who is employed by the employer in a business,
the income from which is included in the gross income. Permanent resident means a resident
who has been present in Uganda for a period or periods in total of five years or more.

vii. Charitable Donations

These are gifts made by the tax payer to exempt organizations during the year of income. The
value of such gift is allowed a deduction for that year of income.
The value of a gift is the lesser of- the value of the property at the time of the making of the gift;
or the consideration paid by the person for the property.
The amount of a deduction allowed for a year of income shall not exceed five per cent of the
person’s chargeable income, calculated before taking into account the deduction.

viii. Assessed loss brought forward.

Assessed loss arises where the total amount of income is exceeded by the total deductions
allowed to the tax payer. This loss shall be carried forward and allowed as a deduction in
determining the tax payer’s chargeable income in the following year of income.
Where, for any year of income, the total farming income derived by a taxpayer who is an
individual is exceeded by the total deductions allowed to the taxpayer relating to the production
of that income, the amount of the excess, in this Act referred to as an “assessed farming loss”,
may not be deducted against any other income of the taxpayer for the year of income, but shall
be carried forward and allowed as a deduction in determining the chargeable farming income of
the taxpayer in the following year of income.

The amount of an assessed loss carried forward for a taxpayer shall be reduced by the amount or
value of any benefit to the taxpayer from a concession granted by, or a compromise made with,
the taxpayer’s creditors in the course of an insolvency whereby the taxpayer’s liabilities to those
creditors have been extinguished or reduced, provided such liabilities were incurred in the
production of income included in gross income.

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BBA III; Income tax 2020/2021

ix. Start-Up costs

A person who has incurred expenditure in starting up a business to produce income included in
the gross income shall be allowed a deduction of an amount equal to twenty five per cent of the
expenditure in the year of income in which the expenditure was incurred and in the following
three years of income in which the business is carried on by the person. For purposes of the ITA,
"expenditure in starting up a business" means-
a. in the case of initial public offering, costs incurred in listing the business with the
Uganda Stock Exchange;
b. in any other case, non-recurring preliminary or preopening costs, which are
associated, with setting up a business such as fees of an accountant, registration charges,
legal fees, costs for promotional and advertising activities, as well as costs for employee
training."
Start up costs of 120m starts in 2020
Allowable deduction = 120* 25% = 30m
Allowable deduction apply for four years starting with 2020, 2021, 2022, 2023

x. Cost of Intangible Assets

A person who has incurred expenditure in acquiring an intangible asset having an ascertainable
useful life is allowed a deduction in each year of income during the useful life of the asset in
which the person wholly uses the asset in the production of income included in the gross income
of an amount calculated using the formula- A/B where;
A is the amount of expenditure incurred and
B is the useful life of the asset in whole years
Allowable deduction = cost of the asset/useful life
Where an intangible asset has been disposed of by the person during the year of income, the cost
base of the asset is reduced by any deductions allowed under this Section to the person in respect
of the asset.
xi. Legal and professional fees like Audit fees, consultancy fees etc are normally allowed
as business expenses incurred on business matters relevant for the production of business
income.
xii. Premiums paid on short leases are normally allowed. Such leases include leased
machinery, buildings, and land to mention but a few.
xiii. Damages and compensations incurred for the purposes of trade, and on actions
relevant to the production of income are allowed. Examples include compensations made
to clients on selling defective items to them.
xiv. Subscriptions paid or payable to professional and trade associations, which
associations are important to enable the business generate revenue are normally allowed
as deductible expenses.

