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ELEMENTS OF TAXATION

ELEMENTS OF TAXATION LECTURE NOTE

PRINCIPLE/CANONS OF TAXATION

When taxes are imposed, certain conditions must be fulfilled and these conditions are known as principles/canons, guidelines of taxation. Therefore principles/canons of taxation are “signposts” in the economy, which should guide the taxation process. They punctuate a good tax system.

(a)Adam smith’s four canons of taxation

1. The canon equality/equity.

This is the most important principle of taxation. This principle explains that there should be justice in taxation where every individual is supposed to pay according to his or her abilities. The principle calls for equality of sacrifice or ability to pay tax in proportion with income received. This means the rich should pay more taxes than the poor.

2. The canon certainty.

According to this principle, the taxes each individual is bound to pay should be certain and not uncertain. The tax payer should know how much, what tax, when, why and where the tax should be paid .this will enhance proper tax planning and fair assessment reducing corruption tendencies within the tax system.

3. The canon of economy.

This principle requires the administration cost of collecting taxes to be as low as possible for both the taxpayer and the tax authority. To the tax authority the administration costs should not exceed 5% of the tax revenue (according to Adam Smith). To the tax payer, the compliance costs should be as low as possible and the tax payer should be left with enough disposable income.

4. The canon of convenience.

with enough disposable income. 4. The canon of convenience. ELEMENTS OF TAXATION NOTES- BY NDYABANAWE JACKSON
with enough disposable income. 4. The canon of convenience. ELEMENTS OF TAXATION NOTES- BY NDYABANAWE JACKSON

ELEMENTS OF TAXATION

The principle requires the tax imposed should cause as little convenience as possible to the tax payer. What to pay, how much to pay and where to pay should be convenient to the tax payer. The canon therefore lays down that the time and manner should be convenient to the tax payer.

(b) Other canons of taxation include;

5. The canon of simplicity.

This is the understanding of the structures of law and administration of taxes. A good tax system

is one which is easy to be understood by the tax payers and tax administrators , the tax payer

should know when to pay, how much to pay and they should also understand who si responsible

for collection of tax and where to pay tax.

6. The canon of flexibility.

The tax system should be flexible to be changed to meet the revenue requirements of the government and the same time to help employers to manage their business

7. The canon diversity

To be sustainable, the tax system should have as many taxes as possible so as to raise enough revenue. This will further uphold the equity since people will not be strenuously taxed, as it would be in a simple tax regime.

8. The canon of efficiency and effective.

A tax is said to be effective when it meets the objectives of the tax. A tax is effective when the

collection and compliance cost are low.

Revision question.

1. Explain the principles/canons of taxation

question. 1. Explain the principles/canons of taxation ELEMENTS OF TAXATION NOTES- BY NDYABANAWE JACKSON (LECTURER)
question. 1. Explain the principles/canons of taxation ELEMENTS OF TAXATION NOTES- BY NDYABANAWE JACKSON (LECTURER)

ELEMENTS OF TAXATION

Important terms/concepts in taxation

Tax holidays.

This is where the government gives a grace period to an investor during which period the investor does not pay tax until the grace period is over.

Tax havens.

These are areas which offer low tax rates so as to boost their activities.

Tax transformation.

It refers to the substituting production of the taxed commodity with a non-tax commodity in order to avoid the effect/burden of the tax.

Tax base

This is an entity/person/firm on which the tax is levied or it refers to an entity that is subjected to taxation.

Real burden of tax

It refers to a sacrifice in terms of a commodity that a person incurs or makes as a result of tax

Taxable capacity

It is the extent to which the person can be taxed and still remains with a disposable income to maintain the reasonable standards of living.

Prohibitive tax

This imposed primarily not to raise revenue but to discourage production of consumption of certain commodities which are harmful.

of consumption of certain commodities which are harmful. ELEMENTS OF TAXATION NOTES- BY NDYABANAWE JACKSON (LECTURER)
of consumption of certain commodities which are harmful. ELEMENTS OF TAXATION NOTES- BY NDYABANAWE JACKSON (LECTURER)

ELEMENTS OF TAXATION

Tax yield

This is the net tax revenue from all taxes after all costs of collection have been deducted from total taxes collected.

