TAXATION

1.0 Introduction
The evolution of tax is attributed to the development of the modern state, which
led to increased expenditure for infrastructure and public services.

1.1 Origin of Tax

Tax is the price we pay for civi lization, which goes hand in hand w i t h organized society.
For society to be organ nized,
ze it needs a well-financed administrative structure. Therefore,
taxation in its different forms has existed as long as society had the minimum elements of
government.
Tax is defined as a monetary charge imposed by the government on persons, entities,
transactions or property to yield public revenue. Where payment is not monetary, a more wide
embracing definition has been adopted as:
Taxes are the enforced proportional contributio o ns from persons and property levied by the
State by virtue of its sovereignty for the support of government and for all public needs
(Thomas. M. Cooley: The Law of Taxation).
One of the main characteristics of a tax is that the payer does not demand something
equivalent in return from the government for the payment. It is expected that when taxes
are collected, they are used by government for public good and not just for those who make the
payment.

1.2 History .of Taxation in East Africa

Taxation as understood today was introduced in East Africa by the early British colonial
administrators through the system of compulsory public works such as road construction,
building of administrative headquarters and schools, as well as forest clearance and other
similar works.

The first formal tax, the hut tax, was introduced in 1900. This is when the first
common tariff arrangements were established between Kenya and Uganda. Through this,
Ugandans started paying customs duty as an indirect tax, which involved imposition of
an advalorem import duty at a rate of 5% on all goods entering East Africa, through the
port of Mombasa and destined for Uganda. A similar arrangement was subsequently
made with German East Africa (Tanganyika) for goods destined for Uganda that entered
East Africa through Dar-es- Salaam and Tanga ports. This gave rise to revenue which was
remitted to Uganda.

The Protectorate government heavily relied on customs duties to fund its programs, yet the
indigenou
us Africans were not engaging in activities that would propel the growth of the
monetary economy. Accordingly, government introduced a flat rate p oll tax that was
1
imposed on all male adults. The reequirement to pay tax forced the indigenous Ugandan
ns to enter
the market sector of the economy thro ough either selling their agricultural produce or
hiri
rin
ng out their services.
ces. The tax burden was later inccreased by the Introduction of an
additional tax to finance local governments. This culminated into the first tax legislation in
1919 under the Local Authorities’ Ordinance. In 1953, following recommendations by a
committee headed by Mr. C.A.G Wallis, graduated personal tax was introduced to finance
local governments.
Income tax was introduced in Uganda in 1940 by a Protectorate ordinance. It was mainly
payable by the Europeans and Asians but was later on extended to Africans. In 1952, the
ordinances were replaced by the East African Income Tax M anagement Act, which laid
down the basic legal provisions found in the current inc c ome tax law. The East African
Income Tax M a n a gement Act of 1952 was repealed and replaced by the East African Income
Tax Management Act of 1958.
The administration of both income tax and customs duty was done by departments of the
East African Community (EAC) until its collapse.

1.3 The Legality of Taxes collected by the Central Government

Articles 152 (i) of the Uganda Constitution provides that “No tax shall be imposed except
under the authority of an Act of Parliament”. Therefore, the Uganda Revenue Authority
Act Cap 196 was put in place to provide the administrative framework in which taxes
under various Acts are collected.
The Uganda Revenue Authority administers the tax laws (Acts) on behalf of the Ministry
of Finance, Planning and Economic Development under the following legislation
regulating taxes:
(i) Customs Tariff Act. Cap 337.
ct
(ii) East African Customs Management Ac
(iii) Excise Tariff Act Cap 338.
(iv) Income Tax Act Cap 340
(v) Stamps Act Cap 342
(vi) Traffic and Road Safety Act Cap 361
(vii) Value Added Tax Act Cap 349
(viii) The Finance Acts.

The basis for charging tax: The theory of social goods.

The existence of social goods provides a rationale for the allocation function of government but its
important for us to look at an efficient allocation mechanism. Social goods have certain
characteristics that don’t favour competitive markets.

Producers work to maximize their wealth while the consumer’s wish is to maximize utility at the
lowest possible cost.
2
The market fails to function in respect to public goods because public goods differ from private
goods in the following ways.

Consumption is non rival e.g roads everyone can consume and your consumption doesnot stop the
other consumption.

Exclusion is inefficient. That is to say, costs in stopping their consumption are too high. Public
goods are no rival because one’s consumption of certain goods does not rival with another person’s
consumption.

Exclusion from consumption of public good is inefficient because its not practical

Public goods confer benefits which are externalized in that they are available to other when
provided therefore the benefits from consuming public goods are not vested in property rights of
some individuals and the market cannot function in providing these goods. Their benefits are freely
available and no rational consumption of social goods.

One serious flaw of the foregoing discussion is the assumption that consumers will reveal their
preferences. This assumption ignored that fact that since social goods is non exclusive, preference
will not be revealed, hence leading to existence of freely riders. To overcome this problem we adopt
the political process to determine which preferences must be addressed. The political process helps
to:-

Obtain revelation of preferences.

Furnish the government with focal resources required to pay for social goods.

Voters in exercising their civil right will elect the candidate with an economic agenda best
approximates their need for social goods.

1.2 Functions of Government.

Government has 3 basic functions in the area of public finance.

• Allocation
• Distribution
• Stabilization

Allocation function.

This is based on the premise that certain goods cannot be efficiently provided by the market. In
those circumstances if we leave provision of all goods and services to the private sector will lead to
market failure. Therefore government must step into provide these goods.

3
Public provision for social goods:- The process of providing social goods thus becomes a political
process rather than an economic process because consumers are not willing to admit how much they
can consume of any good.

Social goods are supposed to be available to all those concerned, however the contribution of their
benefits may be limited. Some social goods can only be enjoyed in a given location yet these are
provided using national taxes. The structure of fiscal policy must take this problem into account (the
problem of capital limitation of benefits)

Distribution Function.

This function is concerned with creating equity among members of society distribution is concerned
with system that will lead to equitable distribution of wealth and income. The distribution of income
and wealth are initially dependent on factors endowments because of differing factor endowments
and earning abilities differ.

We are always concerned with what constitutes a fair or just state of distribution. If a change in
economic conditions is to be efficient to improve welfare then the improvement in position of
person A should not lead to worsening the conditions of person B and C.

If we can achieve this phenomenon then we have a parreto improvement. Parreto improvement is
theoretical, It’s difficult to find a redistribution measure which improves A’s person without
worsening B’s or Cs. Parreto improvement is a win – win position nobody loses everybody wins.
Distributive justice should as far as possible be used to achieve a parreto improvement.

Stabilization Function.

It involves use of fiscal to bring about full employment and price stability in a market economy.
Without public policy guidance the economy suffers from periodic or cyclical fluctuations that
create unemployment.

1.3 General definitions.

A Tax.

A tax is compulsory levy imposed by government upon assess of various categories. A tax is also
referred to as a compulsory non- quid pro quo, this implies that a tax is paid without expecting
corresponding return inform of social goods and services from the government. According to Justice
Homes it is a price of civilization.

Economic theory defines a tax as a leakage from the circular flow of income into the public sector
with exception of loan transaction and direct payment of publicity produced goods and services.

A tax can be distinguished from other forms of payments using guidelines below:-

A tax is compulsory levy (mandatory imposition) and not a price voluntary purchase payment.

4
A taxpayer may not get benefits from the government in respect of the tax paid and benefits could
go to somebody who would not have paid the taxes.

In order to collect the taxes, the law on the subject must be specific and definite enough to enable an
exact sum to be collected.

Taxation, this is the process of administering and collecting taxes, it has the following stages.

• Identification of a tax payer.

• Assessing the tax
• Collecting the tax.
• Educating the tax payers.

1.4 Role of Tax in the Economy

i) To raise government revenue
ii) To fight inflation
iii) To protect and encourage operation of local industries
iv) To encourage export for purposes of improving BOP position
v) To protect society from harmful products
vi) To achieve greater equality and distribution of income
vii) To discourage dumping

1.5 Principles of Taxation

i) Equity and Fairness
ii) Convenience
iii) Certainty
iv) Economical
v) Simplicity
vi) Productivity
vii) Elasticity
viii) Diversity
ix) Flexibility
x) Politically acceptable

1.6 Classification of Taxes.

There are 3 main basis for categorizing taxes;

According to impact and incidence:

Here we have two main taxes; Direct and indirect Tax.
A direct tax is tax under which the impact and incidence fall on the some person. It is paid by the
person on whom it is legally imposed and bears all the incidence. E.g graduate tax, PAYE.
An indirect tax is where the impact is on one person but the incidence is on another. It is imposed
on one person but paid partially or wholly by another. e.g VAT, Excise duty, Custom duty etc.

5
4.1.1 Merits of direct taxes
i) It is equitable because most direct taxes are progressive.
ii) There is certainly. The tax payer and the government are certain of what to Pay
iii) There is Elasticity under direct taxes
iv) Direct taxes are Economical to collect and administer.
v) Simplicity - Easy to understanding
vi) It is desirable, though this is subjective.
vii) It can reduce income inequality.
viii) Civil Consciousness. The tax payer knows what he is paying and takes interest in
government activities
4.1.2 Demerits of direct taxes
i) They can be unpopular because of their incidence.
ii) A lot of formalities and complicated laws are normally involved and this brings
inconvenience.
iii) They are arbitrary. This leads to a lot of discretion of authority. There is no certainly of tax to
be paid.
iv) Evasion, they may calculate dishonestly and encourage corruption
v) It may discourage savings and investment.
vi) It has a low base, e.g not every body can pay income tax, especially non income earners.
Indirect taxes
The main advantages of these takes include:
i) Checking consumption of harmful products and also for protective reasons.(Infant industry
arguments)
ii) Theoretically it should have less evasion since the incidence does not fall on the person who
pays it. when there is evasion however more inequity is created.
Demerits of Indirect Taxes
i) The major demerit include low Revenue, uncertainty and regressively such taxes may also
encourage inflation and they may not encourage civic consciousness.
According to tax rates;
There are four categories;
- Proportional tax
- Progressive tax

6
- Regressive Tax
- Degressive tax

4.2.1 Proportional Tax

It is where the same tax rate is charged irrespective of the size of income.

Tax 100% Proportional Tax

Structure
30% Proportional

0%
Income
NB. Under this tax structure, absolutely the rich pay more.

4.2.2 Progressive tax

It is where the rate of tax raises with increases of income i.e. the higher the income the higher the
tax rate.

Tax rate
80% Progressive

NB. Proportionately the rich pay more

50%

0%
C Q Income
Important to note that under both above taxes the rich pays more, but much more in progressive tax
regime.

4.2.3 Regressive tax

It is where the burden of paying tax falls more on the poor than the rich, i.e. the tax rate is lowered
as the income increases.

7
 Tax rate

Regressive Tax
0%
Income

4.2.4 Degressive tax

A tax is considered to be degressive if the high-income earners pay less tax for the extra income
earned. It is thus a progressive tax where the rate of progression is not sufficiently stiff. This means
that there may be lower relative sacrifice for higher income earners because it is only progressive up
to a certain point beyond which it becomes proportional.

Tax rate Degressiv

e Tax

Degressive Tax

0%
Income
4.3.1 Merits of progressive taxes
i) They are equitable because the rich pays proportionately more than the poor
ii) They are productive
iii) They are economical
iv) It brings equality of sacrifice because the marginal utility of money diminishes with increase
in income.

8
v) It can reduce inequalities of wealth. This increases welfare because the rich sacrifice their
luxuries instead of the poor sacrificing their wealth.

4.3.2 Demerits of Progressive Taxes

i) It may discourage savings. Since the income for investment is heavily taxed
ii) It may be arbitrary because it may difficult to establish what a person earns.
iii) It may be inconveniencing because it has a direct at incidence
iv) It is based on assumption that the same amount of money carries the same utility to tax
payers of equal incomes, this may be inaccurate especially if the expenditure pattern are
different.
v) The merit of proportionate tax is that it is easy to understand.

4.4 Classification of Taxes According to the Tax Base

i) Income tax income, the basis is income
ii) Wealth tax wealth, the basis is personal wealth
iii) VAT, Sales tax. The basis is Turnover in sales.
iv) Exports or import duty. The basis is the Value Import or exports
v) Specific Tax

1.7 Theories of Taxation.

One of the oldest concerns of tax administrators has been to establish the best way of distributing
that inevitable burden resulting from taxation process among the persons liable to taxation. This
concern can be conceptualized and addressed by examining the theories of taxation which underlie
terms of a given tax These include the following.

Benefit Approach

According to this theory individuals should pay according to the benefit they derive from the tax
paid. This implies that individuals must pay for the services and goods that they receive from
government in such amounts that appropriate to their composition of social goods and services.

This theory is idealistically fair since it appeals to those who believe, that unless one pays for a
certain service than one cannot be offered that service. However its weak practically because it
assumes that government should operate as a a private enterprise and hence making a tax in price.

Ability to pay approach.

9
This states that each individual should pay according to his or her ability and according to his or her
means. It requires that those who are able to pay should pay tax and tax should be a function of the
wealth. This theory is more appealing practically but denounces the concept that government
provides goods and services at a cost.

Further more the question of determining one’s ability to pay taxes is raised. Should ones ability be
determined basing on income, wealth or expenditure? Wealth say not be a good determinant of one
ability to pay taxes, but it may imply that one should sell his or her properties to pay the taxes, but it
may imply that one should sells his or her properties to pay the taxes, especially if such properties
do not generate income or do not have good market value.

Expenditure may indicate one’s liability to pay a tax, however, the patterns of individuals
expenditures are important to consider.

Income is taken to be best measure, but it may be difficult to exclude income from speculations and
corruption.

Theory of Equal Sacrifice.

This involves sacrificing a portion of income to the tax system in order to benefit the general public.
There should be some justice and quality among taxpayers when sacrificing their income. The
proponents of this theory propagate for progressive tax. The theory appeals to proponents of
equality, given that each person should make an equity sacrifice of his personal expenditure in
favour of public expenditure. However the theory becomes practically weak in respect of lack of a
concrete measure of equal sacrifice.

The discussion on theories of taxation highlights an important aspect in taxation, namely the Tax
Base Despite the fact that ability to pay is a desirable theory in determining the tax base, a good tax
structure cannot survive with only one tax base.

It is therefore recommended to have more tax bases like, income , wealth property, consumption etc
in order to sustain a wide tax base, which leads to increased tax revenue and reduces tax avoidance
and evasion.

Caution These guidelines should not be used in isolation of each other Before making a worthy
conclusion, analysis of the environment in which the purported employment is said to have taken
place must be well taken care of.

1.8 Categories Of Taxes

There are two broad sections of government revenue. Central government

revenue and local government revenue.

10
 Central Government Revenue

Borrowing Taxes
Donations Miscellaneous
- Income
- VAT
- Excise
Multilateral - Corporation
Bilateral Other Countries Tourism Etc - Import & Export
- PAYE
- Withholding tax

World Bank IMF

Local Government Revenue

Borrowing Donations Taxes

Graduated taxes
Licenses
Foreign Ground tax
Central Government Countries Property Tax
Corporate Bodies Road Tax

1.7.1 Features of a Tax:

i) It is imposed by the government
ii) It is used by the government for the benefit of all the citizens.
iii) It is not levied in return for any specific service rendered by the government to the people
of the country. i.e. you cannot refuse to pay a tax because you don’t expect to benefit from
it.

1.7.2 Structure of the Ugandan Tax System.

The structure of Uganda's tax system depends on, and is defined by the structure of the economy.
The principal elements of the Ugandan economy that influence the tax system are: -
a) There is a substantial informal sector, with a great number of the populace engaged in subsistence
agriculture and small informal enterprises. The economy is accordingly not well monetized. The challenge
for tax authorities is identifying persons who are in the informal sector but whose income would be
appropriate for taxation. Secondly the limited formal sector and considerably a low levels of literacy lead to
the number of persons engaged in activities where there is a regular fixed wage to be very limited. Most
people live off fluctuating earnings and their incomes are very difficult to compute. There is also a poor
record management culture.
b) There is a very narrow manufacturing and services sector base. The country depends more on goods
manufactured outside the country. This explains a higher reliance on customs duties than most other
countries. In order to encourage investments the government has instituted a number of investment and tax
incentives, which have implications for revenue performance.
11
c) There is uneven distribution of income. The nation has few persons with considerably high income and a
majority who are below the tax threshold.
d) There is an unreliable statistical base and this limits the capacity of government to evolve optimal and
working tax policies.
Accordingly the Ugandan tax system has the following principal features: -
a) The tax level in Uganda is considerably low and compares unfavorably to other countries. This is
determined by comparing the tax revenue yield and Gross Domestic Product (GDP). GDP is the
summation of all economic activities in a nation. Where as the ratio of tax revenue to GDP in Uganda is
currently (in year 2006.07_ 13%, it does not favorably compare with other sub Saharan African countries
where it averages 18% for and 38% for the developed countries.
b) The other interesting feature is the composition of the tax revenue shown by the relationship between
direct and indirect taxes. In Uganda the revenue from the direct and indirect taxes is almost equal while
in developed countries there is more reliance on direct taxes.
c) There are two major tax authorities in Uganda. The Uganda Revenue authority, which is responsible for
the central Government revenue and the Local government administration (Districts, and Urban
authorities), which is responsible for collection of local government revenue.
The examples of local government revenue include:
i. Property tax and ground rent in urban centers.
ii. Fees and dues like licenses and permits, approval of plans, market dues, park fees, street
parking fees etc.
The minister of local government is responsible for determining the rates of tax for the different sources of
local government revenue.
The central government revenue includes direct and indirect taxes and range of fees categorized as non- tax
revenue.

Assignment:
i) What are the major consideration when designing a tax system.
ii) Discuss the problems of achieving justice in taxation.
iii) Taxation is a big burden to especially citizens of low income countries like Uganda; Do you
agree?
iv) What are the major sources of Central government revenue

1.8 Brief on E-Tax

E – Registration
URA, through its modernization process, has introduced a new eTAX system to cater for
registration of taxpayers, filing of returns, assessments and payment of taxes. eTAX
is a name given to an Integrated Tax Administration System that provides online services
to the taxpayer on a 24 hour basis.

12
eTAX enables tax payers to lodge their applications online through the web portal, form
anywhere on the globe as long as they are connected to the internet. Upon uploading the
application on the web portal, the system will generate an e – acknowledgement receipt. Note;
any attachments have to be delivered to a URA, Domestic Taxes Office.

The application will be processed; the applicant will be contacted in case of any query,
interview or inspection. The applicant will also beable to search the status of his / her
application on the system using a particular code. When the application is finally approved, the
applicant will be issued a TIN with minimum details displayed on the Certificate of
Registration. Where the application has been rejected, the taxpayer will be issued a rejection
notice stating the reason(s) for rejection.

The taxpayer will on receipt of TIN be able to log onto the web portal and create his / her
own account for any further transactions.
Some of the benefits of e registration: a streamlined and less time wasting process,
application easily done on the web portal. Besides registration, the taxpayer will be able
to amend his / her details with URA in case of any changes. Taxpayer will always receive
feedbacks on the application and this will be possible especially when accurate email addresses
and telephone numbers (of the taxpayers) are indicated in the application.

E. Filing
A taxpayer registered with URA for any tax type has an obligation to submit a return for the
tax period defined by the respective tax law. URA has facilitated the taxpayer to fulfill this
obligation by introducing electronic filing in eTAX
The taxpayer can obtain a return from the web po o rtal (http://ura.go.ug), save a template on
any storage devise, take time to fill in the return and validate the return before they finally
h e web portal. If the upload is successful, the taxpa
upload it on th ayer will receive an auto
generated e-acknowledgement receipt which is evidence of submission. In case of any
problems in filling the respective return , do not hesitate to send an email about the
challenge to URA on the email address; services@ura.go.ug or call the toll free lines
In case there are errors in the return detected by the system, the taxpayer will be given a
chance to amend the errors when he/she is issued a Return Modified Advise Notice.
The return must be submitted by the due date to avoid penalties for late filing and it must also
be submitted for each tax period to avoid estimated assessments that arise out of non
submon of returns. In case the taxpayer is uunnaabble to submit a return on time, he or she ccaann
apply for the extension of time to submit a return late using an application form for late
filing also found on the web portal.
Some of the benefits accruing from e-filing are that the return process has been clearly
separated from the payment process and the taxpayer can now file returns before/ after
making the payment, or make the payment before/ after filing the return.

E. Payment

13
A taxpayer required to make payments to URA for any tax type can do so using the new e
payment process. All the taxpayer needs to do is to go onto the URA web portal
(http://ura.go.ug), access the payment registration slip, register the payment and go to
the bank to make the actual payment over the counter. The taxpayer in future may even not
need to go to the bank as such facilities like internet / online banking. Payment will apply to
all payments made to URA including customs, NTR and agency fees.
Benefits accruing from e payment are that the taxpayer can utilize the service on a 24
hour basis, the taxpayer’s costs of movement between his/her premises and URA or the bank
are reduced; and thus saving time. Taxpayers can also monitor the status of their payments
online through the web portal

2.0 INCOME TAX

Income tax in Uganda is levied under the Income Tax Act of 1997. This Act contains rules for the
ascertainment of income, entitlement to personal relief and the assessment and collection of tax. The
Act was enforced on 23rd Dec 1997 by an Act of Parliament and it came into force on 1st July 1997.

The Internal Revenue Department is charged with the responsibility of prompt assessment and
collection of all direct taxes including Income tax and Stamp Duty.
The persons liable to tax on the following:
(A) All persons resident in Uganda whether or not they are Ugandan citizens.
(B) Non resident persons so long as they derive Income form any property, trade, profession,
vocation or employment in Uganda.

2.1 INCOME TAX ACT OF 1997 AND AMENDMENTS

Central Government taxation.
Government revenue is either collected by the Local Government or the central government. Local
government revenue is collected from parking fees or trading licensees. These revenues are
supposed to be collected by government but can be delegated.

The central government collects the taxes using URA as the agent. URA collects both direct and
indirect taxes.

Tax accounting Principles.

Substituted Year of income (S 39)
A taxpayer may apply, in writing, to use as the taxpayer’s year of income a substituted year of
income being a twelve-month period other than the normal year of income and the Commissioner
may, subject to subsection (3), by notice in writing, approve the application. The normal year of
income runs from 1st July to 30th June.

A taxpayer granted permission under subsection (1) to use a substituted year of income may apply,
in writing, to change the taxpayer’s year of income to the normal year of income or to another
14
substituted year of income and the Commissioner, subject to subsection (3), may, by notice in
writing, approve the application.

The Commissioner may only approve an application under subsection (1) and (2) if the taxpayer has
shown a compelling need to use a substituted year of income or to change the taxpayer’s year of
income and any approval is subject to such conditions as the Commissioner may prescribe.

Method of accounting.
A taxpayer’s method of accounting shall conform to generally accepted accounting principles.
The tax payer may be a cash accounting tax payer or accrual accounting tax payer.
Cash-Basis Taxpayer
A taxpayer who is accounting for tax purposes on a cash basis derives income when it is received or
made available and incurs expenditure when it is paid.

Accrual-Basis Taxpayer

A taxpayer who is accounting for tax purposes on an accrual

basis –

(a) derives income when it is receivable by the taxpayer; and

(b) incurs expenditure when it is payable by the taxpayer.

Subject to this Act, an amount is receivable by a taxpayer when the taxpayer becomes entitled to
receive it, even if the time for discharge of the entitlement is postponed or the entitlement is payable
by installments.
Prepayments.
Where a deduction is allowed for expenditure incurred on a service or other benefit which extends
beyond thirteen months, the deduction is allowed proportionately over the years of income to which
the service or other benefit relates.

Long term contracts.

In the case of an accrual-basis taxpayer, income and deductions relating to a long-term contract are
taken into account on the basis of the percentage of the contract completed during the year of
income.

The percentage of completion is determined by comparing the total costs allocated to the contract
and incurred before the end of the year of income with the estimated total contract costs as
determined at the time of commencement of the contract.

Trading stock.

15
A taxpayer is allowed a deduction for the cost of trading stock disposed of during a year of
income.

The cost of trading stock disposed of during a year of income is determined by adding to the
opening value of trading stock for the year, the cost of trading stock acquired during the year, and
subtracting the closing value of trading stock for the year.

The opening value of trading stock for a year of income is -

(a) the closing value of trading stock at the end of the previous year of income; or
(b) where the taxpayer commenced business during the year of income, the market
value, at the time of commencement of the business, of trading stock acquired prior
to the commencement of the business.

The closing value of trading stock is the lower of cost or market value of trading stock on hand at
the end of the year of income.

Debt obligations with discount or premium.

Subject to subsection (2), interest in the form of any discount, premium, or deferred interest shall be
taken into account as it accrues.

Where the interest referred to in subsection (1) is subject to withholding tax, the interest shall be
taken to be derived or incurred when paid.

Foreign currency gains and losses.

Foreign currency debt gains are included in gross income and foreign debt losses are deductible only
under this section. A foreign currency debt gain derived by a taxpayer during the year of income is
included in the business income of the taxpayer for that year.

A deduction is not allowed to a taxpayer for a foreign currency debt loss incurred by the tax payer
unless the taxpayer has notified the Commissioner in writing of the existence of the debt which gave
rise to the loss by the due date for furnishing of the taxpayer’s return of income for the year of
income in which the debt arose or by such later date as the Commissioner may allow.