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xv. Salaries, wages and other remunerations paid to employees are allowable, when the
remunerations were made to employees who participated in the production of income or
for business purposes. The employer’s contributions to approved retirement funds are
allowable as business expenses on part of the employer. Redundancy payments and
compensations made on retirement or termination of employment contracts are also
allowed as business expenses.
xvi. Mining expenditures
Mining company means a company carrying on any mining operations in Uganda. A person
carrying on mining operations to produce income included in the gross income is allowed a
deduction for any expenditure of a capital nature incurred in searching for, discovering and
testing, or winning access to deposits of mineral in Uganda.
xvii. Capital deductions/ Allowances
These are deductions in respect of qualifying capital expenditure. The deductions enable a
taxpayer recover the qualifying capital outlay over a period of time depending on the nature of
the capital expenditure.
Qualifying capital expenditures
Not all capital expenditures qualify for capital deductions. It is therefore pertinent for us to know
that the following are the qualifying capital expenditures which include;
 Plant and machinery/ depreciable assets
 Industrial Building
 Farm works
 Construction of a green house
 Acquisition or establishment of a horticultural plant
Please note that some capital expenses are already allowable expenses and need not be
considered for further deductions e.g. Minor Capital equipments, costs of intangible assets and
start-up costs.
Types of capital deductions/allowances
 Initial allowance (in the first year of putting an eligible property or industrial building for
into use)
 Wear and tear (depreciation of assets)
 Industrial building deductions (depreciation of buildings)
 Farming capital deductions (farm works

INITIAL ALLOWANCE (IA)

Initial allowance on eligible property; Initial allowance is a deduction given to a person who
places an eligible property into service for the time outside a radius to fifty kilometers from the
boundaries of Kampala during the year of income. The deduction is computed as 50% of the
cost base of the property.

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Eligible property means plant and machinery wholly used in production of income included in
gross income but excludes; Goods and passenger transport vehicles, appliances ordinarily used
for household purposes and office or household furniture fixtures & fittings.

Initial allowance on industrial building; Initial allowance deduction allowed to a person who
puts into use for the first time during the year an industrial building other than an approved
commercial building is 20% of the cost the building.
Cost of the building is 350M which is put into use on 1 July 2020
Initial allowance deduction = 350M * 20% = 70m

DEPRECIABLE ASSETS (WEAR & TEAR)

A tax payer is allowed a deduction for depreciation of depreciable assets other than minor capital
equipment.
Depreciable asset means any plant or machinery or any implement, utensil or similar article,
which is wholly or partly used, or held ready for use, by a person in the production of income
included in the gross income and which is likely to lose value because of wear and tear, or
obsolescence
1) A person is allowed a deduction for the depreciation of the person’s depreciable assets
during the year of income as calculated in the accordance with section 27
2) Depreciable assets are placed into separate pools for each class of asset and the
depreciation deduction for each pool is calculated according to the following formula;
A*B where
A is the written down value of the pool at the end of the year of income, and
B is the depreciation rate applicable to the pool
3) Depreciable assets are classified into three classes as set out in below.
Declining Balance Depreciation Rates for Depreciable Assets
1 Computers and data handling equipment 40%
2 Plant and machinery used in farming, manufacturing and 30%
Mining
3 Automobiles; buses, minibuses, goods vehicles, construction 20%
and earth moving equipment, specialized trucks, tractors,
trailers and trailer mounted containers, rail cars, locomotives
and equipment; vessels, barges, tugs and similar water
transportation equipment; aircraft; specialized public utility
plant, equipment and machinery; office furniture, fixtures and
equipment; any depreciable asset not included in another
class.”

4) The WDV of the pool at the end of the year of income is the total of-

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a) The WDV of the pool at the end of the preceding year of income after allowing for
the deduction for that year and
b) The cost base (cost less initial allowance) of assets added to the pool during the year
of income reduced but not below zero, by the consideration received from the
disposal of assets in the pool during the year of income.
5) Where the amount of consideration received by a person from disposal during the year of
income of any asset or assets in a pool exceeds the WDV of the pool at the end of the
year of income disregarding that amount, the excess is included in the business income
of the person for that year.( gain on disposals)
6) If the WDV of a pool at the end of the year of income after allowing for the deduction is
less than fifty currency points, a deduction shall be allowed for the amount of that
WDV.
7) Where all assets in a pool are disposed of before the end of a year of income, a deduction
is allowed for the amount of the WDV of the pool as at the end of that year.
8) Where a person has incurred non-deductible expenditures in respect of a depreciable
asset, it applies as if the expenditures incurred in different years of income were incurred
for the acquisition of separate assets of the same class.
9) The cost base of the depreciable asset is added to a pool in the year of income in which
the asset is placed in service
10) Where a depreciable asset is only partly used in the year in the production of income
included in the gross income, the depreciation deduction allowed shall be
proportionately reduced.
Format for Wear & Tear Schedule

