TAX ADMINISTRATION AND PLIANCE IN UGANDA: A CASE STUDY OF KAMPALA BUSINESS DISTRICT

INTRODUCTION

• Introduction

This study will examine the relationship between tax administration and tax compliance in URA. In this study, the tax administration will be considered as the independent variable (IV) while tax compliance will be the dependent variable (DV). Measurements of the IV will include tax assessment, sensitization, and enforcement. While the DV will be measured as registration, timely filing of returns, and payment of taxes, as presented by the conceptual framework in Figure 1.1. Chapter one of this proposal will cover the background of the study, the statement of the problem, the purpose of the study, objectives, research questions, hypotheses, conceptual framework, significance, justification, the scope of the study, and operational definitions of terms.

1.2 Background to the Study

The mandate of the Uganda Revenue Authority (URA) is to assess, collect and account for Central Government Tax Revenue (including Non-Tax Revenues) and to provide advice to the government on matters of policy relating to all revenue sources (ura.go.ug, 2020). This study intends to examine the relationship between tax administration and tax compliance at URA a case of Kampala Business District.  Kampala is the largest metropolitan city in Uganda, comprising five divisions including the Kampala Central Division. It comprises the central business district with both the most upscale business and residential neighborhoods as well as low-income households and businesses (en.wikipedia.org, 2020).  The rationale for carrying out this study on this part of the city is that it fairly represents all classes of taxpayers given its diversity in income-generating activities, taxpayer lifestyle, and other factors which impact their compliance with tax. The background to this study is built from four perspectives namely; the historical perspective, the theoretical perspective, the conceptual, and the contextual perspective.

1.2.1 Historical background

Historically, tax compliance is a substantive universal phenomenon that transcends cultural and political boundaries and takes place in all societies and economic systems. There are many studies that explain the behavior of tax compliance in a more realistic situation (Nicoleta, 2011). Tax non-compliance is a major problem for many tax authorities and it is not an easy task to persuade small business taxpayers to comply with tax requirements even though tax laws are always precise (James and Alley 2004). In countries like Australia and Germany, inadequate audit selection and notifications methods, and the length of time taken for auditing are the major attributes of the smallest businesses, as most of the business owners tend to hire incompetent family members and relatives who cannot keep proper financial records (Kasipillai, 2004). Many small business taxpayers are not sure of what should be the domain of tax professionals for the reason that they lack independence and have no or less tax competency (Badenhorst, 2008), since one of the major characteristics of small businesses is the lower level of the specialist tax expertise and greater owner-involvement in day-to-day management (Baurer, 2005). In addition, compliance costs involved in taxation are major impediments to eliciting compliance behavior of taxpayers. It is also believed by most tax policy researchers that compliance costs for tax payments are quite high, especially for SMEs, which lack knowledge and skills of the tax laws and regulations (Shome, 2004). Sometimes the administration of income tax creates problems for business taxpayers when it imposes burdensome reporting and record-keeping requirements. This has led to increased costs of tax for those who try to comply with the tax law (Baurer, 2005). Likewise, most governments have not adequately taken taxpayer compliance costs into account when designing tax rules, yet such expenses fall on to the taxpayers in form of reduced work effort or saving (Bankman, 2005), time spent on the tax compliance process, and monetary expenditures on salaries, overheads and seeking assistance from experts (Munnich, 2004; Slemrod, 2005; Lassila and Smith, 1997).

Developing economies of Africa, are still characterized by low tax compliance levels, in the face of the numerous advocacies for voluntary compliance (Kangave, 2005; Bird, 2004 Ayoki, 2008). Many African governments have adopted tax compliance administrative measures like sensitization, assessments, penalties, interests, and tax audits to ensure tax enforcement instead of compliance (Kayaga, 2007). According to Ayoki (2007), income tax compliance in African counties was very low at 38% by the end of 2005. Moreover, the tax regimes were oriented more towards consumption taxes rather than income taxes; for example, income taxes account for only 27 percent of net URA Collections (URA, 2006/07). This has been accompanied by a lower ratio of tax revenue to GDP of 13.5% as compared to that of Namibia (31%), Kenya (21.2%), Mauritius (19.6%), Zambia (19.4%), Burundi (19%), Ghana (17.2), and Malawi (15.9%) in Sub-Saharan African countries with similar tax structure in 2006/07 (Ayoki, 2008). This problem of compliance levels has also been deep-rooted in the continuing stagnation of income taxes at 25.8% for the past three years. Besides the tax potential of the informal sector (SMEs) in developing countries is partially exploited given the fact that most enterprises have small profits and do not keep accurate financial records (Bonjean and Chambas, 2011), hence the tax revenue contribution made by these enterprises especially the small enterprises in terms of presumptive tax to total tax revenue is insignificant (i.e. less than 0.5% of the total tax).

