In Uganda, all taxes are imposed by laws made by the parliament, the constitution of Uganda article 152 (1) states that no tax shall be imposed except under the authority of an act of parliament.
Discuss 2 forms of taxes outside Uganda which URA can use to increase on its tax base and how it can be collected.
Inefficiencies in the tax administration system in Uganda are a major contribution to revenue short falls deprive government of resources with which to provide public goods and services. In the recent past , Uganda revenue authority (URA) has moved to embrace ways of addressing tax administration inefficiencies.
Discuss the extent to which URA is addressing the inefficiencies in tax administration and state any challenge URA may face.
Definition of tax
According to Dalton (1920), “a tax is a compulsory contribution imposed by a public authority, irrespective of the exact amount of service rendered to the tax payer in return, and not as penalty for any legal offence”.
Encyclopedia Britannica defines tax as “a body of rules under which the public authority has claim on tax payers requiring them to transfer”.
The Collins English Dictionary defines tax as a compulsory financial contribution imposed by a government to raise revenue, levied on the income or property of persons or organizations.
Governments worldwide need resources in form of revenues to perform various functions both social and economic activities. Such social/public services include: education, health, infrastructure, security. Tax is the main source of revenue for any government (Bird et al, 2008). Taxes are compulsory payments to government without expecting direct benefit or return by the tax payer – not based on direct quid pro quo principle. Taxes/revenues collected by Government are used to provide common benefits to all mostly in form of public welfare services. Taxes/revenues do not guarantee any direct benefit for the person who pays the tax (Chijoriga, 2012).
A tax is a mandatory financial charge or some other type of levy imposed upon a taxpayer (an individual or a legal entity) by a state or the functional equivalent of a state in order to fund various public expenditures. A failure to pay, or evasion of or resistance to taxation, is punishable by law. Taxes consist of direct or indirect taxes and may be paid in money or as its labour equivalent. Most countries have a tax system in place to pay for public/common/agreed national needs and government functions: some levy a flat percentage rate of taxation on personal annual income, some on a scale based on annual income amounts, and some countries impose almost no taxation at all, or a very low tax rate for a certain area of taxation.
The following are some of the different types of taxes
Income tax
Many jurisdictions tax the income of individuals and business entities, including corporations. Generally, the tax is imposed on net profits from business, net gains, and other income. Computation of income subject to tax may be determined under accounting principles used in the jurisdiction, which may be modified or replaced by tax law principles in the jurisdiction. The incidence of taxation varies by system, and some systems may be viewed as progressive or regressive. Rates of tax may vary or be constant (flat) by income level. Many systems allow individuals certain personal allowances and other nonbusiness reductions to taxable income, although business deductions tend to be favored over personal deductions.
Personal income tax is often collected on a pay-as-you-earn basis, with small corrections made soon after the end of the tax year. These corrections take one of two forms: payments to the government, for taxpayers who have not paid enough during the tax year; and tax refunds from the government for those who have overpaid. Income tax systems will often have deductions available that lessen the total tax liability by reducing total taxable income. They may allow losses from one type of income to be counted against another. For example, a loss on the stock market may be deducted against taxes paid on wages. Other tax systems may isolate the loss, such that business losses can only be deducted against business tax by carrying forward the loss to later tax years.
The main shortcoming of Uganda’s tax structure since independence has been its over-dependence on a small number of sources of tax revenue, namely trade taxes, sales tax/VAT and income tax (Ole, 1975, Wawire, 1991, Wawire, 2000, Muriithi and Moyi, 2003, Wawire, 2003 and Wawire, 2006). The trade taxes, sales tax/VAT on various imported products are vulnerable to external events because their prices are determined in the world market and tend to be volatile. This has resulted in inadequate tax revenues and continuous existence of budget deficits.
Capital gains
Most jurisdictions imposing an income tax treat capital gains as part of income subject to tax. Capital gain is generally a gain on sale of capital assets that is, those assets not held for sale in the ordinary course of business. Capital assets include personal assets in many jurisdictions. Some jurisdictions provide preferential rates of tax or only partial taxation for capital gains. Some jurisdictions impose different rates or levels of capital gains taxation based on the length of time the asset was held. Because tax rates are often much lower for capital gains than for ordinary income, there is widespread controversy and dispute about the proper definition of capital. Some tax scholars have argued that differences in the ways different kinds of capital and investment are taxed contribute to economic distortions.
