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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.
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.
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.
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.
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.
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.
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
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.
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.
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.
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.
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.
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.
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
INCOME TAX
Introduction
This is tax imposed on a person’s 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 partnership becomes a resident person when one of the partners within the partnership
is a resident person during the year of income.
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.
Meaning of employment
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.
(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.
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.
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.
C is the number of days in the year of income (365 days as per income tax Act)
D is any payment made by the employee to qualify for the benefit.
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.
Example 1.
Paul took furniture loan of shs. 10,000,000 on 1st October,2001 at an interest rate of 5% . the
statutory interest rate as at 1st july 2001 was 15%.
Section 19(2) of the income tax excludes the following from employment income (from being
taxed)
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.
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 31st December 2001 the following transpired;
(i) Under the company’s employee share acquisition scheme, Ounda was given an option to
acquire 1,000 shares on 1st 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 30th 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 31st December
2001.
Example 2.
Evalyne is the resident individual employed by mukwano industry. The following were terms of
her employment during the year ended 31st june 2014.
Additional information
1. He was provided with a motor vehicle of the company on 1st 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.
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 1st 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
31st 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
Required
Example 4.
shs
Required
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 1st 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.
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).
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.
Taxable supplies.
These are goods and services which are reliable for tax.
These are commodities on which VAT is payable at a given rate and for Uganda, the rate is
18%.
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.
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.
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.
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)
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.
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.
Modernization of trade is increased / encouraged where books of account are properly kept since
VAT is never successful under conditions of improper records.
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 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
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.
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)
Cash basis accounting methods may be adopted for by taxable persons whose annual value of
taxable supplies does not exceed 200,000.
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.
Example 1.
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.
Fuel 970,000
Water 204,000
Telephone 312,000
Electricity 447,000
Rent 246,000
Required