TAXATION

Tax refers to a compulsory charge levied by the government or any other

competent authority on persons (individuals, co-operation and other legal entities)
in order to finance government activities.
Or
It is a 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.

BASIC TERMS USED IN TAXATION

1. Tax base. This refers to any item or economic activity that is subject to tax. This
may include the following
 Income earned from economic activities like trade and manufacturing
 Consumption of goods which are subject to taxation
 Income earned from employment
 Property or assets like house, land and other investment
2. Tax liability. Refers to the total amount of money that a tax paying unit is
expected to pay within a given period of time.
3. Tax rate. This is applied on a tax base to derive a tax liability which is the
obligation the tax payer meets. The rate is represented as either a percentage or
a fixed or s specific value based on units
For instance if the income tax payable by companies is 30% and the export duty for
hides and skins is 0.25 dollars per kilogram

Illustrations

(a) If A is the tax base and B is the rate, then the product of A and B is the tax
liability ie A X B = Tax liability

(b) Assume a company had a taxable income of Uganda shs 200,000 and the tax
rate is 30% its tax liability will be
30
100
200,000 X
= shs 60,000

(c) Assume the company above export 150 kgs of hides and skins to Europe, its tax
liability will be

150 X 0.25 Dollars = 37.5 Dollars

N.B. if the tax base is to be paid in Ugandan currency, the ruling exchange rate will
be applied, like if a Dollar is equivalent to 1960 shs, then the amount payable in
Ugandan shillings would be shs 73,500
4. Tax compliance. This is the degree to which the tax paying community meets
the tax obligation as set up in appropriate legal and regulatory provisions.
5. Threshold of a tax. Refers to the amount of money or level of income from
which the tax liability begins.
6. Tax evasion. This is the deliberate refusal of a tax paying unit to pay its tax
obligations in order to reduce its tax liability.
7. Tax avoidance. This is where a tax payer escapes paying tax or pay less by
taking advantage of the Loopholes in the tax laws to reduce one’s tax liability.
8. Value Added Tax. Tax levied on consumption of goods and services and
imposed on value added at every stage in the chain of distribution and
production of goods and services
9. With Holding Tax. These taxes are a form of income tax deducted at source by
one entity upon making a payment to another entity
[Link] duty. This is imposed on the importation of specific goods with a view of
influencing their supply or consumption in the local market, it is normally
charged on socially undesirable and luxurious goods
[Link] of a tax. This is a situation where a tax paying unit usually a
firm artificially increase the value of its capital employed so as to reduce its tax
liability.
[Link] holiday. This refers to the period of non – tax payment given by the
government to reduce consumers spending and encourage investment
spending.

Average rate of tax = (𝑡𝑎𝑥 𝑎𝑚𝑜𝑢𝑛𝑡) X 100

13. Average rate of tax. This refers to the proportion of income that is paid out as

𝑡𝑜𝑡𝑎𝑙 i𝑛𝑐𝑜𝑚𝑒
tax.
[Link] rate of tax. Refers to the proportion of additional income that is paid
Marginal rate of tax = (𝑐ℎ𝑎𝑛g𝑒 i𝑛 𝑡𝑎𝑥
𝑐ℎ𝑎𝑛g𝑒 i𝑛 i𝑛𝑐𝑜𝑚𝑒 X 100
out.
15. Tax rebate. This refers to the tax reduction under special consideration
[Link] yield. This refers to the amount of tax revenue collected from a given
number of taxes
17. Hidden tax. This refers to the tax paid on purchase of goods and services and
usually included in the prices of commodities being bought or taxed.
18. Tax haven. This refers to a situation where a country deliberately offers low tax
rates or relaxed / liberal tax so as to attract as much foreign investment and
trade as possible.
19. Taxable income. This refers to income subjected to taxation
20. Taxable capacity. Refers to the ability of individuals to pay taxes imposed on
them without affecting his / her standard of living.
21. Forward shifting of a tax. This is when the money burden of the tax is shifted
by the tax payer to another party who buys the output being taxed. For example
a manufacturer may shift the burden to tax to the wholesaler who then shifts it
to the retailer and the retailer then shifts it to the final consumer.
22. Back ward shifting of a tax. This is when the official tax payer shifts the
money burden of a tax to the person from whom he buys. For instance a
producer using a given raw material may shift the money burden to the supplier
of such a raw material.
TYPES OF TAXES

There are two broad categories of taxes ie direct and indirect taxes

DIRECT TAXES

These are taxes levied on the incomes and property of individuals and business
entities, the burden of which is directly borne by the person paying it. Direct taxes
include the following

 Income tax. This is the tax levied on profits or income earned by an individual
or a business entity. It takes two forms ie personal income tax and
corporation tax
(i) Personal income tax. Is a tax that is levied on the income of an individual and
it’s normally a progressive tax

(ii) Corporation tax is a tax levied on corporation or company premises and its
normally proportional tax based on the net income of the company. The tax base
for income tax include profits from business, rent and royalties (money paid for
using one’s patent right or assets like land) from selling assets and income from
investments like shares, debentures and other securities and income from
employment

 Wealth tax. It is a tax levied on the accumulated wealth and savings of an

individual or business entity. It may be levied on shares, land and other
investment
 Capital gain tax. This is tax levied on profits received from the sale of capital
assets like sale of property, investment stock etc
 Estate duty. This is a duty levied on estates of deceased persons. It is levied
before or after the property in the estate is shared out to the different
beneficiaries as based on market value of the estate
 Gift tax. This is the tax on gifts or gratuitously acquired
MERITS OF DIRECT TAXES

 Direct taxes help in reducing income inequalities. This is because they are
progressive in nature where by the rich are taxed more than the poor e.g PAYE
 Direct taxes help in reducing inflation in the economy. This is because direct
taxes reduce the people’s disposal income and thereby reducing aggregate
demand for goods and services
 Direct taxes satisfy the principle of equity; this is because they put into
consideration the vertical and horizontal equity like progressive tax
 Direct taxes are certain, this means that tax payers are certain about the nature
of the next pay, when to pay and how much to pay
 Direct taxes are economical; this is because the cost of collecting the taxes is
generally known especially where taxes are deducted from the income or salary
of an individual
 Direct taxes are flexible; this means that they change according to the prevailing
conditions of the market thus satisfying the principle of elasticity
 Direct taxes are simple to understand and they encourage hard work. The tax
payers are encouraged to work hard in order to pay taxes levied on them.
DEMERITS OF DIRECT TAXES