Class I (40%) Total

Details (B) Class II (30%) Class III (20%)
W.D.V at the beginning of the year XX XX 400,000 XX 20m XXXX
Additions during the year (Cost less
initial allowance) XX XX 75,000 XX 0 XXX
Disposals during the year (sale
proceeds) (XX) (XX) (20,000) (XX) (25m)/18m (XXXX)
XX less than XXXX
Depreciable value (A) 1m XX 455,000 XX gain/ loss
Depreciation charge (Wear &Tear) (XX) A*B (XX) 136,500 XXXXXXX
WDV at the end of the year XX XX 318,500 XX

Plant and machinery cost 150,000,000 qualifying for initial allowance

Initial allowance is 50% * 150,000,000 = 75, 000,000
150m – 75m = 75m
Disposal of Plant and machinery which cost 120m 2 years back. Sale disposal precedes is 20m

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BBA III; Income tax 2020/2021

Gain on disposal, if you have sold off all the assets in a particular class at a value higher than the
written down value, then the excess becomes the gain or profits but if it is less than it becomes a
loss. In a situation where by the WDV at the end of the year is less than 1million then it is
allowed as a deduction in that given year of income.

Where the assets in a particular class have been disposed of before the year end, then you take
the WDV at the beginning of the year compare it with the consideration received and if it is more
there is a loss and if the consideration is more , there is a gain

Purchases or acquisition of a Depreciable asset

Purchases and Additions of plant, equipment and machinery, which qualify for wear and tear, are
recorded at their cost of acquisition less initial allowance in the year of income following the in
which the asset was placed in service. The amount is added to the written down value (if any) of
the relevant class or pool of plant and machinery.

Assets purchased across 2 or more years of income

An asset may be purchased over a period of two or more years. Take an example of a
Factory Manufacturing plant acquired over a period of 5 years. Where a person incurs capital
expenditures in respect to a depreciable asset/machinery and equipment, in more than one year of
income the Income Tax Act states that the expenditures incurred in different years of income
relate to acquisition of separate assets but of the same class.

Disposal of depreciable asset

Plant and machinery disposed off are written off from the wear and tear schedule by the
consideration received on the disposal (selling price) other than the cost price.
The consideration price received for plant and equipment disposed off should be subtracted from
the written down value in the appropriate class of the plant disposed off.
Disposal of an asset is described by section 51 to include the following: -
a. A sale, exchange, redemption or distribution of an asset by a taxpayer
b. Transfer of an asset by a taxpayer by way of gift.
c. An asset destroyed or lost.
d. Conversion of an asset from taxable use to non-taxable use or from a non-taxable
use to a taxable use. The taxpayer is deemed to have disposed off the asset at the time of the
conversion for an amount equal to the market value of the asset at that time and to have
immediately re-acquired the asset for a cost base equal to the same value.

Capital Gains/Trading Receipt

Where the consideration received on disposal of the plant and equipment exceeds the written
down value of that class of assets, the excess is called a Trading receipt, which is a taxable
amount.

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Capital Losses/Balancing Allowance

However, if the consideration received is lower than the written down value of the class
of assets disposed off, the difference is called a Balancing Allowance or Trading deduction. This
amount is treated as a loss and allowed as a deduction. This applies where there is no asset left in
the said class or pool of asset
Bartered Assets
Alternatively assets may be traded or bartered; the consideration received on disposal is
the value of the Asset (s) received in exchange, together with cash-if any.

Depreciable Asset Used For both Business and Private Purpose

Where the plant and machinery or any other asset is partly used, for the business and
private purposes, the wear and the tear deduction for that asset should be calculated and
apportioned using the most appropriate variable say number of hours, days or era output. The
Wear and Tear deduction allowable for income tax purposes should satisfy the remoteness and
duality tests i.e. the Wear and Tear allowable corresponds to that proportion of hours, days or
output for which plant/asset was used to generate income included in the business entity's gross
taxable income.
Example 1
RIZE Ltd has provided the following information relating to its Non- current assets for the ended
31st December 2017.
1. Written down value as at 1st January 2017.
class I class II class III
Ugx ‘000 Ugx ‘000’ Ugx ‘000’
40,000 148,000 25,500
2. Purchases during the year
 5 computers at Shs 6,000,000 each.
 Plant and machinery at Shs 120,000,000
 Toyota prado for the CEO Shs 55,000,000
 A delivery van of carrying capacity 10 tons at Shs 80,000,000
 10 executive chairs at Shs 2,000,000
3. Disposals included 2 computers at Shs 3,000,000 and Furniture at Shs 5,000,000
Required; Compute the company’s wear and tear allowable for the year ended 31st December
2017 (Assuming the company qualifies for initial allowance)