Incentive tax

This is the tax that is adjusted by reducing tax in order to stimulate investments or business activity in the economy.

Tax liability

It is the amount of money the tax payer is expected to pay in the given period of time.

Tax exemption

This is where a tax liable person is allowed not pay a given tax due to some reasons for example insurance premiums and medical expenses can be exempted from tax in case of employment income.

Tax avoidance

This is a situation where the tax payer exploits the loopholes /weaknesses in the tax system to dodge tax charged to him or tries to see how or she can pay less or nothing at all as tax.

Tax evasion

This is the deliberate refusal by the tax payer to pay tax imposed or assessed on him.

Reasons why people evade paying taxes in Uganda

Poverty/low incomes among the tax payers. When people are poor that they cannot afford to maintain the current standards of living they will as well refuse to pay tax.

Desire to retain all earnings by the tax payer. When people prefer to retain all the incomes they have earned, they will ignore paying taxes as well.

Political instability, this prevents potential tax payers from earning enough income from which they can pay tax and a result they refuse to pay tax.

which they can pay tax and a result they refuse to pay tax. ELEMENTS OF TAXATION
which they can pay tax and a result they refuse to pay tax. ELEMENTS OF TAXATION

ELEMENTS OF TAXATION

Lack of enough information about taxes. Inadequate information from the tax administrators about procedure of payment of tax, tax to be paid and the importance of paying tax can call for tax evasion among Ugandans.

When the assessment is unfair. Un proper tax assessment by the tax administrators can as well lead to tax evasion, when tax administrators are corrupt and do not asses actual and uniform taxes on the tax payer it will lead to tax evasion.

When payers are not contented with the provision of services by the government. When the government misuses tax payers money and does not provide the social services such as electricity, clean water ,roads, and health services then potential tax payers may deliberately refuse to pay tax.

Revision question

1.

Briefly define the following terms/concepts as used in taxation

(a)

tax avoidance

(b)

taxable capacity

(c)

prohibitive tax

(d)

tax base

(e)

tax transformation

(f)

tax evasion

2.

explain five reasons why people evade taxes in Uganda.

2. explain five reasons why people evade taxes in Uganda. ELEMENTS OF TAXATION NOTES- BY NDYABANAWE
2. explain five reasons why people evade taxes in Uganda. ELEMENTS OF TAXATION NOTES- BY NDYABANAWE

ELEMENTS OF TAXATION

Introduction

INCOME TAX

This is tax imposed on a persons taxable income at specific rates. A person includes an individual, company, partnership, trustee, government and sub divisions of government.

Income tax is charged on every person who has chargeable income for the year of income.

Chargeable income is derived from three main types of income, namely; employment, business and property. Income tax is administered under the income tax Act (1997) cap 340

Taxable persons

The term taxable person is one who has earned chargeable income during the year of income. The term taxable person is defined to include individual, partnership, company, government, and trustees.

Taxable persons are categorized into resident and non- resident persons. These are covered under section 9 and 14 of the income tax Act.

Resident individual (section 9)

An individual is a resident in the year of income if that individual;

(a)

Has a permanent home in Uganda.

(b)

He or she is present in Uganda for a period of aggregate to 183 days or more than a two year period.

(c)

He or she is present in Uganda during the year of income and in each of the two preceding years of income for periods averaging more than 122 days in each year of income.

(d)

Is an employee or official of the government of Uganda posted abroad during the year of income.

of Uganda posted abroad during the year of income. ELEMENTS OF TAXATION NOTES- BY NDYABANAWE JACKSON
of Uganda posted abroad during the year of income. ELEMENTS OF TAXATION NOTES- BY NDYABANAWE JACKSON

ELEMENTS OF TAXATION

Resident company (section 10)

A company is a resident company for the year of income if it;

(a)

Is incorporated or formed under the laws of Uganda

(b)

Has its management and control exercised in Uganda at any time during the year of income, or

(c)

Undertakes the majority of its operations in Uganda during the year of income.