 Direct taxes discourage savings and investments in the economy. This is

because the income that would have been saved is taken away in form of taxes
 They make the government unpopular. These taxes greatly affects the people’s
disposable income to which leads to low purchasing power and standards of
living of people
 Direct taxes are very easy to evade by the tax payers such taxes are less certain
as compared to indirect taxes
 They are not compressive in nature since they are levied on small section of
population. It is only those who earn income or own property that pays taxes
leading to less government revenue
 Direct taxes are not convenient to the tax payers. This is because they are
usually paid in lump sum and therefore the tax payer feels the burden more than
the tax payer for indirect tax
 Direct taxes are less flexible; this is because they cannot be adjusted urgently to
meet the prevailing conditions in the market or economy
 They are not economical. Direct taxes are in most cases collected by the tax
authorities and this involve employing many people to collect taxes
 Direct taxes lead to capital outflow, this is comes as a result of rich people who
tend to take out their capital to another countries where they are less paid
 Direct taxes discourage hard work since they are progressive in nature. The
more one earns the more he or she is taxed
 Direct taxes affect the performance of the enterprises. This is more so in case of
high corporation tax which takes away a bigger percentage of the profits of the
company
INDIRECT TAXES
These are taxes that are levied on goods and services paid by an individual or
business entity and shifted to the final consumer. These taxes are voluntary in that
sense you can only pay them if you opt to buy the goods or consume services which
are levied. The common types of indirect tax include
 Customs duty. This is levied on goods that cross national boarder point either as
imports into the country or exports leaving the country. The tax on imports is
referred to as import duty while tax on exports is referred to as export duty.
 Excise duty. This is a duty levied on the production or importation of specific
goods with a view to influence their consumption or supply in the market. The
technology here is to levy tax on socially undesirable and luxurious
 Specific tax. This is a fixed monetary tax per physical unit of good imported for
example shs 100,000 per tonne of maize flour.
 Octroi tax. This is a tax imposed on goods in transit through a given country.
 Sales tax. It is a tax levied as a percentage on goods or service sold.
 Value Added Tax (VAT). This is a tax levied on consumption of goods and
services. It is levied on the value added at very stage in a chain of production or
distribution of goods and services.
 Or
It is abroad based indirect tax on consumption, charged on value added to
“taxable” goods and services, at different stages on the chain of distribution ie
the more you buy, the more you pay. It is charged on both local products and
imports. It is not a cost to a producer or the distributor chain member and its full
impact is borne by the end consumer. It was first introduced in the European
Union in the 1970’s
It was introduced in Uganda with effect from 1 st July 1996. It replaced sales tax
and commercial transaction levy (CTL)
The governing law is the VAT Act (Cap 349)
Main Features of VAT
 Is abroad – based tax charged and collected at all stages in the chain of
distribution. I.e. its multi stage
 Is an indirect form of tax i.e. the one paying is the one who incurs the tax
burden
 It charged on expenditure (consumption) and not income
 Is charged on valued added
 It is ultimately borne by the final consumer
 Credit mechanism (VAT on inputs credited against taxes on output)
Illustration 1
Assuming that three are levels in the chain of production as follows
(a) Stage 1. Importation of goods with a taxable value of 10,000 shillings
(b) Stage II. Sale of goods by the importer to a retailer at shs 15,000
(c) Stage III. Sale of goods to a final consumer by the retailer at shs 25,000

Calculate the total VAT payable

Stage I. VAT will be charged on importation price
VAT Rate = 18%
VAT Payable = VAT Rate X initial cost
18% X 10,000 = shs 1,800
Stage II.
VAT payable = Valued added X VAT rate
Valued added = 15,000 – 10,000 = 5,000
Vat payable = 5,000 X 18 = shs 900
100

Stage III
VAT payable= Value Added X VAT Rate
Value added = 25,000 – 15,000
Vat payable = 10,000 X 18 = shs 1,800
100

N.B total VAT payable from the 3 stages is 4,500 shillings

From the above, it is clear that though Vat is collected from the three stages, the
one who bears the burden is the final consumer
Illustration 2
The following VAT exclusive transactions were availed to you by VAT registered
business in your town for the month of December 2016
I. Rachael bought goods worth shs 80,000,000
II. Rachael sold the same goods to Penrose for shs 90,000,000
III. Penrose sold the same goods to Deborah a retailer for shs 100,000,000
IV. Deborah sold the same goods to the final consumer for shs 120,000,000
Required
Using the VAT Rate of 18%
I. Compute for the entrepreneurs the VAT chargeable for the value added at
each stage
II. Advise Deborah on the gross value for her goods to the final consumer

Solution
Stage 1
VAT Payable = initial cost X VAT Rate
80,000,000 X 18
100 = 14,400,000 shillings

Stage 2
VAT Payable = Value Added X VAT Rate
Value added = (90,000,000 – 80,000,000) = 10,000,000 shillings
VAT Payable = 10,000,000 X 18 = shillings 1,800,000
100
Stage 3
VAT Payable = Value Added X VAT Rate
Value Added = (100,000,000 – 90,000,000) = 10,000,000 shillings
VAT Payable = 10,000,000 X 18 = 1,800,000 shillings
100
Stage 4
VAT Payable = value Added X VAT Rate
Value Added = (120,000,000 – 100,000,000) = 20,000,000
VAT Payable = 20,000,000 X 18 = 3,600,000 shillings
100

(ii) Gross sales Value = selling price X VAT chargeable

Shs 120,000,000 + 18 X 120,000,000
100
Gross value = 120,000,000 + 21,600,000 = shs 141,600,000

Deborah would be advised on the gross value as follows

 Deborah should include VAT chargeable in her selling price / determining her
selling price
 Deborah should have sold her goods to the final consumer at shs
141,600,000 inclusive of VAT

Trial question
The following VAT exclusive transactions were availed to you by VAT registered
businesses in your town for the month of May 2015,
(i) Masanso bought goods worth shs 60,000,000
(ii) Masanso sold the same goods to Kibooko for shs 88,000,000
(iii) Kibooko sold the same goods to Onzita a retailer for shs 96,000,000
(iv) Onzita sold goods to the final consumer for shs 120,000,000
Required
Assuming the VAT rate is 18%
(a) Compute for the entrepreneur VAT chargeable for value added at each stage
and advice Onzita on the gross sales value for his goods to the final consume
Stage 1
VAT = initial cost X VAT rate
VAT = 60,000,000 X 18
100
VAT = shs 10,800,000

Stage 2
VAT = value added X VAT rate
Valued added = 88,000,000- 60,000,000 = 28,000,000
VAT = 28,000,000 X 18
100
VAT = shs 5,040,000

Stage 3
VAT = valued added X VAT rate
Valued added = 96,000,000 – 88,000,000 = 8,000,000
VAT = 8,000,000 X 18
100
VAT = shs 1,440,000

Stage 4
VAT = value added X VAT rate
Valued added = 120,000,000 – 96,000,000 = 24,000,000
VAT = 24,000,000 X 18
100
VAT = shs 4,320,000

Total VAT = 21,600,000

Onzita should sale his goods to the final consumer including the VAT of shs
21,600,000. Therefore he should sell his goods at shs 141,600,000 to final
consumer