RESTRICTION ON THE COST BASE OF A ROAD VEHICLE

For purposes of depreciation, the cost base of a road vehicle, other than a commercial vehicle is
not to exceed shs. 60,000,000.
Commercial vehicle means-A road vehicle designed to carry loads of more than half a tone
or more than thirteen passengers or a vehicle used in a transportation or vehicle rental
business

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 Where the cost base of a road vehicle is beyond 60,000,000, the person is treated as
having acquired two assets-
a) A depreciable asset being a road vehicle with a cost base equal to 60,000,000
b) A business asset that is not a depreciable asset with a cost base equal to the
difference
Where a road vehicle is disposed of, the consideration received on disposal is apportioned
between the two assets based on the ratio of the cost base of each asset to the actual cost base of
the asset. The gain or loss on disposal of a business asset is included in the determination of
taxable business income. The same is not true for depreciable asset because the total
consideration from a depreciable asset is deducted in the wear and tear schedule under the
respective pool of assets
Example 2
If the vehicle cost is 80M, then sold same assets at 50M after 2 years, then to get the amount to
be included in the schedule; we use (60M/80M*50M)
Acquisition;
Depreciable asset=60M subject to W & T
Business asset =20M subject to CGT
Disposal proceeds;
Depreciable asset (60m/80m)*50m 37.5m
Business asset (20m/80m)* 50m 12.5m
Determination of gain or loss on disposal of the business asset;
Cost 20m
Less; Accumulated depreciation 20%*20m 7.2m
Year one depreciation 4m
Year two depreciation 20%*(20-4) = 3.2m
Carrying amount/Written down value 12.8m
Cash proceeds 12.5m
Loss on disposal 0.3m (allowable deduction).

INDUSTRIAL BUILDING DEDUCTION (IBD)

Industrial building means any building which is wholly or partly used or held ready for use, by a
person in –
i. Manufacturing operations
ii. Research and development into improved or new methods of manufacture
iii. Mining operations
iv. An approved hotel business
v. An approved hospital or
vi. Approved commercial buildings

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Where a person has incurred capital expenditure in any year of income on the construction of an
industrial building and the building is used in the production of income included in the gross
income, the person is allowed a deduction for the depreciation of the building during the year of
income as calculated using the formular-
A x B x C/D where
A is the rate applicable to the building, 5%
B is the capital expenditure incurred in the construction of the building reduced by initial
allowance
C is the number of days in the year of income during which the asset was used or was
available for use in the production of income included in the gross income
D is the number of days in the year of income
 Where an industrial building is only partly used for prescribed uses, the amount of the
depreciation deduction allowed shall be proportionately reduced.
 Where an industrial building is only partly used by a person during the year for
prescribed uses and the capital expenditure incurred in the construction of that part of the
building for other uses is not more than 10% of the total capital expenditure incurred on
the construction of the building, the building is treated as wholly used for prescribed uses.
Building is used 92% for manufacturing and 8% for resindential = the whole building is
used for manufacturing
Building is used 5% manufacturing and 95% residential = the whole building is
considered for residential.
Building used 60% manufacturing and 40% residential = apportion for IBD
 If a person has incurred expenditure in making a capital improvement, to an industrial
building, this applies as if the expenditure is of a separate industrial building
 If it is purchased by a person, the person is deemed to have incurred the capital
expenditure by a person who constructed the building
 The amount of the deduction allowed is not to exceed the amount which, apart from
making the deduction would be the residue of the expenditure at the end of the year of
income
 Where it is disposed of, the cost base of the building is reduced by any deductions
allowed to the person in respect of the building
 Where it is bought and sold together with land, the value of the land shall be the
difference between the total consideration and the value of the building
Note
Capital expenditure does not include
i. Expenditure incurred in the acquisition of a depreciable asset installed in an industrial
building
ii. Expenditure incurred in the acquisition of, or any rights in or over, any land