Resident trust (section 11)

A resident trust means that;

(a)

The trust is established in Uganda, or

(b)

A trust of the trust is a resident person during the year of income , or

(c)

Management and control of the trust is carried out in Uganda at any time during the year of income

Resident partnership (section 12)

Resident partnership becomes a resident person when one of the partners within the partnership

is a resident person during the year of income.

Resident retirement fund.

A retirement fund is a resident retirement fund if it;

(a)

Is organized under the laws of Uganda, or

(b)

Is operated for the principal purpose of providing retirement benefits to resident individuals, or

(c)

Has its management and control exercised in Uganda at any time during the year of income.

Non- resident persons (section 14)

the year of income. Non- resident persons (section 14) ELEMENTS OF TAXATION NOTES- BY NDYABANAWE JACKSON
the year of income. Non- resident persons (section 14) ELEMENTS OF TAXATION NOTES- BY NDYABANAWE JACKSON

ELEMENTS OF TAXATION

A person is a non- resident if that person is not a resident person.

Chargeable income of an individual

Section 15 of the income tax Act defines chargeable income of an individual as the gross income of the person for the year of income less total deductions allowed to the person for that year of income.

Section 18 states that the gross income for the person for the year of income is the sum of business income, employment income and property income.

Gross income

The gross income of a person for the year of income is the total amount of employment income, business income and property income derived during the year of income by the person other than income exempt from employment.

The gross income of a resident person includes income derived from all geographical boundaries

in Uganda.

income derived from all geographical boundaries in Uganda. ELEMENTS OF TAXATION NOTES- BY NDYABANAWE JACKSON (LECTURER)
income derived from all geographical boundaries in Uganda. ELEMENTS OF TAXATION NOTES- BY NDYABANAWE JACKSON (LECTURER)

ELEMENTS OF TAXATION

INCOME FROM EMPLOYMENT

Meaning of employment

Employment is defined in section 3 of the income tax Act , it means;

(a)

The position of an individual in the employment of another person, or

(b)

A directorship of a company; or

(c)

A position entitling the holder to a fixed or ascertainable remuneration; or

(d)

The holding or acting in any public office.

Employment income

Section 19(1) defines employment income to mean any income derived by an employee from any employment. That is any income incidental to employment qualifies to be employment income.

Sources of employment income

(a)

Any wages , salaries, leave pay, payment in lieu of leave, overtime pay, fees, commission, gratuity , bonus, or the amount of any travelling,entertainment,utilities,cost of living, housing, medical, or any other allowances.

(b)

The value of any benefit granted; benefits are often provided to employees as part of their remuneration. The range of such benefits varies from employer to employer and normal varies with the level of seniority of the employee.

Examples of such benefits include;

1.

Motor vehicle benefit. Where the employee is provided with a motor vehicle for use both to perform the duties of the employer and partly for private purposes , the value of the benefit is calculated using the formula.

, the value of the benefit is calculated using the formula. ELEMENTS OF TAXATION NOTES- BY
, the value of the benefit is calculated using the formula. ELEMENTS OF TAXATION NOTES- BY

ELEMENTS OF TAXATION

Motor vehicle benefit = (20%*A*B/C)-D

A is the market value of the vehicle at the time it was first provided to the employee for private use.

B is the number of days in the year of income during which the car was used for private purposes by the by the employee for all or part of the day.

is the number of days in the year of income (365 days as per income tax Act)

is any payment made by the employee to qualify for the benefit.

C

D

Example 1

Calculate the value of benefit derived by employee who was given a company vehicle to use for office work and partly for private purposes. The vehicle hard a cost of 20,000,000 at the time it was given to him he used it for 165 days of in the year of income for his benefit, contributing 600,000 in that year for the use of the vehicle.

Example 2.

You use 10,000,000 vehicle benefit for official and private purposes on equal day basis, paying 5000 per month. Calculate the vehicle benefit.

2. Meals, refreshments and entertainment benefit.Where the benefit provided by an employer to an employee consists of the provision of meals, refreshments or entertainment. The benefit is the cost of employer reduced by any consideration paid by the employee for the meals, refreshment, or entertainment.