MERITS OF INDIRECT TAXES

 They are difficult to avoid and evade since they are contained in the prices of
goods and services consumers buy
 They can be used to strengthen link with other countries or groups of countries
through international trade. This is done by levying import duties
discriminatively on products from other countries
 They help in income redistribution of selectively levied for example levying high
taxes on products consumed by the rich and using the money to help the poor
 Indirect taxes are comprehensive and act as a more reliable source of
government revenue
 Indirect taxes are elastic / flexible i.e the rate can be adjusted upwards
downwards so as to achieve a particular government goal
 Indirect taxes are convenient to the tax payers since they are paid when a
consumer spends on goods and services
 Indirect taxes can be used to check on consumption of harmful goods such as
cigarettes
 They can be used to protect the infant industries from competition with well-
established producers through increasing import duties on similar foreign products
 Indirect taxes can be used as a government tools in correcting the balance of
payment deficit in an economy. This can be achieved through increasing of
import duties
 Indirect taxes encourage hard working and initiative since they are not directly
linked to earnings
 Indirect taxes are less felt and resented since they are usually paid as part of
prices of products bought
 Indirect taxes are more economical in collection. They are collected by suppliers
of goods / services and then passed onto the government
DEMERITS OF INDIRECT TAXES
 Indirect taxes are regressive in nature since the poor are more burdened than
the rich for example taxes levied on consumable products will be paid by both
the rich and the poor
 Indirect taxes are inflationary since they raise prices of commodities which in
turn may cause increase in cost of product (cost push inflation)
 Indirect taxes may discourage production especially if imposed on products
which have a very high elasticity of demand ie the high tax will greatly reduce
demand as well as production and employment levels
 Indirect taxes may not be impartial especially when imposed on selected
commodities which are only consumed by the few people for example taxes on
cigarettes, liquor etc
 Some indirect taxes are difficult to understand for example VAT
 Certain indirect taxes such as import duties encourage smuggling of goods into
the country
 Indirect taxes do not promote civic responsibility among the tax payers. This is
because the tax payers are not aware that any time they pay for goods/services,
they are paying the taxes.
Non- tax revenue is the revenue obtained by the government from sources other
than tax.
Non – tax sources of revenue include
 Licenses
 Market dues
 Fine imposed on those who do not obey the law of the country
 Grants and gifts
 Sale of government property
 Profit from government undertakings like mines, national parks, forests etc
 Deficit financing. Deficit means an excess of public expenditure over public
revenue. This excess may be met by borrowings from the market, borrowings
from abroad, by the central bank creating currency.
REASONS WHY GOVERNMENT IMPOSE / LEVIES TAXES
 Taxes are imposed on imports so as to protect domestic / infant industries from
competition by cheap and dumped products from outside countries
 It is a source of government revenue used to finance public activities like roads,
Hospitals, schools etc
 Taxes are used to reduce income inequalities ie the rich are taxed highly while
the poor are subsidized instead
 To recover the community wealth which individuals have obtained not as a result
of their effort but as a result of efforts of other persons or the community. Death
duty is charged for this purpose
 Taxes are imposed to check on the inflation rate by reducing the purchasing
power of the people. This helps to stabilize the economy through stable prices in
the economy.
 To restrict the consumption of certain products to a substantial amount like
taxes on alcohol drinks, cigarettes etc
 To ensure higher employment levels, taxes are used by the government to
create domestic industries hence creating employment opportunities for the
citizens
 To control monopoly powers like lump sum and specific taxes, that are imposed
on monopoly firms so as to reduce on their abnormal profits hence controlling
their monopoly powers
 To improve the country’s balance of payment position. The taxes may be
imposed on imports to make goods expensive to the importing country thus
saving foreign exchange that was formerly spent
 To encourage forced savings. Taxes may be imposed to firms or individuals to
save for the future e.g NSSF contribution
 To reduce dependence of foreign aid. Taxes may be imposed by the government
to reduce dependency on other economies
 To encourage the responsibility of citizens over public utilities or hard work.
Taxes may be charged on individuals or firms in order to encourage hard work
and in turn are provided with social services
Benefits of paying taxes to business owners.
 It enables the proprietor to run business activities without fear of being closed
down by the government.
 It attracts government support and sympathy in times of need for example VAT
refunds.
 it creates a good reputation / image of the business towards suppliers,
customers, financiers etc
 Government uses tax revenue to provide free education and medical care which
benefits the business.
 Government uses tax revenue to provide infrastructures ie roads used by the
business owners.
 Government uses tax revenue to provide social security which benefits business
for example creating police force and paying for its services.
 Government uses tax revenue to provide national security that protects the
country from external enemies and terrorists which benefits business.
 Government uses tax revenue to pay its workers hence increasing their
purchasing power to buy business goods and services.
 Taxes help to create a sense of social responsibility among business owners
hence promoting hard work.
 Import duties paid by the business help to protect domestic market for local
businesses.
CHARACTERISTICS OF A GOOD TAX SYSTEM
 It should be comprehensive. This means that a good tax system should cover
many economic activities of the economy as possible and should be of many
types by this a lot of revenue would be collected
 It should pose a minimum burden on the tax payers otherwise tax payers will
evade or resist it
 It should be simple to understand by both the tax payer and tax collectors. This
enables them to follow the procedure of payment and tax administration
 It should be optimal i.e. maximum balance should be maintained between tax
revenue, service rendered through public expenditure and the work efforts forth
coming from tax payers in order to increase output
 It should be efficient i.e. not involved in high administrative costs in terms of
efforts, time and financial resources
 It should consider the principle of double taxation ie a tax payer should never be
taxed more than once on a tax base
 It should be neutral i.e. the tax system should have minimum distortion e.g. on
consumption relative prices, production and investment
 It should be politically acceptable to tax payers so as to avoid conflicts between
the government and the tax authority or the tax payer
PRINCIPLES OF TAXATION
Taxation is aimed at ensuring that every tax payer contributes the fair share to a
cost of government activities. Over the years, various principles have been
developed as guidelines in tax administration. These are

Simplicity: The type of tax and the method of assessment as well as collection
must be simple enough to be understood by both the tax payers and the tax
collectors, complicated taxes lead to disputes, delays, avoidance and high costs of
collection in terms of time and resources

Equity or fairness: This means that the tax should be levied fairly so that the
distribution of tax burden is equitable. This can be applied in two different ways
 Horizontal equity. This is where persons who earn equal income of have the
same wealth should pay the same tax
 Vertical equity ie where persons who are in different positions in terms of wealth
or income levels should be treated differently ie persons who are better off than
others bear proportionately heavier burden, the higher the salary earned, the
higher the rate and tax paid. For instance if we had employee A and B.
Employee (A) Employee (B)
Salary shs 10,000,000 shs 15,000,000
Tax rate 10% 20%
Tax payable shs 1,000,000 shs 10,000,000

Convenience: convenience implies that tax should be levied at the time and the
manner which is most convenient for the contributor to pay it. For instance, if the
tax on agricultural land is collected in installments after the crop is harvested, it will
be very convenient for agriculturalists to pay it. Similarly, property tax, house tax
and income tax should be realized at the time when the tax payer is expected to
receive it ( at the end of the month)
Certainty: A good tax system is one that ensures that all parties involved are clear
of their rights and obligations. Tax should be certain in terms of time, place, manner
of payment and the amount to be paid. Unclear tax systems discourage
investments as they are perceived to be unfair, which reduce work effort and
encourage corruption

Economical / cheapness: This principle aims at ensuring that the administrative

cost of clearing taxes is kept as low as possible. Adam smith suggested that costs
involved in collecting taxes should not exceed 5% of the tax revenue. Likewise the
cost of compliance to the tax payer should be as low as possible

Ability to pay: The tax payers should be able to pay the tax assessed on them
without much difficulty, ie the payment of tax should not hinder the operation of the
business entities or affect the standard of living of the individuals

Elasticity: The tax should change directly in the tax base. If the tax base increases,
the tax yield should also increase. This helps the government to raise more revenue
where necessary

Flexibility: A good tax system should be able to accommodate changes in the

social economic environmental needs or the country needs. URA has always
changed its tax system where a need is felt

Productivity: The tax should raise enough revenue to sustain its expenditure. The
Tax should raise enough revenue to sustain its expenditure. The revenue collected
Should be adequate to sustain the government. A tax which brings large revenue is
Better than a number of taxes which bring small revenue

TAX COMPLIANCE.
This is the degree to which the tax paying community meets the tax obligation as
set up in appropriate legal and regulatory provisions.