2.2 Exempt Income Section 21(1).

There are incomes that are expressly exempt from income tax. The Income Tax Act, describes
various sources of taxable incomes, not all incomes earned by each and every person are brought to
tax. Some of these incomes are exempt from income tax, which implies that those incomes are free
from tax.

16
An exempt income is income on which income tax is not charged or levied in any year of income.
These are incomes earned but free from tax. Consequently the earners or receivers of such income
do not have any income tax obligations in respect of such exempt income.

2.2.1 Types and Sources of Exempt income

Subject to Income Tax Act 1997, exempt income for income tax purposes, includes the following: -

1. Listed Institutions: Sec 21 (1) a

Incomes of a listed institution are not brought to tax. Listed institutions are shown in the 1st
schedule of ITA, which include the following: -
1. African Development Bank
2. African Development Fund
3. Aga Khan Foundation
4. East African Development Bank
5. European Development Fund
6. European Investment Bank
7. European Union
8. Foods and Agriculture Organization
9. International Bank for Reconstruction and Development
10. International Civil Aviation Organisation
11. International Development Association
12. International Finance Corporation
13. International Labour organization
14. International Monetary Fund
15. International Telecommunications Union
16. East and Southern African Trade and Development Bank
17. United National Related Agencies and Specialised Agencies

2. Privileged Persons and Diplomats: Sec 21(1) b

Incomes of Persons or Organizations entitled to privileges under the Diplomatic and privileges
Act (1965) are not brought to tax. These include incomes of Diplomats, High Commissioners,
Embassies and other persons or institutions specified under the Diplomats and Privileges Act
(1965).

3. Employment Income Derived From Foreign Country: Sec 21(1) c

Official employment income derived by a person in public service in the government of a
foreign country is not liable to income tax within Uganda. This provision is applied with the
specific provisions below;
o The person is either a non-resident or is a resident individual solely by reason of
performing such service or duty.
o The income is payable from public funds of that foreign country.
o The income is subject to tax in that foreign country.

4. Allowances payable outside Uganda: Sec 21(1) d

Any allowances payable outside Uganda to a person working in Uganda foreign mission
are exempt from income tax. E.g. Ambassadors.

5. Incomes for Local Authorities: Sec 21(1) e

17
 Incomes earned by any local Authority or local government unit are also free from income
tax. Incomes earned by Local councils, Town councils; Municipalities and other Local
Authority establishments are free from Income Tax. Such incomes include collections from
local taxes like graduated tax, user fees and licences.

6. Exempt Organization: Sec 21(1) f

Incomes earned by any exempt organization other than property and business income are
also exempt from Income Tax. Exempt organizations are defined as any company, institution
or irrevocable trust, which include the following:
1. Amateur sporting associations. Eg. Kampala Kids league.
2. Educational institutions, which are public in nature. Eg .Makerere University.
3. Religious Institutions. Eg. Church of Uganda.
4. Charitable Organisation or Institutions. Sanyu Baby’s home.
5. A trade union or employees association registered under the laws of Uganda.
6. An association established for the purposes of promoting farming, mining, tourism,
manufacturing, commerce and industry in Uganda
7. Any entity, which has been issued with a written ruling by the commissioner currently in
force stating that it is an exempt organisation.
8. Any entity, whose incomes or assets, do not confer a private benefit on any person.

However where that exempt organization earns business income which is not related to the
function constituting the basis for the organizations’ existence, that income is liable to
income tax.

Furthermore property income earned by an exempt organization is also liable to income tax.
However, the rental income received, in respect of immovable property, which is used by the
lessee exclusively for the activities of the organization (e.g. amateur sporting associations,
religious, charitable or educational institution, local trade union or association), is not liable
to tax

7. Education Grants: Sec 21(1) g

An education Grant which the commissioner is satisfied, that has been made bona fide to
enable or assist a recipient not appropriate(,) study at a recognised educational or research
institution, does not constitute taxable income on part of the employee.

8. Alimony: Sec 21(1) h

Any amount delivered by way of alimony or allowance under any judicial order or written
agreement of separation does not constitute taxable income on part of the recipient.

9. Gifts and Inheritances: Sec 21 (I) j

The value of any property acquired by way of a gift, bequest, devise or inheritance does not
constitute taxable income. The term bequest means, to donate property or estate, to a person
or to an entity. The term devise has same implications as to bequest.

This provision does not apply if the property is acquired by way of a gift or bequest, which is
part of business, employment or property income. This implies that any property acquired by
way of gift, bequest devise or inheritance in respect of past, present or prospective business,
employment or property relationship is liable to tax.

18
11. Personal Capital Gains: Sec 21(1) k
Any capital gain that is not included in business income or property income does not
constitute taxable income. Capital gains arise out of sale or disposal of an asset at a price or
consideration higher than the written down value of the asset. Capital gains are generally
referred to as gains or profits on disposal of assets in the financial accounting discipline.

In this respect, capital gains earned by an individual on disposal of his or her private or
domestic property are exempt income, hence not liable to income tax. For instance when Joy
sells her Gold plated Necklace at a gain of shs 500,000/=, she is not expected to pay any
income tax on that amount.

However, it should be noted that capital gains in respect of a business undertaking are liable
to income tax. For instance where a company sells its machinery at a capital gain of
700,000/=, the above said amount should be added to its other business incomes and profits
while ascertaining the company's gross taxable income. Therefore capital gains that accrue
out of business operations are taxable for income tax purposes. Details of capital gains that
form part of business income are covered under the Chapter on Income from Business.

12. Income derived by an individual to the extent provided for in a technical assistance
agreement:
According to this section “technical assistance agreement” means a grant agreement between
the Government of Uganda and a foreign government or a listed institution for the provision
of technical assistance to Uganda.

Income derived by an individual to the extent provided for in a technical assistance

agreement where the individual is a non-resident or a resident solely for the purpose of
performing duties under the agreement; and the Minister has concurred in writing with the
tax provisions in the agreement;

13. Foreign source income earned: Sec. 21 (1) m

Any foreign source income derived by a short-term resident of Uganda is exempt from tax.
According to this Section “short-term resident” means a resident individual, other than a
citizen of Uganda, present in Uganda for a period or periods not exceeding two years.
This income could also be derived by a person who is employed in a foreign country or
income earned from a technical assistance agreement between the GOU and a foreign
government.

14. Pension Contributions: Sec 21(1) n and o

A pension or lump sum payment made by a resident retirement fund e.g. NSSF to a member
of the fund or a dependant of a member of a fund does not constitute taxable income. This
implies that the benefits or payments, which accrue to an individual or his/her dependants,
are not liable to income tax. This provision is in line with the constitution of the Republic of
Uganda, which also asserts that such payments should not be subjected to tax.

15. Life insurance proceeds: Sec 21 (1) p

The proceeds of a life insurance policy paid by a person carrying on a life insurance business
are exempt from tax according to the Income tax Act. This is because the insurance
company’s aim is to reinstate the person to the state they were in before the loss. So when

19
 such a person is taxed on that amount of money then the value will be lesser that what it is
supposed to be.

16. Employment Income Earned from Uganda Peoples Defence Forces, Uganda Police,
Uganda Prisons: Sec 21 (1) q
Official employment income of a person employed in Uganda People's Defence Force,
Uganda Police, Uganda Prisons, other than a person employed in civil capacity are not liable
to tax. Caution should be made when analysing the person’s incomes to differentiate official
employment income from the non-official employment income.

This provision therefore implies that non-official employment income and any other income
earned by a person employed by the Uganda People’s Defence Forces, Uganda Police and
Uganda Prisons are subjected to income tax. For instance business income or income earned
through provision of security services, say to a hospital on a part-time arrangement are liable
to income tax.

However, where a person is employed in a civil capacity in any of the institutions mentioned
above, (i.e. Uganda People’s Defence Forces, Uganda Police and Uganda Prisons) his or her
employment income is liable to income tax.

17. Income of the government: Sec.21 (1) r

The income of the Government of the Republic of Uganda and the Government of any other
country is exempt from income tax. This is because the whole essence of taxation is to boost
up the Government revenue, so if the amount already taken as Government income is taxed
then it would not make any sense. For instance when you remove money from one pocket
and put it into another you have not made any income.

18. Bank of Uganda income: Sec.21 (1) s

The income of the Bank of Uganda is not liable to income tax. This is because Bank of
Uganda is a Government institution in charge of Government monies. All the income it
makes will be Government income and as explained in Sec.22 (1) r, income of the
government of the Republic of Uganda is not liable to income tax.

19. Employment Income below the Threshold

Employment Income, whose aggregate value is not more than the threshold, (i.e. shs.
235,000/= per month or shs. 2,820,000 per year of income), in respect of a resident
individual, is not liable to income tax. Details of employment income and the threshold are
discussed in the chapter covering employment income. This provision only applies to
resident individuals, because at the moment the income tax rates for non-resident individuals
do not provide for a threshold.

20. Rental Income below the Threshold

Rental income earned by an individual or natural, whose value is not more than the
threshold, (i.e. shs. 235,000/= per month or shs 2,820,000 per year of income), after allowing
for the statutory deduction, are also not liable to tax. Details of rental income are discussed
in chapter covering property income.

21. Emoluments payable to the employees of EADB with effect from 1st July 1997

20
22. Interest earned by financial institutions on loan granted to any person for the purpose of
farming forestry, fish farming, bee keeping animal and poultry husbandry and similar
operations.

2.3 INCOME CHARGEABLE TO TAX

A tax payer is taxed on his chargeable or taxable income. This is the total income from all sources
listed in the Act, excluding Income exempted by the Act. It is determined as laid down in the Act
and may be reduced by relief or allowances. The various forms of Income chargeable to the tax are
the following;

Ø Business profits including profits from any trade, profession or vacation.

Ø Income from any employment or services rendered.
Ø Income from use or occupation of any property
Ø Dividends or Interest
Ø A pension, charge or annuity or any withdrawals from or payment out of a registered pension
fund or a registered provident fund or registered Individual retirement fund.

2.4 INCOME FROM EMPLOYMENT

What is Employment?
The Income Tax Act under Sec 3 describes employment as,

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

directorship of a Company or a position entitling the holder to a fixed or
ascertainable remuneration of holding or acting in any public office”. (ITA pp.13)

Employment can also be defined as a legal relationship between a master and a servant whereby a
servant is rewarded for the services rendered to his/her master.

Employment entails the existence of a Master (employer) and a servant (employee) maintaining a
relationship bounded by the provision of services by the servant to the master. The master also
reciprocates with rewards or emoluments in monetary form or in kind.

Factors that distinguish Employment from Independent Contraction of services

1. Time Frames and Continuity of Engagement

2. The place where the services are performed

3. The Employer’s Ability to control directly the Timing and Scheduling of work

21
 4. Whether the Employer provides working tools, equipment or any other necessary working
facilities.

Caution These guidelines should not be used in isolation of each other. Before making a worthy
conclusion, analysis of the environment in which the purported employment is said to have taken
place must be well taken care of.

2.5 EMPLOYMENT INCOME:

Section 20(1) of ITA defines employment income as any income derived by an employee from any
employment. Employment income therefore includes cash, any benefit, advantage or gain accruing
to an employee incidental to his employment.

Sources of Employment Income

Employment income for income tax purposes include the following items whether revenue or
capital in nature:

1. Salaries, Wages and Allowances

Any wages, salary, leave pay, payment in lieu of leave, overtime pay, fees, commission,
gratuity, bonus or the amount of any traveling, entertainment, utilities, cost of living,
housing, medical or any other allowances constitute employment income (Sec 20(1) (a)).
2. Benefits in Kind
The value of any benefit provided in kind under section 20(1)(b) constitute employment
income.
(i) Motor vehicle
(ii) House keeper or gardener
(iii) Meals, refreshment and entertainment
(iv) Utilities
(v) Loans
(vi) Waiver of obligation
(vii) Property /services
(viii) Accommodation

3. Discharge and Reimbursements Employee’s Private Expenses

Amount of any discharge of reimbursement by an employer, or expenditure incurred by
the employee, other than expenditure incurred by an employee on behalf of the employer
which serves the proper business purpose of the employer sec 20(1) (c) constitutes
employment income.
However, discharge or reimbursement of medical expenses does not constitute employment
income.
4. Terminal Benefits
Any amount derived as compensation termination of any contract of employment
constitutes employment income in respect of the terminated employee. Sec 20(1)(d)

22
 5. Life Insurance Premiums Paid by Tax Exempt Employer
Any amount paid by a tax-exempt employer as life insurance premium, for the benefit of the
employee or his dependents constitutes employment income.

6. Consideration in Respect to changes in working conditions

Any amounts derived as consideration arising due to changes made in the employee’s
working conditions constitutes employment income. 20(1)f.

7. Issues of shares to Employees

The amount by which the value of shares issued to an employee, under a share acquisition
processes, exceeding the consideration paid by the employee if any and any other payment
made for being granted the right to acquire those shares constitutes employment income. Sec
20(1) (g).

8. Consideration of Waiver of the Right to receive Shares

The amount of any gain or consideration derived by the employee on disposal or waiver of
his right to acquire shares under employee share acquisition scheme constitutes employment
income.

9. Discharge of Employee’s Tax Liabilities by the Employer

Where the employer discharges the employee’s tax liability, the amounts discharged by the
employer shall constitute the employee’s taxable income.

2.4 Employment Income, Which Does Not Constitute Taxable Income

This includes all employment incomes that are not liable to income tax, normally referred to
as non-taxable emoluments.

1. Passage 20(2) a
Passage for person recruited outside Uganda, not a citizen of Uganda or who was in Uganda
solely for a purpose of serving the employer, the cost incurred by the employer of any
passage (Transport) to or from Uganda in respect to employee’s appointment or termination
of employment does not constitute employment income.

2. Medical Expenses 20(2) b

Reimbursement or discharge of employees’ medical expenses. Medical expenses include
premiums paid for medical insurance but does not include the medical allowances.

3. Life Insurance
Any amount paid by a tax paying employer as premium for employee’s life insurance, for
the benefit of the employee or his dependants, does not constitute employment Taxable
income.

4. Costs Incurred while Performing duties of employment Sec 20(2) d

23
 Any amount for and which does not exceed the actual cost likely to be incurred or
reimbursement, discharge of expenditure incurred by an employee in course of performing
duties of employment on accommodation, travel expenses, meals and refreshment, does not
constitute employment income.

5. Meals and refreshments Sec 20(2)e

Value of any meals or refreshment provided by the employer to the employees in premises
operated by the employer or any other person on employer’s behalf, to the benefit of all
employees on equal terms does not constitute employment income.
The meals and refreshments should be provided to all employees without discrimination or
favoritism basing on grades,, seniority, experience or any other measure.
6. Low Cost Benefit Sec 20(2) f
The value of total benefits provided to the employee by the employer during any month, but
whose total value for the month are less than ten thousand (10,000/=) Uganda shillings does
not constitute employment income.
7. Pension Contributions Sec 20(2) g
Any contribution or payment to a retirement fund/pension or provident fund for the benefit
of the employee, or his dependents does not constitute employment income.

The contribution by the employer to retirement fund like the National Social Security
Fund does not constitute employment income tax purposes. The purpose of this
provision is mainly to promote and re-active the culture of saving for old age in
Uganda.

8. Beneficial Loans
Benefit derived by an employee from a loan granted by the employer or discharge of an
interest obligation, where the loan principal amount is less than one million Uganda
shillings, does not constitute employment income.

9. Employment Income Less than the Threshold

Employment income less than the threshold (i.e Shs 235,000/= per month or Shs.2,820,000/=
per year) do not constitute taxable employment. This implies that only employment incomes
above the threshold are brought to income tax.

2.5 Deductions Allowed To Employees In Respect Of Employment Income

1. Clothing
Cost on clothing, which is necessary for the employee to perform duties of employment, and
which are not suitable outside the working environment are allowed as deductions when
incurred by the employer. These include uniforms and protective wear like Helmets, gloves
and overall, Gumboots etc.

2. Traveling
24
The cost incurred on traveling, which traveling is part of the duties of employment are
allowed as deductible expenses. This position is reaffirmed in Nolders V Walters.

3. Tools and Equipment

Where an employee incurs a cost to acquire, maintain or repair tools used to perform duties
of employment, such expenditure are also allowed as a deduction. Take a factory mechanic
who as required by the employer, purchased a toolbox and other tools for use in performing
duties of employment, such an expenditure on tools will be allowed as a deduction to the
employee.

4. Crucial Costs
There cases where an employee incurs costs that are crucial and if the employee does not
meet them he/she may not be able to perform his/her duties of employment. Though there is
no express provision in the Act, Case law provides, that the crucial costs expenditure should
be allowed as deductions.
5. Domestic/Private Expenditure
Domestic and private expenditure are not allowed as deductions. These include maintenance
of ones family, traveling costs including traveling to and from work, alimony and separation
charges or even costs incurred on changing from one employment to another.

2.8 VALUATION / MONETIZATIONOF EMPLOYMENT BENEFITS

Employees are sometimes rewarded goods and services for the services they have offered to
their employers. Due to the fact that the rewards in form of goods and services are incidental
to the employment relationship, such goods and services constitute employment incomes.

Valuation Techniques

1. Motor Vehicles
Where the benefit provided to an employee is in form of a motor vehicle wholly or partly
used for the private purpose, the value of the benefit is calculated as:-

(20% x MKV x A) – D
B

Where; “MKV” is the market value of the vehicle at the time it was first provided
to the employee for private use.

“A” is the number of days the vehicle was in private use of the employee.

“B” is the number of days in the year.

“D” represents any consideration or payment made by the employee for
the benefit.
Illustration.
25
Kampore is an employee of Junta Motors; he is the head of distribution section. His job
involves a lot of travel within and outside the company. In addition to other packages he
uses 40,000,000 company vehicles for his private use 2 days a week. He pays 49,000 a
month to his employers to qualify for the above report.
Required.
Compute Kampore’s monthly and annual taxable income arising out of this facility.

2. House Keeper, Chauffeur, Gardener, House Girl, Domestic Assistant

Where the benefit provided is in form of a housekeeper, chauffeur, gardener or any other
domestic assistant/servant, the value of that benefit is the total employment income paid to
that domestic assistant in respect of service rendered.

3. Meals, Refreshments and Entertainment

Where meals, refreshment, entertainment are provided as benefits incidental to employment,
for employee’s domestic purpose, the value of such benefit is the cost incurred by the
employer to provide those utilities less any payments made by the employee for the same.
4. Utilities
Their instance where utilities like electricity, water, telephone etc are provided as benefits
incidental to employment, for employee’s private or domestic purposes. The value of such
benefits is the cost incurred by the employer to provide those utilities, less any payments
made by the employee for the same.
5. Loans
The benefit provided to an employee may consist of a loan/loan, whose total exceeds one
million Uganda Shillings and with an interest rate below the statutory rate.

The value of benefit therefore is the difference between the interest paid by the employee (if
any) at the rate provided by the employer, and the interest payable at the statutory rate for
that particular year of income.

6. Waiver of Loan Repayment

If the employer wholly or partly writes off a loan, the amounts written off constitute
employment income. The provision applies to all loans, including those loans made in the
ordinary course of business, plus amounts owed to tier parties e.g Commercial Banks.
The value of such benefit is the amount waived by the employer or discharge amounts made
by the employer to settle the employee obligations.

7. Property or Assets
The benefit may also consist of transfer or use of property and sometime provision of
services to an employee for domestic purposes. The value of that benefit accruing to the
employee is the market value of such property or service, reduced by any payment made
by the employee for the same.

26
8. Accommodation
Employers often provide housing or accommodation for their employees. The
accommodation may either be rented or owned by the employer.

Where a benefit provided by an employer to an employee consists of the provision of

accommodation or housing, the value of the benefit is the lesser of:-

a. The market rent of the accommodation or housing reduced by any payment made by the
employee for the benefit.
b. 15% of the employment income, including the amounts referred to above (i.e. market
rent the accommodation) received by the employer.

Illustration.
Jackie is a senior manager with Stanbic bank. She receives a monthly salary of Shs
5,000,000. Jackie is provided with accommodation in Muyenga. The accommodation is
rented by the employers incurring a cost of 1,800,000 per quarter.
Compute the accommodation benefit. I) monthly, ii) Annually

9. Other Unspecified Benefits

For any other benefit other than those expressly covered by the 5th schedule of the Act, the
value of such benefit if the market value of that benefit reduced by any payment made by the
employee for the same.

10. Valuation of Compensation for Termination of Employment

The ITA attaches a relief on compensation received by employees on termination of
employment.
Sec 20(4), asserts that where an employee is compensated on termination was in the
Employment of he employer for ten (10) years or more, the compensation amount included
as employment income is derived using the formula below:
(Total amount derived by compensation x 75%)
This implies that 25% of the compensation is not liable to income tax

2.6 GROSS INCOME

Gross income defined by making reference to various parts of the Income Tax Act 1997.
Section 18(1) refers to gross income of a person for the year of income, as a total amount of
business Income, employment income and property income.

Gross income of a resident person includes income derived from all geographical sources.
This implies that gross income of a resident person is the aggregate of all income (other than
exempt income) earned within and outside Uganda.

27
 While on the other hand, Gross income for a non-resident person includes only that income
derived from sources within Uganda. This implies that only income derived from sources
within Uganda by a non-resident is liable to income tax charge within Uganda.

WHO IS A RESIDENT INDIVIDUAL?

A resident individual subject to section 10 of the Act is described as:-
1. An individual who has a permanent home in Uganda

2. An individual who has been present in Uganda for a period / periods amounting to
a total of 183 days or more in any year of income.

3. An individual who has been present in Uganda during the year of income and in
each of the two preceding years for an average of more than 122 days in each such
year of income.
4. An employee or official of the government of Uganda posted abroad during the
year of income. This category includes persons working as Uganda’s ambassadors
of High Commissioner/representatives in other countries.

2.9 PAYE [Charging Income Tax on Employment Income]

Under the “Pay As You Earn” system, the employer deducts the income tax / PAYE before paying
the salaries or wages to the employees. The amount of PAYE deducted is remitted to Uganda
Revenue Authority by the 15th day of the following calendar month. The income tax payable on
employment income is calculated using the rates provided in part 1 of the 3rd schedule of the ITA.

“Pay As You Earn” (PAYE) is not a type or category of a tax, which exists on its own right, as it
often mistaken. However, pay as you earn is merely a method of collecting Income tax on
employment income. Its therefore important to not that Income Tax on employment income is
administered and collected using the pay as you earn (PAYE) system.
For a resident individual the PAYE rates below are applicable on an annual basis.

RESIDENTS

Chargeable Income (monthly) Rate of Tax (monthly)

Not exceeding shs. 235,000 NIL

Exceeding shs. 235000 but not 10% of the amount by which chargeable income exceeds shs.
exceeding shs. 335,000 235,000
Exceeding shs. 335,000 but 10,000 plus 20% of the amount by which chargeable
not exceeding shs. 410,000 Income exceeds shs. 335,000

28
 A. 25,000 plus 30% of the amount by which
Exceeding shs. 410,000 chargeable income exceeds shs. 410,000 and
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

SIMPLE CALCULATION

Example I
If one is earning shs 350,000, how much do they pay?
10,000 + 20% of excess of 335,000 (because one is in the 3rd bracket)
10,000 + 20% (350,000 – 335,000)
10,000 + 20% of 15,000
10,000 + 3,000
Tax payable is shs. 13,000

Example II
If one is earning shs. 2,000,000, how much do they pay?
25,000 plus 30% of excess of 410,000 (because one is in the 4th bracket)
25,000 + 30% (2,000,000 – 410,000)
25,000 + 30% of 1,590,000
25,000 + 477,000
Tax payable is shs. 502,000

Example III
If one is earning shs. 16,000,000, how much do they pay?
25,000 plus 30% of excess of 410,000 plus 10% of excess of 10 million
i) 25,000 + 30% (16,000,000 – 410,000)
25,000 + 30% of 15,590,000
25,000 + 4,677,000
4,702,000

ii) 10% of Excess of 10,000,000

10% of (16,000,000 – 10,000,000)
10% of 6,000,000
600,000
Tax payable = 4,702,000 + 600,000
= shs 5,302,000

29
 NON RERESIDENTS

Chargeable Income (monthly) Rate of Tax (monthly)

Not exceeding shs. 335,000 10%

Exceeding shs. 335,000 but not exceeding 33,500 plus 20% of the amount by which chargeable
shs. 410,000 Income exceeds shs. 335,000

A. 48,500 plus 30% of the amount by which chargeable

income exceeds shs. 410,000 and
Exceeding 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

NB: Nonresident employees are not entitled to the threshold (shs 235,000); so at every amount
under rates of tax, add shs.33, 500 or (10% of 335,000)
Example I
If a nonresident is earning 350,000 shillings how much does he/she pay?
33,500+20% of (350,000-335000)
33,500+3000
Tax payable is shs. 36,500

Example II
If a nonresident is earning 2,000,000 how much does he/she pay?
48500 + 30% of (2,000,000 – 410,000)
48,500 + 30% of 1,590,000
48,500 + 477,000
Tax payable is shs. 525,500

Example III
If one is earning 16,000,000, how much does he/she pay?
48,500 + (30% of 16,000,000 – 410,000) + 10% of excess of 10,000,000
48,500 + (30% of 15,590,000) + 10% 0f excess
48,500 + 4,677,000+10% of (16,000,000-10,000,000)
4,725,500 + 10% of 6,000,000

30
4,725,500 + 600,000
Tax payable is shs. 5,325,500

TREATMENT OF PART TIME ALLOWANCES

• Employees who are engaged on part-time basis are deemed in principle to be earning
income from more than one source.
• Part-time allowances/earnings are taxed at a flat rate of 30% of the gross
• An employee aggrieved by this treatment may submit a return of emoluments from all
sources and make a claim of tax overpaid.