FARMING CAPITAL DEDUCTIONS

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Farming means pastoral, agricultural, plantation, horticultural or other similar operations

Farm works means any labour quarters and other immovable buildings necessary for the proper
operation of a farm, fences, dips, drains, water and electricity supply works, windbreaks, and
other works necessary for farming operations carried on to produce income included in gross
income but does not include –
i. Farm houses
ii. Depreciable assets
Expenditure incurred by a person in acquiring farmworks is included in the person’s pool for
class 3 assets in the year of income in which the expenditure is incurred and depreciated
accordingly

Horticulture includes –
i. Propagation or cultivation of seeds, bulbs, spores or similar things
ii. Propagation or cultivation of fungi
iii. Propagation or cultivation in environments other than soil, whether natural or artificial
A person carrying on a business of horticulture in Uganda to produce income included in the
gross income who has incurred expenditure of a capital nature on –
a) The acquisition or establishment of a horticultural plant or
b) The construction of a green house
Shall be allowed a deduction of an amount equal to 20% of the amount of the expenditure in the
year of income in which the expenditure was incurred and in the following 4 years of income in
which the plant or green house is used in the business of horticulture carried on by the person

Expenditure of a capital nature incurred in the establishment of a horticultural plant include

expenditure incurred in draining or clearing land

Capital gains Tax

Capital gains arise from the disposal of a business asset that is not a depreciable asset, such as
land and buildings. A disposal of an asset occurs when an asset has been sold, exchanged,
redeemed, distributed, transferred by way of gift, destroyed or lost by the tax payer
The capital gain is the excess of the consideration over the cost base of the asset. However
there may also be a loss when the cost base of the asset is higher than the consideration received
for a business asset.
There is no separate Capital Gains tax legislation in Uganda. However, capital gains from
business are taxable under the provisions of the Income tax Act with other business income at
30%
Example 4
A local manufacturing firm’s asset records indicated the following tax written down values as at
31st December 2015.
class I class II class III

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140,000,000 448,000,000 125,500,000

The following information relates to the capital expenditure incurred during the year.
Expenditure Shs ‘000’
Electricity and water supply works on the farm 4,320
Construction of the drainage 6,500
Purchase of a tractor 120,000
Construction of luxury farm houses to motivate worker 60,000
Horticultural expenditure on the green house 12,430
Plant and machinery 235,000
Construction of a new factory building completed and put 350,000
use on 1st October 2016.
Additional Information
 Furniture and a Toyota Mark X were disposed on in January 2016 for considerations worth
UGX 5,250,000 and UGX 22,500,000 respectively. The car had originally cost UGX
86,000,000 at purchase on 1 July 2013.
 The pre-existing industrial building cost the firm UGX 767,000,000 to construct 6 years
back, The new factory building is occupying land with a valuation of UGX 50,000,000
Required:
Compute the firm’s capital allowances and any capital gains for the year ended 31st December
2016. (15 Marks)

Solution
1. Wear and tear schedule capital deductions on the depreciable assets ‘000’
Details Class 1(40%) Class 2 (30%) Class 3 (20%) Total
WDV at the 140,000 448,000 125,500
beginning of the
year
Additions
Tractor 120,000
Farm works 10,820
Plant and 235,000
machinery
Disposal
Furniture (5,250)
Motor vehicle (15,698)
Depreciable 140,000 683,000 235,372
amount
Wear &tear 56,000 204,900 47,074 307,974
WDV at the end
of the year

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Working
Non- commercial vehicle
Acquisition = 86,000,000
Depreciable asset= 60,000,000
Business asset = 26,000,000
Disposal preceeds
Depreciable asset 60/86* 22,500,000 = 15,697,674
Business asset 26/86 *22,500,000= 6,802,325
Determine gain or loss on disposal
Cost 26,000,000
Accumulated depreciation (20%) 9,360,000
Year 1 20%* 26,000,000 = 5,200,000
Year 2 20% * (26,000,000-5,200,000)= 4,160,000
Carrying ammount = (26,000,000- 9360,000)= 16,640,000
Loss on disposal =9,837,675
2. Horticultural expenditure
Capital deduction = 20% * cost
3. Industrial building deduction (IBD) = 5%* Cost* c/d
IBD for the original building
IBD for the extension