TAX EVASION.
This is the deliberate refusal of a tax paying unit to pay its tax obligations in order to
reduce its tax liability.
Forms / ways/ examples of tax evasion
 smuggling ie failure to declare entry or exit of goods
 under declaration of income ie business income or personal income
 giving lower value of the goods / services imported or exported by the business
 refusal of the business to register for VAT
 overstating of business expenses so as to declare less profits
 Capitalization of tax so as to pay less on business profits
 Bribing tax collectors
 Hiding from tax collectors
Causes / reasons for tax evasion
 Progressive taxation where the tax rate increase with level of income.
 high taxes imposed by the government
 double taxation especially on companies and the share holders
 ignorance of the public about the importance of paying taxes to the country
 corrupt government characterized by misuse and embezzlement of tax funds
 Weak tax administration system characterized by loopholes in tax collection.
 Discontentment about provision of services by the government from taxes paid
Steps to be taken by the business to minimize tax evasion / increase the
level of tax compliance.
 advocating for fair tax rates through business associations
 Obtaining tax education by attending workshops on taxes.
 Resisting corrupt tax officers to avoid bribe and pay little or zero tax.
 Filling monthly tax returns to the relevant tax authorities.
 Maintaining proper business records.
 Ensuring prompt payment of taxes to the tax authorities.
Consequences of tax evasion to the business.
 Temporally or permanent closure of the business hence loss of business income.
 Denial of government support or standing for election offices where tax
compliance is considered a pre – requisite.
 Penalties for non – payment of taxes.
 Forceful payment of arrears from the business profits or entrepreneurs’ income.
 Bad public image of the business especially when closed.
 Loss of smuggled goods that are confiscated by tax authorities.
 Imprisonment over non – paid tax obligation.
TAX AVOIDANCE
This is where a tax payer escapes paying tax or pay less by taking advantage of the
Loopholes in the tax laws, it involves taking advantages of the loopholes in the law
to reduce one’s tax liability.
Though tax avoidance is legal, it is undesirable act that usually leads to non-
compliance. Tax avoidance and tax evasion actions results into losses of tax
revenue and thus undesirable to the authorities
Smuggling
Is an activity which involves the importation or exportation of goods by wrong or
unlawful means with the objective of evading taxes. Smuggling is an illegal method
of conducting business
Forms of smuggling
 Under declaration of goods
 Under valuation of goods
 Misclassification of goods
 Mis-declaration of country of origin
 Short landing transit / re-export of goods
 Falsification of goods
 Dumping
 Document counterfeiting
 Avoid customs entry points and concealment of dutiable goods
LEVELS OF TAX COMPLIANCE
The level of tax compliance depends on the tax payer’s attitude and knowledge,
there are four levels
 Tax payers who are fully complainant and willing to fulfill their obligations
voluntarily
 Tax payers who reluctantly feel obliged to be compliant ie those are the ones
who know that non-compliant would be expensive and accordingly
 Tax payers who show slight resistance to compliance and this more often arises
from lack of knowledge.
 Tax payers who are non-compliant and exhibit resistance to meeting their
obligations. This category includes tax payers who take pride in falling to pay
their tax.
FACTORS INFLUENCING TAX COMPLIANCE
 The extent to which the tax is equitable. An inequitable tax system discourages
tax compliance while equitable tax system encourages tax compliance.
 The extent to which tax laws and regulatory framework is simple and easy to
understand. Complicated tax laws make compliance costs high while easy tax
laws promote tax compliance.
 The level of consistency and fairness in application of tax laws and rules. Laws
and rules that are applied consistently and fairly promote tax compliance while
those which are inconsistent lead to non-compliance.
 The extent to which the tax burden is spread to all potential payers. Fairly
distributed tax burden lead to tax compliance while un fair distribution of tax
burden makes compliance difficult.
 The tax rate. Higher tax rate makes taxation costly and compel tax payers to
avoid payment of tax while low tax rate will encourage tax compliance.
 The quality of management by the tax payers. Through record keeping, where
managers are clear and ethical, it leads to compliance. On the other hand
unethical behaviors of the managers limit tax compliance.
 Popularity of the government and quality of governance. Unpopular governance
associated with corruption discourages tax compliance. On the other hand
government’s popularity and good governance encourage people to pay taxes.
 The quality of tax administration. High levels of professionism, integrity and
customer care exhibited by the tax collectors encourage high levels of tax
compliance since tax payers will build trust in the tax authorities. On the other
hand poor tax administration leads to non-compliance.
Factors limiting tax compliance in Uganda
 Inconvenient tax system where the place, time and season in which tax dues are
collected at times do not favour tax payers.
 An inequitable tax system discourages tax compliance as tax payers tend to feel
that the distribution of tax burden is unfair.
 High taxes rates that make taxation costly and force tax payers to avoid
payment of tax.
 Complicated tax laws and long administrative process make compliance
costs high, lead to disputes, delays, avoidance hence leading to non –
compliance.
 Unethical business management practices like capitalization of tax so as to pay
less on business profits.
 double taxation especially on companies and the share holders
 ignorance of the public about the importance of paying taxes to the country
 corrupt government characterized by misuse and embezzlement of tax funds
 Weak tax administration system characterized by loopholes in tax collection.
 Poor methods of handling defaulters
 Poor service delivery by the government to justify tax payment
 Low levels of income among tax payers
 Political instabilities
Measures that can be undertaken to encourage tax compliance in Uganda.
 Providing tax payers and their authorized agents with clear and timely
information about taxes.
 Ensuring that fair treatment is extended unconditionally to all tax payers.
 Responding efficiently to every tax payer’s inquiry, compliant or request.
 explaining the grounds for every tax assessment and providing proper technical
advice to the tax payers
 Assisting new tax payers to register for tax e.g. VAT registration.
 Educating the tax payers and the general community about their tax obligations
and rights.
 Reducing corruption and embezzlement of tax revenue.
 Ensuring that taxes are simple to be understood by the tax collectors and tax
payers.
 Sensitizing the masses on the role of taxation.
 Using trained personnel to assess and collect taxes.
 Imposing penalties to tax evaders for non-payment.
 Strengthening tax implementation laws.

Penalties for non-tax compliance should include;

 Forceful payment of all the tax arrears/ imposition of fines or penalty on tax
defaulters.
 Temporally or permanent closure of the business that regularly evade taxes.
 Confusion of the goods being smuggled to evade taxes.
 Publishing of tax defaulters once identified.
 Denial of government support to non-compliant tax payers.
 Denial of public/government contracts and tenders once tax payer is blacklisted.
 Strict monitoring of the tax defaulters’ business.
 Denial of any relevant tax refunds that ought to be paid by tax authority to a
non-tax compliant tax payers.
 Imprisonment of tax defaulters after court ruling.
 Taking over a tax defaulters business
 Inclusion of tax defaulters in the shame list

Procedures for tax compliance.

 Registration of the tax payers with Uganda Revenue Authority.
 Obtaining the tax identification number (TIN)
 Preparation of tax records i.e income statement, tax returns
 Getting assessed for tax by the tax authorities.
 Submitting timely tax returns.
 Payment of taxes.
 Receiving feedback from the tax authority i.e by SMS, tax certificates
NB. The steps must be in chronological order.
Mark activities if programme is used.

TAXABLE CAPACITY
Taxable capacity refers to the ability of an individual to pay the tax that is
imposed on him/her and remain with enough money to enjoy the standard of living
he/she is accustomed to.

The amount of tax burden which the citizens of a country are ready to bear is not
rigidly fixed. It can increase with a change in the distribution of wealth, the size of
population, method of taxation and other factors.

Absolute and relative taxable capacity

Absolute taxable capacity. Refers to the maximum tax paying capacity of the
economy or country as a whole or a region, or an industry or a group of individuals

Relative taxable capacity. Refers to the comparison between the absolute

taxable capacity of different taxpayers or industries or groups of tax payers

FACTORS INFLUENCING THE TAXABLE CAPACITY OF A COUNTRY

Types of taxes levied. People are more willing to pay taxes imposed on goods
from which they acquire direct benefit, the fairer the taxes the higher the taxable
capacity.

Size of the taxable income, the greater determines the taxable capacity, the higher
the taxable income, the higher the taxable capacity and the lower the taxable income,
the lower the taxable capacity.