NB It is an obligation of the taxpayer to file a return of income where he/she has multiple
sources of income. No

2.9.1 Computation Of Tax on Income From Employment

The determination of taxable income from employment is now a scan through what has been
covered above and translate the facts regarding a particular employee’s remuneration into legally
taxable figures. It should be noted that while chargeable income provides for adjustment of
allowable deductions, employees have not been privileged to enjoy meaningful deductions as their
expenses have been considered private; e.g, the cost of travel from home to the place of work.

Example 1.

Kato is a resident Ugandan signed a 5 years contract with International Labour Organization starting
on 1st July 2005. The terms of employment are:
a) Monthly basic salary is 4,000,000.
b) He was given a motor vehicle which he used for private work only on weekends which cost
the organization 20,000,000.He used the motor vehicle for 10 months and it broke down.
c) He was entitled to medical insurance with Micro care worth 600,000 per annum.
d) The organization offered to pay his house rent for accommodation worth market value of
550,000 per month.
e) Kato’s son is disabled who needs constant care from his single parenting father and because
of the nature of the job which allows no time for Mr. Kato for his son, the organization
agreed to include his son on its life insurance scheme worth Shs 100,000 per month.
f) Pay in lieu of leave is worth Shs 250,000.

Compute Mr. Kato’s chargeable income and PAYE for the month and the year.

Example.2

1. Jack is employed with International Tele-compunction Union(ITL) and during the year the
following took place concerning his employment.
31
 • He is paid a monthly salary of 2,500,000.
• He is entitled to an annual leave in April. In case the leave is not taken he is paid an amount
of 300,000 in lieu of the leave. He did not take the leave.
• During the month of June he was nominated by ITL to attend a conference in South Africa.
He paid his freight charges and paid other expenses while in SA and they amounted to
4,000,000.ITL reimbursed him 5,000,000.
• He is given a company car at a value of 5,000,000. He uses the car during week days only.
• He is given accommodation allowance of 500,000 per.
• The company also pays for his house girl and house boy 60,000 monthly. However to
qualify for this scheme he pays 10,000 per month.
• Jack applied for a loan of 4,000,000 and this was given to him at interest free rate. The
interest at the beginning of the financial of bank of Uganda (1st July 2005) was 15% although
by the time he got the loan in March 2006 it was standing at 18%.
• He is also entitled to a medical allowance of 250,000 per month.
• During the company party he was given a gift of a wallet worth 9,500.

Required.
i. Compute Jack’s Annual chargeable income
ii. Assess the tax that must be paid by Jack during the year.

Example. 3

Mr. Oundo is a resident employee with Bananda investments, a resident tax paying company.
Oundo works as the General Manager and for the year ended 31st December 2013, the following
transpired:
a) Basic salary: shs.500, 000 per month.
b) Entertainment allowances: shs.100, 000 per month.
c) Accommodation: rent shs.6, 000,000 p.a. paid by the company to the landlord.
d)
e) Transport: drives a Prado (cost 20 million) for both private and official use. It is estimated
that 100 days in a year are for private use.
f) The school fees for his children are met by Bananda High school, which is a sister company
to Bananda Investments. The amount involved is shs.3, 000,000 p.a.
g) In December 2013, Oundo was given 2 air tickets for himself and wife for a 5-day private
holiday in South Africa. The air tickets cost the company shs.5,000,000. He also received
leave pay of shs.1, 000,000.
h) The company pays shs.1, 000,000 life insurance premium per month on his behalf.
i) Oundo is covered by the company’s medical insurance scheme where the company pays
shs.500,000 p.a. to the insurance company on his behalf.
j) Under the company’s employee share acquisition scheme, Oundo was given an option to
acquire 1,000 shares on 1st January 2013 when the price was shs.1, 000 per share. He paid
shs.10, 000 for the option but did not exercise the option (pay for the shares) until 30th

32
 December 2013 when the value of the shares was shs.1, 200. He paid shs.1, 000,000 for the
1,000 shares offered to him.
k) During the year, the company sent Oundo up-country for 10 days to supervise some
company projects. He was given shs.2,000,000 estimated to cover the cost of travel,
accommodation and meals.
Required:
Compute Oundo’s taxable income and liability for the year ended 31st December 2013.

Solution example 3

Oundo’s Taxable Income

For the year ended 31 December 2013
Shs
Basic salary (500,000 x 12) 6,000,000
Entertainment allowance (100,000 x 12) 1,200,000
Accommodation (note 1) 3,522,884
Motor vehicle benefit (note 2) 1,095,890
School fees 3,000,000
Leave pay 1,000,000
Air tickets 5,000,000
Life insurance premium (note 3)
Medical insurance (note 4)
Share acquisition scheme (note 5) 190,000
Subsistence allowance (note 6)
21,008,774
Tax Liability
300,000 + 30% (21,008,774 – 4,920,000)
300,000 + 30% (16,088,774)
300,000 + 4,826,632
5,126,632
Notes:
1. Accommodation benefits is the lesser of the shs.6,000,000 and the 15% of the chargeable
income including the rent shs.6,000,000; i.e. (6,000,000 + 1,200,000 + 1,095,890 +
3,000,000 + 1,000,000 + 5,000,000 + 190,000 + 6,000,000) 15% = 3,522,884
Which is lower than shs.6,000,000. So accommodation benefit becomes the lower value.
2. Vehicle benefit is calculated using the formula.
(20% x A x B/C) – D
But A = market value = cost of vehicle = 20,000,000
B = 100 days
C = 365 days
D=0
So benefit = (20% x 20,000,000 x 100/365) – 0
= 1,095,890.
3. Life insurance premium is not taxable under section 19(2) [c]; i.e., the employer is a
taxpayer.
4. Medical insurance is not taxable under section 19(2) [b].

33
 5. Share acquisition scheme: The benefit is the market value of the shares less any amount paid
for them; i.e., 1,200,000 – (1,000,000 + 10,000) = 190,000.
6. Subsistence allowance is not taxable under section 19(2) [d].

Example. 4

You have been employed by a foreign construction company for the last 7 ½ months with the
following monthly remuneration
Shs.
Basic salary 1,000,000
Medical allowance 400,000
Meals 100,000
Utilities 70,000
Overtime pay 60,000
Monthly bonus 40,000

Additional information:
• You use a shs.10,000,000 company vehicle for official and private purposes on equal day
basis paying shs.5,000 per month to the employer.
• You are provided with a house girl and gardener each paid shs.20,000 per month.
• The meals were provided by the employer in the company canteen during official working
hours using cafeteria system.
• You are provided with accommodation which costs shs.100,000 per month. The amounts are
paid by the employer.

Required:
Compute your monthly taxable income and tax liability.

Solution Example 4.

Monthly Taxable Income

shs
Basic salary 1,000,000
Medical allowance (note 1) 400,000
Utilities 70,000
Overtime pay 60,000
Bonus 40,000
Vehicle benefit (note 2) 78,000
House girl and Gardener 40,000
Accommodation (note 3) 100,000
1,788,333

Tax Liability
25,000 + 30% (1,788,333 – 410,000)
25,000 + 30% (1,378,333)
25,000 + 413,499.9

34
 = 438,500
Notes:
1. Medical allowance is taxable under section 19(1) [a]. It should not be confused with
medical insurance in the previous question.

2. Vehicle benefit is calculated as below

[20% x (10,000,000 x 183/35)] – 5000 = 78,333
12
3. Accommodation is the lesser of the shs.100,000 and 15% of chargeable income
including rent; i.e., 15% x 1,788,333 = 268,300, higher than 100,000. Therefore we
take shs.100,000.
Example 5

Mr. Ebok is an employee of Bokstar Ltd. During the year ended 31.12.2012, he received the
following from the employer.
shs
1. Basic monthly salary 450,000
2. Annual medical reimbursement 2,000,000
3. Leave pay 1,000,000
4. Company loan of 5% interest (Bank interest is 20%) 20,000,000
5. Company food ration worth 20,000
6. Air ticket during annual leave 3,000,000
7. During the year, he was given a company car which was bought at shs.20,000,000
five years ago. It is depreciated on a straight – line basis at 10%. It is estimated that
private use of the car was 73 days during the year. The company deducts shs.30,000
per month from his emoluments in respect of the car benefit.
8. He stays in a company house whose monthly market rental value was put at
shs.100,000 by a recent market survey.

Required:
Compute Mr. Ebok’s annual taxable income and tax liability for the year ended 31.12.2012

Solution 6
Ebok’s Annual Taxable Income
For The Year Ended 31.12.2012
Shs

Basic salary (450,000 x 12) 5,400,000

Annual medical reimbursement (note 1)
Air ticket during annual leave (note 2) 3,000,000
Leave pay 1,000,000
Interest benefit (note 3) 3,000,000
Food ration (20,000 x 12 – note 4) 240,000
Vehicle benefit (note 5) 40,000
35
Accommodation benefit (note 6) 100,000
12,780,000

Tax liability

300,000 + 30% (12,780,000 – 4,920,000)

300,000 + 30% (7,860,000)
300,000 + 2,348,000
=2,648,000

Notes:
1. Medical reimbursement is not taxable under section 19(2) (b).
2. Air ticket during annual leave is taxable under section 19(1) (c).
3. Interest benefit was calculated as below:
(20% - 5%) 20,000,000
15% x 20,000,000 = 3,000,000
4. Food ration is taxable under section 19(1)(b). A ration is a fixed quantity that one is
officially allowed to have when there is not enough for every body to have as much
as they want. This means that it is a benefit to a particular individual only and
therefore taxable.
5. Vehicle benefit: first determine the market value as cost less accumulated
depreciation and then apply the formula; i.e.;,

20,000,000 – (10% x 20,000,000 x 5)

20,000,000 – 10,000,000 = 10,000,000
Applying the relevant formular
(20% x 10,000,000 x 73/365) – (30,000 x 12)
400,000 – 360,000 = 40,000
6. Accommodation benefit is the lesser of the market rent and 15% of the
changeable income including the rent (15% x 12,780,000). So we take 100,000 as
the benefit.

Example 6
Mrs. Kwewana Nyo has been an employee of Kwekwana Ltd. For the last 15 years. She was
recently retired and granted shs.10,000,000 in June 2013 as compensation.
Required:
Compute her annual income tax assuming she had no other income during the year ended 30 June
2013.

36
Solution Example 6
Mrs. Kwewana’s taxable income
For the year ended 30 June 2013
Compensation (75% x 10,000,000) = 7,500,000

Taxable liability
300,000 + 30% (7,500,000 – 4,920,000)
300,000 + 30%(2,580,000)
300,000 + 774,000
= 1,074,000

Example.7
Muzungu is a European electrical engineer specializing in installation of turbines. He was contracted
to install turbines at the recently commissioned Owen Falls Extension Power station in Uganda and
was paid for his professional services as follows:

Air ticket 3,000,000

Hotel accommodation at Sheraton Hotel 2,000,000
Amount remitted to his home country account 10,000,000
Required:
compute the income tax liability of Muzungu payable in Uganda.

Solution example. 7
Muzungu’s taxable income
Air
ticket (Note 1) -
Hotel accommodation (Note 2) -
Amount remitted to his home country 10,000,000
10,000,000

Muzungu’s tax liability (Note 3)

582,000 + 30% (10,000,000 – 4,920,000)

582,000 + 30% (5,080,000)
582,000 + 1,524,000
= 2,106,000
Notes:
1. Air ticket is a passage cost which is not taxable under section 19(2) (a).
2. Hotel accommodation is not taxable under section 19(2) (d).
37
 3. Muzungu is a non- resident so we use non-resident individual tax rates.

Example 8.
Kengoma was a civil servant with Bombo Military Barracks and was laid off on 30th December
2013. His monthly emoluments include
Shs
Basic salary 150,000
Entertainment 200,000
Medical Expenses 50,000
Shamba boy 40,000

Other benefits:
1. Occupied a house provided by the employer
2. Termination benefits amounted to 30 months basic salary payment
3. Acquired a shs.2,000,000 loan from the employer
4. Uses an employer’s vehicle for private purposes
5. Provided with meals at work

Required:
What additional information would you required to calculate Kengoma’s annual taxable income and
his tax liability?

Solution Example 8.

The following would be required:

- The market rent of the house he occupied.
- The number of years he worked for Bombo so as to determine how much of the termination
benefits to tax.
- The interest rate (if any) at which the shs.2,000,000 loan was given and the bank of Uganda
discount rate so that the interest benefit could be determined.
- The number of days the vehicle was used or available for use for private purposes and the
contribution he made (if any) to qualify for the benefit.
- The value of the meals provided and whether such meals were also provided to other
employees on similar terms.

Example .9

Naginda is employed by Fandex Ltd., a Kampala based company. Her appointment letter in part
reads as follows:

Subsequent to your successful interview, the board of directors of Fandex Ltd are happy to appoint
you Financial Accountant. You will report to the Director of Finance who will assign you duties.
The following are your terms and conditions of service:

38
 • Your monthly basic salary shall be shs. 500,000.
• You and your family will enjoy the company’s medical facilities through the company’s
established medical insurance scheme where the company has committed an annual
insurance premium of shs.1,200,000 on your behalf.
• You will be granted 30 days annual leave plus leave allowance of 10% of your annual basic
salary.
• The company will meet your electricity, telephone, and water bills in addition to the monthly
shs.300,000 rent for your accommodation.
• You are entitled to a company car but due to the current break down of cars, you will receive
a monthly shs. 50,000 in lieu of transport until after your first anniversary when a car will be
available for your use.
• The company will contribute 10% of basic salary towards National Social Security Fund
(NSSF) while yourself will contribute 5% of your basic salary.
• This appointment letter is effective 1.1.2013. The terms and conditions of service shall be
subject to change after you have completed your one-year probation period.

During the year, management reviewed the performance of Naginda and having been found
excellent, she was extended on 1.7.2013 a shs. 10,000,000 interest- free loan to enable her furnish
her house. The bank interest rate was 20% p.a.
Like other employees, Naginda was offered a bonus of shs.600,000 in December 2013.

The company paid her annual utility bills as follows:

Shs
Electricity 300,000
Water 250,000
Telephone 180,000

Naginda was allowed to proceed for leave on 1.1.2014 having successfully completed her probation.

Required:
Compute Naginda’s annual taxable income from employment and the tax (PAYE) payable by her
for the year ended 31.12.2013.

Solution Example .9

Naginda’s annual taxable income

for the year ended 31.12.2013

Basic salary (500,000x12) 6,000,000

Medical insurance (note 1) -
Leave allowance (10% x 6,000,000) 600,000
Utilities: Electricity 300,000
Water 250,000
39
 Telephone 180,000
Accommodation (note 2) 2,119,500
Transport allowance (50,000x12) 600,000
Contributions to NSSF (note 3) -
Interest benefit (note 4) 2,000,000
Bonus 600,000
12,649,500

Tax liability
300,000 + 30% (12,649,500 – 4,920,00)
300,000 + 30% (7,729,500)
= shs. 2,618,850
Notes:
1. Medical insurance is not taxable under section 19(2) [b].
2. Accommodation is the lesser of the market rent (shs. 3,600,000) and 15% of the chargeable
income including market rent (2,119,500).
3. Employer’s contribution to NSSF is not taxable under section 19(2) [g].
4. Interest benefit is 20%x 10,000,000 = 2,000,000.

Practice Question:
Zedd is a Manager of Candy Limited, a company dealing in the importation and sale of Candy.
Zedd was appointed effective 1 July 2007.
His letter of appointment, among other things, contained the following terms of employment:

(i) Basic monthly salary Shs 5 million, payable in arrears.

(ii) A company car, which had just been acquired at Shs 40 million.
(iii) Rent allowance of Shs 700,000 per month plus domestic bills of electricity, telephone and
water.
(iv) Reimbursement of private entertainment expenses not exceeding Shs 200,000 per
month.
(v) Loan facilities from the company not exceeding Shs 20 million at an interest rate of
5% per annum. The loan(s) would be repayable in four years’ time.
(vi) Company to contribute the equivalent of 10% of basic salary to National
Social Security Fund and Zedd would be required to contribute 5% of his basic salary to
the same Fund.
(vii) A 30 working days’ leave after every year; leave pay being equal to a month’s
basic salary. The company to meet annual leave travel costs.
(viii) Medical insurance allowance for self and immediate family amounting to Shs
300,000 per month. The company maintains a medical scheme with an international
medical group for all the employees.
(ix) A hardship allowance of Shs 70,000 per day when deployed to supervise the
company’s outlets in the remotest parts of the country in addition to a normal subsistence
allowance, to cover maintenance costs while on duty.
(x) Company to pay subscription fees to any professional body that Zedd subscribes to,
up to a limit of Shs 300,000 per annum.
(xi) Appointment is effective 1 July 2007.
40
 Additional information:

Zedd accepted the above terms and reported immediately for duty.
(i) By 30 June 2008, Zedd had privately used the car during that year for approximately
70 days. He had also paid Shs 300,000 towards expenses related to the car.
(ii) The company paid subscription fees on his behalf to the Institute of
Certified Public Accountants of Uganda (ICPAU) amounting to Shs
250,000.
(iii) The company paid Zedd rent allowance for a house he got in Muyenga of Shs
700,000 per month and the monthly domestic bills amounted to Shs 200,000.
(iv) During the twelve months to 30 June 2008, Zedd incurred a total cost of
Shs 2 million in respect of entertainment.
(v) Zedd took a furniture loan of Shs 12 million on 1 March 2008. Assume that the statutory
rate of interest at 1 July 2007 was 15%.
(vi) The annual leave travel expenses amounted to Shs 300,000 and were paid
together with leave pay in December 2007.
(vii) During the financial year Zedd spent a total of 30 working days supervising the company’s
outlets upcountry.
(viii) Zedd received alimony from his ex-wife of Shs 10 million on 30 April 2008.
Required:
(a) Compute Zedd’s chargeable employment income for the year ended 30th
June 2008 commenting on any information not used.

3.0 TAXATION ON BUSINESS INCOME

Definition
Section 3 of the ITA (1997) defines business as “Any Trade, Profession, Vocation or Adventure in
the nature of trade but does not include employment.

3.1 TRADE
Trade refers to the exchange of goods and services for a profit motive. It refers to the buying and
selling of goods and services with the aim of earning a gain.

BADGES OF TRADE.

41
Business is ordinarily taken to mean trade which is the buying and selling of goods or any adventure
in the nature of trade. As the Lord Wilberforce pointed out in the case of RansomeVs Higgs
1974,every one is supposed to know what trade means so parliament which wrote it into law has
wisely abstained from defining it.
The Royal commission on taxation of profits and income 1956 listed six badges of trade which are
generally used in determining what is an adventure in the nature of trade.

1. The Motive
Pursuance of profits is a good indicator of a trading or business activity.

2. Method of Acquisition of the Item Sold

There are circumstances where a person acquired the commodity being disposed off as a gift or
through inheritance. On subsequent disposal of such a commodity, you cannot wholly conclude that
the disposal is by way of trade. On the other hand if the commodity was acquired by way of
purchases, given the circumstances e.g. motive of purchasing or bought for re-sale other than private
use, then you can conclude that the disposal constitutes trade or a business activity.

3. Subject Matter of Transaction

If the commodity, which a person has disposed off, is of a type, which is normally acquired for
personal enjoyment or as an investment, the profit arising on disposal is not included in trading
profit or business income. Such profits constitute capital gains.

4. The length of the period of ownership.

The length of time during which the asset/commodity is held is a good indicator of a business or
trading transaction.

A person who buys a commodity and sells it soon after purchase is said to be in trade. In most cases
during the period of ownership the person neither derives any income nor personal enjoyment from
the commodity.

5. Frequency or number of similar transactions by the same person.

The more frequent the person repeats a certain type of transaction; the more likely is that transaction
or set of activities will be constructed as trading. Trading comes out strongly where there are a series
of transactions in a repeated nature; or forming a habitual and continuous activity.

6. Supplementary work on or in connection with the property realized.

In many cases the person buys a commodity and performs work on it to make it more saleable.
Supplementary work may take form of modifications in shape, colour, size or volume, processing or
altering any attribute of the commodity to make it readily saleable. The modification and
supplementary works are indicators or pointers to the conclusion that the activity was a trading or
business activity.

42
3.2 SOURCES OF BUSINESS INCOME.
According to section 19(1) of the ITA (1997), Business income refers to any income derived by a
person incidental to carrying out business; whether it is of a revenue or capital nature. Business
income includes the following:
1. Any gain that arises on the disposal of business assets or on the satisfaction or
cancellation of a business debt that may a revenue or capital gain.
2. Any amount received by a person as a consideration for restricting the person’s
capacity to carry on business.
3. Gross proceeds derived by a person from the disposal of trading stock.
4. The value of any gift derived by the person by virtue of past, present or
prospective business relationship.
5. Interest derived in respect of trade receivables or a person engaged in the
business of banking or money lending.
6. Rental income derived by a person whose business is wholly or mainly the letting
or holding of property.
7. Any amount received by a person carrying out business and is not exempted from
taxation by the ITA (1997)

3.3 ALLOWABLE DEDUCTIONS

Allowable deductions include all expenditures that were wholly and exclusively incurred in the
generation of income under tax assessment for the accounting period under review. In addition such
expenditures must be of a revenue nature.
Allowable deductions include the following;
1. All expenditures and losses incurred by the person to the extent to which those
expenditures and losses were incurred in the production of income during the year of
income under review.
2. Any loss on disposal of business assets whether capital or revenue in nature during
the year of income under review.
3. Expenditures on meals, refreshments and entertainment are allowable as business
expenses under the following circumstances.
(i) Meals and refreshments are provided to employees within the employees’
premises or those operated by third parties but on arrangement with the
employer on his behalf; which meals and refreshments are for the sole
benefits of employees on equal terms.
(ii) Where the person’s businesses is the provision of meals, refreshments and
entertainment and such facility have been provided to other persons at the
payment of an arm’s length consideration then the cost of providing such
meals, refreshments and entertainment is taken as an allowable deduction.
(iii) Where meals, refreshments and entertainment are provided as benefits to
employees for their private or domestic consumption such meals,
refreshments and entertainments not treated as an allowable deduction.

43
 4. Interest expenditure incurred during the year of income in respect of debt obligation,
only to the extent that the obligation has been employed to generate income included
in the gross income of the year of income under review.
5. Minor capital equipment expenditures incurred during the year of income to acquire a
minor depreciable asset whose cost is less than Ug.shs 100,000/= . This provision
applies to only to depreciable assets, which can function on their own right and not as
an individual item or part of other depreciable assets.
6. Legal, accountancy, auditing and other professional fees paid by the person for the
services rendered are allowable expenses except where such services were absolutely
not necessary.
7. The cost of routine repairs of property and equipment occupied or used by the person
in the generation of income is allowed as deductible expenses.
8. Specific bad debts written off are allowed as expenses incurred in the production of
income.

NOTE
(i) Bad debts to be allowed as a deductible expense it must have been resulted
out of the business operation.
(ii) The business concern must have taken all necessary steps to recover the said
debt but failed so that the amounts are allowed to be written off as bad debts.
(iii) Where a previously written off debt is recovered, the amounts recovered are
taken as business income for taxation.

9. Lease premiums paid on short notes (less than 99 years) are treated as allowable
deductions.
10. Employments remunerations in terms of salaries and allowances.

3.3.1 OTHER ALLOWABLE EXPENDITURES

i) Start Up Costs/Preliminary Expenses
These are costs incurred on the formation of business. They include costs incurred to enable the
entity to come into existence. A deduction is allowable for the start up costs at a rate of 25% on a
straight-line basis. i.e. over a period of 4 years.
ii) Scientific Research Expenditure
Scientific research means any activity in the field of natural or applied science for the development
of human knowledge. This includes any costs of scientific research undertaken for the purposes of
developing one’s business. A deduction is allowed for such scientific research expenditure in the
year of income it was incurred.
iii) Training Expenditure
44
An employer is allowed for expenditure incurred during the year of income on the training of his/her
employees so long as
(i) Such training does not exceed an aggregate of 5 years
(ii) Such training is provided to a resident person.
(iii) Such training is designed to increase the workers efficiency on the job. General
purpose academic training cost is not allowed as a deduction.
A deduction is allowed for such training expenditure in the year of income it was incurred.
iv) Charitable Donations
A donation or gift made during a year of income is allowed as deduction if such a donation or gift
was made to any of the following organizations:
1. Religious institution
2. Registered Charitable organization
3. Educational / Medical institution of a public nature
4. Amateur sporting association
However, the value of the donation or gift allowed as a deduction should not exceed 5% of the
business taxable income calculated before taking into account the donation or gift.

v) Fees / Subscriptions
Fees or Subscriptions made to a trade association to which a firm is a member is tax allowable. This
assumes that such an association is registered to further the causes of business. However any
contribution to a political party is considered voluntary and would not have a direct connection to
the business trading activities. But where there is proof that such a political donation is related to the
survival of the business, it may be tax allowed. For subscriptions made with the view of creating a
business Goodwill or building a firm’s image, such expenditure is taken to be of a capital nature and
therefore, it is not tax allowable.