3. House keeper,chauffeur,gardener, or domestic assistant.Where the benefit provided by an employer to an employee consists of the provision of house keeper, chauffeur,gardener or domestic assistant, the value of the benefit is the total employment income paid to the domestic assistant in respect of the services rendered to the employee, reduced by any payment made by the employee for the benefit.

reduced by any payment made by the employee for the benefit. ELEMENTS OF TAXATION NOTES- BY
reduced by any payment made by the employee for the benefit. ELEMENTS OF TAXATION NOTES- BY

ELEMENTS OF TAXATION

4. Utilities.These include water bills,electricity bills. Where the benefit provided by an employer to an employee consists of the provision of the utilities in respect of the employees place of residents. The value of the benefit is the cost of the employer reduced by any payment made by the employee for the utilities.

5. Loan benefits.Where the benefit provided by the employer to an employee consists of a loan not exceeding shs.1,000,000 in total at a rate of interest below statutory rate (bank of Uganda rate) the value of the benefit is the difference between the interest rate paid during the year of income as statutory rate.

Example 1.

Paul took furniture loan of shs. 10,000,000 on 1 st October,2001 at an interest rate of 5% . the statutory interest rate as at 1 st july 2001 was 15%.

Determine the loan interest benefit for the month .

Loan benefit= (statutory rate-loan interest rate)*loan amount

6. Property/ services. Where the benefit provided by an employer to an employee consists of the transfer or use of the property or provision of services , the value of benefit is the market value of the property or service produced by any payment made by the employee for the benefit.

7. Accommodation. Where the benefit provided consists of providing accommodation or housing other than housing allowances or reimbursement of housing expenses. The value of benefit is the lesser of the market rent of accommodation or housing reduced by any payment made by the employee for the benefit.

INCOME EXCLUDED FROM EMPLOYMENT INCOME

Section 19(2) of the income tax excludes the following from employment income (from being taxed)

1.

Passage costs

termination of employment where the employee;

incurred by the employer in respect of the employee’s appointment or

Was recruited or engaged outside Uganda.

appointment or  Was recruited or engaged outside Uganda. ELEMENTS OF TAXATION NOTES- BY NDYABANAWE JACKSON
appointment or  Was recruited or engaged outside Uganda. ELEMENTS OF TAXATION NOTES- BY NDYABANAWE JACKSON

ELEMENTS OF TAXATION

Is in Uganda solely for the purpose of serving the employer, and

Is not a citizen of Uganda

2. Reimbursement or discharge of medical expense. This should however not be confused with medical allowance which is taxable, and medical expenses includes medical insurance premium.

3. Insurance premium paid by a tax paying employer for the benefit of the employee or his dependents.

4. Value of meals or refreshments provided to all fulltime employees in the premises operated by or on behalf of the employer for the benefit of all employees on equal terms or relatives of an employee.

5. Any benefit whose value is less than 10,000 a month. Do not add all the benefits and then compare them with 10,000, pick one category of the benefits.

6. Any contribution or similar payment made by an employer to a retirement fund for the benefit of employee or his dependents.

PAY AS YOU EARN (PAYE) SYSTEM

PAYE is not tax but rather a system of collecting income tax on incomes from employment. The employer is mandated to withhold appropriate amounts from individual monthly employment incomes. The appropriate amount is computed using individual income tax rates provided in part 1 of the third schedule.

The employer is supposed to remit the tax withheld to Uganda Revenue Authority by the 15 th day of the next calendar month. The accountability and payment of PAYE is the responsibility of the employer and any underpayment is recovered from the employer as if she /he was actually the tax payer.

from the employer as if she /he was actually the tax payer. ELEMENTS OF TAXATION NOTES-
from the employer as if she /he was actually the tax payer. ELEMENTS OF TAXATION NOTES-

ELEMENTS OF TAXATION

INCOME TAX RATES

(a) Annual resident individual tax rates

Chargeable income

Rate of tax

 

Not exceeding shs.1,560,000

Nil

Exceeding shs.1,560,000 but not exceeding shs.2,820,000

10%

of

the

amount

by

which

chargeable

income exceeds shs.1,560,000

Exceeding shs.2,820,000 but not exceeding shs.4,920,000

Shs.126,000 plus 20% of the amount by which chargeable income exceeds shs.2,820,00