DIFFERENT TYPES OF TAXES IN UGANDA
Excise Tariff Act, Cap. 338;
This is a tax that is imposed on specified imported or locally manufactured goods, and services. Essentially it is a tax on “luxury” items. The applicable rates may be specific or ad valorem.
The tax is imposed on the value of the import; and in the case of locally manufactured goods, the duty (local excise duty) is payable on the ex-Factory price of the manufactured goods. Exported locally manufactured goods are exempt from excise duty. Persons supplying excisable goods and services are required to register and file monthly Returns to the tax authority by the15th day of the month following the month in which delivery of the goods was made.
Income Tax Act, Cap. 340;
This is tax imposed on a person’s taxable income at specific rates. A person includes an individual, company, partnership, trustee, Government and sub divisions of Government.
Income tax is charged on every person who has chargeable income for each year of income. Chargeable income is derived from three main types of income, namely; business, employment and property. Income tax is administered under the Income Tax Act (1997) Cap 340.
In Uganda, income tax applies generally to all types of persons who derive income, whether an individual, bodies of individuals, or corporate entities. Resident persons are taxed on worldwide income, while non-resident persons are taxed only on income derived from sources in Uganda.
Income tax is imposed on three broad categories of income –Business income, Employment income and Property income.
Most of the taxes imposed are self-assessed. The self-assessment system imposes on the taxpayer, in the first instance, responsibility for calculating taxable income and the tax due on that income. The taxpayer’s calculations may however be reviewed by revenue officials when returns are filed and may be subject to further audit.
Stamps Act, Cap. 342;
Stamp Duty is imposed by the Stamps Act. It is a duty payable on any instrument (document) which upon being created, transferred, limited, extended, extinguished or recorded, confers upon any person, a right or liability.
The affected instruments (currently about 66) are listed in the Schedules to the Stamps Act. The applicable rates are either fixed or ad valorem.
The most common instruments that attract stamp duty include
Affidavits
Agreements or Memorandums of Agreement
Company Articles and Article of Association (0.5%)
Caveats
Insurance policies
Powers of Attorney
Promissory Notes
Mortgage Deeds (0.5%)
Debentures (0.5%)
Transfer of immovable property (1%)
Value Added Tax Act, Cap. 349;
Value added tax (VAT) is required on every taxable supply made by a taxable person, every imported good and the supply of any imported services by any person. Taxable supplies are goods or services made under the business activity of a taxable person. Taxable persons are people who make, or expect to make, taxable supplies valued at one-quarter of the annual registration threshold during three calendar months of the year. Taxable persons must register. As of July 2010, the annual registration threshold is fifty million Ugandan shillings. The standard rate for VAT in Uganda is 18 percent.
Goods imported into the country from without the EAC must be valued for taxation purposes i.e. a customs value must be determined. The customs value forms the basis for computation of customs duties which include import duty,
Value Added Tax, Withholding tax, Excise duty and other duties e.g. environmental levy. Applicable tax rates are defined in the Customs External Tariff.
Goods are valued using the following methods adopted by GATT (General Agreement on Tariff and Trade) and applied chronologically –
1) Transaction value.
2) Transaction value of identical goods.
3) Transaction value of similar goods.
4) Deductive value.
5) Computed value.
6) Fall back value.
Gaming and Pool Betting (Control and Taxation) Act, Cap.292;
This is the type of tax that is charged on betting companies, these include sports betting and
Capital Gains
Capital gains arise from the disposal of a business asset that is not a depreciable asset, such as land and buildings. A disposal of an asset occurs when an asset has been sold, exchanged, redeemed, distributed, transferred by way of gift, destroyed or lost by the taxpayer. The Capital gain is the excess of the consideration over the cost base of the asset. Conversely, there may also be a loss when the cost base of the asset is higher than the consideration received for the business asset.