3.3.2 NON ALLOWABLE EXPENSES.

i) Drawings
Drawings are not allowed as deduction for business income taxation purposes. They are added to the
reported net profits when computing the business taxable income.
ii) Fines And Penalties
In general, fines and penalties including the costs of tax appeals and related costs are disallowed
expenditures. This is because such expenditures are not necessitated by the business conduct.
However, where the firm pays a fine or a penalty on behalf of its employee as part of his/ her
remuneration package, such expenditure is allowed as a deduction.
iii) Capital Expenditures
Any expenditure in connection with the acquisition of a capital asset, renovations, replacing a
capital asset as well as any initial capital outlays is not tax allowed.
iv) Recoverable costs.
Any expense that would appear to be allowed but later is to be recovered by insurance,
Governmental grant or by any other outside means, there is no tax benefit that will be received in
such a circumstance.

45
v) Domestic or Private expenditure.
These include meals taken at work, transport of a worker.
vi) Any expenditure or loss recoverable under insurance contracts
vii) Income tax Expense
viii) Income transferred to reserves
ix) Contribution made to a retirement fund-pension
x) Any a limony or allowance paid under any judicial order
x) Depreciation expense

4.0 CAPITAL DEDUCTIONS

These are deductions in respect of qualifying capital expenditure. The purpose of giving capital
deductions is to enable a tax payer receive the qualifying outlay over a period of time depending on
the nature of the capital expenditure. Capital deductions are the equivalent of depreciation. That is
why we listed depreciation among the non-allowable deductions so that we can compute and allow
its equivalent ( capital deduction). By opting for capital allowances/ deductions instead of
depreciation, they intend to give a deduction with a standard formula of arriving at the amount to
allowed every year. This cures the vagueness in the depreciation amounts due to the fact that
different companies used different methods and rates to compute depreciation and could look up one
which increases the expenses so as to pay little tax.

4.1 Qualifying Capital Expenditure

Not all capital expenditure qualify for capital deductions. It is therefore pertinent for us to know that
the following are the qualifying capital expenditures.
1. Expenditure on plant and machinery
2. Expenditure on industrial buildings
3. Expenditure on farm works
4. Expenditure on mining operations
Note: some capital expenses are already allowable expenses and need not be considered for further
deductions e.g. , minor capital equipment , costs of intangible assets and start up costs.

Types of capital deductions/ allowances

1. Wear and tear
2. Industrial building deductions
3. Initial allowance –repealed
4. Start up cost

a) Wear and tear

46
This is a capital deduction allowed in respect of depreciable assets which are plant and machinery.
Note that a depreciable asset is defined in section 2 to mean plant and machinery or any equipment,
utensil of similar article used by a person in the production of income and which is likely to lose
value because of wear an tear or obsolescence.

Meaning of plant and machinery

Apparently, there is no statutory definition of either plant of machinery for capital deductions
purposes.
None the less, case law provides us with two cases in which the judges at least described what plant
and machinery could entail in the absence of solid statutory definition. These cases include:

a) Yarmouh Vs France (1887) in which the judge described plant as,

“whatever apparatus used by a business man for carrying on his business, not being stock in
trade , but all goods and chanttel, fixed or movable, live or dead, which he keeps for
permanent employment in his business.”
b) Wimpy international Ltd Vs War Land (1988), in which the judge seems to have deduced
further down to earth meaning from the foregoing case- Yarmouth Vs France.
Consequently the judge in the case of wimpy came up with three demarcation tests which
distinguish plant and machinery from other items. These tests include:

i) Functional test: That the asset must have been actively used in the carrying on business
during the year.
ii) Inventory test: The asset must not be an item of stock in trade and immaterial items should
be expensed/ expended in the year in which they have been acquired even if they are to
be used for more than one year. This position of the judge does not in any way worry a
tax consultant in practice or in training because section 26 of ITA also requires minor
capital equipment to be expended in the year of acquisition.
iii) With which and not in which test: The asset should be with which and not in which
business was carried on during the year. E.g a trailer mounted container which is used to
house the front desk manager is not considered to be plant and machinery but that which
is used to transport goods qualified to be.

4.2 Classification Of Plant And Machinery For Wear And Tear Purposes

The ITA classified plant and machinery in 4 classes with different rates as follows:

Class I – computer and data- handling equipment. This includes type writers and calculators whose
value is not less than shs.1,000,000. The rate is 40%.

Class II – Automobiles, buses, mini buses with a seating capacity of less than 3o passengers; goods
vehicles with a local capacity of less than seven tones; construction and earth moving
equipment . The rate of 35%.

47
Class III – buses with a seating capacity of 30 or more passengers goods vehicles designed to
carry or pull loads of more than 7 tonnes; specialized trucks; tractors, trailers and trailer
mounted containers; plant and machinery used in farming, manufacturing or mining
operations. The rate is 30%.

Class Iv – railroad cars, locomotives and equipments; vessels barges, tugs and similar water
transportation equipment; aircraft, specialized public utility plant, and machinery, office
furniture, fixtures and equipment; any depreciable asset not included in another class . This
include farm works. The rate is 20%.
Note:
1. The cost of a vehicle other than a commercial vehicle ( luxury vehicle) for purposes of wear
and tear is restricted to Shs 60,000,000. If the vehicle cost more than Shs. 60,000,000 then
the person is deemed to have bought two separate assets; whose cost is the difference
between the actual cost and the Shs. 60,000,000. This business asset if assumed not to
depreciate and is not include any where for any deduction. When such as vehicle is sold, the
vendor is deemed to have sold two separate assets and hence the considerations received
should be apportioned between the depreciable and business asset; i.e.
Restricted cost x consideration
Actual cost
= price for which the depreciable asset was sold
Business asset cost x consideration
Actual cost
= price for which the business was sold.
1. The gain/ loss on disposal of a business asset is included in the determination of taxable
business assets is included in the determination of taxable business income. The same is not
true for depreciable asset because the total consideration from a depreciable asset is deducted
in the wear and tear schedule under the respective pool of assets.
2. Farm works under class four include labour quarters and other immovable buildings
necessary for proper operation of a farm, fences, dips, drains, water and electricity supply
line, wind breaks and other works necessary for farming operations, but does not include
farm houses (and depreciable assets).
3. Expenditure of a capital nature on horticulture incurred on acquisition of plant or
construction of a green house is allowed a deduction of 20% of the expenditure on straight
line basis over a period of five years. It therefore implies that this expenditures does not
qualify for deductions in any of the four classes above. Horticulture means.
(a) Propagation or cultivation of seeds, bulbs, spores of similar things.
(b) Propagation or cultivation of fungi.
(c) Propagation or cultivation in environments other than soil whether natural or artificial
4. The depreciation rates in the four classes above are on reducing balance method.
5. Purchases are added to the written down value (b/d) of the relevant class, while disposal are
deducted.
6. The ITA recommends the pooling system; i.e. the balance b/d additions, disposal and
balances c/d in a class are total values of all assets include rather than individual costs.
48
 However students find it difficult to use the pooling system and prefer the individual asset
method. They should discuss their with their facilitators.
7. Trading receipts/ capital gains arise where the consideration received on disposal of the plant
and machinery exceeds the written down value of that class of assets. This excess (trading
receipts) is taxable and should be included in the business income of the person of that year.
8. Where the consideration is exceeded by the written down value of the class of assets
disposed off, a capital loss of balancing allowance arises. This loss is deducted before
arriving at the chargeable business income for the year.
9. Where a person acquires a depreciable asset but pays for it in installment for more than one
year of income, each annual installment is considered a separate asset but of the same class.
10. Where plant and machinery is used for both business and private purposes, the wear and tear
should equally be apportioned using the most suitable apportionment basis.
11. Where the written down value of the pool of assets at the end of the year of income, after
allowing the deduction (wear and tear) is less than Shs 100,000, a deduction shall be allowed
for the amount of the written down value.
12. Where an asset of plant and machinery is bought on hire purchases, the hire purchase interest
does not constitute the cost base of the asset . it should be allowed under section 26.
13. Where a person sales plant and machinery for less than their written- down value, he / she is
deemed to have received the greater of:
(a) The cost base (WDV) of the asset at the time of sale; and
(b) The fair market value of the asset at the time of sale.
14. The cost base of the depreciable asset is added to added to a pool in the year of income in
which the asset is placed in service and not when it is bought.

Format of wear and tear schedule

1st class (40%) 2nd class (35%) 3rd class (30%) 4th class (20%)
B/d
Additions

Disposals

Wear & tear

WDV (c/d)

B) Initial Allowance

This is also called investment allowance or first year allowance. Under section 28, initial allowance
is granted to a person who puts to use an item of eligible property for the first time- during the year
of income.
The rate at which initial allowance is allowed depends on the location of the investment, i.e. in a
prescribed area or a non- prescribed area.

49
 Prescribed areas include Entebbe, Kampala, Namanve, Jinja, and Njeru. The rate is 50%.
Non-prescribed areas include any other location which is not a prescribed area. The rate is 75% of
the cost base at the time of use.
Industrial buildings other than approved commercial buildings construction started on or after 1
July 2000 also qualify for initial allowance of 20%.
Note: For the purposes of determining the cost base for other capital deductions the initial
allowance is reduced from the initial cost base.

Eligible property

Section 28(3) describes items, of eligible property to mean plant and rnachinery wholly used in the
production of income included in gross income but does not include:
a) Goods and passenger transport vehicles,
b) Appliances of a kind ordinarily used for household purposes, or
c) Office or household furniture, fixtures and fittings.

Format o Wear and Tear schedule with initial allowance

‘ 1 Class (40%) 2nd Class 35%) 3rd Class (30%) 4 Class (20%)
WDV (b/d) -
Additions

Initial allowance

Disposals

Wear & Tear

WDV (c/d)

c) Industrial Buildings

Section 2 defines an industrial building as a building wholly or partly used or held ready for use by a
person in:
a) Manufacturing operation including power generation and water supply.
b) Research and development into improved or new methods of
manufacture.
c) Mining operations.
d) An approved hotel business.
e) An. Approved hospital.

f) An approved commercial buildings

Points to notes

1. Capital deduction in respect of industrial building is called Industrial Building Deductions

(IBD).
50
2. The IBD rate is 5% on a straight-line basis.
3. Where an industrial building is partly used for the qualifying uses, and the cost of
constructing that part used for non- qualifying use is not more than 10% of the total expenditure,
then the deduction is granted in full as if the building was V wholly used for the qualifying use.
Otherwise the deduction is V apportioned accordingly.
4. Expenditure on improvement/extension of an industrial building is considered as construction
of a separate industrial building.
5. Capital expenditure incurred on acquisition of rights over land, on which an industrial building is
constructed, does not qualify for IBD. However, expenditure on preparing the site or foundation
of an industrial building qualifies for IBD.
6. Where an industrial building is purchased, the purchaser takes the residual value on purchase
and gets IBD for only the remaining period.
7. The cost of the building does not include, the cost of depreciable assets installed in the
building.
8. The IBD must never exceed the cost; i.e., the residual value should never be a negative
figure.
9. Where an industrial building is bought and sold together with land, the value of the land is
the difference between total consideration and the residual value.

10. There is initial allowance on new industrial buildings at 20% except approved commercial
buildings. For a new commercial building or extension of an industrial building to qualify
for initial allowance, construction of such must have commenced on or after 1S July 2000.
Because of the imaginary years used throughout this book, we did not calculate initial
allowance on industrial buildings where applicable. However, in a practical situation, you
will be given the actual years which you will compare with the statutory provision of 1 July
2000 and then act accordingly.

Rates of Tax
The tax rate varies with the category of the taxpayer and also with the resident or non-
resident status of the taxpayer.

a) Individual tax rates: Any person who carries on business as a sole trader or partnership
is taxed at individual tax rates - Refer to Employment Income.
b) Companies other than mining companies: The rate is 30% of chargeable income.
c) Mining companies: The rate applicable to mining companies is derived using the formula:

R = 70 - 1500/X
Where:
X is the number of percentage points represented by the rate of chargeable income of a
mining company for the year of income to the gross revenue of the company for the year;
i.e.,
X= Chargeable income x100
Gross revenue

51
Points to note:
i) If the rate derived per formula above exceeds 45%, then the rate of tax shall be 45%.
ii) If the rate derived from the formula is less than 25%, then the rate shall be 25%.
iii) Gross revenue means the normal accounting turnover plus net capital gains from disposal of
business assets if any.

d) Rate of trustees and Retirement Funds

i) When a trustee is for the trust of the estate of a deceased resident individual, the trustee is
charged at individual resident rates for the year of income in which death occurred and the
following year of income.
ii) Trusts are taxed at 30%.
d) Withholding tax rate for interest and dividends for resident persons is 15% of the gross
amount.

Example 1. CW1
Below is the income statement for Good Tales Limited for the year ended 2013;

“000” “000”
Sales 100,000
Less: Cost of Goods Sold:
Opening Stock 2,000
Purchases 78,000
Cost of goods Available for sale; 80,000
Less: Closing stock 5,000
Cost of Goods sold 75,000

Gross Profit: 25,000

Add; Other Income 1,000
Net Gross Profit 26,000

Less: Operating Expenses

Salaries 6,000
Bad debts 30
Transport 2,000
Insurance Premium 300
Advertising 2,100
Office Expenses 400
Medical 1,230
Motors Vehicle Expenses 4,000
Professional Fees 200
Audit Fees 300
Entertainment 50
52
Motor Vehicle fuel 3,000
Drawings 700
Damaged stock 500
Stationery 900
Depreciation 790 22,500

Net Profits 3,500

Additional Information:
i) Office equipment, furniture and fittings were the only non current assets of the company
with a written down value as at 31st December 2010 of shs. 2,000,000
ii) Provisional income tax amounting to shs. 700,000 was paid during the year
iii) The Managing Director took consumables valued at shs. 1,450,000. The sales reported are
net of this amount.
iv) Closing stock excludes insured stock that had been damaged in transit and compensation
claims are being processed. The stock figure however includes 4,000,000 being the value of
goods invoiced but not yet delivered.
v) Other income includes a trading receipt of shs.600,000 realized on sale of old furniture
which had a written down value of shs. 100,000 only.
vi) Salaries include wages worth shs.1,400,000 paid to shamba boy and a watch man, the two
worked for the Managing Director as a benefit from the company.
vii) Two directors have company vehicles which are used for business and private purposes. The
company meets fuel and maintenance expenses and its was established that 1/3 of the total
running time was related to private use.
viii) Professional fees were incurred during the recent valuation of fixed Assets.

Required: Compute;
a) Adjusted company’s taxable income.
b) Net tax payable
c) Outstanding Tax Liability

Solution:

Question One – Compulsory

“000”
PBT 3,500

Add: Disallowables:

Depreciation 790
Damaged Stock – Insurance 500
Stock –closing 500
53
 Stock Drawings by MD 1,450
Salaries for shamba boy 1,400
Maintaince Expense – Private 1,333
Fuel expense – private 1,000
Bad debts-considered general 30
Entertainment 50
Drawings 700 7,753
11,253
Less: Allowables
Invoiced by not Delivered 4,000
Gain on disposal of furniture 100
Wear and Tear 236 (4,336)

Taxable Income 6,917

b) Tax Payable 6,917 *30% = 2,075.1

c) Outstanding Tax Liability:

Tax payable for the year 2,075.1

Less: Provisional Tax 700

Outstanding Tax 1,375.1

Workings: 1

Wear and Tear of Furniture: 20%

Balance b/d 2,000
Addition: -
W&T (2011) 20% of 2000 (400)
W&T (2012) 20% of 1600 (320)
Balance b/d 2013 1,280
Disposal (100)
W&T (2013) 20% of 1180 236
Balance c/d 944

Intently

Example 10.
Bananda Ltd is located in Busia town. The company manufactures bicycles for the regional market.
Below are extracts of its financial statements for the year ended 30th June 2004.

A. Statement of Financial Position

Non-current Assets
Notes:
i) Information from the previous tax computation indicates the following: Initial cost for the
industrial building as at 30th June 2003 was shs.50, 000,000.
54
Written down values as at 30th June 2003 were as follows:
Shs.
Class 1 20,000,000
Class II 10,000,000
Class III 30,000,000
Class IV 8,000,000

ii) Additions: These are per actual cost on the following dates Industrial building – 01st July
2003. Heavy Lorries -These were two Lorries; one UAA was bought on 1 October 2003
at shs4, 000,000. While the other UAB was bought on 31st December 2003 at shs.6,
000,000.
Cars: The UXT was bought at shs.5, 000,000 on 1’ July 2003 While the other UAB was bought at
shs.30, 000,000 on 1 April 2004
Computer worth 5, 000,000 and office furniture of 2,000,000 were bought on 1 July 2003.
B. Statement of Comprehensive Income
Shs.
Gross profit b/d 100,000,000
Expenses
Depreciation 23,000,000
Rent 20,000,000
Entertainment 2,000,000
Cost of lease extension 1,000,000
Salaries 30,000,000
wedding contribution 500,000
NSSF(company contribution) 3,000,000
Profit for the period 20,500,000

Required:
(i) Compute industrial building deductions for the years ended 30th June 2004.
(ii) Compute wear and tear for the year ending 30th June 2004
(iii) Outline the four (4) aspects that are normally considered in determining chargeable
income.
iv) Make an income tax computation to determine taxable income for Bananda Ltd for the
year ended 30th June 2004.
v) Determine the tax liability for the year.
Solution Example .10

(i) IBD
5% X 50,000,000 = 2,500,000

55
Notes:
a) The written down value as at July 2003 is as per the Financial Accountant which is not
recommended for tax computation. Please note that the written down values we always look
out for in taxation are as per the tax accountant.

b) The examiner says the residual value (salvage value) of the building as per the previous tax
computations was shs.60, 000,000. This means that these buildings were written off and
cannot attract any further IBD because he did not give the cost of the buildings on which
IBD is calculated.

c) IBD was therefore computed only on additions.

Remember that additions are recorded at the same amounts both in the accountant’s books and tax
accounts. Its also mentioned that additions were made at the beginning of the year. This means a full
year’s IBD is charged.

ii) Wear &Tear schedule

Particular
Class I -40% Class II-35% Class III -30% Class IV -20%
.
Shs. Shs. Shs. Shs.
WDV (1-7-2003) 20,000,000 10,000,000 30,000,000 8,000,000
Additions:
Computers 5,000,000
Car UXT 5,000,000
Car UAB 30,000,000
Heavy lorries - - 10,000,000
Office furniture - 2,000,000
S.total 25,000,000 45,000,000 40,000,000 10,000,000
Initial allowance - -
25,000,000 45,000,000 40,000,000 10,000,000
Wear & Tear 10,000,000 (7,875,000) 10,800,000 (2,000,000)
WDV (30-6 2004) 15,000,000 37,125,000 29,200,000 8,000,000

Workings
Class I — Wear &Tear = 25,000,000 x 40% = 10,000,000

Class II- Wear & Tear

Car UXT = 5,000,000 x35% = 1,750,000
Car UAB = 30,000,000 x 35% x 3/12 = 2,625,000
WDV /d = 10,000,000 x 35% = = 3,500,000
Total Wear & Tear 7,875,000

Class III - Wear & Tear

56
 WDV b/d = 30,000,000 x 30% = 9,000,000
Lorry UAA = 4,000,000 x 30% x9/12 = 900,000
Lorry UAB = 6,000,000 x 30% x 6/12 = 900,000
Total W& T 10,800,000

Class IV - Wear & Tear = 10,000,000 x 20% = 2,000,000

iii) The four aspects normally considered to determine chargeable income include:
- Exempt income.
- Allowable deductions.
- Disallowable deductions.
- Capital deductions.

iv) Bananda Ltd Taxable Income

For the year ended 30th June 2004
Shs,
Net profit as per Accountant 20,500,000
Add: Disallowable deduction:
Depreciation 23,000,000
Entertainment 2,000,000
Cost of lease extension 1,000,000
Wedding contribution 500,000
NSSF 3,000,000
Chargeable Income 50,000,000
Less: Capital deductions:
IBD (2,500,000)
Initial allowance - not allowed -
Wear & Tear (30,675,000)
NSSF contribution (now allowable)
Taxable income 16,825,000
Tax liability
30% x 16,825,000
= 5,047,500
Example 11.

GOLDSPHERE LTD is a mining company in Uganda. Below is the company’s statement of

Comprehensive Income for the year ended 3 l Decembe-2007
Shs.
Sales (note 1) 800,000,000
Cost of sales 500,000,000
Gross profit 300,000,000
Operating expenses:
Depreciation 10,000,000

57
Rent 40,000,000
Fuel 80,000,000
Salaries 30,000,000
Advertising (note 2) 40,000,000
Training (note 3) 15,000,000
Travelling (note 4) 8,000,000
Net profit 77,000,000

Notes to the accounts:

(1) Sales are broken down as follows: Shs.
Gold export 500,000,000
Local sales to Bank of Uganda 350,000,000
Less: Sales commission 50,000,000
Total sales 800,000,000

(2) Advertising shs.40,000,000. This includes shs. 10,000,000 spent on motor rally sponsorship.
(3) Training shs.15,000,000. This includes shs.5,000,000 being school fees of MD’s children.
(4) Travelling shs.8,000,000. This includes shs.2,000,000 on account of the air ticket the company
offered the chief accountant for his honeymoon

Required:
(i) Compute Goldsphere’s taxable income for the year ended 31st December 2007.
(ii) Compute Goldsphere tax liability for the year ended 31 December 2007.

Solution example 10
GOLDSPHERE LTD
Taxable income
For the year ended 31/12/2007
Shs.
Net profit as per the Accountant 77,000,000
Add: Disallowable expenses:
Motor rally sponsorships (note 1) 10,000,000
Fees for MD’s children 5,000,000
Accountant’s air ticket 2,000,000
Depreciation 10,000,000
Chargeable income 104,000,000

Tax liability
Derive the rate first, hoping we still remember that it is a mining company:
70 - 1500/x
x = chargeable income
Gross income
58
 = 104,000,000 x 100
850,000,000
= 12%
Thus 70 - 1500/12
= 70 - 125
= -55%
Note: The -55% is less than 25% so the rate applicable is 25%.
Hence tax liability = 25% x 104,000,000
= 26,000,000

Notes:
1. Goldsphere Ltd either exports or sales her gold to Bank of Uganda only. Sponsorship of motor
rally cannot be considered expenditure intended to attract customers.

2. In financial accounting sales commission is treated as an operating expense. It is not deducted

from the sales in the trading account. Therefore, if we were marking accounting the accountant
could have got it wrong. However, in taxation as long as it was deducted, it has no effect on the net
profit and that is why we ignored it in the disallowables. But for purposes of getting the correct
gross revenue, this commission has to be added back;
i.e..., 800,000,000 +50,000,000 = 850,000,000

Example 11.
Below is the income statement of Muddogo Ltd.

Muddogo Ltd income statement

For the year ended 31’s December 2005
Shs. Shs.
Sales (1) 90,000,000
Cost of sales (2) 80,000,000
Gross profit 10,000,000
Operating expenses:
Rent (3) 600,000
Lost stock (4) 2,000,000
Transport 400,000
Salaries 1,500,000
Medical (5) 1,800,000 6,300,000
Net profit 3,700,000

Notes to the accounts

1. Sales - shs.90, 000,000.
These are invoiced values of goods sold and delivered during the year. The figure excludes

59
 shs.2, 000,000 for the goods which were sold and invoiced during the year but were never delivered
to the buyer.
2. Cost of sales - shs.80, 000,000.
The closing stock included in this figure was shs.11, 000,000 valued at market prices. This was later
realized to be a mistake as it was l0% higher than the cost price of these stocks
bearing in mind that the recommended value for income tax purposes should be lower of the cost
price or market price.
3. Rent - shs.600, 000. This covers both the business premises and Managing Director’s flat. 30% is
estimated to relate to the flat.
4. Lost stock - shs.2, 000,000. This stock was lost through armed robbery. However the insurer
fully compensated the company. In addition police was able to recover shs.300,000 worth of stock
from the robbers which was handed back to Muddogo Ltd. This was after Muddogo Ltd had been
compensated.
5. Medical - shs.1, 800,000. 20% relate to medical claims for staff for the previous year.

Required: Compute the taxable income of Muddogo Ltd for the year-ended 31st December 2005.
Determine the tax liability as well.

Solution Example. 11

Muddogo Ltd Taxable Income

For the year ended 31st December 2005
Shs.
Net profit: 3,700,000
Add: Disallowables
Omitted sales 2,000,000
Lost stock (2,000,000 + 300,000) 2,300,000
Previous year medical claims (note 1) 360,000
8,540,000
Less: Allowables
Over valuation in closing stock (note 2) 1,000,000
Taxable income 7,360,000
Tax liability
30% x 7,360,000 = 2,208,000

Notes:
1. Business taxation is based on accrual basis accounting. Therefore the medical claims for the
previous year were allowed in that year although they were not paid.

2. Amount of over valuation was got as

11,000,000 -11,000,000/1.1 or
11,000,000x 110
= 1,000,000
60
 When the closing stock is over valued, it understates the cost of sales, which in turn over states the
gross profit. For fair taxation purposes we adjust this by deducting the excess from the chargeable
income.

