SUB-MODULE 13: TAXATION

A tax is a compulsory charge levied by the government or any other competent

authority on persons or on business (individuals, corporations or other legal
entities) in order to finance government activities.
Taxes are a general obligation and are not paid in exchange for a specific benefit.
Therefore, there is no direct relationship between the tax paid and the benefits in
terms of public services received by the persons who have paid tax. The amount of
money paid by any business depends on the volume of its operations, profits or
nature of the business.
It may also depend on the items brought into or out of the country businesses.
Taxation is the process through which governments obtain money from eligible
Persons, companies and other entities by application of the law. 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. Taxes are usually collected by a
government agency. In Uganda, this role is performed by Uganda Revenue Authority
URA.
CHARACTERISTICS / ATTRIBUTES/ QUALITIES OF A GOOD TAXATION SYSTEM
1. It should be comprehensive that is, taxes should be levied on as many tax bases as
possible and should be of many types. It should therefore cover different people earning
incomes in different ways.
2. It should impose a minimum tax burden on the tax payer that is, a tax payer should
be able to pay the tax with the leas t burden.
3. A good taxation system should be efficient that is, cheap in its assessment,
administration and collection. Therefore, the tax imposed should be easily administered
without involving high administrative costs in terms of time, efforts and financial
resources.
4. A good taxation system should be optimal that is, a maximum balance should be
maintained between tax revenue services rendered through public expenditure and the
work effort forth coming from tax payers in order to increase output.
5. A good taxation system should consider the principle of double taxation that is, should
not imposed on the tax payer on the same base more than once
6. It should promote equity, social and economic justice. It should be progressive in
order to distribute the tax burden equitably (the higher the income the higher the tax
charged and the lower the income the lower the tax charged).
7. A good taxation system should channel and direct resources to priority areas.
8. It should help to achieve national objectives. It should promote economic stability,
economic growth (inject revenue in areas which are productive and should expand
incomes and employment).
9. It should be convenient that is, collected at such a time when the tax payer is able to
pay (when he/ s he has the money to pay).
10. It should be buoyant/ flexible that is, the revenue should change with changes in
national income of the economy or the rates should adjust according to the economic
changes.
11. Neutrality. the tax system should have minimum distortion for example on
consumption, relative prices, production and investment.
12. It should yield government revenue to economy.
13. It should recognize basic rights of the tax payers, that is, tax payers should not be
harassed, inconvenienced and exploited by the tax authority.
PRINCIPLES OF TAXATION / CANONS OF TAXATION
These refer to rules (guidelines) that must be observed when assessing, collecting and
administering taxes. These include the following;
1. Principle of Simplicity. The type of tax and the method of assessment and collection
must be simple enough to be understood by both the tax payers and collectors.
2. Principle of Equity/fairness. The tax should be levied fairly so that the distribution of
tax burden is equitable. It implies that tax should be Levied on citizens on the basis of
equality
3. Principle of Convenience. This means that the place, period and seasons in which
tax dues are collected should be convenient to the tax payer, for instance, Pay as You
Earn (PAYE) is deducted from an employee’s employment income by the employer at
the point of paying the salary.
4. Principle of Certainty. A good tax system is one that ensures that all parties
involved are clear of their rights and obligations. The tax should be certain in terms of
time, place, manner of payment and amount to be paid.
5. Principle of Economy. This principle aims to ensure that the administrative cost of
collecting taxes is kept as low as possible both to the collection agent and tax payer.
According to Adam Smith, the cost of collection and administration of taxes to the
collecting agent should not exceed 5% of the tax revenue.
6. Ability to pay. Tax payers should be able to pay the tax assessed on them without
much difficulty. The payment of tax should not hinder business operations or affect the
financial status of an individual.
7. Principle of Elasticity. A good tax should change directly with the change in the tax
base. If the tax base increases, the tax yield should also increase. This helps
government to raise more revenue.
8. Principle of Flexibility. A good tax system should be able to accommodate changes
in the social economic environmental needs of a country. The government should be
able to increase or decrease tax rates depending on its objectives, needs and policies,
for instance if the government objective is to reduce unemployment, the tax rates should
be reduced. However, if the government objective is to fairly reduce income inequalities,
the income taxes should be made progressive.