Cost base of an asset is the amount paid or incurred by the taxpayer in respect of the asset, including incidental expenditures of a capital nature incurred in acquiring the asset, and includes the market value at the date of acquisition of any consideration in kind given for the asset.
Capital gains are included in the gross income of the taxpayer and assessed as a business income.
The following are some of the taxes that are not in Uganda
Inheritance tax, estate tax, and death tax or duty are the names given to various taxes which arise on the death of an individual. In United States tax law, there is a distinction between an estate tax and an inheritance tax: the former taxes the personal representatives of the deceased, while the latter taxes the beneficiaries of the estate. However, this distinction does not apply in other jurisdictions; for example, if using this terminology UK inheritance tax would be an estate tax.
Marginal tax rate
A marginal tax rate is the tax rate an individual would pay on one additional dollar of income. Thus, the marginal tax rate is the tax percentage on the last dollar earned. In the United States in 2016, for example, the highest marginal federal income tax rate was 39.6%, applying to earnings over $415,050. Earnings under $415,050 that year had a lower tax rate of 35% or less.
Marginal tax rates are applied to income in countries with progressive taxation schemes, with incremental increases in income taxed in progressively higher tax brackets. In economics, one theory is that marginal tax rates will impact the incentive of increased income, meaning that higher marginal tax rates cause individuals to have less incentive to earn more. This is the basis of the Laffer curve theory, which theorizes that population-wide taxable income decreases as a function of the marginal tax rate, making net governmental tax revenues decrease beyond a certain taxation point.
With a flat tax, by comparison, all income is taxed at the same percentage, regardless of amount. An example is a sales tax where all purchases are taxed equally. A poll tax is a flat tax of a set dollar amount per person. The marginal tax in these scenarios would be zero.
A marginal tax rate is the amount of tax paid on an additional dollar of income. The marginal tax rate for an individual will increase as income rises. This method of taxation aims to fairly tax individuals based upon their earnings, with low-income earners being taxed at a lower rate than higher income earners.
Under a marginal tax rate, tax payers are most often divided into tax brackets or ranges, which determine the rate applied to the taxable income of the tax filer. As income increases, what is earned will be taxed at a higher rate than the first dollar earned. While many believe this is the most equitable method of taxation, many others believe this discourages business investment by removing the incentive to work harder.
For the 2016 tax year (taxes due in 2017), in the United States, there are seven different marginal tax rates based on an individual’s income. They are 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. Individuals who make the lowest amount of income are placed into the lowest marginal tax rate bracket, while higher earning individuals are placed into higher marginal rate tax brackets. However, the marginal tax bracket in which an individual falls does not determine how the entire income is taxed. Instead, income taxes are assessed on a progressive level. Each bracket has a range of income values that are taxed at a particular rate. For example, in 2016, for a single taxpayer, the marginal tax rates have the following income ranges:
10% Bracket: 0shs. to 90,275shs.
15% Bracket: 90,275shs. to 370,650shs.
25% Bracket: 370,650 shs. to 910,150 shs.
28% Bracket: 910,150 shs. to 1,900,150 shs.
Ways Uganda can apply marginal tax systems
Uganda can apply marginal tax systems on the public servants who earn higher income to reduce income inequality and improve on the standard of living of all the citizens in the same rate.
Using this tax systems people who have very high incomes would pay the largest share of taxes and this will make the country have high tax base and also an increase of tax income of the country.
Proponents of the use of tax brackets and progressive tax systems contend that individuals with high incomes are more able to pay income taxes while maintaining a relatively high standard of living, while low-income individuals struggle to meet their basic needs and should be subject to less taxation. Furthermore, the use of tax brackets has an automatic stabilizing effect on an individual’s after-tax income, as a decrease in salary is counteracted by a decrease in tax rate, leaving the individual with a less substantial decrease in after-tax income.
Ways Uganda revenues authority is trying to
Under Section 4 (1)(a) of the Uganda Revenue Authority (URA) Statute,1991, the Authority is tasked with the mandate to assess, collect and account for all government revenue to which specified Uganda laws apply. Under Section 10(2) of the same Statute, the Commissioner General is responsible for the day-to-day operations of the Authority; the management of funds, property and business of the Authority and for the administration, organization and control of the other officers and staff of the Authority. These financial statements are also under Section 17(1) of the same Statute, the responsibility of the Authority and the Commissioner General.