Income distribution in the country, taxable capacity is high where there is income
inequality as the rich tax payers are heavily taxed while the poor have little income
to be taxed

The level of voluntary compliance to tax laws, Taxable capacity becomes high
where there is a high level of voluntary compliance and tax evasions and avoidance
would be controlled

Efficiency of tax administrators, taxable capacity is high where the concerned

authorities are efficiency in their duties e.g in educating tax payers, collection etc

The level of employment in a country, a person will only be in position to pay taxes
when he is earning, taxable capacity will be high where people have enough
employment opportunities where they can acquire income

The level of a tax base in the country, the higher the tax base the higher the
taxable capacity and vice versa

Character of taxation. If taxes are devised wisely, then they give less resentment
from people and bring forth a large yield.
Tax revenue performance in Uganda.

Since an adequate volume of government revenue is essential for public

expenditure and economic growths, the ratio of tax revenue to GDP had been used
regularly to measure and judge the success of a country’s fiscal management.
Generally, the tax revenue to GDP ratio in developed countries has been high
mainly above 30% and the less developed countries, low. The average sub-Saharan
Africa ratio has been estimated at about 18-20%, while Uganda’s has been
stagnating at about 12-13% which is below the sub – Saharan average.

The reasons for the poor revenue performance in Uganda

 A large informal sector where there is wide spread tax evasion

 Poor taxpaying culture that reduces tax compliance levels
 Low levels of income due to unemployment and underemployment with many
people falling below the threshold and any further taxes on them would
worsen their disposal incomes.
 Poor record keeping that poses a challenge in determining the correct taxes
payable.
 High illiteracy rates that affect understandability of tax laws, record keeping
and tax procedures.
 Limited applications of technology due to poor infrastructure like low
coverage of reliable internet.
 Political interference and poor tax laws that do not enable expansion of the
tax base.
 The poor state of social services that discourages people from paying taxes.
 Skills deficiencies of staff and lack of adequate training
 Corruption of both tax payers and tax officers that creates leakages.
Suggested solutions for improving revenue performance in Uganda

 Exploiting information technology tools with automation of the tax collection

system- e- tax, Asycuda World and others.
 Partnering with banks to ease tax collection exercise
 Tax education programs to increase awareness and tax compliance.
 Training tax officers and paying them well so as to minimize corruption.
 Widening the tax base by expanding the tax register by bringing in players in
informal sector.
 Scrutinizing transactions of multinational corporations for instance through
anti- avoidance measures like transfer pricing guidelines
 Tax administration reforms to increase efficiency.
For administration purposes, taxes are mainly categorized in two broad tax heads
namely;

International taxes (customs and excise) This includes

 Customs duty and excise duties on imports

 VAT on imports
  Withholding tax on imports
 Trade regulations
Domestic taxes. The deals with

 Income tax
 Rental tax
 Withholding tax on supply of good and services
 VAT on local goods and services
 Local excise duty
 Gaming tax
FACTORS HINDERING TAX ADMINISTRATION

 Slow decision making resulting from the bureaucratic tendency in the tax
collection department
 Low morale partly due to low remuneration and declining professionalism and
corruption among tax collectors
 Inadequate support to the tax administrators regarding infrastructure, logistics
and other sources
 Poor standards of business management and record keeping among the
business community
 High degree of tax evasion through smuggling, forgeries , under declaration and
other forms of indiscipline
 Low levels of professionalism and acceptance of corruption as a normal way of
conducting public affairs
OBLIGATION OF A TAX PAYER

 File returns in prescribed format and on time

 Pay taxes on due date
 Keep proper records of accounting
 Display registration certificate in business premises
 Communicate changes in registration details e.g. name, address, nature of
the business etc
 A tax payer is required to register voluntarily with URA
 Disclosure / declaration of information which ever URA needs to know
RIGHTS OF A TAX PAYER

 Right to be attended to URA as regards to appeal and objections

 Right to prior notice by URA on any matter like inspection
 Right to claim for refunds by URA within the prescribed time limit
 Right to be attended to by URA in regard to processing returns, customs entries
and other documents

Individual income tax. This tax is imposed on the chargeable income of an

individual. Chargeable income is derived from gross income

Gross income: there are three sources of income under the Income Tax Act.
 i) Business income
ii) Employment income
iii) Property income
Business income. Is any income derived by a person from carrying on a business
and also includes a gain on disposal of a business asset.

Employment income is income earned by an employee from any employment

and includes wages, salary, leave pay, payment in lieu of leave, overtime pay,
commission, gratuity, bonus or the amount of any travelling, entertainment,
utilities, cost of living, housing, medical or other allowance and the value of benefits
granted.

Property income includes any dividends, interests, annuity, natural resources

payments, rents, royalties and any other payments derived by a person from the
provision, use, or exploitation of property.

The sum of the income from all the three sources above is referred to as gross
income. This excludes income that is exempt from tax.

INCOME TAX

Is direct tax imposed on a person’s income at specific rates for a given period of
time. It is charged on every person who has chargeable income for each year of
income.

Chargeable income of a person for a year of income is the gross income of the
person for the year of income less total allowable deductions.

Example 1: chargeable income

Chemong limited is a printing company operating in karamoja dealing in general

printing. The company registered gross revenue of shs 150 million for the year
ended 31st October 2015. Expenditure incurred in deriving that revenue amount to
shs 90
million.

Required

Compute chargeable income

Solution
Sales 150,000,000
Expenditure 90,000,000
Chargeable income 60,000,000

Gross income (sec 17)

Gross income of a person for a year of income is the total amount of Business income,
employment income and property income, other than exempt income.

Example 2
IVAN is a resident individual. He earned the following income during the year ended
2015.
Property income shs 120,000,000
Employment income shs 80,000,000
Business income from his whole sale shop in Kawanda shs 250,000,000
Required

Compute Ivan’s gross income

Solution
Property income 120,000,000
Employment income 80,000,000
Business income 250,000,000
Gross income 450,000,000

Question 1

Ms Kirabo Susan a resident of Lungala earned income from different sources in the
year 2008 as indicated below.

Business income shs 1,000,000, employment income shs 2,400,000, property

income shs 500,000, In addition, he incurred expenses totaling to 1,200,000 shs to
earn the income, shs 150,000 is exempted from tax. Determine Ms Kirabo’s gross
income and her chargeable income
Solution
(i) Gross Income = Total Income – Tax exempted income
But Total income = Business income + employment income + property income
1,000,000 + 2,400,000 + 500,000

Gross income = 3,900,000 – 150,000 = shs 3,750,000

(ii) Chargeable income = Gross Income – Expense

3,750,000 - 1,200,000

Chargeable income = shs 2,550,000

Question 2
Marvin earned income from different sources for the year 2013
Business income shs 2,000,000
Employment income shs 4,800,000
Property income shs 100,000
In addition, he incurred expenses and losses amounting to shs 2,400,000. A total of
shs 300,000 out of the income is tax exempt
Required: determine Marvin’s Gross Income and Chargeable income
(i) Gross Income = Total Income – Tax exempted income

But Total income = Business income + employment income + property

income Shs 2,000,000 + shs 4,800,000
+ shs 100,000
Total income = shs 6,900,000
Gross Income = shs 6,900,000 – shs 300,000
Gross income = shs 6,600,000

(ii) Chargeable income = Gross Income – Expense

Shs 6,600,000 – shs 2,400,000
Chargeable income = shs 4,200,000
 EMPLOYEES RELIEF / EXEMPT EMPLOYMENT INCOME
This refers to gains or income that is not included in chargeable income and
therefore not taxable.
 Pension; pension is tax exempt
 Medical expenses or discharge
 Life insurance
 Meals and refreshment ( if provided in equal terms to all employees)
 NSSF contributions
 Services of security guards
 Allowances paid to a member of parliament except salary
 Terminal benefit for a worker who has provided services for a period of ten
years
 Non cash benefit whose value is below 10,000
Taxable benefits for a tax payer
 Housing / accommodation allowance
 Transport allowance
 Medical allowance
 Holiday allowance / leave allowance
 Entertainment allowance
 Training allowance
 Bonus pay
 Interest benefit
 Motor vehicle benefit
 Loan benefit
 House keeper allowance
 Etc ( make more research)