In Uganda, taxation began during the colonialists when they asked for the poll tax and hut tax in the 1920s. By the 1940s, the graduated tax had been introduced which went on even after colonial times. The compliance with these taxes was higher than the recent indirect taxes used today. This was because of forceful enforcement measures employed by revenue officers, like arrests.  However, after the 1990s, compliance with tax payments started taking a downward trend due to the introduction of indirect taxes (Terkper, 2013; James, Barbour & Stern, 2017; Ayoki, 2017). These called for much education, sensitization, assessments, and indirect enforcement (Ahmed & Braithwaite, 2015). These in the end are presumed to negatively affect the compliance and performance of the Uganda Revenue Authority. It is from such a background that this study will be undertaken to assess the relationship between tax administration and tax compliance in the Uganda Revenue Authority (URA) while taking a case study of the Kampala Business District.

1.2.2 Theoretical Background

This study will be guided by the ability to pay theory advanced by Arthur Cecil Pigon in 1943 and formalized by Richard Musgrave in 1960. Under this theory, the most popular and commonly accepted principle of equity or justice in taxation is that citizens of a country should pay taxes to the government in accordance with their ability to pay. It appears very reasonable and just that taxes should be levied on the basis of the taxable capacity of an individual. For instance, if the taxable capacity of person A is greater than that of person B, the former should be asked to pay more taxes than the latter. Some economists like Samuelson (2012) are of the opinion that ownership of a business or property is a very good basis for measuring one’s ability to pay. This idea is out rightly rejected on the ground that if a person earns a large income but does not spend on buying any, he will then escape taxation. On the other hand, if another person earning income buys; he will be subjected to taxation. The proponents of this theory realized that in practice trouble would arise with the definition of the ability to pay. Therefore, they argued that there is a need to put in place valuers who can impartially enforce any form of tax in a country. This idea intimates that tax assessment, tax sensitization, and tax enforcement can be among the most effective ways of improving tax compliance. In a nutshell, the ability to pay theory advocates alignment of tax administration with the ability of the taxpayers if the goal of improving tax compliance is to be realized.

1.2.3 The conceptual background

Many scholars define the concept of tax administration and tax compliance as inseparable elements. In this study, tax administration is referred to as dealing with taxpayers in order to collect tax and sanction non-compliance (Gupta, 1997). In Uganda, Oriaro (1997), Abigaba (1998), Chen and Reinikka (1999), and Mulindwa (2000) have pointed out the aspects they consider relevant in measuring tax administration, and in summary, these include locating the taxpayer, checking on taxpayer compliance and collection of taxes. However, Mulindwa (2015) takes tax administration to consist of tax assessments, sensitization, and enforcement. Therefore, in this case, the tax administration will be measured while using Mulindwa’s (2015) conceptualization to measure tax administration as tax assessment, tax sensitization, and tax enforcement.

Tax compliance, on the other hand, according to Singh (2013), is a person’s act of filing their tax returns, declaring all taxable income accurately, and disbursing all payable taxes within the stipulated period without having to wait for follow-up actions from the authority. In addition (Maxwell, 2014) also looks at tax compliance as the degree to which the taxpaying community meets the tax obligation as set out in the appropriate legal and regulatory provisions. From the works of Franzoni, (1998); and Plumley, (1996) tax compliance is described in terms of registration, correct reporting, timely filing, and payment of amounts due. In this study, therefore, tax compliance will be measured using attributes of tax registration, return filing, and tax payment. Return filing, according to Ming et al (2013) is the filling in and uploading of an electronic form used to report incomes earned and expenses incurred on which tax due or payable is based. Required tax returns include VAT returns, Income Tax returns and pay as you earn a return. According to Teera (2015), tax payment refers to the payment of taxes, Interest, or penalties as per filed returns or as per assessments raised due to Audits or by the commissioner within the law. Tax registration on the other hand refers to the Acquisition of a Tax Identification Number (TIN) specifying the taxes registered for. Registration for taxes will either be as an individual or a company (Ming et al, 2015).