9. Principle of productivity. This states that taxes should yield revenue to the
government and at the same time government should be able to calculate correctly in
advance how tax yield will be and at what rate tax revenue would flow in (aids
budgeting).
10. Principle of comprehensiveness/Canon of diversity. This principle states that the
tax system should cover as many aspects of the economy as possible, that is, it should
cover all people who earn income in different ways such as salaries, wages, profits,
rent, accumulated incomes and so on.
11. Principle of impartiality. This states that the tax system should not discriminate
among tax payers, for instance, indirect taxes.
12. Principle of optimality. This states that there should be minimum social costs due
to taxation but maximum social benefits are in form of increased government
expenditure while social costs take the form of reduced government expenditure.
13. Principle of neutrality. This states that taxes should not have adverse effects on
the economic activities, that is, taxes should minimize the distortion of relative prices to
check the possibility of poor resource allocation.
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 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
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. 30% is the tax
rate.
3. Tax Liability. This refers to the total amount of money that a tax paying unit is
expected to pay within a given period of time.
Illustrations
(a) If A is the tax base and B is the rate, then the product of A and B is the tax liability
That is A X B = Tax liability
(b) Assume a company had a taxable income of Ugx 200,000 and the tax rate is 30% its
tax liability will be
30
200,000 X = Ugx 60,000
100
(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
4. Taxable income. This refers to the income liable to taxation.
5. Taxable capacity. This refers to the extent to which an individual can pay taxes
imposed on him/her without affecting his/her standard of living.
To a business enterprise, it refers to the extent to which the firm can pay the taxes
imposed on it without affecting its productivity/output.
To the government, it refers to the proportion of the country’s gross domestic product
(GDP) in form of taxes without causing social, economic and political effects on the
economy.
6. Threshold of a tax. This refers to the amount of money or level of income from which
the tax liability (tax obligation) begins.
7. Impact of a tax. This refers to the firm, person or transaction on which tax is
imposed.
OR
It refers to the first point of contact of a tax and the person on which the tax is officially
levied.
OR
It refers to first resting place of a tax.
8. Incidence of a tax. It refers to the person or firm that ultimately/finally pays the tax
that has been imposed.
OR
It refers to the burden that tax payment creates on that last person supposed to meet
the cost of tax.
OR
It refers to the last resting place of a tax.
9. Average rate of tax. This refers to the proportion of income that is paid out as tax.
Tax amount
Average rate of tax (ART) = x 100%
Tax income
9. Marginal rate of tax. It refers to the proportion of additional income that is paid out
as tax.
Change in tax
Therefore, Marginal rate of tax (MRT) = x 100%
Change in income

10. Tax yield. This refers to the total amount of tax revenue collected from a given
number of taxes.
11. Tax evasion. This refers to the deliberate refusal by a tax paying unit to pay taxes
imposed on it.
12. Tax avoidance. This refers to a situation where the tax payer takes advantage of
the loopholes/weaknesses in the tax system so as to pay as little tax as possible or to
pay no tax at all.
13. Tax holiday. This refers to the period of non-tax payment given by the government
to reduce consumers’ spending and encourage investment spending.

14. Forward shifting of a tax. This is when the money burden of the tax is shifted by
the tax payer to another party that buys the output being taxed, for instance, a
manufacturer may shift the burden of tax to the wholesaler who then shifts to the retailer
and the retailer finally shifts it to the consumers.
15. Backward shifting of a tax. This is when a tax paying unit/official tax payer shifts
the money burden of 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.
16. Tax rebate. This refers to the tax reduction under special considerations.
17. Capitalization of a tax. This is a situation where a tax paying unit usually a firm
officially increases the value of capital employed so as to reduce tax liability.
18. 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.
19. Tax haven. This refers to a situation where a country deliberately offers low tax
rates or relaxed/liberal tax laws so as to attract as much foreign investment and trade as
possible.
20. Tax registration. This is the process of getting eligible persons recorded on the
taxpayers’ register. When a person is registered as a taxpayer, a Tax Identification
Number is given.
21. E-Taxation. This is a system of tax administration using online technology that is;
the use of internet to register, assess and pay taxes.