3. Following the repealing of Section 22(2)(g), a person is allowed a deduction of the cost of
housing his employees.

Example . 12
Mr. Serious is a small transporter who acquired a TATA lorry
on hire purchase at a price of shs.60, 000,000. This price included interest of 20%. The lorry was
acquired on 1 January 2005 and the hire purchase price was to be met in 12 equal monthly
installments. However after five months, Mr. Serious became unable to meet future installments and
the lorry was returned to the purchase company on 1 July 2005.

Required:
compute Wear and Tear due to Mr. Serious for the year-ended 3 December 2005.

Solution Example 12
Get the cost of the lorry by eliminating the interest i.e.

60,000,000/1.2 =50,000,000
A TATA lorry is in class 3
Therefore; Wear and Tear for five months = 30% x 50,000,000 x 5/12
= 6,250,000

Example. 13
Maama Okello Ltd had a net profit before taxation of shs.91, 000,000 reported by the Financial
Accountant for the year ending 31st December 2008. On examination of their books and records, the
following was discovered:

1. Depreciation worth shs.790, 000 had been provided for in respect of office furniture with a book
value of shs.2, 000,000.
2. The company which was in its third year of production incurred preliminary expenses worth
shs.4,000,000 and purchased patent rights at shs.6,000,000 which had 10 years
of life on its formation.
3. Provisional income tax amounting to shs, 700,000 was paid during the year.
4. One of the directors took consumables from the company valued at shs.1, 450,000. The sales
figure was net of this amount.
5. Other incomes includes: receipt from sale of an old van at shs.600,000, which had a WDV of shs.
100,000.

61
6. Shs.220, 000 relate to repair expenses of which shs.99,900 was used to purchase office chairs,
shs.110,000 used to acquire a bicycle for the company.
7. The company made a grant to The Aids Support Organization (TASO) worth shs.100, 000.

Required:
i) Compute the company’s taxable income for the year ended 31 December 2008.
ii) Compute its tax liability.

Solution Example. 13
Maama Okello
Taxable income
For the year ended 31.12.2008

Net profit as per Accountant 91,000,000

Add: Disallowables 790,000
Depreciation
Provisional income tax 700,000
Drawings 1,450,000
Cost of bicycle (note 3) –
Grant toTASO 100,000
94,040,000
Less : Allowables
Preliminary expenses (4,000,000 x 25%) 1,000,000
Patents (6,000,000/10) 600,000
Proceeds from disposal of old van (note 1) 600,000
Wear and Tear (note 2) 422,000
91,418,000
Less Grant to TASO 100,000
Taxable Income 91,318,000

Tax liability
30% x 91,318,000 = 27,395,400
Less: Provisional tax = 700,000
26,695,400
Notes:
1. Proceeds from disposal of a depreciable asset do not constitute business income. What however is
not clear is whether there were other assets in the pool. Because of this uncertainty, we did not
determine a trading receipt to include in the taxable income.
1. Wear and Tear was computed as follows:
Office furniture - 20% x 2,000,000 = 400,000
Bicycle - 20% x 110,000 = 22,000
422,000

62
3. Cost of minor capital equipment is now sh.1, 000,000.

Example. 14
Kansanga International Hospital Ltd is a company that deals in the provision of Medical services to
the general public. The hospital, which started operating on 1st July 2000, has its head offices in
Kampala. The company’s tax accounting date is 30th June and the minister of finance approved its
business operations. The results of Kansanga International hospital Ltd for the year to 30 June 2005
were as follows:
Shs. ‘000’ Shs. ‘000’ Shs. ‘000’
Receipts 3,600,000
Unrealized foreign exchange gain 54,000
Interest income 20,000
Profit on disposal of non-current assets 25,000
3,699,000
Less: Cost of sales (600,000)
Gross profit 3,099,000
Less: Expenses
Salaries and wages paid 646,000
NSSF company contribution 47,500
Employee taxes (PAYE) 256,500 950,000
Unrealized foreign exchange loss 27,000
Depreciation 250,000
Advertising 95,000
Repairs and maintenance costs 90,000
Uniform for staff 15,000
Electricity and water bills 150,000
Telephone costs 120,000
Specific provision for trade bad debts 35,000
Provision for future repair costs 65,000
Legal fees 80,000
Accountancy fees 12,000
Non-current assets valuation fees 39,000
Pension 20,000
Other tax allowable costs 150,000
Total Expenses 2,098,000
Net profit 1,001,000

Additional information is as follows:

a) At the start of its business operations on 1 July 20x0, the company had incurred the
following capital expenditure:
Description Cost (in shs.)
Land 450,000,000
63
 Hospital building 1,500,000,000
Motor vehicles (cars) 20,000,000
Fixtures and fittings 150,000,000
2,120,000,000
b) During the year to June 2005, the company incurred the following additional expenditure:
Description Amount (in shs.)
1 Mercedes Benz car 85,000,000
3 Pick-up vans (6-tonnes) each at 45,000,000
5 computers totaling 12,500,000
Office chairs and tables 5,000,000
Hospital equipment 100,000,000

c) During the year the company made an extension to the hospital at a cost of shs.4 10,000,000. The
extension was completed
(d) During the year the company disposed off three computers at a price of shs3,500,000 and a
motor vehicle at shs.4,500,000.
e) The company had an agreed tax loss of shs.50, 000,000 as at 30th June 2004.
f) On 15th December 2001, the company acquired a set of hospital equipment worth
shs.150, 000,000 from a UK nonresident supplier on credit. On negotiations with the management
of the company, this debt was written off on 31” March 2005.
g) The company paid provisional tax of shs.200, 000,000 during the year 30th June 2005.
h) On the interest income of shs.20,000,000 it earned, Standard Chattered Bank withheld
shs.3,000,000 as withholding tax, which was remitted to URA. The company was only paid shs.
17,000,000.

i) Analysis of legal fees

Shs.
Increase in share capital 15,000,000
Debt collection fees 10,000,000
Purchase of the extra piece of land 55,000,000
80,000,000
j) The tax written down values of the company’s depreciable assets as at July 2004 were as follows:
Class Shs.
I 95,000,000
II 75,000,000
IV 250,000,000

Required:
Compute the final corporation tax payable by Kansanga International Hospital Ltd for the year
ending 30th June 2005.

Solution Example. 14 “000”

64
 Net profit 1,001,000
NSSF company contribution (non allowable)
Unrealized foreign exchange loss 27,000
Depreciation 250,000
Provision for future repair costs 65,000
Non-current assets valuation fees 39,000
Pension 20,000
Increase in share capital costs 15,000
Purchase of extra piece of land 55,000
Cancellation of business debt 150,000
1,621,500
Less:
Unrealized foreign exchange gain 54,000
Profit on disposal of non-current assets 25,000
Agreed tax loss 50,000
Initial allowance Not Allowed 56,250
Wear and Tear 182,525
IBD 85,250
1,168,475

Workings:

Wear & Tear schedule

Particulars I II III IV
Shs. Shs. Shs. Shs.
WDV (1’ July 2004) 95,000,000 75,000,000 - 250,000,000
12,500,000 165,000,000 105,000,000
Additions:
107,500,000 240,000,000 355,000,000
(56,250,000) - (50,000,000)
Initial allowance not allowed
101,250,000 240,000,000 305,000,000
(3,500,000) (4,500,000) -
Disposals
97,750,000 235,500,000 305,000,000
Wear & Tear (39,100,000) (82,425,Doo (61,000,000)
WDV (30-6-2005) — 58,650,000 153,075,000 244,000,000

IBD
1,500,000,000 x 5% = 75,000,000
410,000,000 x 5% x 6/12 = 10,250,000
85,250,000

Tax liability
30% x 1,168,475,000 350,542,500
65
Less: Provisional tax (200,000,000)
Withholding tax (3,000,000)
Final tax payable 147,542,500

Example. 15

Kampala Bank Ltd is a financial institution providing financial

services to the general public. The bank has been in business since 2010 and a summary of its
financial results for the year to 30th June is as follows
Shs.(000)
Notes
Income:
Interest income 5,600,000
Fees and charges 3,000,000
Foreign exchange trading income (3) 1,500,000
Other income 900,000
Total income 11,000,000
Expenditure:
Interest expenditure 1,200,000
Staff expenses (6) 2,700,000
Depreciation 550,000
Repairs and maintenance (2) 900,000
Loss on disposal of non-current assets 7,000
Subscription (4) 17,000
Legal fees (7) 29,000
Audit fees 24,000
Entertainment 12,000
Fraud and forgeries 75,000
Advertising and publicity (8) 300,000
Bank of Uganda deposit insurance 50,000
Insurance of non-current assets 65,000
Specific loan provision 850,000
General loss provision 150,000
Cash shortages 25,000
Training expenses (computer courses) 95,000
Other tax allowable expenses 850,000
Total expenses 7,899,000
Net profit for the year 3,101,000
Notes:
1. The bank’s assets had the following written down values as at July 2011:
Shs.(000)
Class I 500,000
Class II 45,000
66
Class III 150,000
Class IV 160,000

2. The bank has a policy of expensing capital assets which individually cost less than shs. l million
in the year of purchase. In line with this policy, the bank expensed furniture costing shs.24, 000,000
during the year 2012. Of this amount shs.3, 200,000 relates to furniture which individually cost less
than shs.100, 000. The expensed furniture cost was booked in the repairs and maintenance account.
There were no other non-current assets additions or disposals.

3. Foreign exchange trading income includes shs.200, 000,000 relating to unrealized foreign
exchange gains resulting from the translation of accounts donated in foreign currency.

4. Subscriptions include shs.2, 000,000, which relates to the subscriptions of the senior managers of
the bank to Kampala club and Golf club, and no Pay As You Earn was paid on them. The balance
relates to subscriptions to Uganda Institute of Bankers.

5. The Bank’s tax assessment from Uganda Revenue Authority for the year of income ended 30th
June 2011 showed that it had an accumulated tax loss of shs.450, 000,000 as at 31st June 2011.

6. Staff expenses are analyzed as follows:

Shs.(000)
Salaries and Wages 1,701,000
NSSF company contribution 120,000
NSSF staff contribution 60,000
Staff PAYE 770,000
Medical expenses 9,000
Staff accommodation 40,000
Total 2,700,000

7. Legal fees are comprised of shs.16, 000,000, which were paid to the bank lawyers for the disposal
of properties of borrowers who failed to repay their loans. The balance of
shs.13, 000,000 relates to a provision of legal fees the bank expects to incur in the following year for
an impending legal suit filed by a borrower against the bank in respect of outstanding loan balance.

8. Advertising expenses are analyzed as follows:

Shs (000)
TV and newspaper adverts 100,000
Installation of billboards 80,000
Renting billboards space 120,000
Total 300,000

Required: Compute the corporation tax payable by Kampala Bank Ltd for the year ending 30th
June 2012.
67
Solution Example 15

Kampala Bank Ltd taxable income

For the year to 30 June 2012
Shs. (000

Net profit 3,101,000

Add:
NSSF company contribution (Note 1) -
NSSF staff contribution (Note 2) 60,000
Staff PAYE (Note 3) 770,000
Depreciation 550,000
Expensed furniture (24,000 — 3,200) (Note 4) 20,800
Loss on disposal of non-current assets 7,000
Senior managers subscriptions 2,000
Contingent legal fees 13,000
Entertainment 12,000
Installation of billboards (Note 5) 80,000
General loss provision 150,000
4,765,800
Less:
Accumulated tax loss 450,000
Unrealized foreign exchange gain 200,000
Wear and Tear (see working) 312,910
3,802,890
Tax liability
30% x 3,802,890
= 1,140,867

Wear and Tear schedule

Particulars I II Ill IV
Shs.(0) Shs.(000) Shs.(000) Shs.(000)
WDV (1-1-2011) 500,000 45,000 150,000 160,000
Additions: - - - 100,800
500,000 45,000 150,000 260,800
Wear and Tear (200,000) (15,750) (45,000) (52,160)
WDV(30-6-2012) 300,000 29,250 105,000 208,640

1. NSSF company contribution is neither taxed in the hands of the employer (company), nor
employee. NSSF staff contribution and staff PAYE are part of the gross salary of the employees. An
employer is allowed a deduction of the gross salary which includes the NSSF staff contribution and
PAYE. If we were given salaries as gross, then we disallow both NSSF staff contribution and staff
68
PAYE. On the other hand, if we are given net salaries, then we allow both NSSF staff contribution
and staff PAYE so as all in total the gross salary.
4. Any expenditure on a capital item whose cost base is greater than shs.1, 000,000 is capitalized
and taken to the Wear and Tear Schedule.
5. Installation of billboards is a capital expenditure which is plant and machinery for class 4 of the
Wear and Tear Schedule.

Example .16

Zavuga U) Limited is a company incorporated in Uganda. The company’s offices are located in
Kampala, Uganda. The company deals in buying and selling of agricultural produce such as beans,
posho and groundnuts. Zavuga (U) Limited commenced business on 1 July 2010. The start-up costs
of the company then amounted to shs. 12,000,000.
During the first year of operation, the company incurred a tax loss of shs.35, 000,000. The tax loss
has been agreed with the Uganda Revenue Authority.

The company has produced its audited financial statement for the year ended 30th June 2013 and has
asked you, as their Tax Advisor, to prepare the tax computations for submission to the Uganda
Revenue Authority.
The Tax Manager has already reviewed the company’s tax file and has passed it to you with the
following:
1. The Company made a net profit before tax of shs.40, 000,000 during the year ended 30th June
2013.
2. The company made a contribution to the NSSF amounting to shs.8; 000,000. This amount is the
10% contribution made by this company to the fund.
3. The depreciation charged in the financial statements was shs. 10,000,000.
4. The company spent shs.15, 000,000 as housing to its senior staff who are entitled to housing
allowance
5. The company incurred shs. 10,000,000 for legal fees. Of this amount shs.7, 000,000 was spent on
debt collection activities while shs.3, 000,000 was spent on registering the title for the company’s
property bought at Bunga, a suburb of Kampala.
6. The company spent shs.3,000,000 on donations. The donation was made towards the Kabaka’s
coronation anniversary.
7. The training costs of shs.5, 000,000 was spent towards MD’s tuition for the Executive Masters of
Business Administration degree he is undertaking at ESAMI.
8. The company made provision for bad debts during the year as follows:
Specific Shs.30, 000,000
General Shs.20, 000,000
9. Included in the company’s income statement was unrealized foreign exchange loss amounting to
shs.5, 000,000 realized exchange gains of shs.2, 000,000.
10. The company made a profit on the sale of noncurrent assets of shs.5, 000,000.
11. The company received interest on treasury bills amounting to shs.1, 250,000.

69
12. The company paid withholding tax of shs2, 300,000 and made two provisional tax payments
amounting to shs.6, 000,000.

Additional information:
a) The written down values of the non-current assets agreed with the Uganda Revenue Authority as
at 30th June 2012 were as follows:
Class Amount in shs.
I 25,000,000
II 15,000,000
III Nil
IV 10,000,000

b) The company made several purchases of non-current assets during the year as follows: computer
shs.5,000,000; secondhand pick-up van shs.10,000,000; a luxury Toyota Prado car for the MD at
shs.15,000,000; furniture shs.5,000,000; equipment shs.9,000,000.
c) The company also made the following assets disposals during the year: computers which had a
net book value of shs.15,000,000 were sold at shs.20,000,000; the sale of motor vehicles realized
shs.18,000,000. Included in the proceeds for motor vehicles sales was shs.8,000,000 which related
to the sale of the Pajero Mitsubishi car which was previously used by the MD. The Pajero car was
bought on 1’ July 2011 at the cost of shs.80,000,000.

Required:
a) Compute Zavuga (U) Ltd’s corporation tax for the year nded 30th June 2013.
b) The due dates for payment of the final tax liability for the year ended.

Solution Example. 16

Zavuga (U) Ltd taxable income

For the year to 30th June 2013
Shs.
Net profit 40,000,000
Add back:
Depreciation 10,000,000
NSSF company contribution 8,000,000
Legal fee on title registration (note 1) 3,000,000
Donations (note 2) 3,000,000
MD tuition (note 3) 5,000,000
General and specific provision for bad debts
(20,000,000 + 30,000,000) 50,000,000
Unrealized foreign exchange loss 5,000,000
Withholding tax 2,300,000
Provisional tax 6,000,000
70
 124,300,000
Less:
Start-up costs (12,000,000 x 25%) 3 ,000,000
Tax loss 35,000,000
Profit on sale of non-current assets (note 4) 5,000,000
Initial allowance (note 5) -
Loss on disposal of a business asset 4,500,000
Wear and Tear (note 6) 36,950,000
39,850,000

Tax liability
30% x 39,850,000 = 11,955,000
Less: Withholding tax (2,300,000)
Provisional tax (6,000,000)
3,655,000

Currently all companies in Uganda operate on self-assessment. Hence the due date for payment of
the final tax liabilities is on the due date for furnishing the return of income.

Notes:
1. Legal fee in respect of title registration is a capital expenditure which is included in the cost base
of that respective property.
2. Donations: This was made to a non-tax-exempt organization.
3. The cost of education leading to a degree whether or not it is directly relevant to the person’s
employment or business is considered private expenditure and therefore disallowed (see section
22(3)[df). This should not be confused or mistaken for training expenditure in section 33.
4. Profit on sale of depreciable asset is not income from business for tax purposes. We therefore
assumed that all the profits related to depreciable non-current assets; i.e., computers – 20,000,000 —
15,000,000 (see paragraph (c) of additional information in the question). The shs.4,500,000 loss was
made on disposal of part of the Pajero which is not depreciable.

5. Initial allowance was calculated at 50% owing the fact that the company was located in Kampala,
a prescribed area. The computations were as follows:

Class I — Computers: 15,000,000 x 50% = 7,500,000

Class IV — Equipment: 9,000,000 x 50% = 4,500,000
Please note that we used the pooling system in entering additions and also recognized section 29(3),
which excludes vehicles and fixtures from initial allowance.

6. We repeat for emphasis that this Wear and Tear schedule is based on the pooling system.
Note that the disposal of vehicles was a little bit complex because it included a Pajero which has a
depreciable and business asset. The disposal proceeds we need in the Wear and Tear schedule are

71
those of the depreciable asset. Therefore we apportion the disposal proceeds between the
depreciable and business asset as follows:

60,000,000 x 8,000,000 = 6,000,000

80,000,000

It is assumed that the depreciable asset found in a Pajero was sold for 6,000,000 and the business
asset still found in the same Pajero was sold for 2,000,000.

Therefore the disposal proceeds found in the Wear and Tear schedule will be 10,000,000+
6,000,000 = 16,000,000.

The Wear and Tear schedule is shown below:

Particular I II Ill IV
Shs. Shs. Shs. Shs.
th
WDV (30 June 2012) 25,000,000 15,000,000 - 10,000,000
—
15,000,000 70,000,000 - 14,000,000
Additions:
40,000,000 85,000,000 - 24,000,000
Initial allowance [not allowed] () - -
40,000,000 85,000,000 - 24,000,000
Disposals (20,000,000) (16,000,000) - -
20,000,000 69,000,000 - 24,000,000
Wear and Tear (8,000,000) (24,150,000) - (4,800,000)
WDV (30th June 2013) 12,000,000 44,850,000 19,200,000

Note: Additions in class II include shs.10,000,000 worth of a second pick-up van and
shs.60,000,000 worth of a Prado; i.e, the cost base of the Prado for Wear and Tear purposes was
restricted to 60,000,000 in accordance with section 27(11) and part II of the sixth schedule.

5.0 Partnership Tax

A partnership is a relationship which subsists between persons carrying on a business in common
with a view of making profits. The presence or absence of a written partnership agreement is not
decisive in determining whether a partnership relationship exists between persons sec 65 (2).
A partnership is not a separate tax paying entity, income a rising from its activities is assessed on
individual partners. Sec.65 (3) states that a partnership shall be liable to furnish a partnership return
of income in accordance with sec.92, but shall not be liable to pay tax on that income.
Although a partnership is recognized as a legal personality for tax purposes, the taxable income of a
partnership is first determined on the basis of the partnership profits and then apportioned to the
partners on the basis of their agreed profit sharing ratios. The tax payable is assessed on individual
partners. It follows that a partnership is deemed to be a person for accounting purposes.

72
5.1 Partnership formation
Persons can enter into partnership with one another without any form of written agreement. It is
however, wiser to leave an agreement drawn out, as this will tend to lead to fewer possibilities of
misunderstanding and disagreements between partners. Further details of partnership existence are
under sec.10.2 of this module.

Such partnership agreement (deed) should cover the following;

i) Capital to be contributed by each partner.
ii) Ratios in which profits or losses are to be shared.
iii) Rate of interest if any to be earned on capital before profits are shared.
iv) Rate of interest if any to be charged on partners’ drawings.
v) Salaries to be paid to partners.

Generally, if the work to be done by each partner is of equal value but the capital contribution is
unequal, it is equitable to grant interest on the partners’ capital. This interest is treated as a
deduction before computation of profits and their distribution according to the profit sharing ratio.
The rates of interest should be agreed upon and should be equal to the rates which they will have to
use if they invested capital elsewhere.

Interest on Drawings
To deter the partners from drawing cash unnecessarily from the business, the concept of interest on
drawings from a business was advanced. The amount charged on the drawings has an effect on
profits.
The interest charged is added to the net profits before appropriation of profits i.e. interest paid into
partnership.

5.2 Salaries to Partners

If a partner has extra tasks, ordinarily the partnership compensates him/her by way of salary. His
salary is deductible before arriving at the profits to be shared.

5.3 Principles of Taxation of Partnerships

1. A partnership is obliged under Sec. 65 and 66 of the Income Tax Act, Cap 340 to submit returns
of income. The senior or managing partner (or under the UK law the precedent resident partner)
has the responsibility for the submission of the total profits of the partnership while all the
partners should individually file returns (of income) detailing their share of the partnership
income.
2. The assessment (i.e. determination of the total adjusted income) is done in the partnership name
(i.e. as if the partnership were a person liable to tax). It follows the normal tax law and practice
in determining the assessable and allowable items in the Tax Computation.
3. The allocation of the profits or division of the assessment follows the method of calculating a
partner's income from the partnership business which is precisely laid down in section 67 of the
Income Tax Act, Cap 340.
73
4. In event of a change in a partnership either by a partner being admitted, leaving, retiring or
dying there is a cessation of the old business and commencement of a new business for tax
purposes even if there is no physical break in the truck. The old partnership ceases on the date of
the change while the new partnership commences immediately.
For the purposes of assessment, the cessation and commencement provisions of the Income Tax
Act, Cap 340 should be applied.
5. A partnership is a resident partnership for a year of income, if at any time during that year, a
partner in the partnership was a resident person (Sec. 12).
6. Where the partnership is a non-resident partnership for a year of income, Sec. 87 applies (i.e.
taxes paid under Sec 83,84,85, and 86) in calculating partnership income or partnership loss of
the partnership for that year.

5.4 Partner’s Income

Normally assessments are made upon the person receiving the income. The person being an
individual e.g. joint owners are separate persons where two or more persons receive interest on a
bank account. Each person is assessed on that share of interest received (Sec. 66).
The income from partnerships is as under;
(i) The sum of Remuneration, Interest on capital paid to the Partnership less interest on
drawings
(ii) Each share of Partnership income is calculated after the partners' salaries, interest on capital
payable to any partners and addition of interest on capital payable to Partnership by any
partner.
(iii) Section 67 provides that, a partner is therefore assessable on any excess of his share and interest
over his share of any loss made by the Partnership as a whole.

Example .1

John and Mark were in Partnership with the profit sharing ratio of 2:3 and 1:3 respectively. Mark
earned a salary of shs. 300,000/=, the .interest earnings were as follows;

John Mark

Interest on drawings 100,000 50,000

Interest on Capital 500,000 250,000

The net profit before any distribution to the partners was shs. 36,000,000/= for the year ended
December 2012.

74
 Required:
a) Calculate the profit to be shared
b) Calculate the income assessable on Partners
c) Partners tax liability. Resident individuals

d) There are several factors that are considered when determining the existence of partnership; state
and explain the factors considered in law to determine the existence of the partnership incase of
disagreements.

5.5 Existence of Partnership

The question as to whether a partnership exists where 2 or more persons in association carry out
business activities is a question of fact, though the legal interpretation of documents may also be
involved. It is important to determine the existence of a partnership for the purpose of determining
whether a partnership return and accounts would be required as per provisions of Sec. 65 (3) of the
ITA.
Whether there is a written agreement or not the real issue to be decided is whether the concerned are
carrying out business in common with a view of making profit and not to reduce tax liability Sec.
65(2). The Uganda ordinance refers to certain arrangements such as;
• Joint tenancy.
• Sharing of gross receipts
• Sharing of net profits
• Advancing money to a business in return for a share of profits
• Interest based upon profit
• Receipts based upon profit in return for goodwill

However, none of these (above) can in itself constitute a partnership, but it does give the positive
rule that the receipts of a share of profit is prima facie evidence that the recipient is a partner
although it does not of itself make him a partner.
The foundation of a partnership must therefore be an agreement between the persons concerned;
after a deed of partnership is drawn out. If there is no deed, there may be a written law or letters
according to the terms agreed upon, but in other cases there may be no written agreement or records
at all. Even if there is a deed, it is not conclusive enough for the existence of a partnership. The facts
must show that it has been acted upon.