1.2.4 Contextual background

URA was set up in September 1991 to administer central government taxes. The main aim was to professionalize tax collection so as to ultimately improve the tax ratio (MoFPED, 2010). It was set up by an act of parliament as a government agency responsible for the central government taxes. Subsequently, URA achieved the said objectives for (nearly) the first six years of implementation up to around 1995/1996 (URA Corporate plan. 2002/2003–2006/7). Later in the subsequent years, the tax to GDP-ratio stagnated at about 11-12% up to 2009. The nominal growth in tax revenue has continuously increased but at a decreasing rate from 56.6% in 1992/1993 to a mere 6.4% in 2013/2014.  Because of that, tax compliance remains a challenge especially in the field of income tax to the extent that in all, Uganda collects just about 50% of the government expenditure requirements from tax revenues. In an effort to improve the administration and revenue collection, URA management introduced the Domestic taxes department which is headed by the commissioner and six assistant commissioners who are in charge of large taxpayer office, field delivery, returns, and payment processing, arrears and objections management, non-tax revenue and audits. This department collects all domestic taxes, does registration, receipt of returns, filling, auditing, assessments, collection, and refunds. All the domestic tax branches and offices including Kampala Central Office are under this department. This office is mandated to ensure that there is a high level of tax compliance among small businesses in Kampala so that they do tax registration, return filing, and tax payment, in the virtue to improve revenue performance in form of expected revenue, actual revenue collections/net collections, reduced tax arrears and tax evasion and avoidance. However, despite the above efforts, there have been reports concerning increasing non-compliance. For instance, in Kampala Central Office, Uganda’s revenue collection is equivalent to 4.5% of GDP which is below other regions of Kampala in URA (URA, 2014). This study, therefore, intends to investigate whether tax administration has an effect on tax compliance in the Kampala Business District of URA.

1.3 Statement of the problem

The growth trend in net revenue collection from the financial year 2015/16 to the financial year 2018/19 was an upward one with FY 2018/19 registering 14.95 percent growth (Uganda Revenue Authority, 2020). In FY 2019/20, there was a decline in growth by 0.81 percent although the revenue increased by UGX 133.99 billion in comparison to FY 2018/19.

There have been efforts to increase tax compliance in cities and urban Authorities in Uganda and Kampala Business District, in particular, such as legal reforms, publication of handbooks for tax administrators and trainers by the government, sensitization workshops for tax administrators and owners by businesses, fixing an affordable rate of tax of 3% by the council and securing a service provider to enforce collection of the tax. In spite of these efforts, tax compliance in URA Kampala Business District has remained below the set target. For instance, in 2016, URA Kampala Central Office set a target of 70% and achieved only 53%. In 2017, the target was set at 72%, and only 55% was achieved whereas, in 2018, the returns were 54% below the set target of 75% (Provisional Outturn for Recurrent Revenue Performance 2015/16–2018/19). Secondly, according to UBOS (2017), only 42.2% of taxpayers are registered for taxes in Kampala Business District. In addition, the rate of tax evasion and avoidance has been reported as increasing annually by 11% (URA Survey, 2016). Failure of the tax compliance index is assumed to have significant consequences on the service delivery and economic growth of Uganda. This study, therefore, intends to investigate whether tax administration has an effect on tax compliance in the Kampala Business District of URA.

1.4 Purpose of the study

The purpose of the study is to investigate the relationship between tax administration and tax compliance in the Kampala Business District of URA.

1.5 Objectives of the study

The objectives of this study will be:

1. To examine the relationship between tax assessment and tax compliance in the Kampala Business District of URA.
2. To examine the relationship between tax sensitization and tax compliance in the Kampala Business District of URA.

• To examine the relationship between tax enforcement and tax compliance in the Kampala Business District of URA.

1.6 Research questions

1. What is the relationship between tax assessment and tax compliance in the Kampala Business District of URA?
2. What is the relationship between tax sensitization and tax compliance in the Kampala Business District of URA?