This responsibility includes preparation and fair presentation of the financial statements in accordance with the Public Finance Management Act, 2015 and International Public Sector Accounting Standards (IPSAS), and for such internal controls as management determines is necessary to enable the preparation of financial statements that are free from material misstatements whether due to fraud or error.
Simplification
The Uganda revenues authority has made the administration of taxes not complicated to assess and collect as is necessary which invariably result in lower cost to tax administrators and tax payers.
Shorter audits
The Uganda revenues authority has ensured that there is a clear system of tax audit which is as far as possible begin as soon as possible after a return is filed. This gives the taxpayer the ability to respond quickly to the needed information.
Transparency
Transparency of the tax rules by Uganda revenues authority has been an on-going goal. Taxpayers know the rules of the game under which their transactions are taxed. All documents relating to tax administration are published with interpretation and explanatory materials readily available to taxpayers.
Training
Both tax administration officials and professionals at Uganda revenue authority are given the needed training to perform their duties.
Cost of Compliance
This has been reduced because taxpayers are given enough time to ensure that books and records are appropriately maintained. Only those records that are normally maintained and are necessary for the requirements of tax compliance.
Confidentiality
Tax administrators have maintained the confidentiality of the return information they receive. This has facilitated the willingness of taxpayers to provide the information needed for audit tax filings.
Challenges faced in collecting taxes by Uganda Revenues Authority
All civilized countries need to collect taxes for several reasons, such as to finance developmental activities, to meet their day to day expenses related to maintenance of a free and fair society, to control the economy through fiscal measures, and to a certain extent, to change the economic behavior of people. This authority of national governments to collect monies from taxpayers must recognize a balance between the nations’ authority to tax and taxpayers’ rights. Thus, the real challenge for nations is to ensure that taxpayers are treated with fairness, justice, and equity, while national governments assert their jurisdiction as taxing authorities. Ideally this tax collection can be analogized to the extraction of honey from the abode of honeybees where honeybees are not disturbed and careful extraction of the honey results in a circular process
Sound tax system should identify surpluses in the economy and should tax it in such a fashion as to cause minimal damage to productive activity. Tax collection should act as a catalyst for economic growth. Ideally a tax system should be neutral with respect to its effect on economic behavior. In the real world, however, it is impossible to achieve neutrality.
While tax laws impose obligations on tax payers to contribute to government revenues, the actual amount of revenues flowing into the hands of any government depends on the effectiveness of its tax administration (Bird, 2003). Weaknesses in revenue collections lead to inadequate tax collections. Not only do developing countries face an uphill battle in bringing individuals and businesses into the taxation process but governments face insufficient administration staff with low skills, high levels of illiteracy among tax payers, lack of logistics and lack of reliable data (Kangave, 2005).
However for Uganda revenues authority there are numerous challenges that the organization faces
While tax laws impose obligations on tax payers to contribute to government revenues, the actual amount of revenues flowing into the hands of any government depends on the effectiveness of its tax administration (Bird, 2003). Weaknesses in revenue collections lead to inadequate tax collections. Not only do developing countries face an uphill battle in bringing individuals and businesses into the taxation process but governments face insufficient administration staff with low skills, high levels of illiteracy among tax payers, lack of logistics and lack of reliable data (Kangave, 2005).
A major constraint is the lack of adequate resources to sustain and facilitate the operation of tax authorities. Resources to administer a tax can be generally divided into two categories: human resources and physical resources. Human resources is not only the number of tax officials but also the quality of tax officials.
Lack of modern technology, especially computers, to facilitate the taxation process is another impediment to effective tax administration. Until recently, the tax agencies had to rely on manually entering taxpayer data into records books, and keeping a voluminous amount of tax information in print
By and large, taxpayers of all countries do not want to pay taxes unless compelled by a situation where they are left with no option other than to pay the taxes.
Therefore, for better tax compliance, a system should be designed that automatically extracts taxes rather than leaves the payment of taxes to the voluntary choice and morality of taxpayers.