IMPORTANCE / ROLES OF TAXATION IN A COUNTRY
1. Taxes are major sources of government revenue to finance the provision of social
services and other development services/projects.
2. Taxes are used by the government to protect infant industries so that they can be
able to compete with well-established industries.
3. Taxes help to improve on the balance of payment position, for instance, the
government can increase import duties on certain commodities to discourage their
importation.
4. Taxes are used to discourage consumption of harmful products like drugs, spirits,
cosmetics, that is. This can be done by imposing high tariffs on such commodities.
5. Taxes are used to reduce income inequalities in an economy, for instance,
progressive taxes which help to reduce income gap between the poor and the rich.
6. They help to check on the rate of inflation in an economy thus economic stability
through stable prices in the economy. This is achieved by levying high taxes on people’s
incomes.
7. Taxes guide the level and direction of both private and public economic activities in
the country, for instance, government can encourage or discourage an activity in the
country by lowering or raising taxes respectively.
8. Taxes are used by the government to control monopoly power. This is done through
imposing high taxes which increase the cost of production and this may face the
monopolist to run out of the business.
9. Taxes are used by the government to discourage exportation of certain commodities
so as to leave more for the local market through high export duties.
10. Taxation is used to combat unemployment, that is, a low tax rate may be imposed
on firms that use labour techniques of production and this guarantees employment.
Investment incentives like subsidies, tax holidays may be offered to increase investment
levels so as to increase employment opportunities.
11. Taxes are used by the government to promote individual responsibility and self-
reliance, that is, individuals are compelled to work hard and pay taxes to avoid shame
and embarrassment.
12. Taxes are used by the government to reduce dependence on other economies in
terms of foreign aid, that is, it enables the country to become self-reliant and self-
sustaining. It again reduces the need for borrowing.
REASONS WHY GOVERNMENT IMPOSES/LEVIES TAXES (OBJ ECTIVES OR
RATIONALE OR REASONS OR JUS TIFICATIONS OR PURPOSES OR NEEDS FOR
TAXES)
1. To raise revenue. Revenue is obtained through the taxes imposed on various tax
paying units and it can be used to finance development activities such as improving
infrastructure like roads, schools, hospitals, paying salary to civil servants, and so on.
2. To discourage consumption of certain goods which the government considers to be
harmful to the society. When the government imposes high taxes on such goods, they
become expensive thus discouraging people from consuming them, for instance, drugs,
cosmetics, and so on.
3. To protect home/infant industries from foreign competing producers. This can be done
by imposing heavy import duties on imports which make them expensive to the
importing countries.
4. To regulate economic activities in the country. Taxes can be used to guide the level
and direction of both private and public economic activities in the country, for instance,
the government can encourage or discourage an activity by lowering and raising taxes
respectively.
5. To improve on the country’s balance of payment position. This can be done by
imposing high taxes on imports which makes them expensive to the importing country
thus saving the foreign exchange that was originally spent.
6. To control inflation. When high taxes are imposed on the income of individuals, this
disposable income become low/lower. This reduces their purchasing power thus
reducing the rate at which prices are increasing.
7. To discourage the exportation of certain products. When high export duties are
imposed on exports, less of such commodities will be exported to other countries thus
leaving more for the local market.
8. To reduce dependence on foreign aid. Taxes can be used by the government to
reduce dependence on other economies, that is, it enables the country tobecome self-
reliant. This is because a variety of taxes improves on government revenue, reduce
budgetary deficits and therefore reduce theneed for borrowing.
9. To reduce/correct income inequalities. Taxes can be used to fairly redistribute income
among people especially where the tax system is progressive in nature.
10. To combat unemployment. Taxation may be used to solve the unemployment
problem in an economy, that is, a low tax rate may be imposed on firms that use labour
techniques of production and this guarantees employment. Also, investment incentives
like subsidies, tax holidays may be offered to increase investment levels so as to
increase employment opportunities.
11. To promote individual responsibility. Taxes can be used by the government to
promote individual responsibility and self-reliance, that is, individuals can be compelled
to work hard and pay taxes to avoid shame and embarrassment.
