THE EFFECT OF TAX EDUCATION ON VALUE ADDED TAX PERFORMANCE URA NAKAWA

INTRODUCTION

This chapter covers the background of the study, Statement of the problem, purpose of the study, research objectives, research questions and scope of the study, significance of the study and definition of terms.

1.1 Background of the study

The major aim of most governments in developing countries is to stimulate and guide their economic and social development. These governments continue to reach out for the goal of government promoted and directed development. Kaldor (2011) pointed out the importance of government revenue in accelerating economic development. Whatever the prevailing ideology or political situation of a particular country, it must steadily expand a host of non-revenue yielding services such as education, health, infrastructure, and social security. Toye (2012) asserted that the link between taxation and economic development is a link between a universal desire and a form of government action that is believed to be a means to that end. Wildford and Wilford (2013) asserted that one of the most important policy upon which most economists agree is that emerging nations must increasingly mobilize their own internal resources to provide economic growth. The most important instrument by which resources are marshaled is through the implementation of an effective tax policy. Currently, tax revenues play a vital role in Uganda ’s economic development. This is evidenced by the attention problems of taxation have received over the years, Vision 2040 contain reforms in all areas of tax policy. They emphasize the need to raise more revenue without increasing the burden of taxation on those who are already contributing to the exchequer. The tax measures contained in these documents consist of broadening the tax base to include additional sector activities and strengthen tax administration.

These measures were adopted after the government realized that the present tax structure does not raise adequate revenues thereby encouraging domestic borrowing and seeking external finance, which are only temporary measures of deficit financing. Moreover, external funds can no longer be relied on due to donor conditions and the increasing interest to channel funds to Eastern Europe after the cold war (Gelb, 2014). Furthermore, potential sources for domestic borrowing are few and external grants reduce autonomy and increase political and economic dependence. The alternatives are therefore to raise money through taxation, curtail desired government expenditures, or continuously revise the tax structure.

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, (Wawire, 2015). 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.

The sources of inadequacy of revenue from taxation include tax structure that is not buoyant or income-elastic, a long time lag between government revenue collection and spending, lack of fiscal discipline, and reluctance of the government to control its expenditures, and lack of information about the behaviour of Uganda ’s tax revenue functions , this study intends to investigate into the effect of tax education on value added tax performance URA NAKAWA.

1.2 Statement of the problem

Several studies have been undertaken on the response of tax revenues to changes in GDP (Wawire, 2003). In Uganda , such studies have found a positive relationship between tax revenues and GDP. However, these studies omitted some key determinants of tax revenues, such as the nature of the tax system, and institutional, demographic and structural features of the economy.

Specific determinants that are usually omitted include: unusual circumstances that have been experienced in the economy such as coffee and tea booms, oil shocks, drought, labour unrest, 1972 coup d’etat attempt, political uncertainty and different demonstrations in kampala especially by the Forum for democratic change former presidential candidate.

However uganda’s economy has been meant with numerous challenges especially volatility in its exchange market for example Although coffee contributed as much as $400 million annually to total merchandise exports during the mid-1990s, it currently (2010) contributes about $280 million (MAAIF, 2011). Understandably, the sector’s poor performance raised concerns among policy makers.However, despite the declining foreign earnings compared to the mid-1990s, coffee remained the main foreign exchange earner for the country. Its share in total export earnings declined marginally from 17.9 percent in 2009 to 17.5 percent in 2010, this study therefore intends to investigate into the effect of tax education on value added tax performance URA NAKAWA.

1.3 Purpose of the study

The purpose of study is to investigate the effect of tax education on value added tax performance URA NAKAWA.

1.3 Objectives

1. To establish the level of tax education about vat conducted by URA nakawa
2. To establish the determinants of vat performance in Uganda

• To recommend policies for improving the performance of vat in Uganda

1.4 Research questions

1. What is the level of tax education about vat conducted by URA Nakawa
2. What are the determinants of vat performance in Uganda

• What are the recommended policies for improving the performance of vat in Uganda

1.5 Scope of the study

The study scope will cover the following aspects

1.5.1 Study scope

The study scope will cover the following;  the level of tax education about vat conducted, determinants of vat performance , and the recommended policies for improving the performance of vat in Uganda.

1.5.2 Geographical scope

The study will be conducted in Nakawa Kampala Uganda.

1.8.3 Time scope

The period of investigation will be  from February to October 2016.

1.9  Significance of the study

The study  will help the future academicians with information regarding the level of tax education about vat conducted by URA Nakawa.

The study will also help future researcher have information regarding  the determinants of vat performance in Uganda

The study will help the management of URA have information regarding the recommended policies for improving the performance of vat in Uganda

CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

This chapter discusses what various scholars have written about the level of tax education about vat conducted, the determinants of vat performance and policies for improving the performance of vat in Uganda.