5.5 Factors To Consider Whether A Partnership Exists

1. The way profits are shared, who is entitled to a share and who is responsible for losses

75
 a) A contract to the payment of salary of an employee engaged in business by share of profits of
a business (profit sharing scheme) does not of itself constitute (make) the servant a partner in
the business or liable as such.

b) A person being a widow or child of a deceased partner and recognized by way of annuity a
portion of profits made in the business in which the deceased was a partner. It is not by
reason of such receipts that he/she can be a partner.

c) A person receiving by way of annuity a portion of profits of a business in consideration of

the sale by him of goodwill is not a good reason of such receipt that he/she becomes a
partner.
d) The advance of money by way of loan to a person engaged in any business on a contract with
that person that, a lender shall receive a rate of interest varying with the profit or shall receive
a share of the profit arising from the business, does not of itself make the lender a partner
with the person carrying on the business provided that the contract is in writing and signed by
/ on behalf of all the parties there to.

2. In whose name a bank account / tenancy stands and what persons have the power to draw on the
account.
3. Whether the terms of the deed or agreement are being followed. A partnership deeds I; evidence
of Existence of partnership but is not conclusive enough since a partnership ma exist without a
written agreement. Additionally, a mere execution of a partnership agreement does not create a
partnership if it is not acted upon by the parties involved.
4. In whose name the business is carried on or what name appears on business correspondent and
whether registration of business name is required, and if so, whose name appears a;
. proprietor in the register.
5. Whether an individual claiming to be in a partnership actually exercises the rights and due
ot a partner e.g.
• has he got authority to bind the firm without its creditors?; or
• has he got any rights to access the firm's books of accounts; or
• Does he act as a proprietor or an employee of the firm?
6. What arrangements are in force for the partners' share of profit, driving, interest on a
capital contribution by individual partners.

6.0 INCOME FROM PROPERTY

Properties can be divided into:

• Portfolio investment e.g. shares, securities and debentures
• Tangible properties e.g. premises
• Intangible properties e.g. Copy rights, Trademarks etc.

76
Property income as defined includes any dividends, interest, annuity, natural resource payments,
rents, royalties and any other payment derived by a person from the provision, use or exploitation of
property.

6.1 Dividend Income

• Shareholders are entitled to a return on their investment inform of dividends (out of the
company’s profits).
Note:
• Definition of dividend excludes a distribution paid by a building society. Dividends paid by a
building society are interest.
A dividend paid by a non resident company is therefore treated as a foreign sourced income

Tax Treatment of Dividend Income

• A dividend paid by a resident company to an affiliate resident company is exempt from tax if the
company receiving the dividend controls directly or indirectly 25% or more of the voting power
in the company paying the dividend.
• A dividend paid by a resident company to any other resident shareholders (this includes
individuals, and resident companies that control directly and indirectly less than 25% of the
company paid the dividend) is subject to 15% withholding tax on the gross amount of the
dividend.
• A dividend paid by a resident company to a non resident person is subject to 15% tax on gross
amount of the dividend.
• A dividend paid by a building society is treated as interest for tax purposes

6.2 Interest Income

Sec 2 of the ITA defines interest as any payment made under debt obligation so long as it is not a
return of capital and it includes any premium or discount.

Tax Treatment of Interest Income

Sec 79 provides 3 alternative tests for determining whether interest is derived from Uganda or not.
The tests show that interest is treated as derived from sources in Uganda if
– It arises from a debt obligation secured by immovable property located or movable used
in Uganda
– The payer of interest is a resident person
– The borrowing relates to a business carried on in Uganda

• Interest paid by a resident financial institution to a resident individual, a resident retirement fund
or an exempt organisation is subject to 15% withholding tax on the gross amount of the interest
and the tax is withheld is deemed a final tax
• Interest derived by a resident person in circumstances other than those specified above is
included in gross income either as business income as property income and is fully taxable
because it is not a final tax.
77
• *Remember that a final tax means that the income on which the tax was determined is not added
to any other income to determine a taxable income.
• Please note that tax on the following incomes is a final tax.
– Interest paid by a natural person
– Interest paid to a financial institution
– Interest paid by a company to an associate company (the company where the paying
company controls 50% or more of voting power
– Interest paid which is exempt from tax in hands of recipient

• Interest paid by a resident company in respect of debentures is exempt from tax under the
Act provided the following conditions are satisfied:
– The interest is paid outside Uganda
– The company issued the debentures for the purpose of raising funds for use in the
business carried outside in Uganda
– The debentures were widely issued by the Company to a non resident person outside
Uganda for the purpose of raising a loan outside Uganda

6.3 RENTAL INCOME

Rent is defined to mean any payment including a premium or like amount made as consideration for
use or occupation of or the right to use or occupy, land or buildings

Tax Treatment of Rental Income

• Rental income derived by a resident person(other than a resident individual) from the lease
of property either in or outside Uganda and the rental income derived by a resident
individual from the lease of property outside Uganda is included in gross income either as
property income or business income and is fully taxable
• Rental income derived from the lease of immovable property in Uganda by a non resident
person is included in gross income as either business income or property income.
• Income derived from the lease of movable property is treated as a royalty under the Act
• In ascertaining chargeable income some deductions may be allowed. The deductions will
include all expenditure and losses of a revenue nature. Capital deductions will also be
granted on any contents included in the property,
• Where part of the premises are used by the owner for residential or other private purposes,
then the expenses should be proportionately adjusted.
•

Rental Tax
• Sec 5 formally imposes a separate tax referred to as rental tax on rental income derived by
resident individual for a year of income. Rental tax in sec 5 is a final tax and no tax credit is
allowed.

• Guidelines in computing individual rental income tax

78
 – All rents earned during the year are put together
– A flat percentage rate of the total rents is granted annually as a deduction for costs to
arrive at net rents currently the allowance is 20% of gross rents
– A threshold is granted annually against the net rents after a deduction for costs to
arrive at net chargeable rents – 2,820,000 p.a

– A fixed tax rate is applied to the net chargeable rents to determine the tax payable at
20%.
• Formula: rental income tax = 20% (80% of gross rents per annum minus threshold) i.e 20%
(80% R – 2,820,000).

RENTAL INCOME
Taxation of Rental Income is separately provided for under the Income Tax
Act. This is rent earned by individuals, companies, partnerships and is
segregated and taxed separately as if it is the only source of income for the
taxpayer.
IMPORTANT STEPS
1. For Individuals;
Step I: Determine the total annual gross rents from all sources of the
individual; say R;
Step II: Deduct 20 percent allowance for costs i.e R – 20%, therefore
R = 80%R
Step III: Deduct threshold (Shs.2, 820,000) i.e 80%R – 2,820,000
Step IV: Determine income tax at 20% i.e 20% (80%R – 2,820,000).

2. For Partnerships
Step I: Determine the total annual gross rents of individual
partners; say R;
Step II: Deduct 20 percent allowance for costs i.e R – 20%, therefore
R = 80%R

Step III: Deduct threshold (Shs.2, 820,000) i.e 80%R – 2,820,000)

Step IV: Determine income tax at 20% i.e 20% (80%R – 2,820,000).

ILLUSTRATIONS: (3 Scenarios)
Scenario 1: Gross rents not exceeding Shs. 2,820,000 per annum: Tax
is NIL since gross rent does not exceed threshold.
Scenario 2: Gross rents say, Shs. 3,000,000 per annum; Allow

79
 20% costs, therefore 3,000,000 – 600,000
Net Rents = 2,400,000 since net rent DOES NOT exceed
threshold, tax is NIL.
Scenario 3: Gross rents say, Shs.4, 000,000 per annum.

Step I:
Allow 20% Costs
4,000,000 – 20 x 4,000,000
100
= 4,000,000 – 800,000
Net rents = 3,200,000.
Step II:
Allow Threshold:
3,200,000 – 2,820,000
Net chargeable rent = 380,000 (in excess of threshold)
Step III:
Calculate tax at 20%
20 x 380,000
100
Rental Income Tax = 76,000
NB: An individual whose Gross or Net rent per annum Does Not Exceed the
threshold pays NIL Rental Income Tax.
3. For Companies, Trustees and retirement funds;
Step I: Determine the total annual gross rents from all sources of the
company; say R;
Step II: Deduct all expenses incurred in the production of the rental
income i.e R – total expenses call them E, therefore R = (R-E)
Step III: Determine income tax at 30% i.e 30% (R – E).

ILLUSTRATION
If the company earns Ugx. 30 million out of which Ugx. 15 million was
from rental property and the expenses attributed to rental income are Ugx
3 million for the year, the rental tax is calculated as follows

80
 Rental tax = 30% (total rental income – expenses attributed to rental
income)
Rental tax = 30% (15,000,000 – 3,000,000)
Rental tax = 30% X12, 000,000
Rental tax = UGX 3,600,000
TAXPAYER’S OBLIGATION
• Complete a return of Rental Income for a year of income with
supporting agreements where available or rental receipts issued to
tenants(s) during the year.
• Declare ALL your sources of rental income in FULL for a given year of
income. The year of income is from 1st July to 30th June.
• Submit (furnish) the return, ANNUALLY to Uganda Revenue
Authority, through your Local Revenue Office, within six months after
the end of the relevant year of income. i.e not later than 31st
December.
• Pay the rental income tax by the appropriate due date.
ENTITLEMENT TO TAX CREDIT
The taxpayer is entitled to a tax credit in respect of any rental tax paid
provisionally or in advance during the year of Income. This however can
only be offset against rental tax liability since the source is taxed
separately.

6.4 Royalty Income

• Royalty includes any payment, including a premium or like amount, made as consideration for
the use or right to use a range of rights and properties, including both intangible and tangible
movable property; consideration for imparting scientific, technical, industrial or commercial
knowledge or information, and for rendering assistance ancillary to the matters referred to
above.

Tax Treatment of Royalties Income

• Royalties derived by resident person from any source are property income included in the gross
income of the person.
• Royalties derived from sources in Uganda by a non resident person are subject to 15% of the
gross amount payable. The payment is a final tax and is collected by withholding.

6.5 Natural Resources Payment

• This is defined in Sec 2 to mean:

81
 a) A payment, including a premium or like payment, made as consideration for the right to take
minerals or a living or non living resource from the land or
b) A payment calculated in whole or in part by reference to the quantity or value of minerals or
a living or non living resource taken from the land.

Tax Treatment of Natural Resources Payment

A natural resource payment derived by a resident person from any source is property income
included in gross income of the person. Where the natural resource payment is a foreign source
the resident person is allowed a credit for any foreign tax paid in respect of the income.

Natural resource payment derived from sources in Uganda by a non resident person is subject to
a 15% tax on the gross amount of the payment as a final tax.

Example .01
(a) Hajjat Aisha Nalugambo is a landlady with steady tenants. She earned rental income from her
houses below for the year ended.

31st December 2013 as follows;

Location Monthly rent (Shs) Monthly Maintenance.

Expenditure (Shs)
Plot 6, Ntinda 300,000 50,000
Plot 7, Muyenga 400,000 60,000
Plot 10, Makerere 200,000 30,000

REQUIRED: Compute Hajjat’s rental income tax for the year- ended
31st December 2013.

Solution Example .01

Hajjat’s taxable rental income.
Plot 6, Ntinda (300,000x12) 3,600,000
Plot 7, Muyenga 400,000x12) 4,800,000
Plot 10, Makerere 200,000x12) 2,400,000
Total 10,800,000

Rental income tax liability.

Gross rental income 10,800,000
Less: 20% x10,800,000 2,160,000
Threshold 2,820, 000 4,980,000
5,820,000
Less: tax at 20% 1,164,000
5,664,000.
82
Example .02
Libido limited owns the following residential properties and their respective rental incomes:
Location Zone 1 (Shs) Zone 2 (Shs)

Kireka 22,000,000 21,000,000

Entebbe 42,000,000 91,000,000
Jinja 82,000,000 34,000,000
Malaba 97,000,000 12,000,000

Additional information; Shs

i. Security expenses 22,000,000
ii. Minor repair expenses 14,000,000
iii. Wages and salaries 17,000,000
iv. Water expenses 21,000,000
v. On further scrutiny it was established that actually 50% of the above
security expenses were paid by the tenants as stated in the tenancy
deeds / agreements.
vi. The company suffered bad debts amounting to Shs. 24,000,000 and
made donations to red Cross worth Shs. 49,000,000

Required : i) Compute the company’s tax liability at year end.

ii) If the above items were owned and used to generate Rental income by
yourself, compute your own tax Liability at the year end.

Solution Example.02
Libido Limited
Chargeable income.
Kireka ( 22,000,000 + 21,000,000) 43,000,000
Entebbe (42,000,000 + 91,000,000) 133,000,000
Jinja (82,000,000 + 34,000,000) 116,000,000
Malaba (97,000,000 + 12,000,000) 109,000,000
401,000,000
Less expenses:
Security (50% x22,000,000) 11,000,000
Minor repairs 14,000,000
Wages and salaries 17,000,000
Water 21,000,000
Donations (note1) 16,900,000
Bad debts (note 2) - 79,900,000
321,100,000
Tax liability
30% x 321, 100,000 = 96,330,000

Notes:
83
 1. Donations: we took the lesser of the cost of the donations and 5% of the
chargeable income before considering the donation ( i.e. 5% x 338,000,000).
2. Bad debts: These were considered general since there is no information as to
whether they were specific.

Example . 03
Hon. General alhaji Mbase Boona is a Ugandan reside in Muyenga, a suburb of Kampala city
and works for Bombo Army Headquarters. He has commercial properties from which he
collects rental income. Some of the properties are located in Pretoria, South Africa, while some
are located in Kampala. During the year to 30th June 20x1, Hon. Mbase’s rental records
revealed t he following.

S. African Property Uganda Property.

( S.A. Rand) (U shs)

Rental income 35,000 79,000,000

Expenses:
Ground rate 1,200 1,500,000
Water and electricity 5,000 1,200,000
Clearing and Maintenance 1,000 3,500,000
Security 500 950,000
General repairs 7,000 19,000,000
Depreciation 1,750 3,900,000
16,450 30,050,000
Net rental profit 18,550 48,950,000

Additional information:
i) The exchange rate between the Uganda shilling and the South African Rand was
Shs. 200 to R1 during the period.
ii) Hon. Mbase also earned a net transport income of Shs. 12,500,000 from his mini
bus during the year to 30 th June 2011. When the motor license of the minibus was
being obtained , Hon. Mbase was instructed by the Uganda revenue authority official to
pay a provisional tax of Shs. 500,000. This amount was paid on 1st January 2011.

iii) Hon. Mbase earned a net interest income of Shs. 5,000,000 during the year to 30th
June 2011. Withholding tax was deducted by Bank of Baroda and remitted to URA.
iv) During the same year Hon. Mbase was given dividends amounting to Shs. 35,000,000
from shares he holds in a Kenyan company operating in Tanzania.
v) Hon. Mbase is also employed by Saracen as a defense consultant. Saracen is a
Ugandan company located in Kampala and mainly deals in ware engineering and

84
 theft therapy. For the year to 30th June 2011, Hon. Mbase’s employment terms were
as follows:
• Monthly salary shs. 3,500,000.
• A full- time company car, which was purchased at shs. 20,000,000 on 1st January
2011. Hon. Mabse was the first person to use the car in the company on 1:1 basis.
• Monthly cash allowances for utilities amounted to shs. 350,000.
• A company house whose market value is shs. 900,000. The Honorable pays a monthly
rental fee of shs. 100,000 to his employer.
• During the year to 30th June 2011, Hon . Mbase paid PAYE on his employment
income amounting to shs. 8,400,000.

Required:
a) State the tax returns Hon. General Mbase was required to file with URA during the year to
30th June 2011 and then the respective due dates.
b). Compute the amount of tax Hon. General Mbase is required to pay for the year to 30th
June 2011.

Solution example .03

a) Hon. General Mbase was supposed to file the following returns within four months after
30th June 2011.
• Return in respect of rental income-31st October 2011.
• Return in respect of income from the minibus – 31st October 2011.
• PAYE return every 15th day of the month following the month in question.

Solution example .03

(b) Remember that rental income of an individual is charged to tax independent of any other
income earned by the same individual.

Income from Uganda property 79,000,000

Income from SA property ( 35,000 x 200) 7,000,000
Gross rental income 86,000,000

Less: qualifying deduction ( 20% x 86,000,000) 17,200,000

Threshold 2,820,000
20,020,000
Chargeable income 65,980,000
Less tax at 20% 13,196,000
52,784,000

85
ii).Other Incomes:
Transport income 12,500,000
Net interest income ( note 1) -
Dividends ( note 2) 35,000,000
Salary ( 3,500,000x12) 42,000,000
Car benefit ( note 3) 1,000,000
Allowances ( 350,000 x12) 4,200,000
Accommodation ( note 4) 8,52000
104,300,000
Add: Provisional tax 500,000
Chargeable income 104,800,000

Tax liability

300,000 + 30% ( 104,800,000- 4,920,000)

300,000 + 30% ( 99,800,000)

300,000 + 29,964,000 = 30,264,000

Less: Provisional tax 500,000
PAYE 8,400,000
8,900,000

Tax payable 21,364,000.

Notes:
1. Interest income is subject to withholding tax of 15% at source and is a final tax for
an individual.
2. Dividends were paid from outside Uganda to a resident person whose income for tax
purposes is world income. However, if dividends paid from outside Uganda were
subject to with holding tax in the country where they were paid, the individual taxpayer
will be allowed credit of these. But in this Case it was not mentioned whether dividends
were subject to withholding tax or not. So we assume that the figure was gross. It is also
pertinent for us to note that the act addresses only dividends paid by a resident company to
a resident taxpayer as those subject to with holding tax (section 118). That is the reason why
we did not withhold 15% of the dividends and preferred to include them among other incomes.
3. Car benefit ( 20% x 20,000,000 x 182.5 / 365) x6/12.
3. Accommodation was the lesser of the market value and the 15% of the chargeable
income including the net market value.

86
2.3 Value Added Tax (VAT)
2.3.1. Definition:
VAT is an indirect consumer tax imposed at different levels in the chain of production or
distribution of goods and services. It is ultimately born by the final consumer. Value Added Tax was
introduced in Uganda on 1st July 1996 and administered under the VAT Act CAP. 349, Laws of
Uganda. Currently the standard VAT rate is 18%.

VAT is an indirect tax and its also referred to an “In rem” in the tax is ‘on things’ and ‘advalorem’
meaning on value created on things

As an indirect tax VAT is imposed at some point in the system but is meant but is meant to be
shifted to the person who will ultimately bear the burden. The value of VAT is a sales tax
administered in a multiple stage form. Each seller in the chain collects the VAT from the purchaser
at the time of sell as addition to the sale price. Each seller is required to state the sale price and the
VAT separately. The seller then remits the balance to the government collecting authority. The net
effect of this is that the tax is imposed at each stage on the sum of wages, interest, rents, profits and
other factors. Of production furnished by the supplier hence a tax on value added.

Why was VAT introduced in Uganda?

1) To generate more government revenue by widening the tax base
2) To reduce the costs of administration especially with the collection of the sales and CTL taxes
3) Fair distribution of resources especially according to ability to pay since only those who have
the ability to pay are those who pay
4) VAT is flexible both in the tax rate and tax liability
5) It has an element of certainty and clarity (VAT is more certain and clear as compared to sales tax
and CTL) AND may give some bit convenience to the taxpayer
6) VAT is more users friendly than sales and CTL
7) VAT can bring about economic stability especially during inflation
8) VAT is less harmful to people’s efforts, consumption, savings and output that is cant deter
economic growth and stability (it is neutral tax)

Causes of the strike

1) Lack of adequate knowledge and education on the part of tax collectors/payers that don’t ever
pay the taxes
2) Increase of rates of other taxes than those that were replaced by VAT
3) Smuggling of goods was threatened due to the introduction of VAT where goods sold
accompanied with a tax invoice
4) Political influence
5) Lack of records, accounting and methods used for VAT were not known to the tax collectors or
payers
6) Lack of commitment from the URA officials to conduct the required services

87
7) Erosion of the capital base by tying up the tax claims in taxes (submission is within the 15 day)
yet tax claim is within 45 days. Therefore capital tied up in taxes would be two months
8) The rate imposed was very high (the 18%)
9) Delay of refunds because URA was not efficient about meeting the time of refund
10) The threshold was very high for some small traders (small traders could not afford the liability
since the gains from such business were small
11) Paying a tax on tax effect (you pay VAT on import duty) yet this import duty has already been
paid for.

Effects of the Strikes

1) Low of government revenue or cash flows
2) Small size traders were eliminated since the threshold was increased from 20m = to 50m/=
3) The URA staff became more users friendly
4) In the long run the government has steadily increased revenue from VAT
5) Tax education, which was introduced and is being carried out vigorously
6) Some tax tariffs were reduced

2.3.2. VAT Mechanism:

The VAT mechanism helps demonstrate the following:
a) VAT is charged at stages in the chain of distribution of supplies (goods and services)
b) VAT is ultimately borne by the final consumer
The VAT Mechanism involves three (3) things:
a) Output tax: This refers to VAT charged on sales and is the one, which a taxable person pays.
b) Input tax: This refers to VAT charged on purchases/ expenses and this is the one that is claimable
by a taxable person.
c) Tax (VAT) Liability: This is the difference between output tax and input tax. The difference is
positive then it is a tax liability from the taxable person, and if it is negative it is a tax refund to
the taxable person.
Example:
Acul Ocolo imported textile materials whose taxable value at importation was Shs. 10,000/- import
nd import Duty He sold the goods to Nampere (Wholesaler) at 15,000/- (VAT exclusive). Nampere
sold the goods to Kawere (retailer) at Shs. 20,000/= (VAT exclusive). Kawere sold the goods to
Kasedde (final consumer at Shs. 30,000/- (VAT exclusive).

Tax payer Purchase/ Sales Output tax @ Input tax @ Tax (VAT)
Imports 18% 18%
to URA

Acul Ocolo (at Customs) 10,000/- - - 1,800/- 1,800/-

Acul Ocolo (L. Transaction) 10,000/- 15,000/- 2,700/- 1,800/- 900/-

88
Tax payer Purchase/ Sales Output tax @ Input tax @ Tax (VAT)
Imports 18% 18%
to URA

Nampere 15,000/- 20,000/- 3,600/- 2,700/- 900/-

Kawere 20,000/- 30,000/- 5,400/- 3,600/- 1,800/-

Kasedde (Final Consumer) 30000 - - 5,400/- 5,400/-

2.3.3: Scope of VAT

VAT is charged in three distinct ways;
i. On taxable goods and services supplied by a taxable person in Uganda
ii. On taxable imports by any importer
iii. On Imported services by the recipient of the services
Taxable supplies and Non - taxable (exempt) supplies:
Taxable supplies are goods and services upon which VAT is applicable. This include supplies at a
standard VAT rate (which is currently 18%) and those at zero rate (0%) e.g. exports, drugs and
Medicines, Scholastic materials and cereals.
Exempt supplies are those where VAT is not applicable, that is neither at standard rate nor at Zero
rate e.g. Education services and processed food stuffs.
Classification of VAT rates

No. Rate Classification Example

1 18.0% Standard rate On imported motor vehicle
2 5.0% Specific rate On Commercial properties
3 0.0% Zero rate Drugs and medicines
4 Nil Computers

Comparison Zero-rated and exempt supplies

Whereas no VAT accrues from both zero rated and exempt supplies, the following are the major
differences between the two: -
Zero rated supplies are categorized as taxable whereas exempt are non-taxable.
Dealers in zero rated supplies have aright/ obligation to register for VAT whereas those for exempt
do not.
Dealers in Zero rated supplies are entitled to input tax credit and tax (VAT) refunds where as those
for exempt do not.