Exceeding shs.4,920,000

Shs.546,000 plus 30% of the amount by which chargeable income exceeds shs.4,920,000

b) Monthly resident individual tax rates

Chargeable income

 

Rate of tax

 

Not exceeding shs.130,000

 

Nil

Exceeding

shs.130,000

but

not

exceeding

10%

of

the

amount

by

which

chargeable

shs.235,000

income exceeds shs.130,0000

Exceeding shs.235,000 but not exceeding shs.410,000

 

Shs.10,500 plus 20% of the amount by which chargeable income exceeds shs.235,000

Exceeding shs.410,000

 

Shs.45,500 plus 30% of the amount by which chargeable income exceeds shs.410,000

(b) Annual non resident individual tax rates

Chargeable income

 

Rate of tax

Not exceeding shs.2,820,000

 

10%

Exceeding

shs.2,820,000

but

not

exceeding

Shs.282,000 plus 20% of the amount by which chargeable income exceeds shs.2,820,000

shs.4,920,000

chargeable income exceeds shs.2,820,000 shs.4,920,000 ELEMENTS OF TAXATION NOTES- BY NDYABANAWE JACKSON (LECTURER)
chargeable income exceeds shs.2,820,000 shs.4,920,000 ELEMENTS OF TAXATION NOTES- BY NDYABANAWE JACKSON (LECTURER)

ELEMENTS OF TAXATION

Exceeding shs.4,920,000

Shs.702,000 plus 30% of the amount by which chargeable income exceeds shs.4,920,000

(c) Monthly non-resident individual tax rates

Chargeable income

 

Rate of tax

Not exceeding shs.130,000

 

Shs.23,500 plus 20% of the amount by which chargeable income exceeds shs.235,000

Exceeding

shs.235,000

but

not

exceeding

Shs. 23,500 plus 30% of the amount by which chargeable income exceeds shs.410,000

shs.410,000

Computation of tax on income from employment

Example 1.

mr. ounda is a resident employee with Bananda investments, a resident tax paying company and he works as a general manager and the year ended 31 st December 2001 the following transpired;

(a)

Basic salary shs.500,000

(b)

Entertainment allowances shs.100,000 per month

(c)

Accommodation :rent shs.6,000,000 p.a paid by the company to the landlord.

(d)

He drives a prado (cost 20 million) for both private and official use. It is estimated that 100 days in a year are for private use errands.

(e)

The school fees for his children are met by Bananda High School, which is a sister company to Bananda investments. The amount involved is shs.3,000,000 p.a

(f)

In December 2001, oundo was given 2 air tickets for himself and wife for 5 day private holiday in south Africa .the air tickets cost the amount shs.5,000,000 . he also received leave pay of shs.1,000,000

(g)

The company pays shs.100,000 life insurance premium per month on his behalf.

(h)

Ounda is covered by the company’s medical insurance scheme where the company pays shs.500,000 p.a to the insurance company on his behalf.

shs.500,000 p.a to the insurance company on his behalf. ELEMENTS OF TAXATION NOTES- BY NDYABANAWE JACKSON
shs.500,000 p.a to the insurance company on his behalf. ELEMENTS OF TAXATION NOTES- BY NDYABANAWE JACKSON

ELEMENTS OF TAXATION

(i)

Under the company’s employee share acquisition scheme, Ounda was given an option to acquire 1,000 shares on 1 st January 2001 when price was shs.1000 per share.

He paid shs.10,000 for the option but did not exercise the option but ( pay for the shares) until 30 th December 2001 when the value of the shares was shs.1,200. He paid shs.1,000,000 for 1000 shares offered to him.

(j)

During the year ,the company sent Ounda up-country for 10 days to surpervise some company projects. He was given shs.2,000,000 estimated to cover the cost of travel, accommodation and meals. Required Compute Ounda’s taxable income and tax liability for the year ended 31 st December

2001.

Example 2.

Evalyne is the resident individual employed by mukwano industry. The following were terms of her employment during the year ended 31 st june 2014.