12. To control monopoly. Taxes may be imposed by the government so as to regulate
monopoly power. This is done through imposing high taxes which increase the cost of
production and this may force a monopolist to run out of the business.
TYPES OF TAXES
There are two broad categories of taxes that is 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
includes 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 and so on.
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
1. 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 like PAYE
2. 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
3. Direct taxes satisfy the principle of equity; this is because they put into consideration
the vertical and horizontal equity like progressive tax
4. 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
5. 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
6. Direct taxes are flexible; this means that they change according to the prevailing
conditions of the market thus satisfying the principle of elasticity
7. 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
1. 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
2. They make the government unpopular. These taxes greatly affect the people’s
disposable income to which leads to low purchasing power and standards of living of
people
3. Direct taxes are very easy to evade by the tax payers such taxes are less certain as
compared to indirect taxes
4. 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
5. 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
6. Direct taxes are less flexible; this is because they cannot be adjusted urgently to
meet the prevailing conditions in the market or economy
7. They are not economical. Direct taxes are in most cases collected by the tax
authorities and this involve employing many people to collect taxes
8. Direct taxes lead to capital outflow, this comes as a result of rich people who tend to
take out their capital to other countries where they are less paid
9. Direct taxes discourage hard work since they are progressive in nature. The more
one earns the more he or she is taxed
10. 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 Ugx 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 that is 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 1st July 1996. It replaced sales tax and
commercial transaction levy (CTL)
The governing law is the VAT Act (Cap 349)

MERITS OF INDIRECT TAXES

1. They are difficult to avoid and evade since they are contained in the prices of goods
and services consumers buy
2. 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
3. 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
4. Indirect taxes are comprehensive and act as a more reliable source of government
revenue
5. Indirect taxes are elastic / flexible that is the rate can be adjusted upwards
downwards so as to achieve a particular government goal
6. Indirect taxes are convenient to the tax payers since they are paid when a consumer
spends on goods and services
7. Indirect taxes can be used to check on consumption of harmful goods such as
cigarettes
8. They can be used to protect the infant industries from competition with well-
established producers through increasing import duties on similar foreign products
9. Indirect taxes can be used as a government tool in correcting the balance of payment
deficit in an economy. This can be achieved through increasing of import duties
10. Indirect taxes encourage hard working and initiative since they are not directly linked
to earnings
11. Indirect taxes are less felt and resented since they are usually paid as part of prices
of products bought
12. 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
1. 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
2. Indirect taxes are inflationary since they raise prices of commodities which in turn
may cause increase in cost of product (cost push inflation)
3. Indirect taxes may discourage production especially if imposed on products which
have a very high elasticity of demand that is the high tax will greatly reduce demand as
well as production and employment levels
4. 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 and so on.
5. Some indirect taxes are difficult to understand for example VAT
6. Certain indirect taxes such as import duties encourage smuggling of goods into the
country
7. 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 include;
Stamp Duty; This is a charge for legalising transactions and/ or documents. For
example, upon purchase of land.
Fines and Penalties; These are imposed on any person who has broken the law like
traffic offences, court fines.
Passport Fees; This is revenue received from individuals who apply for passports.
Permit Fees; This is a fee imposed to allow an individual/ entity transact a business.
For example, trading license, animal transit permit and work permit.
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.
Taxes and Duties Collected by the Local Government Authorities
Local Government Authorities are responsible for the assessment and collection of local
government revenue to be used within the locality. They include the Districts, City
Councils and Municipalities, town councils, among others. These local authorities collect
revenue such as;
Property Tax. This is tax levied on income derived by a person from the provision, use
or exploitation of property.
Hotel Tax. This is a tax charged on hotels and paid monthly by the hotel owner to local
authorities.
Local Service Tax. This is a tax levied on wealth and incomes of all persons in gainful
employment, self–employed and practicing professionals, self-employed artisans,
businessmen/women and commercial farmers.
Trading License Fee. This is a fee paid to allow a person carry out a specified
business in a given area for a period of time usually one year.
Permit Fees. This is a fee imposed to allow the taxpayer transact a business. For
example; trading permit, animal transit permit, among others.
Registration Fee. This is a fee paid to enable a business to have a legal right to exist
and/ or legally carry out an activity.