89
2.3.4:VAT registration
The following are the persons who are obliged to register for VAT.
i. Those who deal in taxable supplies whose annual turnover (sales) exceed the annual threshold.
The current threshold is 50 million shillings per annum.
Note: Effective registration is determined on a quarterly basis, that is, if one's turnover of
taxable supplies in three consecutive months exceeds 12.5 million, such a person should
apply to be registered for VAT. This should be within 20 days after three months period
e.g. if taxable turnover for January to March exceeds 12.5 million shillings, the dealer
should apply for registration with in 20 days after end of March i.e. by 20th of April
ii. Government ministries, departments, urban councils that are involved in business activities like
tendering of markets and construction works are supposed to register for VAT.
Note: Voluntary Registration
Persons, who deal in taxable supplies whose turnover is less than threshold but would wish
to register for VAT, may apply for registration voluntary basis.
Main reasons for voluntary registration are:
(a) To be able to benefit from input tax credit and VAT refunds.
(b)Access business from large firms as these prefer to deal with fellow registered persons
Tax Computations
Tax computation involves mainly three (3) areas:
Tax base/ taxable value: the price of a taxable good or service Excluding VAT.
i. Tax rate: The percentage used to compute VAT. The current rate is 18%.
ii. Tax Liability = output tax - input
Example:1
Acul Ocolo Co. Ltd deals in sale of bottled water. In the month of April, 2007 it had the following
business transactions: All figures VAT exclusive.
Purchases & Expenses (Inputs)
Purchased 1,000 cartoons of water at Shs. 10,000,000
Rent was Shs. 1,000,000
Electricity bill was Shs. 550,000
Security was Shs. 500,000
Transport cost were Shs. 200,000
Salary was Shs. 4,500,000
Stationery was Shs. 120,000
90
Sales (Outputs)
Sold 950 cartoons of water at Shs 13,775,000
Required: Compute Acul Ocolo's tax liability
Solution
Tax Liability = Output tax - Input taxable
Output tax = sales value x 18%
= 13,775,000 x 18% = 2,479,500/=
Input tax = Total value of taxable purchases x 18%
= 12,370,000 x 18% = 2,226,600/=
Note: Employment services (salary) is exempt from VAT, so it was not included in the total value
of taxable purchases
Therefore, tax liability = 2,479,500 - 2,226,600 = 252,900/=

Example 2:
Acul Ocolo Uganda Ltd is a VAT registered dealer in a variety of imports and exports. In the
month of December 2005, the company's transactions were as detailed below;
Inputs;
Imported curtain blinders for head office block at CIF value of Shs 30,000,000.
Both import and excise duty were at 10%
Received a bill and paid for insurance costs for office block Shs. 5,500,000
Purchased 200 bags of Sugar for resale Shs. 65,000 per bag
Purchased 10,000 litres of milk for resale at Shs. 10,000,000
Purchase truckloads of processed foodstuffs for resale at Shs. 15,000,000
Office telephone bills in the month were Shs. 550,000
Repair of trucks used to transport business goods 1,950,000/=
Paid Shs 7,770,000 for accommodation of company directors at Jinja sunset hotel
Received and paid the bill of external auditors of Shs 5,500,000
Received tax invoice of the office rent and paid for it at 2,200,000
Outputs:
Sold 1,000 bags of sugar at Shs. 78,000 per bag
Exported al the unprocessed food stuffs to France at Shs. 25,000,000
Sold an old stock of life jackets at 25,000,000
91
Additional information:
All figures are VAT exclusive
The tax payer furnished returns and paid taxes due on 15th February 2006
Required:
Without apportioning input VAT, compute the principal tax the firm paid.
Compute penalty for late filing and interest for late payment of tax in (i) above

Solution:
Input (Purchases and Expenses)

No. Supplies Tax Computation Input tax Remarks

(Shs.)
i Blinders 30mx18% 5,400,000
ii Insurance 5,500,000 990,000 Service now vatable
iii Sugar 200 bgsx65,000x 18% 2,340,000
iv Milk 10mls x 18% 1,800,000 Now fully vatable
v Raw bananas Not applicable Nil Food stuff is exempt
vi Telephone 550,000x 90%x 18% Only 90% of telephone is
allowed. 10% is deemed to
have been used on non business
89,100 calls
vii Repairs of 1,950,000 x 18% Would dis-allow if it is luxury
truck 351,000 vehicle like land cruiser
viii Hotel 7,770,000 x 18% Assume it was official
Accommodati
on 1,398,600
ix Audit Services 5,500,000 x 18% 990,000
x Office rent 2,200,000 x 18% 396,000
Total input
tax allowed 13,754,700

Output (Sales)
No. Suppies Tax Computation Output tax Remarks
(Shs)
i Sugar 78m/=x18% 14,040,000
92
No. Suppies Tax Computation Output tax Remarks
(Shs)
ii Export of bananas 25m/=x0% All exports are
0 zero rated.
iii Life jackets Not applicable Nil These are exempt
supplies
Total output tax 14,040,000

Summary:
(i) Tax payable = output - input taxable
= 14,040,000 - 13,754,700
= 285,300
Example 3

c) Mawungu Enterprises had the following transactions for the month of May 2013:
Expenditure: Shs ’000’

Office furniture and equipment (VAT inclusive) 8,500

Office stationery (VAT inclusive) 6,000
Computers (VAT exclusive) 5,500
Computer repair charges (VAT exclusive) 1,200
Inventories for trading (VAT exclusive) 47,800
Purchase of pickup truck to ferry goods (VAT inclusive) 65,214
Airtime purchase (VAT inclusive) 4,560
Additional information:
1. Sales turnover was Shs 210 million (VAT exclusive).
2. All purchases were made from VAT registered companies.
3. Sales worth Shs 12 million (VAT exclusive) declared in August 2010 have been
determined as bad debts and written off.
Required:
Compute the VAT claimable/ payable for the month of May 2013. [15 marks]

c) VAT [15 marks]

Input VAT:
Office furniture and equipment [8,500*18/118] 1,297
Office stationery (VAT inclusive) [6,000*18/118] 915
Computers (VAT exclusive) [5,500*18] 990
Computer repair charges (VAT exclusive) [1,200*18] 216
Inventories for trading (VAT exclusive) [47,800*18 8,604
Purchase of pickup truck to ferry goods [65,214*18/118] 9,948
93
 Airtime purchase (VAT inclusive) [4,560*18/118] 696
Total Input Vat 22,666
Add: Bad Debt Sales [12,000*18% 2,160
24,826

Out Put VAT:

Sales 210,000*18% 37,800

VAT Payable = Out Put VAT – Input VAT

Therefore: VAT Payable = 37,800 - 24,826

= 12,974

VAT MECHANISM
,TRAIL & SCOPE.pptx

2.4 Administrative procedures for the Administration of Domestic Taxes

There are principally fur (4) administrative processes that are applicable in the assessment and
collection of domestic taxes, and these are:
(a) Declaration of liability
(b)Assessment of the tax
(c) Objection and appeals
(d)Collection and recovery
(e) Declaration of the Tax Liability:
This is the process through which a taxpayer informs URA of their tax liability. This is done by
filling in a prescribed return form, for a given tax period. The tax period depends on the type and
form of tax. For example, for VAT, the tax period is one month. For income and corporation tax,
the tax period is normally one year (which is normally referred to as a year of income), but not
for with holding tax like PAYE, the return is submitted on a monthly basis.
The taxpayers are also obliged to pay the due tax on the date that the submission of the return is
due, which in case of a tax period of one month is normally within 15days after the end of the
month for which the return has been made. For example, if one is declaring tax for the month of
April 2007, the form must be filled and declared by the 15th of may 2007, for income and
corporation tax, the due date for submission of a return of income is four months after the expiry
of the year of income to which the return relates.
Penal tax for failure to furnish a return.

94
Declaration of one's tax liability, i.e. submission of a tax return, is mandatory and failure to do so
is deemed an offence under the Taxing Statutes. A taxpayer who commits such an offence is
obliged to pay a penalty referred to as penal tax.
In case of income and corporation tax, if a person fails to furnish an Income Tax return within the
prescribed period, he is liable to a penal tax equal to 2% of the tax payable for that year before
subtracting any credit allowed to the payer his/her chargeable income or 200,000/- per month
whichever is the greater for the period the return is outstanding.
In case of VAT, if a person fails to furnish a VAT return within 15days of being required, such
person commits an offence and is liable on conviction to fine no exceeding 300,000/= or to
imprisonment for a term not exceeding six months or both.
(f) Assessments
This is the process of establishing tax payable. It involves determining the tax base and
subsequently applying the tax rate to compute the due tax. Under the selling assessment regime,
it is the responsibility of the taxpayer to determine the due tax liability and to advise the tax
authority on such liability at the declaration stage. The Tax Authority will ordinarily accept such
declaration as a true representation of the taxpayer's due tax affairs. However, in circumstances
where the Authority has reason to believe that the tax payer has not declared as required or that
the declarations made not accurate, the Authority will review the declaration to establish the level
of non- compliance and / or the true tax liability, and this process may be extended to auditing
and investigation.
(g) Objections and Appeals
Tax payers who are dissatisfied with the tax assessed (or any decision that may be deemed an
assessment under the taxing statutes), have a right to express their dissatisfaction and seek redress
through filing a written notice of objection to the URA Commissioner General (CG). This must
be within the prescribed period after receiving the notice of assessment. Currently the period to
respond is 45 days after service of the notice of assessment for both VAT and income tax.
The decision that are deemed assessments under the Taxing Statutes include:
(a) The decision to register or cancel the registration of a person under the VAT dispensation
of a person under the VAT dispensation.
(b)The management of refund of tax application.
(c) The notice requiring a third party to pay over a taxpayer's money to the tax authority
without recourse to such taxpayer.
The Commissioner General has a prescribed period within which to respond to the notice of the
objection, and the way he disposes of objection is through making a decision referred to as the
objection decision. There are 3 options open to the commissioner general through which he can
dispose of notice of objection and these are:
(a) To allow or accept the objection in its entirety.
(b)To allow or accept the objection in part;
95
 (c) To reject the objection (in its entirety).
Currently the period to respond is 30 days for VAT and 90 days for income tax. If the
Commissioner General fails to respond too the notice of objection in the prescribed time, he
would be deemed to have accepted the objection in its entirety. In practice, the taxpayer writes to
the Commissioner General to advise him that his response implies that he elected to accept the
objection.
Where the taxpayer is not satisfied with the Commissioner General's objection decision (through
either a rejection or partial acceptance of the objection), he may apply to the Tax appeals
Tribunal (TAT) within the required time frame. The TAT has powers to fully dispose of and
resolve all matters where the objection is based on matters of facts. Where the matter contention
is either a matter of law or mixed law and fact, the taxpayer has aright of appeal to the high Court
and can utilize all the options of appeal up to the Supreme Court.
(h) Collection and Recovery:
In case of a fully compliant taxpayer, the function of collection is done at Declaration, where
taxes payable are declared and paid at the time of submission of return to the Uganda Revenue
Authority.
In case where the taxpayers have not complied within the prescribed time frames, there would be
need for extra measures to be taken to recover the tax. The measures taken to recover the tax
follow the lines of ordinary management of business credit which involves the following:
(a) Communicating with, and advising the tax payer of the taxes due and asking them to pay on a
particular date through written reminders, telephone calls and advisory visits to the tax payer.
(b)Where the above fails to yield, enforcement measures can be undertaken, including:
i. For persons leaving Uganda (permanently) who are defaulting on their tax obligation, the
Commissioner of immigration is requested to restrain such person's departure until full
recovery of due tax, or a financial bond guaranteeing payment of tax is secured.
ii. Recovery from third parties, who owe, hold or have authority from another person to pay
money to such defaulting taxpayer.
iii. Closure of business and instituting distress proceedings against movable property (goods
and chattels) of person who has defaulted on paying taxes. This will involve auctioning
the attached moveable property and use the proceeds to settle both the due tax and the
auctioneer's fees.
iv. Recovery from receivers, liquidators and executors/ administrators the deceased's estates.
Such receivers etc are personally liable for the tax liability.
v. The commissioner General can cause the registrar of Titles to register charge on the real
property of a defaulting taxpayer. The law gives the Commissioner general preferential
claim against other claimants on the assets of the person liable to tax (until the tax is
paid).
vi. Seizure of goods where Commissioner General has reasonable ground to believe that the
96
 due (VAT) tax will not be paid, or alternatively requiring such taxable person to give
security of tax due as a condition being allowed to make such taxable supply.
vii. File a civil suit in court of competent jurisdiction.
Exercise 1.

Mugaga Ltd registered for VAT on October 2011. The company started trading in march 2011 and
deals in electrical appliances. The company had the following transactions from March 2011 to
December 2011.

15th April 2011 Bought a computer for cash for business use 5,000,000
20th April 2011 bought office furniture for cash 7,000,000

Bought stock for resale as follows;

Sales Invoice date Payment Date
15th April 2011 5,000,000 16th April 2011
th
15 August 211 35,000,000 14th September 2011
th
20 October 2011 15,000,000 12th December 2011

The Sales were as follows:

Invoice Date Sales Invoice Value Cash received –current Sales and Debtors

April 2011 3,000,000 2,000,000

May 2011 1,000,000 1,000,000
June 2011 500,000 1,000,000
July 2011 - -
August 2011 5,000,000 6,000,000
September 2011 3,000,000 3,000,000
October 2011 9,000,000 7,000,000
21,500,000 20,000,000

The following extra information is available:

1) The sales invoices and cash receipts from current sales plus debtors are VAT inclusive where
applicable.
2) The purchases prices are VAT exclusive
3) All purchases of the company are made from VAT registered suppliers who issued valid tax
invoices to the company.
4) Standard gross mark on all sales is 25%
5) The company paid VAT in respect of hotel accommodation for its director during the month
of October 2011 of shs. 450,000
6) The company bought a second-hand computer from Tanzania during the month of October
2011 at a cost of shs. 25,000,000. The VAT paid in Tanzania in respect of the computer is

97
 equivalent to shs. 2,500,000. At the customs entry point into Uganda, the company paid
extra VAT of shs. 4,675,000.
7) The company paid October 2011 wages to casual laborers amounting to shs. 1,500,000.

Required:
a) Compute VAT claim on stock and capital goods at registration.
b) Compute the Company’s VAT liability for the month of October 2011 Using:
i) Invoice basis accounting
ii) Cash basis accounting
iii) What is the due dates for filing the October 2011 VAT returns

6.0 Taxation of Small Business

Taxpayers (Presumptive Tax)

The concept of small businesses in taxation was developed to accommodate low
income taxpayers who would ordinarily find it difficult to prepare formal accounts. The
preparation of these accounts would usually require engagement of a professional
accountant which is costly.
In order to address this challenge, the Income Tax Act provides for an arrangement of
taxing small businesses based on gross turnover or total sales. This is commonly referred to as
presumptive tax.

Who is a Small Business Taxpayer?

For income tax purposes, a small business taxpayer is a resident taxpayer whose gross
turnover from all businesses owned by such a person in a year is more than Ten million
shillings but does not exceed Fifty Million Shillings. The term TURNOVER refers to one’s total
gross sales in a year.

PERSONS NOT INCLUDED

Not included in this category of taxpayers even when the turnover is less than 50
million shillings are persons carrying on the following businesses:
(a) Medical practice
(b) Dental practice
(c) Architectural service
(d) Engineering service
(e) Accounting practice
(f ) Legal practice
(g) Any other professional service

(h) Public entertainment service

98
 (i) Public utility service
(j) Construction service
NOTE: Persons falling under the above listed business categories OR whose gross
turnover is above FIFTY MILLION shillings in a year are required by law to file final and
provisional income tax returns and be assessed to tax the normal way which is based on
net income for the year and progressive rates of tax.

3. COMPUTATION OF THE TAX LIABILITY

The tax payable is calculated and determined on the basis of the different thresholds
provided in the Second Schedule or one percent of the gross turnover. In the case of a
taxpayer whose gross turnover is above five million shillings but does not exceed Ten
Million Shillings a year, the tax payable is NIL.
Tax rates for Small Business Taxpayers are contained in Table I below:

Tax rates for Small Business Taxpayers are contained in Table I below:
GROSS TURNOVER TAX PAYABLE
The entire tax rate structure is as follows:
Gross Turnover Tax Payable
Gross turnover exceeds 5 million but does not
exceed 10 million a year. Nil

Gross turnover exceeds shs 10 million but does Shs.450,000 or 3% of gross

not exceed shs 20 million. turnover whichever is lower

Gross turnover exceeds shs 20 million but does shs 750,000 or 3% of gross
not exceed shs 30 million turnover whichever is lower

Gross turnover exceeds shs 30 million but does shs 1,050,000 or 3% of gross
not exceed shs 40 million turnover whichever is lower

Gross turnover exceeds shs 40 million but does shs 1,350,000 or 3% of gross
not exceed shs 50 million turnover whichever is lower

ILLUSTRATIONS
A. Bracket (Shs 10 million - Shs. 20 million)
Example I: Assume one’s gross turnover is Shs 12 million:
3% of Shs 12 million equals Shs 360,000 which is less than Shs 450,000
Therefore tax payable is Shs 360,000
Example II: Assume one’s gross turnover is Shs 18 million:
99
 3% of Shs 18 million equals Shs 540,000 which is more than Shs
450,000

Therefore tax payable is Shs 450,000

B. Bracket (Shs 20 million - Shs. 30 million)
Example I: Assume one’s gross turnover is Shs 23 million:
3% of Shs 23 million equals Shs 690,000 which is less than Shs 750,000
Therefore tax payable is Shs 690,000
Example II: Assume one’s gross turnover is Shs 29 million:
3% of Shs 29 million equals Shs 870,000 which is more than Shs
750,000
Therefore tax payable is Shs 750,000
C. Bracket (Shs 30 million - Shs. 40 million)
Example I: Assume one’s gross turnover is Shs 34 million:
3% of Shs 34 million equals Shs 1,020,000 which is less than Shs
1,050,000. Therefore tax payable is Shs 1,020,000

Example II: Assume one’s gross turnover is Shs 38 million:

3% of Shs 38 million equals Shs 1,140,000 which is more than Shs
1,050,000
Therefore tax payable is Shs 1,050,000
D. Bracket (Shs 40 million - Shs. 50 million)
Example I: Assume one’s gross turnover is Shs 43, 580,000:
3% of Shs 43,580,000 equals Shs 1,307,400 which is less than Shs
1,350,000
Therefore tax payable is Shs 1,307,400
Example II: Assume one’s gross turnover is Shs 48,700,000:
3% of Shs 48,700,000 equals Shs 1,461,000 which is more than Shs
1,350,000
Therefore tax payable is Shs 1,350,000.

100
 4. RETURN OF GROSS TURNOVER
In order to enjoy the benefit of paying the LOWER tax in each bracket, a
taxpayer is required to file a return of Gross turnover for a given year. Otherwise, a
taxpayer will automatically be assessed to the standard tax in the tax bracket in which
such taxpayer falls as contained in the Table I above.
5. (a) FINALITY OF TAX
The tax computed on the basis of GROSS TURNOVER is a final tax on the taxpayer’s
business income, no deduction is allowed unless the taxpayer opts that his/her
income tax payable should be calculated by applying the relevant rates of tax
determined under the Income Tax Act to the chargeable income for the year. This means
that no further assessment is required.
Also note that no deductions are allowed in respect of any expenditure or losses incurred.
(b) Tax Credit
No tax credit is allowed to be set off against the final tax except in the following cases:-
(i) A tax credit arising out of withholding tax paid in respect of amounts included in
the gross turnover of the taxpayer.

6. ELECTION (OPTION) FOR INCOME TAX ASSESSMENT

(i) The law provides for an option in writing notifying the commissioner that the tax payer
prefers (opts) his/her income tax payable to be calculated by applying the relevant rates
of tax determined under the Income Tax Act to the chargeable income of the taxpayer
for the year of income.
(ii) In order to qualify, a taxpayer is required to submit the election notice together with
his/her Annual Income Tax Return for that year by the due date of filing such return.

8.0 International Taxation and Smuggling

• Relief available to a resident person who pays foreign tax on foreign source income includes
– Reliefs for foreign employment income
– Reliefs under double taxation arrangement (foreign tax credits)
• Sec 80 provides the exemption relief from international double taxation for foreign source
employment income derived by a resident individual if foreign tax has been paid in relation
to the income.
• Sec 81 provides for the credit method of relief from international double taxation for foreign
source income if foreign income tax has been paid in relation to the income.

Example . Foreign Credit Limit

Bandi Ltd operates a wholesaling business in Uganda with branches in Kenya and Malawi.
For the 1997/98 year of income, Bandi Ltd had a chargeable income of 100m/= of which
20m/= was derived from sales through the Kenyan branch(on which Kenyan tax of 8.5m/=
101
 was paid) and 10m/= from sales through the Malawi branch (on which 2.5m/=in Malawi tax
was paid). Ugandan chargeable income is 30m/=.

Required:
Find the amount of the foreign tax credit allowed for the Kenyan and Malawi taxes and the
balance payable.

Solution
The amount of foreign tax credit allowed is limited to the Ugandan tax on foreign income
i.e. Foreign tax credit = 30% (20m + 10m) = 9m
Total foreign tax paid is (8.5 + 2.5) = 11m
Thus a Foreign tax of 2m is not a tax credit.
Tax payable = 30m- 9m = 21m.

8.1 Taxation Branches

• A branch is defined as a place where a person carries on business as includes:
A place where a person is carrying on a business through an agent, other than a general agent
of independent status acting in the ordinary course of business as such.

• Sec 82 of ITA 1997 says 15% shall be charged for each year of income and is hereby
imposed on every non resident company carrying on business in Uganda through a branch,
which has repatriated income for the year of income.
The following formula for computing repatriated income is used
A + (B – C) – D
Where;
A= is the total cost base of assets, net of liabilities, of the branch at the commencement of
the year of income.
B= is the net profit of the branch for the year for income
C =is the Ugandan Tax payable on the chargeable income of the branch for the year of
income
D= is the total cost base of assets, net of liabilities of the branch at the end of year of income.

Example. 1
Jingo is a non resident company conducting business through branch operations. On 1st July
2002, the total cost bases of the assets were 600m/=. The net profit of the branch for the year
of income ended 30th June 2003 is 110m/= on which 33m/= is payable. The total cost base of
assets of the branch at 30th june 2003 is 535m/=.

Required: Calculate the repatriated income of the branch and tax thereon.

Solution:
A+ (B – C) - D
= 600m + (110 – 33) – 535
102
 = 142m/=
Extra tax payable 142m x 15% = 21.3m/=

Tax on international payments

• Sec 83 says a 15% tax is imposed on every non resident person who derives any property
income from sources in Uganda.
• Sec 84 says a tax of 15% is imposed on every non resident entertainer, sports person or
theatrical, musical or sports persons who derive income from any performance in
Uganda

• Sec 85 says a tax of 15% is imposed on every non resident person deriving income under
a Uganda source services contract (other than an employment contract).

• As per Sec 86, a tax is imposed on every non resident person carrying on the business of
ship operator, chartered, or air transport operator who derives incomes from the carriage
of passengers who embark cargo or mail which is embarked on Uganda, and on road
transport operator who derived income from the carriage of cargo or mail which is
embarked in Uganda.
• The rate of tax is 2% the gross amount derived from the carriage and is treated for all
purposes of this act as a tax on chargeable income.

• Where a non resident person carries on the business of transmitting messages by cable
radio, optical fiber or satellite communication, the chargeable income of the person
derived from the transmission of messages by apparatus established in Uganda whether
or not such messages originated in Uganda shall be taxed 5% of the gross amount
derived by the person in respect of the transmission.

Withholding tax and withholding agents

• If you are a withholding agent and you do not withhold the tax from payments made, you
become personally liable for the tax.

Withholding agent Tax with held

Employer All tax due on employee’s income

A resident payer of interest ( Note 1) 15% of the gross amount of interest payable

A resident person who pays management or 6% on the gross amount of the payment
professional fees to a resident professional (
Note 2)

103
A resident company which pays a dividend 15% of the dividends
to a resident shareholder (Note 3)

Payer of royalties 15% of the gross amount to non resident

person

Government and its institutions and any 6% of the gross amount of the goods,
company where government has interest services supplied or imported.
paying an amount exceeding 1m for supply
of goods or services or imported goods.
(Note 4)

• Note 1 This doesn’t apply to:

– Interest paid by a natural person
– Interest paid to a financial institution
– Interest paid which is exempt
• Note 2 Applicable only if the professional in not registered for VAT
• Note 3 For an individual the 15% withholding tax is a final tax while for a company, the
gross dividend is aggregated with other income for tax purposes.

• Note 4: This doesn’t apply to:

– The supply or importation of petroleum or petroleum products
– The supply or importation of plant and machinery
– The supply or importation of human or animal drugs
– The supply of importation of scholastic materials
– Importation of religious, charitable or educational institutions.
– The supply or importation of raw materials
• This withholding tax is treated as advance payment of the taxpayer’s tax liability for the year
of income.

• Tax withheld is treated as final tax only in the case of individuals, for companies, interest,
dividends. It is not added to their income to arrive at their taxable income.
• Tax with held must be paid within 15 days after the end of the month in which payment was
made. However tax withheld for promoters or non resident entertainers it must be paid
104
 within 5 days of the performance or by the day before the departure from Uganda of the non
resident which ever is the earlier.