Basic salary per month

900,000

Medical allowance per year

600,000

Hardship allowance per month

50,000

Top up allowance

200,000

Entertainment allowance per month

60,000

Additional information

1. He was provided with a motor vehicle of the company on 1 st January 2013, he used it for his personal journeys on Sundays only and the value of the vehicle was shs. 18,000,000 at the time he received it.

2. The company provided meals worth1200,000 to Evalyne during the year.

3. ¼ of these was provided to his visitors at work place.

4. The company refunds his medical bills of 800,000 but he hard actually incurred only

500,000.

bills of 800,000 but he hard actually incurred only 500,000. ELEMENTS OF TAXATION NOTES- BY NDYABANAWE
bills of 800,000 but he hard actually incurred only 500,000. ELEMENTS OF TAXATION NOTES- BY NDYABANAWE

ELEMENTS OF TAXATION

5.

The company paid his children school fees at kampala parents school of shs.660,000

6.

The company gave him a loan of shs.3,000,000 at 1% interest on 1 st January 2013 and Bank of Uganda’s rate was 13%.

7.

The company paid his medical insurance premiums to National Insurance Co-operation of shs.1,300,000

8.

He stayed in the company house which could fetch shs.250,000 per month in the open market. Required

Compute Evalyne’s annual taxable income and tax liability (PAYE) for the year ending

31

st December 2014.

Example 2. Komujuni is a resident individual employed by KK investment ltd as an accountant for 2014. His appointment letter read as follows. Basic salary per month 340,000

Hardship allowance per year

245,000

Being around allowance per year

200,000

Entertainment allowance 400,000 Top up allowance per month 250,000

Private allowance

per month

50,0000

Private benefit per month 50,000

Transport allowance per month

200,000

Medical allowance 24,000

Life insurance premium per year

452,000

Medical expenses per month 129,000 Additional information

(a)

The company pays his monthly insurance premium worth 250,000

(b)

On January 2004, she obtained a loan from the employer of 16,000,000 paying interest of 3% statutory rate is 12%.

(c)

She resides in a company house whose market value per month is 450,000. He pays only 125,000 per month.

(d)

The company meets her utility expense per month worth 125,500

company meets her utility expense per month worth 125,500 ELEMENTS OF TAXATION NOTES- BY NDYABANAWE JACKSON
company meets her utility expense per month worth 125,500 ELEMENTS OF TAXATION NOTES- BY NDYABANAWE JACKSON

ELEMENTS OF TAXATION

(e)

She is entitled to domestic assistants allowance of 250,000

(f)

She receives 9900 per month as special duty allowance.

(g)

She drives a company car with a cost of 42,000,000 only on weekends for private purposes and other days for official duty. He pays only 4000 per month for the benefit.

Required

Compute her monthly taxable employment income and tax liability(PAYE).

Example 4.

Muzungu is a European electrical engineer specializing in installation of turbines. He was contracted to install turbines at the recently commissioned owen falls extension power station in Uganda and was paid for his professional services as follows.

shs

Air ticket

3,000,000

Hotel accommodation Sheraton hotel

2,000,000

Amount remitted to his home country account

10,000,000

Required

Compute the income tax liability of Muzungu payable in Uganda.

the income tax liability of Muzungu payable in Uganda. ELEMENTS OF TAXATION NOTES- BY NDYABANAWE JACKSON
the income tax liability of Muzungu payable in Uganda. ELEMENTS OF TAXATION NOTES- BY NDYABANAWE JACKSON

ELEMENTS OF TAXATION

VALUE ADDED TAX (VAT)

VAT is an indirect tax that is a tax levied on the production and consumption of goods and services. It is administered by the tax authorities , but most of the work of collecting tax falls on the VAT registered business, which hand the tax they collect over to the tax authorities.

Value added tax was introduced in Uganda with effect from 1 st july 1996 to replace sales tax and commercial transaction levy (CTL) . it is believed that VAT was to close the loopholes within the sales tax.

VAT is paid by any person purchasing a commodity on which it is reliable for payment, that is it is paid to the supplier of the commodity and the supplier remits it to URA.