Computation of chargeable income

Employment income Shs Tax Treatment
Basic salary xxx Taxable
Add other allowance
Bonus pay xxx Taxable
Loan benefit xxx Taxable
Transport allowance xxx Taxable
Medical allowance xxx Taxable
Chargeable employment income xxx

Individual TAX RATES

Income is charged tax in relation to a defined year of income where a tax rate of an
individual is based on a year , however, in the case of PAYE, the rate
administratively reduced to monthly rates
Chargeable (monthly) income

Chargeable Tax rate (shs)

monthly Income
(shs)
0 – 235,000 Nil
235,001 – 335,000 10% of the amount by which chargeable income exceeds shs
235,000
335,001 – 410,000 Shs 10,000 plus 20% of the amount by which chargeable
income exceeds shs 335,000
410,000 and above (A)Shs 25,000 plus 30% of the amount by which chargeable
income exceeds shs 410,000
(B) where the chargeable income of an individual exceeds
shs 10,000,000 an additional 10% is charged on the amount
by which chargeable income exceeds shs 10,000,000

Chargeable (annual) income

Chargeable Tax rate (shs)

annual Income
(shs)
Not exceeding shs 2,820,000 Nil
Exceeding shs 2,820,000 but not 10% of the amount by which
exceeding shs 4,020,000 chargeable income exceeds shs
2,820,000
Exceeding shs 4,020,000 but not Shs 120,000 plus 20% of the amount
exceeding shs 4,920,000 by which chargeable income exceeds
shs 4,020,000
Exceeding shs 4,920,000 (A)Shs 300,000 plus 30% of the amount
by which chargeable income exceeds
shs 4,920,000
(B) where the chargeable income of an
individual exceeds shs 120,000,000 an
additional 10% is charged on the
amount by which chargeable income
exceeds shs 120,000,000
Non- resident individuals

The rate for non- resident individuals does not include tax free allowance.

Chargeable annual Income (shs) Tax rate (shs)

Not exceeding shs 4,020,000 10%
Exceeding shs 4,020,000 but not Shs 402,000 plus 20% of the amounts
exceeding shs 4,920,000 greater than shs 4,020,000
Exceeding shs 4,920,000 (A)Shs 582,000 plus 30% of the amount
by which chargeable income exceeds
shs 4,920,000
(B) where the chargeable income of an
individual exceeds shs 120,000,000 an
additional 10% is charged on the
amount by which chargeable income
exceeds shs 120,000,000
 Chargeable monthly Income (shs) Tax rate (shs)
Not exceeding shs 335,000 10%
Exceeding shs 335,000 but not Shs 335,000 plus 20% of the amounts
exceeding shs 410,000 greater than shs 335,000
Exceeding shs 410,000 (A)Shs 48,500 plus 30% of the amount
by which chargeable income
exceeds
shs 410,000
(B) where the chargeable income of an
individual exceeds shs 10,000,000 an
additional 10% is charged on the
amount by which chargeable income
exceeds shs 10,000,000
It should be noted that non- resident employees are not entitled to the threshold (
shs 235,000); so at every amount under rates of tax, add shs 23,500 or ( 10% of
235,000)

Question 1

Suppose Ms Nkinzi Penrose’s monthly income is shs 350,000. How much does
she pay as PAYE?
Tax payable = 10,000 + 20% of excess of shs 335,000
20
100
10,000 + x (350,000 – 335,000)
Tax payable = 10,000 + 0.2 X 15,000
Tax payable = 10,000 + 3,000
Tax payable = shs 13,000

Question 2

Mr. Kimuli Fred is earning shs 2,000,000. How much does he pay as PAYE?
Tax payable = 25,000 + 30 X (2,000,000 – 410,000)
100
Tax payable = 25,000 + 477,000
Tax payable = shs 502,000

Question 3

Ms. Mulungi Anna works with Mega Standards Super Market as an Accountant and
earns a monthly salary of shs 16,000,000. How much does shs pay as PAYE.

(i) Tax payable = shs 25,000 + 30% 0f shs 410,000 Plus 10% of excess of
10,000,000
Tax payable = shs 25,000 + 30 X (16,000,000 – 410,000)
100
Tax payable = shs 25,000 + 4,677,000
Tax payable = shs 4,702,000

(ii) 10% (16,000,000 – 10,000,000) = shs 600,000

Tax payable is 4,702,000 + 6 00,000
Tax payable = shs 5,302,000
Question 4

Ms. Nakimuli Patricia, a Ugandan working with BMK publishers LTD earns shs
350,000. Calculate her PAYE
Tax payable = 10,000 + 20% of (350,000 – 335,000)
Tax payable = shs 10,000 + 3,000
Tax payable = shs 13,000

Question 5

Acul Ocolo is employed as a security guard in Karacen (U) Ltd. He earns a monthly
salary of Shs 225,000.

Required: Is Karacen (U) Ltd obliged to deduct PAYE tax from Acul Ocolo?

Solution

No, because Acul Ocolo’s monthly salary is less than the threshold so his salary
does not attract PAYE.

Acul Ocolo is an employee of company Y. He earns the following monthly

income: a salary of Shs 300,000; travelling allowance of Shs 50,000 and
medical allowance of Shs 30,000, NSSF shs 30,000, life insurance
premium for shs 80,000.

Compute his monthly PAYE tax liability.

Solution
Employment Income:
Salary 300,000
Travelling allowance 50,000
Medical allowance 30,000
Total 380,000

Use rates in the third bracket, i.e.

Step 1
Shs 380,000 - 335,000...............................................................................................45,000
Step 2
20% × 45,000................................................................................9,000
Step 3
9,000 + 10,000 ..............................................................................19,000
PAYE........................................................................................................................19,000
Note. NSSF and life insurance premium are not included since they are exempt.
Therefore not important when computing chargeable income.
 VAT MECHANISM

Output Tax

This is the VAT a taxable person charges upon making taxable supplies i.e. tax
charged upon selling taxable goods and services.

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 local sources or
imported.

This involves three items ie

i) VAT on purchases and expenses which is called input Tax

ii) VAT on sales which is called output Tax
iii) VAT liability which is output Tax – input Tax
iv) VAT refund which is input tax – output tax
NB. Where output Tax exceeds input Tax, the tax payer pays the difference as VAT
to URA, but where the input tax exceeds the output tax, the tax payer claims the
difference as VAT Refund from URA

Question 1

Ms. Nabuuma Oliver is a reknown retailer in Kikubo; she mainly deals in trading
sugar from Kakira Sugar Uganda Ltd. In the month of February 2016 she bought 100
bags at shs 5,000,000 and resold all of them at shs 7,500,000

Calculate her input tax, output tax and VAT liability

(i) Input tax = 18 X 5,000,000 = shs 900,000
100
(ii) Output tax = 18 X 7,500,000 = shs 1,350,000
100
(i) Tax liability = Output Tax – Input Tax
1,350,000 – 900,000
Tax liability = shs 450,000

Question 2

In January Mzee Ssenkubuge bought the same quantity of sugar, at the same price,
but due to credit crunch, he only sold 50 bags at a total of shs 3,750,000. Calculate
his estimated VAT refund payable as at January 2016