8.0 CUSTOMS DUTY:

Definition:
A custom duty is a tariff or tax on the import of or exports of goods. The duties are levied on
imports and exports and are usually listed in the country's tariff schedule. Duties may be ad valorem
or specific.
(a) An advalorem duty is a fixed percentage of the value of the good that is being imported e.g.
10% of value X.
(b) A specific duty is a duty of a specific amount of money that does not vary with the price of
the good but with its weight, volume, surface, etc. The specific duty stipulates how many
units of currency are to be levied per unit of quantity (e.g. US$2 per Kg/ per pc).
Illustration on specify duty:
Acul Ocolo imports 100 cartons of jute bags from Hong Kong. Each carton contains 200pcs. The
CIF Mombassa for the goods is USD 5000. The customs duty rate for the jute bags is USD$ 0.45
per piece.
Assuming the current exchange rate is UGX 2,500 to 1 US$, determine the customs duty payable.
Solution:
Step 1: Deriving customs duty: -
Applying the duty rate of USD 0.45 PER piece
100ctns x 200 pcs = 20,000 pcs
Import duty (ID) will be;
ID = 20,000 x US$0.45 = US $9000
ID = US$9000 x 2,500 = 22,500,000/=
Therefore, the customs duty payable is 22,500,000/=

8.1 Types of duties:

a) Import Duty
This refers to the customs duties that are payable at importation.
On entering Uganda, goods are declared on a customs declaration document called a bill of entry,
which is issued by URA in a prescribed format.
b) Export Duty:

105
This refers to any customs duties payable on exportation of goods for example taxes payable on
hides and skins.

8.2 EXEMPTION OF INTERNATIONAL TRADE TAXES

Legal Basis
Section 114 of the East African community Customs Management Act (EAC- CMA) 2004 provides
for exemption of customs duties and taxes on importations by specified categories of people and
goods outlined in the 5th Schedule.
Exemptions fall in two broad categories namely;
1. Specific Exemptions:
These apply on goods imported by or on behalf of privileged person and institutions. Examples in
this category are:
• The president.
• Donor agencies with bilateral or multilateral agreements with the he partner states
• International and regional organizations with diplomatic accreditation.
• Disabled, blind and physically handicapped persons
• Rally drivers,
2. General exemptions
These are goods of a general nature that fall in various categories which include the following:-
• Deceased person’s effects,
• Passenger's baggage and personal effects of passengers,
• Mosquito nets and materials for manufacture of mosquito nets,
• Raw materials for manufacture of medicaments and;
• Solar equipment among others.
• Computers
• Educational articles and materials

8.3 COMPUTATION OF IMPORT DUTY

Duty on import is determined on the basis of the following: -
a) Determination of the customs value.
Customs value is the Cost of the goods(C), insurance of the goods (I) and the freight (cost of
Transport)(F). This is referred to as CIF value of the goods on which customs duty is

106
 charged. However, for air Freight cargo, value is based on Cost and Insurance (C&I) as per
the current law.
b) Determination of the tax payable using the tax rates as defined in the customs tariffs contained
in the Customs External Tariff (CET).
Taxes collected are determined basing on the Common External Tariff (CET) which stipulates three
tax bands (rates) of:
(i) 0% for raw materials.
(ii) 10% for intermediate goods or semi processed goods.
(iii) 25% for finished goods originating outside the community.
Further more, Duty payable may be determined giving consideration to origin and other existing
trade agreements due to preferential rates for example COMESA and East African rate for goods
imported from Kenya. The Import duty rate for goods imported from COMESA countries and those
from Kenya to any of the community members is currently 6%.
Finally the goods are examined by a customs officer and if satisfied with the valuation and
documentation, the goods are released.

Example. 1
Acul Ocolo imports a tractor head (a lorry that pulls a semi trailer) from China at a CIF value of
USD 50,000 attracting an import duty 10%. In order to derive the customs duty, it is necessary to
convert the USD to Ugandan Shillings by applying the current exchange.
Note: The exchange rate is issued by the bank of Uganda on a monthly basis for export and import
rates. This rate differs from open market commercial exchange rate.

Solution:
Assuming the current exchange rate is UGX 2,500 to 1US$,
Apply the current exchange rate to correct the customs value to Uganda Shillings, which would be
as follows; -
Step 1: Determining Customs Value
Customs value = CIF * Exchange rate
$ 50,000 US$* 2,500
Customs Value= 125,000,000/=
Step 2: Deriving Import Duty: -
Applying the duty rate of 10% to customs value,

107
 Import duty (ID) will be;
ID = 85,000,000*10% = 8,500,000
Therefore, the import duty payable is 8,500,000/=
Other than import duty the customs department collects other taxes, which include: -
• Valued Added Tax (V.A.T) 18%
• Excise duty (E.D) on specific goods
• Withholding TAX (WHT) 6%

Illustration 2; Computation of other taxes (Excise Duty, VAT and Withholding Tax).
Assuming Acul Ocolo and Sons Ltd imports wine from Australia at CIF Value of US $ 25,000
attracting 25% import duty, 70% excise duty, VAT of 18% and withholding tax of 6%. The current
Exchange rate is UGX 2,500.
Step1 Determining Customs Value
Convert exchange rate to UGX
Customs value (CIF)
$25,000*2,500
= 62,500,000/=
Step 2: Computing Import Duty
Apply 25% import duty rate to the customs value 62,500,000 UGX
I.D = 62,500,000 * 25%
I.D = 15,625,000/=

Step 3: Determining excise duty

To derive the excise duty value we add; the (customs value + import duty)
E.D = Customs Value + Import duty
= 62,500,000+15,625,000
= 78,125,000
Excise duty = Excise duty value * excise duty rate
E.D = 78,125,000 * 70%
Excise duty payable = Shs. 54,687,500
Step 4: Determining Value Added Tax (VAT) 18%

108
 The VAT value is derived by adding the customs value to import duty and excise duty (CIF
+ I.D +E.D)
VAT Value = CIF + I.D +E.D
To derive VAT you apply the VAT rate to the VAT Value
VAT =(62,500,000+15,625,000+54, 687,500)*18%
=132,312,500*18%
=Shs.23,816,250/=
Step 5:Determining With Holding tax (WHT) 6%
To derive WHT you apply the withholding tax rate to the customs value.
Customs Value = 62,500,000 * 6%
WHT = 3,750,000/=
Therefore, the Total Tax Payable (T.T.P) by Acul Ocolo on the Wine imported from Australia i
will comprise of; -

Import Duty 15,625,000

Excise Duty 54,687,500
VAT 23,816,250/=
W/Tax 3,750,000/=
Total tax Payable = 97,749,750/=

Illustration 3
Acul Ocolo & Co. Limited located in Kikuubo Kampala imports polythene packing bags
from Kenya. The CIF value for the goods is US$ 8,000. Polythene bags attract an import
duty 6%, (East African rate for Kenya goods imported into Uganda under the EAC Customs
Union) Excise duty 50%, and VAT 18% and Withholding tax 6%.
What would be the taxes payable for the Polythene bags given that exchange rate at the time
of importation is UGX 1,700 to 1 US$.
Solution:
Step 1: Determining Customs Value
Convert CIF Value in USD to Uganda shillings
Customs Value = CIF * Exchange rate
Us $ 8,000 US$ * 1,700
Customs Value = 13,600,000

109
Step 2: Deriving Import Duty
Applying the duty rate of 6% to customs value,
Import Duty (ID) will be:
ID = 13,600,000 * 6%=
Therefore, the import duty payable is 804,000/=
Step 3: Determining excise duty
To derive the Excise duty value we add; the (customs value + import duty)
E.D. Value = Customs Value + import duty,
E.D.V = 13,600,000 + 804,000
E.D.V = 14.404,000 UGX
Excise duty = excise duty value * excise duty rate
Therefore E.D = 14,404,000 * 50%
Excise duty payable = 7,202,000/=
Step 4: Determining Value Added Tax (VAT) 18%
The VAT value is derived by adding the customs value to import duty and excise duty (CIF+I.D+
E.D)
VAT value = CIF+I.D+ E.D
To derive VAT you apply the VAT value (13,600,000 + 804,000 + 7,202,000)
VAT = VAT Value * VAT rate
VAT = 21,606,000 * 18%
Therefore VAT = 3,889,080/=
Step 5: determining Withholding tax (WHT) 6%
To derive WHT you apply the withholding tax rate to the customs Value = 13,600,000 *
6% ; WHT = 816,000 UGX
The total tax payable by Acul Ocolo enterprises Limited on polythene bags imported from Kenya
(East Africa Community) will be as follows; -
Import duty 804,000
Excise duty 7,202,000
VAT 3,889,080
WHT 816,000
Total tax payable = 12,711,080
Illustration 4

110
 Acul Ocolo Industries Ltd is a manufacturer of Mattresses. They import an item called High
density Polythene as their raw material from South Africa. The CIF Value for the raw
material is USD $ 35,000. High density Polythene is 0% import duty, 18% VAT and
exempted from withholding tax. The Exchange rate is UGX 1700 to 1 US$
Qn what are the taxes payable on the raw materials?

Solution:
Step 1: Determining Customs Value
Convert exchange rate to UGX
Customs value (CIF)
$ 35,000 * 1700
= 59,500,000/=
Step 2 Deriving import Duty
Apply 0% import duty rate to the customs value UGX
I.D= 59,500,000*0%
I.D = NIL
Step 3 Determining Excise duty
To derive the excise duty we add;the(Customs value + import duty)
E.D Value = Customs value + import duty
= 59,500,000 + NIL
Excise duty = Excise duty Value * excise duty rate
E.D = 59,500,000 * 0%
Excise duty = Excise duty Value * excise duty rate
E.D = 59,500,000 * 0%
Excise duty Payable = NIL
Step 4: Determining Value Added Tax (VAT) 18%
The VAT value is derived by adding the customs value to import duty and excise duty (CIF
+ I.D + E.D)
VAT value = CIF + I.D + E.D
To derive VAT you apply the VAT rate to the VAT value
VAT = (59,500,000 + NIL + NIL)* 18% = 59,500,000 * 18%
= 10,710,000/=

111
Step 5 Determining Withholding tax WHT 6%
With holding tax (WHT) is Exempt for this local manufacture.
Therefore, the ONLY APPLICABLE TAXES PAYABLE for importation of raw materials
by Max Pan Industries Ltd is 10,710,000 as VAT.
Therefore, the total tax payable (T.T.P) by pan Industries on High Density Polythene From
south Africa will comprise of: -
Import duty NIL
Excise duty NIL
VAT 10,710,000
W/Tax NIL
Total Tax Payable = 10,710,000/=

8.3 EXPORT DUTY COMPUTATION

Determination of export duty involves the following process;
a) Determination of the customs value. This is based on (FOB) cost i.e. for the case of hides
and skins, prior defined cost according to grade of skin per Kg.
b) Determination of the tax payable using the tax rates as defined in the customs tariffs
contained in the Customs External tariff (CEF) i.e. 20 % for hides and skins.
c) Examination of the goods and if satisfied with the valuation and documentation, the
goods are released for export. The examination is based on grades ranging from
grade I - IV and the weight per Kg.

Example 1.
Acul Ocolo Tanners Ltd is an exporter of hides and skins. They have 10 plates of wet salted hides
and skin of various grades and weights and values in a"1x20" container with detail as here below:

S/No. Skin Grades Weight Value/grade/Kg Customs Value in USD

in USD

1 Grade I & II 7,500Kg 0.40/Kg 3000

2 Grade III & IV 1,000Kg 0.35/Kg 350

112
Exchange rate for exports differs from that of imports and this case, the rate is currently UGX 2,400
per 1 USD. Therefore Customs value in Uganda Shillings will be:
Customs Value in UGX = Cost x Exchange Rate
USD 3350 x 2,400 = 8,040,000
Therefore, export Duty on a 1 x 20" container will be Custom value in Uganda shillings x Tariff rate
of 20% for Exports. The only tax payable in this case is Export Duty, therefore;

Export Duty = 8,040,000/= x 20% = 1,608,000

= 1,608,000

8.4 Smuggling and Its Effects

• Smuggling is an activity which involves the importation or exportation of goods by wrong or

unlawful means with the objective of evading taxes and any other measures prohibiting or
restricting the importation or exportation of such goods.
• Smuggling is an illegal method of conducting business.

Forms of Smuggling
• Outright avoidance of official customs controls across the borders e.g. through bushes
• Under declaration of goods
• Undervaluation of goods
• Misclassification of goods
• Falsification of documents
• Mis-declaration of country of origin because of different tariff rates.
• Short landing transit and or Re – export. Smuggling occurs when the goods finally end up on
the Ugandan market leading to total evasion of taxes and other controls.

Effects of Smuggling
• Loss of revenue
• Collapse of industries
• Unemployment
• Destruction of market for local primary products
• Environmental degradation
• Health hazards
• Unequal distribution of wealth
• Retards standards of living
Deters incentives to investment

113
Sample Questions

Kyampisi Coffee Limited was registered in Uganda in June 2008 and commenced
business on 1 July 2008. The company deals in the local purchase, processing and
export of coffee and cocoa. The principal company premises and factory are located in
Kampala with another smaller factory in Mbale where most of the coffee is sourced.
Some plant and machinery is located in Mbale. The following is the company’s
statement of comprehensive income for the year ended 30 June
2011.
Statement of Comprehensive Income for the year ended 30 June 2011:
Notes Shs ‘000’
Income:
Turnover 110,000,005
Cost of sales (97,500,000)
Gross profit 12,500,005

Expenditure:
Operating expenses (details below) 387,005
Staff expenses 1 935,000
Administration expenses 2 1,189,000
Total expenditure 2,511,005
Net profit before tax 9,989,000

Operating expenses:
Depreciation 404,000
Amortized pre-paid lease rentals 2,005
Reversal of provisions 3 (73,000)
Bank charges 54,000
387,005
Notes to the accounts:
1. Included in staff expenses is Shs 80 million that the company paid to
Uganda Revenue Authority as a penalty for wrong computation of staff PAYE
taxes over the years after a tax audit.

2. Administration costs include the following among other items:

Shs ‘000’
Realized exchange loss on legal/professional fees. This
amount was unrealized at the end of June 2010. 52,000
Travel expenses for the managing director and his
family’s vacation. 13,100
Purchase of a personal car for the managing director 56,500
Rent for staff – staff are taxed on the benefit 120,600

114
 Classand
Advertising I marketing 9,352 237,560
Class
Donation II organization of PAM awards
towards 47,050 24,500
3.
Class III 83,775
The provision that was reversed relates to an amount that had been owing to
Class IV
FBK Packers that was eventually paid391,111
during the year. The provision
had been made in period ending June 2010.
4. Details relating to non- current assets:-
(i) Written down values as at 1 July 2010:
Shs ‘000

(ii) Additions to depreciable assets during the year:

Kampala Mbale
Shs ‘000’ Shs ‘000’
Computers 3,459 1,040
Office furniture (tables and chairs) 32,700
Plant and machinery 200,321 122,000
Toyota Land Cruiser 25,200
5 Yamaha motorcycles 22,000
(iii) An extra block was added to the buildings in Kampala during the year
at a total cost of Shs 115 million. The block was completed and was put
to first use on 1 May 2011. The aggregated cost for existing buildings
which still have a residual value is Shs 1,250 million. All
the buildings were put to use on 1 July 2008.
5. The company’s start-up costs in 2008 amounted to Shs 1,500 million.
6. The company paid provisional tax of Shs 1,000 million during the year and had
no tax recoverable from previous years.

Required:
(a) Compute the tax adjusted profit, tax liability and tax payable by Kyampisi
Coffee Limited for the year ended 30 June 2011.

(b) Advise Kyampisi Coffee Limited on circumstances under which they can deduct
bad debts when computing tax payable for a year of income.

Question 2
Mr. Nganga is the acting chief executive officer (CEO) of Crown Architects (U) Ltd,
115
an engineering consulting firm based in Uganda with regional headquarters in Nairobi,
Kenya. Mr. Nganga is the chief finance officer (CFO) in Nairobi but has moved to act as
CEO in Uganda for four months while the company recruits a new CEO. He is a
citizen of Kenya and has his permanent home and family in Kenya. Mr. Nganga’s
terms of employment include the following, among other things:
(i) His contract commenced on 1 May 2012 and ends on 31 August 2012. His basic
salary is Shs 14,500,000 per month payable in arrears.
(ii) Accommodation is provided to him by the firm and an apartment has been
rented for him in Nakasero at Shs 5,750,000 per month.
(iii) His water and electricity bills are paid by Crown Architects (U) Ltd.
(iv) Medical insurance is provided for him and his family. A premium of Shs
350,000 is payable to Jumbo Insurance Company by Crown Architects (U) Ltd
every month.
(v) A Toyota Land Cruiser Prado has been purchased for his use during his stay
in Uganda after which it will be taken over by the new CEO. The vehicle has
cost the company Shs 67,000,000.
(vi) The company has registered Mr. Nganga for NSSF and it contributes 10%
while Mr. Nganga contributes 5% to the same fund.
During the month of May 2012, the following activities took place in respect to
Mr. Nganga’s employment:
(i) He took a salary advance of Shs 6 million repayable within four months in equal
installments. The current Bank of Uganda interest rate is 8.5% per annum.
(ii) He was paid a relocation allowance of Shs 5.2 million.

(iii) A return air ticket was purchased for him to report for duty from Kenya to
Uganda and back after his term of employment. The air ticket cost USD
468. The May 2012 URA exchange rate was 1 USD = 2,896 UShs.
(iv) The human resource department in Kenya has paid into his Uganda bank
account Shs 2.5 million. This is a reward in recognition of his performance
during the past year while still in the Nairobi office.
(v) His water and electricity bills for the month of May 2012 amounted to Shs
380,000.
Required:
(a) Compute Mr. Nganga’s tax liability and net pay for the month of May 2012.

(b) Identify Mr. Nganga’s benefits or allowances that will be exempt from
Ugandan tax as per the Income Tax Act of Uganda.

Question 3
Kyetume Boys (U) Ltd deals in the wholesale of assorted products including salt, wheat
flour, maize flour, packed juices, and powdered milk. The products are sourced

116
 locally or imported. The company was in business for the year ended 31
December 2011 and is registered for value added tax (VAT). The company applies
the standard apportionment method to claim for input VAT on its
purchases. During the month of December 2011, the company had the following
transactions:-
(i) Sales (VAT inclusive):
Shs ‘000’
Standard rated 165,200
Exempt 22,030
Zero rated 137,060
Total 324,290
(ii) An Isuzu truck was purchased to transport customer products at Shs 75.5
million, VAT exclusive.
(ii) 150 bags of maize flour were purchased at Shs 12,750,000 VAT exclusive.
(iv) The company paid insurance for company vehicles to Nice Insurance
Company of Shs 3 million.
(v) The company purchased gifts for the company’s ‘star’ workers for the
month for Shs 5 million, VAT inclusive.
(vi) Purchased office stationery at Shs 6,250,000, VAT exclusive.

(vii) Purchased home furniture for the new chief executive officer (CEO) at Shs
15 million, VAT inclusive.
(viii) Imported packed juices (1000 cartons) at Shs 160,850,000 VAT exclusive.
(ix) The company incurred repairs and maintenance charges for company’s
pool passenger vehicles at Shs 4.8 million. The vehicles used to transport sales
staff to the field.
(x) Paid security services fees of Shs 3 million, VAT exclusive of which Shs
550,000 was for security services at the managing director’s home.
(xi) The managing director donated 50 cartons of packed juices to Stella
Babies Home as a Christmas gift. The company normally sells a carton of
packed juice at Shs 250,000, VAT inclusive.
Required:
(a) What type of supplies are the following for VAT purposes?
• Maize and wheat flour
• Packed juices
• Salt
• Milk

(b) Compute the tax payable/claimable by Kyetume Boys (U) Ltd for the
month of December 2011.

117
Question 4

le Engineering Group is an oil and gas consulting firm with presence in The Netherlands and
Ireland. The firm deals in drilling of oil wells, construction of oil refineries as well as
undertaking feasibility studies for oil exploration companies. With the recent discovery
of oil in Uganda, Eagle Engineering Group is considering expanding into
Uganda.
The company plans to open up a legal entity in Uganda and to send expert staff to Uganda to
execute assignments. It will either send its employees or independent consultants.
These employees / consultants will be coming to Uganda on a needs basis for periods of
not more than 3 months every year. Eagle Engineering Group has not yet decided where the
parent company to the Ugandan entity will be based.
The parent company will continue supporting the Ugandan entity by providing management
services as well as technical support. These services will be charged to the Ugandan
entity.

You are a tax advisor at DSK Consulting which Eagle Engineering Group has approached
for tax advice before setting up a Ugandan entity.
Required:
(a) Advise Eagle Engineering Group on whether to open up a branch or subsidiary
and give two reasons for your choice.

(b) With explanations, advise Eagle Engineering Group on the residence status of the
employees / consultants and what their basis of taxation will be.

(c) Give your opinion on the income tax implications of Eagle Engineering Group using
either its own employees from the parent company or hiring independent consultants to
execute assignments in Uganda.

(d) Write a memo to the directors of Eagle Engineering Group advising them on the
value added tax (VAT) and withholding tax implications of the
management services and technical support fees that the Ugandan entity
will be paying the parent company.

(e) DSK Consulting will charge Eagle Engineering Group USD 5,000 (exclusive of taxes)
for the above advice. Giving reasons, what will be the VAT
treatment of the above services – will the services be VATable and if yes at
what rate?

Question 5
Kyagulanyi & Sons Ltd deals in the importation, resell and sometimes export of
sugar. During the month of December 2011, the company imported 1,000 bags of
sugar from the United Arab Emirates (UAE) of 50 kgs per bag. The cost of the sugar
was USD 35,714.
118 Income Tax Computation by CPA, Alex Oboth - Feb 2017
The cost of transporting the sugar from the UAE to Mombasa was USD 4,000 and
insurance costs of USD 400 from Dubai to Mombasa, Kenya and USD 200 from
Mombasa to Kampala, Uganda. The then import rates of sugar were as follows:
Import duty –
75%
Excise duty – Shs 25 per
kg
VAT –
18%
Withholding tax (WHT) – 6%. The company is exempted from 6% WHT on
imports.
URA imports exchange rate for December 2011 was 1 USD = 2,800 UShs.
Tax is computed based on cost, insurance and freight (CIF) value. The freight
value considered is up to Mombasa.
Require
d:
(a) Using the above information, compute the tax payable by Kyagulanyi &
Sons Ltd to URA Customs.

(b) Uganda is a member of the East Africa Community Customs Union and
Common Market. Currently, goods produced within any member state
enjoys 0% import duty rate on importation.
Suppose the sugar imported by Kyagulanyi & Sons Ltd was manufactured in
Kenya, compute the tax that would be paid by Kyagulanyi & Sons Ltd on
importation.

(c) Give two advantages of Uganda being part of the EAC Customs Union and
Common Market

Question
6
Mr. Mugambwa has been constructing three residential units in Ntinda which
were completed in January 2011 at Shs 80 million. During the year ended
31
December 2011, Mr. Mugambwa earned gross rental income of Shs 28 million
and incurred security expenses of Shs 3 million, maintenance costs of Shs 5
million and legal fees of Shs 3.5 million. This was the only income for Mr.
Mugambwa during the year.
Require
119 Income Tax Computation by CPA, Alex Oboth - Feb 2017
 d:
(a) Distinguish between the tax treatment of rental income of an individual and
rental income earned by a company.

(b) Advise Mr. Mugambwa on his rental tax for the year ended 31 December
2011 and when his return will be due.
(c) You are a tax advisor at PPK Consulting and Mugambwa has requested you
to advise him on how much tax he would have paid had he registered
the business as a company.
Compute tax payable had Mr. Mugambwa registered his business as a
company for the year ended 31 December 2011.

.
Question 7
(a) Define and explain the relationship between tax base, tax rate and tax
revenue.

(b) Define the following terms: (i) Incidence of tax.

(ii) Progressive tax. (iii) Tax planning.

(c) Value added tax (VAT) was introduced in Uganda in 1996. Accounting for
VAT can be on a cash basis or invoice basis. A proper tax invoice is
required to claim input tax on purchases for VAT by registered entities.
Required:
Identify two advantages and one disadvantage of accounting for VAT on a
cash basis.

(d) Outline three features of a proper VAT tax invoice.

Question Two:
Mr. Zaidi is a professional accountant who has been employed by BB Breweries Ltd. He has a 3 year
contract term of service running from 1 October 2010. As part of his entitlements, the following
accrued to Zaidi for the year ended 30
September 2011:
(i) Monthly salary Shs 15 million.
(ii) Medical bill Shs 7 million for his dental surgery at a private clinic. The company has a
medical scheme for all employees with RAA Hospital.
(iii) His two children attended a short course at an international school and
paid course fees of Shs 5 million per child.
120 Income Tax Computation by CPA, Alex Oboth - Feb 2017
(iv) He was provided with a security guard at Shs 300,000 per month as per his entitlement.
However, due to the prevailing insecurity then, he
engaged an additional two security guards at Shs 350,000 per guard.
(v) He was offered a loan of Shs 120 million at an interest rate of 12% p.a.
The statutory rate ruling for that year was 9.5%.
(vi) He was paid travel allowance for his spouse of Shs 4.5 million. The contract is silent
about travel allowances for spouses.
(vii) The company provides meals to employees at the canteen. Zaidi’s brother who was still
looking for a job would occasionally have lunch at the
company’s canteen under Zaidi’s request to the canteen manager. During the year Zaidi’s
brother consumed meals worth Shs 700,000.
(viii) Zaidi is also entitled to a car maintenance allowance of Shs 1.5 million per
month. During the year he bought himself a Toyota RAV4 at a cost of Shs
50 million.

Zaidi is a partner in ZX Certified Public Accountants. The other partner is Xavier. The partners share
profits or losses in the ratio 3:2 respectively. For the year ended 30 September 2011, the firm made
a profit of Shs 135 million. The partnership paid salaries of Shs 7 million and Shs 6 million to Zaidi
and Xavier respectively which was not included in the profits. The capital allowances accruing
to the firm amounted to Shs 8.5 million. A depreciation charge of Shs
6.2 million was made in the financial statements. Interest paid on the capital contribution for the
period amounted to Shs 2.3 million and Shs 1.4 million to
Zaidi and Xavier respectively.
Required:
(a) Compute Zaidi’s taxable employment income for the year ended 30
September 2011, giving reasons as to why you have omitted / included the amounts.

(b) Compute the partnership’s taxable profits / losses attributable to each partner for the year
ended 30 September 2011.

(c) Determine Zaidi’s total tax liability for the year ended 30 September 2011 .

121 Income Tax Computation by CPA, Alex Oboth - Feb 2017