• What is the relationship between tax enforcement and tax compliance in the Kampala Business District of URA?

1.7 Hypothesis of the study

1. There is a significant relationship between tax assessment and tax compliance in URA
2. There is a significant relationship between tax sensitization and tax compliance in URA

1.8 Conceptual framework

INDEPENDENT VARIABLE (IV)                                    DEPENDENT VARIABLE (DV)

Figure 1.1: A Conceptual Framework for understanding the relationship between tax administration and tax compliance

Source:  Adapted and modified from Abigaba (1998), Iga (1999), and Shotton, (2000)

From the conceptual framework in Figure 1.2.1, it is hypothesized that tax administration has a relationship with tax compliance. If the URA performs tax assessment, tax sensitization, and tax enforcement, this can influence its tax compliance in terms of tax registration, timely filing of returns, and timely payment.

1.9 Significance of the study

1. The study will help analyze problems affecting tax administration and suggest ways for administrators and policymakers on how the problems can be addressed in order to improve tax compliance in URA Kampala Business District and other urban centers in Uganda.
2. The study shall also help URA in Uganda and Kampala Business District in particular to improve service delivery. Money generated from the tax is expected to be expended on providing services. Such services include; road construction and maintenance, street lighting, anti-malarial drains, physical planning, and other services required by taxpayers within their areas. Increased revenue from the tax would therefore be helpful in providing the above services.
3. The study shall contribute to the existing body of knowledge on tax and act as a basis for academicians and researchers to conduct further research in the same area.

1.10 Justification of the study

Prior studies have been done on tax compliance all over the world and in Uganda but there have been no specific studies done on the relationship between tax administration and tax compliance in Uganda revenue authority using Kampala Business District as a case study in this current year. This is because Kampala central office is located in the middle of Kampala town and has the largest number of small and medium taxpayers who are not compliant either in terms of Tax registration, return filing, and return payment, thus the rationale behind the choice of this study is to empirically establish the relationship between tax administration and tax compliance in Uganda revenue authority using Kampala Business District.

1.11 Scope of the study

Geographical scope

The study will be conducted in URA Kampala Central Office in the central part of Kampala city. This region will be chosen because it is accessible by the researcher with a high rate of small businesses being in the heart of Kampala.

Content scope

The study will analyze tax administration focusing on tax assessment, sensitization, and enforcement and their influence on tax registration, Tax return filing, and tax payment.

Time scope

The study will focus on the period from 2016 to date because it is when compliance with tax assorted has been indicated as failing to hit the target.

1.12 Operational Definitions

Return filing; this refers to filling in and uploading an electronic form used to report incomes earned and expenses incurred on which tax due or payable is based. Required tax returns include VAT returns, Income Tax returns and pay as you earn a return.

Tax payment: In this study, tax payment will refer to the payment of taxes, Interest, or penalties as per filed returns or as per assessments raised due to Audits or by the commissioner within the law.

Tax registration; this shall refer to the Acquisition of a Tax Identification Number (TIN) specifying the taxes registered for. Registration for taxes will either be as an individual or a company.

Tax administration: This will mean how taxes are assessed, sensitization made, and enforcement is performed.

 Tax assessment:  this will mean the mechanisms used in apportioning taxes to taxpayers in Kampala Business District (KBD).

Tax sensitization:  this will mean the mechanisms used in educating and making potential taxpayers aware of the taxes that they are mandated to pay in the Kampala Business District.

Tax enforcement: action taken on a ratepayer who fails to pay. This involves administering a demand notice, recovery by the warrant, recovery by action, a charge of penalties/interest, recovery from tenants and occupiers, prohibition of transfer of, and imposing a rate first charge on

Tax compliance: the amount of revenue collected from tax in Uganda shillings during a financial year.

References

(2020, November). Retrieved from ura.go.ug: https://www.ura.go.ug/readMore.do?contentId=999000000000199&type=TIMELINE

en.wikipedia.org. (2020, November 20th). Kampala Central. Retrieved from https://en.wikipedia.org/wiki/Kampala_Central_Division

Uganda Revenue Authority. (2020). Annual Revenue Performance Report FY 2019/20. Kampala: URA. Retrieved from ura.go.ug.