Penal provisions making tax evasion a costly affair should supplement this automatic extraction of taxes.
The tax administrators of Uganda revenues authority may face a challenge of massive task evasion. Nevertheless the problem of tax evasion bothers tax administrators of developing countries and developed countries alike.
In the real world, those who wish to reduce their tax liability have more choices than just tax evasion. Smarter and more sophisticated taxpayers, who find the cost/risk of evasion greater than the benefit, practice risk-free legal ways of non-payment of taxes rather than blatant tax evasion, which is popularly known as tax avoidance.
The Uganda revenue faces a challenge of tax avoidance which is preferable because there are less or no chances of getting caught and prosecuted. It is also believed that relatively less wealthy and consequently less well -advised people engage in tax evasion whereas relatively wealthier and better advised people practice tax avoidance. Therefore, the loss to government revenue on account of tax avoidance is much greater compared to tax evasion. For effective revenue collection, governments need to curb not only the tax evasion but also the tax avoidance. The tax collection system should be designed in such a way that not only the tax evasion but also the tax avoidance becomes difficult for the taxpayer.
Most developing and underdeveloped countries, including Uganda, are characterized by the existence, in greater degree of unutilized manpower on the one hand and of unexploited natural resources on the other, but they have aspirations to become developed countries. Developing countries are trying to fulfill the increasing developmental needs of their country and people by way of public expenditure within their limited resources. Indirect taxes are a major contributor of the revenue in developing economies like Uganda.
Kiser and Baker (1994) argued that tax systems in most poor countries are characterized by widespread corruption and tax evasion. Substantial amounts never reach the treasury. This erosion of the tax base has several detrimental fiscal effects. The consequences of lost revenue to the funding of public services are of special concern (Tanzi, 2000).
On the other hand, those working in the informal sector of Ugandan economy do not see the need to pay tax whereas they dominate the economy (Chijoriga, 2012).
To them only, civil servants should pay tax on their earnings and this amount to over flogging the willing horse. Besides, the activities of the strong union in the formal sector do not even pave way for a successful tax policy implementation in the formal sector. However, challenges in revenue collection according to Chijoriga (2012) include; a) Broadening the tax base, informal sector included in the tax net; b) Ensuring that all due Government revenue is collected and tax evasion and avoidance are controlled; c) Raising the level of revenue yield to be commensurate with the average yield achieved in sub-Saharan Africa; d) Addressing stakeholders’ (community’s) expectations by exercising various statutory powers fairly in accordance with the law – without political influence; e) Expediting tax decision making and rulings by putting in place well established procedures and criteria; and f) Improving staff integrity.
Limited Diversity, It is risky for the Local Government to depend upon very few sources of Local revenue such as a system is bound to breed a lot of uncertainty for the treasury. If Local revenues come from diversified sources, then any reduction in a particular revenue item is bound to be very small, hence the principle of diversity.
However too much multiplicity of taxes should be avoided as it may lead to unnecessary cost of collection and hence violate the economy principle. Fiscal authorities should be in position to predict and accurately forecast the revenue a particular tax will generate and at what rate it will flow in, for this is because inelastic tax is usually unproductive (Bahiigwa et al, 2004).
Low tax base in Uganda, Uganda revenues authority faces a major challenge of corruption in Tax collection, The country is facing a massive problem of unemployment and underemployment. It is extremely difficult to widen the tax base and to collect taxes from unemployed and underemployed people, According to Auditor general report, (2015), The second schedule to the Income tax Act Cap.340 provides guidance on various tax rates for small business tax payers, depending on the gross turnover. This should form a basis for assessment and collection of the presumptive tax. It was noted during field inspections of businesses in central and western Uganda that there were not several businesses within the towns /trading centers, which fall under the presumptive tax categorization from which the stations were not collecting presumptive taxes nor were they making following ups. Failure to collect presumptive taxes implies loss of revenues to the Government and poor performance of the tax head.
Abundance of Exemptions for Political Reasons, There are too many exemptions under direct taxes as well as indirect taxes based on the push and pull of various lobbying groups. The following two categories of exemptions are worth mentioning here
References