Solution
18
100
Input Tax = X 5,000,000 = shs 900,000
18
100
Output Tax = X 3,750,000 = shs 675,000
VAT Refund = input Tax – Output Tax
Shs 900,000 – shs 675,000
VAT Refund = shs 225,000
Question 3
In the month of July 2004. John Maria had VAT exclusive transactions with VAT
registered enterprises as follow
i) Purchase 28,000,000
ii) Sales 3,400,000
Calculate his Vat paid to URA
i) Input Tax = Taxable value on purchases X VAT rate
= 28,000,000 X 18
100
Input tax = shs 5,040,000

ii) Output Tax = Taxable value on sales X VAT rate

= 3,400,000 X 18
100
Output Tax = shs 612,000
VAT refund = input Tax – Output Tax
5,040,000 – 612,000
VAT refund = shs 4,428,000
Circumstances under which VAT is refundable
 When input is greater than output tax. For instance if for a given period the
input tax is shs 10,000,000 and the output tax is shs 4,000,000, then the
difference of shs 6,000,000 would be refunded to the tax payer.
 When a taxpayer pays more than what was supposed to be paid, the excess
is refunded. For example if one is supposed to pay shs 5,000,000 and it is
discovered that the true tax was supposed to be shs 3,000,000, then the
excess of shs 2,000,000 is refunded.

 When there is a proven bad debt. A bad debt for VAT refund considers the
following
 Should have been outstanding for a period of at-least two years
 There should be proof that all necessary steps were taken to recover
the money but no avail.
 When one loses the stock through fire, burglary and any other proven
methods.

NOTE; WHEN THE VAT EXCLUSIVE

Example
Allan a wholesaler trader in Nakasero market made his purchases and sales
during the month of September 2009 and it is as follows
No. Items Purchases (VAT Sales (VAT
exclusive) exclusive)
1. 150 bags of sugar 7,500,000 9,000,000
2. 10 boxes of soap 500,000 6,000,000
3. 300 carton of cooking oil 40,000,000 50,000,000
4. 100 bags of salt 2,000,0000 3,000,000
Total 54,500,000 68,000,000

Required
Calculate Allan’s VAT liability
VAT liability = Output – Input Tax
 Output Tax = Taxable Value on sale X VAT Rate
68,000,000 X 18
100
Output Tax = shs 12,240,000
Input Tax = Taxable value of purchases X VAT Rate
54,500,000 X 18
100
Input Tax = shs 9,810,000

VAT liability = Output Tax – Input Tax

= 9,810,000 – 12,240,000
VAT liability = shs 2,430,000

b) When VAT Inclusive given by the formula:

r
r + 100 Where r is the VAT rate.

Illustration
18
18+100
If the rate of tax (r) = 18% then the tax fraction = =
18
118
. For example if the consideration (VAT inclusive) is Shs. 20,000, then VAT
= 20,000 × 18/118 = Shs. 3,051.

Allan who deals in steel and hard ware his transaction during the month of
August 2009
No Items Purchases (VAT inclusive) Sales (VAT inclusive)
1 Ms plate 50,000,000 70,000,000
2 Iron bar 70,000,000 130,000,000
3 Angle bar 30,000,000 50,000,000
y4 Hollow Section 80,000,000 150,000,000
Total 230,000,000 400,000,000

VAT inclusive = 𝑉𝐴𝑇 𝑅𝐴𝑇𝐸 𝑥 𝑉𝐴𝑇 i𝑛𝑐𝑙𝑢𝑠i𝑣𝑒 𝑣𝑎𝑙𝑢𝑒

Calculate the Vat liability

𝑉𝐴𝑇+100

X 230,000,000 = shs 35,084,746

18
118
Inputs =

18
118X 400,000,000 = shs 61,016,949
Output =
VAT liability = output – input
61,016,949 – 35,084,746
Shs 25,932,203
Computation of VAT Payable or
Refundable VAT = output tax – input tax
Where output tax is greater than input tax, the taxpayer pays the difference. Where
input tax is greater than the output tax, the taxpayer claims the difference.

More examples
Use the information below to determine the tax rates for the following tax payers

Tax payer Income Tax rates Tax (liability)

Bwesigye 1,000,000 150,000
Innocent 800,000 80,000
 Bossa 600,000 48,000
Ddungu 400,000 20,000

X 100
𝑡𝑎𝑥
𝑙i𝑎𝑏i𝑙𝑡𝑦
𝑡𝑎𝑥𝑎𝑏𝑙𝑒 i𝑛𝑐𝑜𝑚𝑒
Tax rate =
X 100 = 15% X 100 = 10%
150,000 80,000
1,000,000
Bwesigye =
800,000
Innocent =

48,000
X 100 = 8% 20,000
X 100 = 5%
400,000
Ddungu =
600,000
Bossa =

(b) Onzita earned the following incomes in shillings from the different sources
for the year 2014.
Property income 800,000
Business income 3,000,000
Employment income 4,380,000
Expenses and losses for the year 3,000,000
Income that is exempt was 1,180,000
 Annual chargeable income Tax rate (shs)
(shs)
Not exceeding shs 2,820,000 Zero
Exceeding shs 2,820,000 but not 10% of the amount by which chargeable
exceeding shs 4,020,000 income exceeds shs 2,820,000
Exceeding 4,020,000 but not Shs 120,000 + 20% of the amount by which
exceeding shs 4,920,000 chargeable income exceeds shs 4,020,000
Exceeding shs 4,920,000 Shs 30,000 + 30% of the amount by which
chargeable income exceeds shs 4,920,000
Calculate Onzita’s
i. Gross income
Gross income = income from all sources – Tax exempt
= (property income + Business Income + employment income)
=shs (800,000 + 3,000,000 + 4,380,000) – shs 1,180,000
= shs 8,180,000 – shs 1,180,000
= Gross income = shs 7,000,000

ii. Chargeable income

Chargeable income = Gross income – total losses and expenses
= shs 7,000,000 – shs 3,000,000 = shs 4,000,000

iii. Income tax he paid

Income Tax = 10% (4,000,000 – 2,820,000)
Income tax = 10% of 1,180,000
Income Tax = shs 118,000

Sample Questions
1 a) Explain the principles of a good tax system
b) Why are taxes imposed on firms and individuals in Uganda?
2 a) Distinguish between direct and indirect taxes
b) Explain the challenges facing taxation in Uganda
3 a) Explain characteristics of a good tax system
b) Give merits and demerits of direct taxes
4 a) Distinguish between tax compliance and tax incidence
b) Discuss the advantages and disadvantages of tax
compliance 5 a) Describe the factors that affect tax compliance
in Uganda
b) What measures that can be undertaken to encourage the citizens of a country
to pay tax
6 a) Distinguish between impact of a tax and tax burden
b) Discuss possible solutions to the problems of taxation in Uganda
c) kiyenge ltd is a retailer dealing in domestic appliances. In June 2014 he
purchased appliances worth shs 7,500,000 exclusive of VAT. The company sold the
same at shs 11,000,000 also exclusive of VAT.

Required
a) Determine the value Added
b) Determine the VAT payable or claimable.

d) Basajjakambwe enterprises purchased stationary worth shs 600,000 and incurred

rent of shs 2,600,000 in May 2010. He made sales of shs 790,000 in the same
month. All figures were VAT inclusive.

Required

Determine VAT payable / claimable.

Question

Muwonge a cotton ginner sold 10 bales of cotton to Nyanza textile at shs

10,000,000. Nyanza textiles produced bed sheets out of the cotton and sold them to
Merowoma ltd (a wholesaler) at shs 17,500,000. Merowoma ltd sold to Meme Joy (a
retailer) at shs 22,500,000. Meme Joy sold all the bed sheets to various customers
and the total sales were shs 30,000,000.

N.B: all figures are VAT exclusive and the VAT rate applicable is 18%.