Plan Fees. This is a fee charged for approval of construction plans and urban plans.
Market Dues. These are charges made to allow an individual to trade in the market.
Street Parking Fees. This is fee payable for use of parking space in urban areas.
Land Fees. This is a fee payable for land transactions.
Advertising / Billboard Fees. These are fees charged to allow one to put up adverts
like sign posts.
Rent from district markets. Rental fee is payable by tenants who operate from district
markets.
Registration Fee. This is a fee imposed to allow an individual or entity to have a legal
right to exist or legally carry out an activity.
CALCULATING VAT AND INCOME TAX PAYABLE
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)

Example 1
Assuming that three are levels in the chain of production as follows
(a) Stage 1. Importation of goods with a taxable value of Ugx 10,000
(b) Stage II. Sale of goods by the importer to a retailer at Ugx 15,000
(c) Stage III. Sale of goods to a final consumer by the retailer at Ugx 25,000
Calculate the total VAT payable
(i) Stage I. VAT will be charged on importation price
VAT Rate = 18%
VAT Payable = VAT Rate X initial cost
18% X 10,000 = Ugx 1,800
Stage II.
VAT payable = Valued added X VAT rate
Valued added = 15,000 – 10,000 = 5,000
18
Vat payable = 5,000 X = Ugx 900
100
Stage III
VAT payable= Value Added X VAT Rate
Value added = 25,000 – 15,000
18
Vat payable = 10,000 X = Ugx 1,800
100
N.B total VAT payable from the 3 stages is 4,500 shillings
(ii) VAT charged to final consumer = consumer purchase price X VAT rate
= 25,000 x 18%
= 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.
Example 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 Ugx 80,000,000
II. Rachael sold the same goods to Penrose for Ugx 90,000,000
III. Penrose sold the same goods to Deborah a retailer for Ugx 100,000,000
IV. Deborah sold the same goods to the final consumer for Ugx 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
18
80,000,000 X = Ugx 14,400,000
100
Stage 2
VAT Payable = Value Added X VAT Rate
Value added = (90,000,000 – 80,000,000) = Ugx 10,000,000
18
VAT Payable = 10,000,000 X = Ugx 1,800,000
100
Stage 3
VAT Payable = Value Added X VAT Rate
Value Added = (100,000,000 – 90,000,000) = Ugx 10,000,000
18
VAT Payable = 10,000,000 X = Ugx 1,800,000
100
Stage 4
VAT Payable = value Added X VAT Rate
Value Added = (120,000,000 – 100,000,000) = 20,000,000
18
VAT Payable = 20,000,000 X = Ugx 3,600,000
100
(ii) Gross sales Value = selling price + VAT chargeable
18
Ugx 120,000,000 + X 120,000,000
100
Gross value = 120,000,000 + 21,600,000 = Ugx 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 Ugx 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 Ugx 60,000,000
(ii) Masanso sold the same goods to Kibooko for Ugx 88,000,000
(iii) Kibooko sold the same goods to Onzita a retailer for Ugx 96,000,000
(iv) Onzita sold goods to the final consumer for Ugx 120,000,000
Required
Assuming the VAT rate is 18%
(a) Compute for the entrepreneur VAT chargeable for value added at each stage
(b) Advice Onzita on the gross sales value for his goods to the final consume
INCOME TAX PAYABLE
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 Ugx 150 million for the year ended
31st October 2015. Expenditure incurred in deriving that revenue amount to Ugx 90
million.