VAT is only collected by those registered to collect it and such people are taxable persons or registered suppliers.

VAT charged by the registered supplier is called out put tax VAT charged on purchase is called in put tax.

REASONNS FOR INTRODUCING VAT IN UGANDA

To broaden the tax base so that more government revenue can be generated. VAT is the base tax revenue earner for the government since it is got at each and every stage of production.

VAT was introduced to replace sales tax and CTL in order to improve and simplify the sytem of tax administration and collection.

It was introduced in order to improve the contribution of the tax revenue to growth domestic product (GDP).

of the tax revenue to growth domestic product (GDP). ELEMENTS OF TAXATION NOTES- BY NDYABANAWE JACKSON
of the tax revenue to growth domestic product (GDP). ELEMENTS OF TAXATION NOTES- BY NDYABANAWE JACKSON

ELEMENTS OF TAXATION

VAT is neutral tax and therefore less harmful to economic growth. The majority of the tax payers do not notice when paying tax.

VAT was introduced to improve the tax administration and reduce the cost associated with the collection of sales tax and commercial transaction levy. This is because VAT is self policy.

VAT is based on the ability to pay approach and therefore those who cannot pay can postpone the consumption of such commodity.

VAT was seen as cheaper than the sum of two taxes it replaced . sales tax ranged between 15% and 25% while CTL was 15% compared to a standard rate of VAT which is currently 18%.

VAT was also introduced because it is difficult to evade. If the firm understates its out puts, it will be caught by the disclosures of the firms buying in puts from it.

VAT was also introduced in order to encourage exports because there is no VAT on exports.

TERMS USED IN VAT

Taxable supplies.

These are goods and services which are reliable for tax.

Standard rate commodities.

These are commodities on which VAT is payable at a given rate and for Uganda, the rate is

18%.

Zero rated commodities.

These are goods or services where VAT is charged at a rate of zero (0%) and the trader does not charge VAT on the goods his is suppling.

Exempt commodities.

A person dealing in exempt supplies does not pay any VAT and still can not cliam any VAT paid on in puts.

Tax invoice.

still can not cliam any VAT paid on in puts. Tax invoice. ELEMENTS OF TAXATION NOTES-
still can not cliam any VAT paid on in puts. Tax invoice. ELEMENTS OF TAXATION NOTES-

ELEMENTS OF TAXATION

This is a document which shows specified details of transactions. It is required to support a cliam

of refund on the in put tax paid.

TYPES OF VAT

Production VAT.

The value added by the firm is got by deducting in put except capital goods from out put.

Consumption VAT.

A value added by the firm is sales-all in puts including capital in puts purchased.

Wage type VAT.

To get the tax base, the frim deducts the net earns (profits and interest) from its capital . in practice this form of VAT is rare.

Income type Vat.

Depreciation of fixed investment is deducted from gross value of out put to arrive on value added.

Revision question.

1 (a) what are advantages and disadvantages of VAT in Uganda ? (16 marks)

(c) State any 4 limitations of VAT in Uganda.

ADVANTAGES OF VAT IN UGANDA

VAT encourages exports since no VAT is charged on exports and this makes export competitive

in the world.

VAT is relatively economical in terms of administration and collection , that is costs are low.

The use of VAT eliminates corruption in the tax system simply because the tax payer are the tax collectors.

system simply because the tax payer are the tax collectors. ELEMENTS OF TAXATION NOTES- BY NDYABANAWE
system simply because the tax payer are the tax collectors. ELEMENTS OF TAXATION NOTES- BY NDYABANAWE

ELEMENTS OF TAXATION

VAT helps in the distribution of the tax burden since it is paid at different stages of production.

It also widens the tax base that raises the government revenue/income because it is charged on a variety of commodities.

VAT avoid the problem of double taxation since charged on value that is added on each stage in the production process.

VAT promotes efficiency in business management because it involves proper maintenance of books of accounts.

Modernization of trade is increased / encouraged where books of account are properly kept since VAT is never successful under conditions of improper records.

DISADVANTAGES OF VAT IN UGANDA

With VAT, tax revenue is delayed especially when submitting to URA first because a registered sup bpliers first uses it for his/her business.