2.2 LEVEL OF TAX EDUCATION ABOUT VAT CONDUCTED

The origins of the VAT can be traced back to the writings of a German economist F Von Siemens, who proposed the VAT in 1918 as a substitute for the then newly established German turnover tax. The development of these proposals into the introduction of a VAT in a state is credited to Maurice Faure and Carl Shoup who were responsible with the introduction in France in 1954 of the Taxe sur la Valeur Adjoutee. Since then over 100 countries have introduced some form of VAT –the only OECD country not to have done so is the United States.

VATs have become the most common type of consumption tax for a variety of reasons. Unlike income taxes, VATs do not distort consumption-savings/investment decisions.2 Because sellers can claim a credit for VAT paid on their inputs, there is no cascading of taxes as can occur with other consumption taxes. The tax is often regarded as “self-policing” as it is imposed on every transaction throughout the production process reducing revenue losses should one party fail to collect VAT. It is also neutral between the domestic production and imported goods when compared to an import tariff. It has been widely recognised that a well designed VAT can raise significant amounts of revenue on a stable and sustainable basis and the decision to introduce a VAT has often been made for these reasons.

A commonly cited disadvantage of VATs is that they can be regressive in nature being a problem which can arise with most types of indirect tax. A single rate VAT applied to the broadest possible base becomes essentially a proportional tax on consumption and therefore regressive.5 Often to address this problem of regressivity, multiple rates of VAT are offered along with a range of exemptions even though such provisions have a negative impact on the effectiveness and efficiency of VAT.

Regressivity is usually a greater issue for developing countries where a large proportion of the population lives in poverty. For this reason, many developing countries have adopted multiple VAT rates with the lower rates applying to necessities such as food and utilities as well as exempting a wide range of goods and services to promote greater progressivity. Empirical studies into VAT adopted in developing countries have shown that such measures do address the problems of regressivity and make the tax more progressive.

The introduction of a VAT in a developing country has its own challenges. They are usually introduced in developing countries as part of an economic liberalisation programme involving reductions in tariffs often at the recommendation of international advisory bodies such as the IMF or World Bank. In order to maintain adequate tax revenues, many developing countries have found it necessary to retain excise taxes to offset revenue losses from tariff reductions and also for social purposes. This has resulted in the VAT being an additional tax impost rather than a replacement for existing taxes leading to greater complexity for businesses.

Obtaining compliance with VAT laws in a developing country can be a challenge especially where there is a large informal sector.10 In most developing countries the majority of VAT collected is from imports with the remainder collected from a few large taxpayers

2.2  Determinants of VAT performance

Osoro (1993) examined the revenue productivity implications of tax reforms in Tanzania. In the study, the tax buoyancy was estimated using double log form equation (2) and tax revenue elasticity using the proportional adjustment method (equation 4). The argument for the use of proportional method was that a series of discretionary changes had taken place during the sample period, 1979 to 1989, making the use of dummy variable technique impossible to apply (Osoro 2013). For the study period, the overall elasticity was 0.76 with buoyancy of 1.06. The study concluded that the tax reforms in Tanzania had failed to raise tax revenues. These results were attributed to the government granting numerous tax exemptions and poor tax administration.

Ariyo (2012) evaluated the productivity of the Nigerian tax system for the period 1970 – 1990. The aim was to devise a reasonable accurate estimation of Nigeria’s sustainable revenue profile. In the study, tax buoyancy and tax revenue elasticity were estimated using equation (4) and (5) respectively. The slope dummy equations were used for the oil boom and SAPs. It was found that on the overall, productivity level was satisfactory. However, the results indicated wide variations in the level of tax revenue by tax source. The were attributed to the laxity in administration of non-oil tax sources during the oil boom periods. Significant reduction in public expenditure and prudent management of financial resources were suggested as solutions to the fiscal deficit. The study further asserted that there was need to improve the tax information system to enhance the evaluation of its performance and facilitate adequate macro-economic planning and implementation (Ariyo, 2011)

Chipeta (2010) evaluated effects of tax reforms on tax yields in Malawi for the period 1970 to 1994. The results indicated buoyancy of 0.95 and an elasticity of 0.6. The study concluded that the tax bases had grown less rapidly than GDP. Kusi (2014) studied tax reform and revenue productivity of Ghana for the period 1970 to 1993. Results showed a pre-reform buoyancy of 0.72 and elasticity of 0.71 for the period 1970 to 1982. The period after reform, 1983 to 1993, showed increased buoyancy of 1.29 and elasticity of 1.22. The study concluded that the reforms had contributed significantly to tax revenue productivity from 1983 to 1993.