Required
Compute chargeable income
Solution
Sales 150,000,000
Expenditure 90,000,000
Chargeable income = 150,000,000 – 90,000,000 = Ugx60,000,000
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 Ugx 120,000,000
Employment income Ugx 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 = 120,000,000 + 80,000,000+ 250,000,000 = Ugx 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 Ugx 1,000,000, employment income Ugx 2,400,000, property
income Ugx 500,000, In addition, he incurred expenses totaling to 1,200,000 Ugx to
earn the income, Ugx 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 = Ugx 3,750,000
(ii) Chargeable income = Gross Income – Expenses
= 3,750,000 - 1,200,000
Chargeable income = Ugx 2,550,000
Question 2
Marvin earned income from different sources for the year 2013
Business income Ugx 2,000,000
Employment income Ugx 4,800,000
Property income Ugx 100,000
In addition, he incurred expenses and losses amounting to Ugx 2,400,000. A total of
Ugx 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
= 2,000,000 + 4,800,000 + 100,000
Total income = Ugx 6,900,000
Gross Income = 6,900,000 – 300,000
Gross income = Ugx 6,600,000
(ii) Chargeable income = Gross Income – Expenses
= 6,600,000 – 2,400,000
Chargeable income = Ugx 4,200,000

VAT MECHANISM
Output Tax
This is the VAT a taxable person charges upon making taxable supplies that is 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 orimported.
This involves three items that is
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 Ugx 7,500,000
Calculate her input tax, output tax and VAT liability
18
(i) Input tax = X 5,000,000 = Ugx 900,000
100
18
(ii) Output tax = X 7,500,000 = Ugx 1,350,000
100
(iii) Tax liability = Output Tax – Input Tax
= 1,350,000 – 900,000
Tax liability = Ugx 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 Ugx 3,750,000. Calculate
his estimated VAT refund payable as at January 2016
Solution
18
Input Tax = X 5,000,000 = Ugx 900,000
100
18
Output Tax = X 3,750,000 = shs 675,000
100
VAT Refund = input Tax – Output Tax
= 900,000 – 675,000
VAT Refund = Ugx 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
18
= 28,000,000 X
100
Input tax = Ugx 5,040,000
ii) Output Tax = Taxable value on sales X VAT rate
18
= 3,400,000 X
100
Output Tax = Ugx 612,000
VAT refund = input Tax – Output Tax
= 5,040,000 – 612,000
VAT refund = Ugx 4,428,000
How to Comply and Pay Taxes
1. Registration
Every taxpayer or any person who is in business is expected to register with URA for tax
purposes. A Taxpayer who is registered is issued with a Tax Identification Number (TIN)
which is the key identifier of the taxpayer. Tax registration is free and can be done at
any URA office or online on the URA web portal (www.ura.go.ug) and it should be done
in time.
Tax Identification Number (TIN). This refers to the computer number assigned to the tax
payer for identification purposes. The TIN is known to the tax payer and this number is
kept by the tax authorities. It is important for purposes of reference, issuing tax
clearances, filing returns and making inquiries.
Requirements for TIN Registration
For an individual to be registered for a TIN the following must be submitted:
A copy of two identification documents e.g. Driver’s Permit, Voter’s Card, Passport,
Employer ID, National Identity Card and email address of the applicant, among others.
A fully completed individual application form. (The taxpayer is required
to provide accurate information when filing the application form.)
2. Filing Tax Returns
A t ax return i s a declaration form designed by a Tax Authority for purposes of
accounting for taxes. Filing tax returns involves completing the tax return form with
correct information about the business for the respective period and submitting it to the
Tax Authority for purposes of establishing the position of the taxpayer. Filing tax returns
is done for domestic taxes.
3. Declaration (for customs)
This involves providing accurate and correct information particularly during importation
of goods and services to the URA Customs when clearing on a prescribed form for
further processing. This can be done using Automatic Systems’ Custom Data
World.(ASYCUDA).
4. Payment of Tax
The correct amount of tax due should be paid in time. This can be done through the
bank, use of mobile money and e-payment platforms like pay way.
5. Record Keeping
The taxpayer should keep accurate and proper business records as required by the
international standards. Proper record keeping is necessary for assessment /
determination of the proper tax payable.

ASSIGNMENT to be done per course

-Describe the demerits / disadvantages of Insurance.
- What are advantages and disadvantages of ATMs.
- Explain the challenges / problems faced by Commercial Banks in Uganda.
- Explain benefits of paying taxes to business owners (how do business owners
benefit from paying taxes).
- Why Uganda rely more on indirect taxes than direct taxes.
- What are demerits or disadvantages or negative effects of paying taxes or
taxation.
- Explain the problems / challenges of taxation in Uganda (What are factors for
the low tax base / tax capacity in Uganda)
- What are solutions to problems of taxation in Uganda.