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Rates of Tax
In accordance with the Act, a tax to be known as income tax shall be charged for each year of
income and is imposed on every person who has chargeable income for the year of income

The tax payable by the tax payer is calculated by applying the relevant rates of tax determined
under the Act to the chargeable income, subtracted any tax credits allowed to the taxpayer for the
year of income

Business Income – Self-Employment- Individual

Income derived from business in form of profits is chargeable to income tax on the individual
where the business is conducted as a sole proprietorship. The individual is expected to file one
tax return indicating all the incomes the individual earned in the year of income.
Tax rates applicable on the chargeable income is the PAYE

Business Income – Self-Employment- Partnership

This is where individuals pool resources and do business together. A partnership has some
obligations like filing tax returns but because it is not a legal entity, the responsibility of tax
payment is with the partners who individually file their individual tax returns reflecting incomes
earned from the partnership and any other incomes that may have been earned elsewhere.
Self-employment therefore covers those taxes on the individual’s profits or gains from trade,
vocation or profession whatever the case. The tax liability is computed using the individual
schedules above. PAYE for individual partners

Business Income-Corporate
In case of non-individual persons, corporation tax is chargeable on those person’s profits or gains
from business.
Companies other than Mining Companies.
The rate is 30% of chargeable income.

Example 5
Crystal Consults Ltd (CCL) is a resident company that provides IT consultant services in
Uganda. CCL profit and loss account for year ended 31st December 2019 showed the following.
Shs'000' Shs'000'
Sales 526,000
Cost of sales (121,000)
Gross profit 545,000
Other incomes 12,180
Less operating expenses
Salaries and wages 146,900
Repairs and maintenance 35,200

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Rent 24,000
Sundry expenses 42,350
Bad debts 18,200
Depreciation 41,500
Subscription costs 12,000
Donations to TASO 6,000
Provisional tax 15,500
Net profit 75,530

Additional information
1. Cost of sales include a withholding tax paid on imports of Shs 4,000,000
2. Other incomes include; Shs ‘000’
Discount received 7,520
Unrealized foreign exchange gain 12,500
Unrealized foreign exchange loss (8,940)
Gain on disposal of computers 1,100

3. Salaries and wages include; Shs ‘000’

Staff salaries 70,000
Contributions to NSSF 22,400
Directors’ remuneration 34,500
Local service tax on staff salaries 12,000
PAYE paid for directors 8,000

4. Sundry expenses include; Shs ‘000’

Staff welfare 22,000
Donations to Kampala city festival 5,000
Staff training costs 14,400
Loss on disposals of furniture 950

5. Bad debts include; Shs ‘000’

General provisions 8,000
Specific provisions 5,000
Bad debts written off 5,200
6. Subscriptions relate to director’s membership to the Bagagga Kwagalana group.
7. At the beginning of the year CCL acquired a 10 year patent right at a cost of Shs 45
million. This transaction was not recorded in the company’s books accounts.
8. The tax written down values from the wear and tear schedule as at 1st January 2019.
Shs ‘000’
Class 1 152,000

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Class 2 114,000
Class 3 89,200
The following fixed assets were acquired and put into use during the year.
• Computers at Shs 12,000,000
• 10 data storage devices each at Shs 645,000.
• Land cruiser TX for the managing director Shs 110,000,000
• Furniture and fittings at Shs 10,000,000

Disposals of fixed assets during the year were;

• 3 computers each at Shs 800,000
• Furniture and fittings at Shs 5,450,000
• Toyota Mark X at Shs 46,000,000 which had originally cost UGX 80,000,000 at purchase
2 years ago.
Required:
(i) Compute CCL’s tax liability for the year ended 31st December 2019.
(ii) Explain the meaning of tax assessed loss its treatment in determining a tax payer’s tax
liability

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