Milambo (2011) used the Divisia Index method to study the revenue productivity of the Zambian tax structure for the period 1981 to 1999. The results showed elasticity of 1.15 and buoyancy of 2.0, which confirmed that tax reforms had improved the revenue productivity of the overall tax system. However, these results were not reliable because time trends were used as proxies for discretionary changes and this was the study’s major weakness.

In relation to Uganda , Ole (2015) estimated income elasticity of tax structure for the period 1962/63 to 1972/73. Tax revenue was regressed on income without adjusting for unusual observations. The results showed that the tax structure was income inelastic (0.81) for the period studied. The study recommended that the system required urgent reforms to improve its productivity. The results also implied that Uganda ’s tax structure was not buoyant and therefore the country would require foreign assistance to close the budget deficit.

Njoroge (2013) studied the revenue productivity of tax reforms in Uganda  for the period 1972/73 to 1990/91. Tax revenue was regressed on income after adjusting tax revenues for discretionary changes. The period of study was divided into two to make it easier to analyze the effects of tax reforms on revenues from various taxes. Income elasticity of total tax structure was found to be 0.67 for the period 1972 to 1981. This meant that the government received a decreasing share of rising GDP as tax revenues. The elasticity estimates for individual taxes were as follows: sales tax 0.6, import duties 0.45 and income tax 0.93. The buoyancy for the overall tax system for the same period was 1.19, implying that the tax system was quite buoyant.

In an attempt to highlight the trends in Uganda ’s tax ratios, tax effort indices and their implication for further tax reforms, Wawire (2015) performed a regression of tax revenue on income. The estimated tax equation was used to compute tax effort indices by dividing the predicted with the actual figures. After examining the tax effort indices, the study concluded that the slowdown in economic growth had resulted in high levels of taxation that did not match delivery of public goods and services.

2.3 POLICIES FOR IMPROVING THE PERFORMANCE OF VAT

In this age of globalization, most developing countries want to become integrated with the international economy. However, they face significant challenges in this pursuit, including the need to increase tax revenues. Hence tax policy makers have to analyze the prevailing conditions in the country and determine the relevant mix of taxes that can raise sufficient revenue. Many developing countries, Uganda included, have increasingly begun to restructure their tax systems for this specific purpose. Despite numerous tax reforms that were intended to improve the economic and social situation by supporting infrastructure and increasing the quality of public goods provided by the government, the situation in Uganda remains fragile, and the country remains among the poorest in the world. Based on the current approved budget for the financial year 2005/2006, a widening budget deficit of 9.2% compared to the previous financial year of 8.6% was reporte, (MoF, 211).

One of the most flexible ways to raise per capita incomes and to support increases in real GDP growth rates is through taxation. Taxation is a sovereign right of the state used to transfer resources from private to public use in order to achieve the economic and social goals, (Richard, 2014).

Governments can and do “commandeer resources” directly from the people. This method would be practicable only in war times, however, and would be rejected by the masses in peaceful times. Governments sometimes print the money they need to function,4 although it is recognized that this method drives inflation. Developing countries make heavy use of domestic and foreign borrowing, but this is not an adequate alternative to increasing tax revenues.5 The majority of the people in developing countries receive very low incomes, if any, from which the government cannot borrow. And it may not be constructive for a government to rely on foreign aid as there are many deleterious consequences flowing from aid dependency. Thus taxation emerges as one of the most effective domestic tools that governments have direct control over to develop the resources needed to meet their social, economic, and political goals.

Although Uganda’s revenue performance has improved remarkably in nominal terms from 1986 to 2006 as a result of these changes, it is still comparatively low and clearly does not meet Uganda’s needs as measured against optimal levels of public expenditure for the country.8 It is therefore accurate to conclude that the government must improve its tax policy to increase government revenues, but in a way that takes the realities of Uganda’s social and economic structures into consideration. The challenge of inefficient domestic revenue mobilization carries important policy implications for Uganda (among which are included bad public services and increased debt), because domestic revenue production has not improved significantly despite the many changes the government has made. While several piecemeal efforts have been implemented in Uganda, concrete ideas on how the overall tax system can be improved remain scarce.

CHAPTER THREE

METHODOLOGY

3.0 Introduction

This chapter presents the methodology which consists of the research design, area of study, study population, sample population and selection, sampling technique, data collection method, data quality control, data collection procedures and limitations of the study.

3.1 Research design

Qualitative and quantitative research designs will be used. The researcher will use the above method because many aspects will be covered in the study concerning the  Effect of tax education on value added tax performance URA Nakawa  given the complex nature of URA Nakawa.

3.2 Area of the study

The study will be carried out in URA Nakawa.