The tax burden falls more on small firms and poor consumers than big firms and high income consumers since there is a uniform rate of VAT (18%)

VAT is inflationary in nature. It raises the cost of production and as a result it increases the price of the final product.

VAT makes it difficult to access because of poor record keeping in Uganda .

VAT has also reduces savings investment and also affect employment and consumption due to a high rate of 18% that cannot be afforded by all.

VAT put the unregistered firms to a better position to out competitive registered firms since the un registered ones does not pay it.

In Uganda today the rate of VAT has made the government un popular.

Limitations of VAT

VAT has made the government un popular. Limitations of VAT ELEMENTS OF TAXATION NOTES- BY NDYABANAWE
VAT has made the government un popular. Limitations of VAT ELEMENTS OF TAXATION NOTES- BY NDYABANAWE

ELEMENTS OF TAXATION

The majority of the business community do not understand VAT and therefore is charged arbitrarily.

The rate of 18% is very high and this limits its popularity.

Many Ugandans are ignorant about exempt commodities, zero related commodities and standard related commodities.

VAT in Uganda has remained un urban tax since rural people does not register for VAT.

There is big informal sector where books of accounts are not easily accessed for VAT assessment.

PROCEDURE FOR VAT REGISTRATION

A trader applies for VAT registration and is registered under applicants for VAT registration.

The district officers or the head of VAT registration at head office will acknowledge the receipt

of the application form.

An inspection is madeby an office party to establish the validity of the information on the application form.

The inspecting officer makes a report about the nature of the business,location and address,status

of recording,keeping turn over etc.

The officer makes a recommendation whether or not to register for VAT giving reasons as appropriate.

A communication is made to the applicant indicating with his application for VAT registration

has been accepted or rejected.

If accepted to register for VAT, VAT registration certificate is issued to the applicant hence

becomes a member of VAT.

Revision questions

1(a) Define VAT and give 5 reasons for introducing VAT in Uganda (12 marks)

and give 5 reasons for introducing VAT in Uganda (12 marks) ELEMENTS OF TAXATION NOTES- BY
and give 5 reasons for introducing VAT in Uganda (12 marks) ELEMENTS OF TAXATION NOTES- BY

ELEMENTS OF TAXATION

(b) what are advantages and disadvantages of VAT (8 marks)

2(a) explain 4 types of VAT(8 marks)

(b) state any procedures for VAT registration in in Uganda(12 marks)

METHODS OF ACCOUNTING FOR VAT

There are two methods namely;

Cash basis method

Invoice basis method

Cash basis method

Cash basis accounting methods may be adopted for by taxable persons whose annual value of taxable supplies does not exceed 200,000.

There are two rates of VAT namely;

The standard rate (18%)

Zero rate (0%)

VAT is computed by applying the VAT rate on the taxable value, that is

VAT=R*TV

Where

R is VAT rate.

TV is taxable value.

Where we have VAT inclusive value, VAT is computed as follows .

= R/R+100*VAT inclusive value

Example 1.

as follows . = R/R+100*VAT inclusive value Example 1. ELEMENTS OF TAXATION NOTES- BY NDYABANAWE JACKSON
as follows . = R/R+100*VAT inclusive value Example 1. ELEMENTS OF TAXATION NOTES- BY NDYABANAWE JACKSON

ELEMENTS OF TAXATION

If we have a price of shs.250,000 paid for an item including VAT, then the amount of VAT can

be computed as follows.

Example 2.

A trader who is registered for VAT had the following transactions on the month of march 2006

and all amounts are exclusive of VAT.

 

Shs.

Duplicating paper

218,000

Fuel

970,000

Water

204,000

Telephone

312,000

Electricity

447,000

Rent

246,000

Receipts for the month of march .

Sales (standard rate)

1700,000

Required

Compute the traders VAT tax liability .

1700,000 Required Compute the traders VAT tax liability . ELEMENTS OF TAXATION NOTES- BY NDYABANAWE JACKSON
1700,000 Required Compute the traders VAT tax liability . ELEMENTS OF TAXATION NOTES- BY NDYABANAWE JACKSON