Required.
a) Determine the total VAT payable through the process / trial.
b) Compare your answer with the VAT Meme joy (the retailer) collects from her
customers.
Question

KAMWESIGYE is a trader in Ntinda. His business is VAT registered. The following

transactions appeared in her books for the Months of January 2016.

No. PRODUCTS PURCHASES (Shs )VAT SALES (Shs) VAT

Exclusive
1 Apples 4,000,000 9,000,000
2 Pineapples 4,500,000 6,500,000
3 Pawpaw 9,000,000 14,000,000
4 Mangoes 8,000,000 12,000,000
5 Oranges 12,000,000 18,000,000
37,500,000 59,500,000
a) Use 18% as VAT rate. Calculate
i. VAT paid by KAMWESIGYE on each type of product.
ii. Compute VAT paid to URA.
 b) NAMUSOKE is an employee of an NGO and she earns Shs 8,000,000 per
year. The company uses monthly pay tax rates below to calculate PAYE
deductions.
MONTHLY CHARGEABLE INCOME RATE OF TAX
(Shs)
0 – 235,000 NIL
235,000 – 335,000 10% of the amount by which
chargeable income exceeds
Shs 235,000
335,000 – 410,000 Shs 10,000 plus 20% of the amount
by which chargeable income
exceeds Shs 335,000
410,000 – 10,000,000 i. Shs 25,000 plus 30% of the
amount by which chargeable
income exceeds shs
410,000
ii. Above Shs 10,000,000,
charge additional 10%

Calculate NAMUSOKE’s monthly PAYE deductions.

c) BUKIRWA owns a house in Kamwokya town where she earns rental income of
Shs 28,000,000 a year.
-Use 20% as provision for expenses and losses of the total rental income
-Use Shs 1,560,000 as Tax Threshold
-Use 20% as rental income tax rate.
Calculate.
i. Chargeable rental income.
ii. Rental income tax.
iii. Net rental income.

d) State two reasons for non- tax compliance in Uganda today.

Other Trial numbers

1. Assuming Adyebo imports soda from South Africa at a CIF value US $ 1,000
attracting 25% import duty, 60% excise duty, VAT of 18% and withholding tax
6%. The current exchange rate is Ug. Shs 1747.64. compute the ;
i) import duty
ii) excise duty
iii) Value Added Tax
iv) withholding Tax
v) Total tax payable
2. Ms. Kato a trader in Kikubo – Kampala imports Polythene bags from China. The
CIF value for the goods is US $ 5,000. Polythene bags attracting an import duty
of 25%, Excise duty 50%, VAT 18% and withholding Tax 6%.
Required
What would be taxes payable for the polythene bags given that the exchange
rate at the time of importation is Ug. Shs 1765 to 1 US Dollar?
3. Malcolm industries are manufacturers of drinking Straws. They import an item
called high density polythene as their raw material. The CIF value for raw
material
 is US $ 20,000. High density polythene is 0% import duty, 18% VAT and exempted
from withholding tax. The exchange rate is shs 1765 to 1 US Dollar.
Required
What are taxes on the raw materials?
4. (a) Distinguish between impact of a tax and tax burden
b) Discuss possible solutions to the problems of taxation in Uganda
c) Lucy has a flat in Kampala city, where she earns shs 72,000,000 as a
rental income a year. Given that the rental tax rate is 20% provision
for 20% and threshold is shs 1,560,000. Calculate (i) Lucy’s rental
tax (ii) Net rental income
5. You are an entrepreneur employing five workers who are entitled to allowances.
List four examples of taxable employment allowances for your employees
b) In the month of July 2014, Joseph Mali had VAT exclusive transactions with
VAT registered enterprises as follows:
Purchases shs 1,800,000
Sales shs 2,400,000
Calculate:
i) VAT paid to Uganda Revenue Authority by Joseph Mali (use 18% as VAT
rate)
ii) Total purchase price (VAT inclusive) paid by Joseph Mali
C) Sem, an employee earns a gross salary of shs 3,600,000 per year. The
employer uses the monthly PAYE tax rate below to calculate PAYE deductions
Chargeable Tax rate
monthly Income
1 Not exceeding shs 235,000 Nil
2 Exceeding shs 235,000 but 10% of the amount by which
not exceeding shs 410,000 chargeable income exceeds shs
235,000
3 Exceeding shs 335,000 but Shs 10,000 plus 20% of the amount
not exceeding shs 410,000 by which chargeable income exceeds
shs 335,000
4 Exceeding shs 410,000 Shs 25,000 plus 30% of the amount
by which chargeable income
exceeds shs 410,000

Required:
Calculate the annual amount of PAYE deductions for Sem
a) Explain three negative effects of taxation on the business

6. There is a concern about tax evasion among entrepreneurs in your district. As a

tax compliant entrepreneur, the district trade officer has requested you to
address entrepreneurs
i) Give the meaning of tax evasion
ii) Mention three examples of tax evasion practiced by entrepreneurs in
your country

b) The following VAT exclusive transactions were availed to you by VAT

registered businesses in your community for the month of July 2014
 Musa bought goods worth shs 40,000,000
 Musa sold the same goods to Suba shs 58,000,000
 Suba sold the same goods to Mweso the retailer for shs 70,000,000
 Mweso sold the goods to the final consumer for shs 84,000,000
Required:
Using the VAT rate of 18%
(i) Compute for the entrepreneurs the VAT chargeable for
the value added at each stage
(ii) Advise Mweso on the gross sales value for his goods to the
consumer
7. (a) Differentiate between Direct tax and Indirect Tax
(b) Give two examples of each in 7 (a) above
(c) State two advantages of Value Added Tax (VAT)
(d) Jose is a Ugandan citizenship employed in Uganda. He
earns shs 800,000 as gross pay per month.
Required
Use the income tax details below to calculate the Pay As You Earn
(PAYE) chargeable to Jose per month
Chargeable Tax rate
monthly Income
Not exceeding shs 235,000 Nil
Exceeding shs 235,000 but 10% of the amount by which
not exceeding shs 410,000 chargeable income exceeds shs
235,000
Exceeding shs 335,000 but Shs 10,000 plus 20% of the amount
not exceeding shs 410,000 by which chargeable income
exceeds shs 335,000
Exceeding shs 410,000 Shs 25,000 plus 30% of the amount
by which chargeable income
exceeds
shs 410,000
(d) In the month of May 2016, Charles Odoi bought goods for shs
6,400,000 (VAT Exclusive). He sold these goods for shs 10,800,000
(VAT Exclusive). These transactions were carried out with VAT
registered business.
Required; Using 18% as VAT rate, calculate VAT;
i) paid by Charles Odoi on purchase
ii) received by Charles Odoi on sales
iii) paid by Charles Odoi to Uganda revenue Authority
Question
Several traders in your community have been complaining about URA
and its taxes. URA has organized a tax education workshop and has
invited you as an expert in taxation to speak to them.
(a) (i) Develop a root cause analysis to solve the
rampant tax evasion in the community.
(iii) Explain to the traders the consequences of tax evasion.
(b) Explain to the traders the difference between
(i) VAT inclusive and VAT exclusive transactions
(ii) VAT refund and VAT liability
(c) Kikaawa an importer of motor vehicles , imported a tractor
from Japan at a CIF value of 3,000 US dollars, attracting an
import duty of 25% , excise duty is 40%, VAT is 18% and
withholding Tax is 6%
Calculate;
(i) Customs value
(ii) Excise duty
(iii) Value Added tax (VAT payable)
(iv) Total amount of tax payable by Kikaawa
Note: the exchange rate is shs 3,500 per US dollar
(1 US dollar = 3,500 shillings)