3.3 Study population and sample size

The study will target officials from finance department,

3.4 Sample size

According to (Amin, 2005) sampling involves selecting a sample of the population in such a way that samples of the same size have equal chances of being selected. The sample comprised of 30 respondents who will include officials from ICT department, procurement staff, and accountants of URA.

While carrying out research, purposive sampling will be applied to the below different categories of respondents.

Table 3.4.1 Sample size

SOURCE: NSSF

3.5 Data Collection Instruments

The major instruments for data collection will be questionnaires guide. Surveys will be one part of a complete data collection and evaluation strategy. The major method of data collection for the study will be survey, which will be done using selected instruments like questionnaires.

The questionnaire will provide respondents with ample time to comprehend the questions raised and hence, they will be able to answer factually.

3.5.1 Questionnaires

The questionnaires will be used to collect quantitative data. The researcher will administer the questionnaires to all the respondents, which will be designed basing on study objectives and questions. Respondents filled in the questionnaires themselves. The questionnaires will be close ended with likert scales questions.

3.6 Reliability and Validity of data

Data analysis in this study will focuse on data validity and reliability. To establish the validity of the questions, pre-testing will be done amongst the selected categories of respondents. Their comment will be incorporated in the final instruments to suit the data requirement of the study. The final amended research instrument will be  reviewed jointly by the researcher and the supervisor. Reliability will be checked using the test – retest practice advocated for by Amin (2005). In other words, the questions will be put to course mates and their comments noted, they will then be presented to the respondents and their views will be compared with those of the course mates. On receipt of the questionnaires, manual editing will be done, followed by coding. Frequency count of different variables will be done and this will give the number of occurrences and percentages out of total occurrences.

3. 7 Data collection methods

Source of data will be from both primary and secondary sources.

(a) Primary data

Primary data will be obtained from the questionnaires administered on the target respondents to gain opinions and practices on The effect of tax education on value added tax performance URA Nakawa.

(b) Secondary sources Secondary data is data which has been collected by individuals or agencies for purposes other than those of a particular research study. It is data developed for some purpose other than for helping to solve the research problem at hand (Bell, 1997). This comprised of literature related to The effect of tax education on value added tax performance ura nakawa  in relation to the case study. Secondary data will be sourced because it yields more accurate information than that obtained through primary data, and it is also cheaper.

3.8 Data collection procedures

Upon receiving the University permission to carry out research, the area of study will be visited for purposes of familiarization.  The researcher will seek permission from staff and once allowed to proceed with research, questionnaires will be issued and an interview will be carried out with the selected staff.

3.9 Quality control of data instruments

The instrument will be taken to the supervisor to check its correctness there after pilot study will be carried out to find out if it measures what it is meant for.

3.10 Data processing and analysis

The raw data will be coded, edited, and arranged ready for analyzing only completed raw data will be analyzed using statistical tables and graphs.

3.11 Limitations of the study

Financial constraint, this is in terms of financial support for transport, printing questionnaires among other requirements that require finance. However this shall be overcome by soliciting money from friends, relatives and sponsors which will assist in making my work a success.

Respondents may delay in filling the questionnaire and fear to give information, but they will be persuaded that the information will be kept secret.

QUESTIONNAIRE

TOPIC: THE EFFECT OF TAX EDUCATION ON VALUE ADDED TAX PERFORMANCE URA NAKAWA

A CASE STUDY: NSSF

Dear respondent

I am XXXXXXXX a student of Kyambogo university, am carrying out a study on the above stated topic. You are one of the respondents randomly selected to participate in the study. The information given shall be treated with at most confidentiality and shall only be used strictly for academic purpose.

SECTION A:             GENERAL DATA

1. Which department do you belong to in this organization?

Procurement               finance                            marketing

adminstartion

• Sex: Male                    female

• Age a) 18 -29 b) 30 – 39 c)  40 and above

• Educational level

Certificate                               Diploma                      Degree             Others

5. For how long have you been working with URA?

Less than three years                                 4-7 years

8-10 years                                                  above 11 years

Please tick one appropriate.

Please tick one appropriate.

SECTION B: LEVEL OF TAX EDUCATION ABOUT VAT CONDUCTED BY URA

Key: SA=strongly agree, A=agree, N=neutral, D=disagree, SD=strongly disagree

Tick in the box where appropriate.

SECTION D: DETERMINANTS OF VAT PERFORMANCE

Key: SA= strongly agree, A=agree, N=neutral, D=disagree, SD=strongly disagree

Please mention other determinants of VAT performance

…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

SECTION C: POLICIES FOR IMPROVING THE PERFORMANCE OF VAT

Key: SA= strongly agree, A=agree, N=neutral, D=disagree, SD=strongly disagree

Please mention other policies for improving the performance of VAT.

…………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………