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Taxation in Uganda

Taxation in Uganda

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 ad valorem 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 indigenous Africans were not engaging in activities that would propel
the growth of the monetary economy. Accordingly, government introduced a flat rate poll tax that wasimposed on all male adults.

The requirement to pay tax forced the indigenous Ugandans to enter the market
sector of the economy through either selling their agricultural produce or hiring out their services. The tax burden was later increased 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 Management Act, which laid down the basic legal provisions found in the current income tax law.

The East African Income Tax Management Act of 1952 was repealed and replaced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. Under the EAC dispensation, there were regional taxing statutes and uniform administration but the national governments (or partner states, as they were called) retained the right to define tax rates.

After the breakup of the EAC, the tax departments were transferred to the Ministry of Finance with the transfer of the Income Tax Department in 1974; followed by the Customs Department in 1977. In 1991, the function of administering Central government taxes was shifted from the Ministry of Finance to the Uganda Revenue Authority, a body corporate established by an Act of Parliament.

The EAC was re-established in 1999 by Tanzania, Kenya and Uganda. Rwanda and Burundi joined the EAC in 2007. The EAC in December 2004 enacted the East African Community Customs Management Act 2004 (EAC-CMA). This Act governs the administration of the EA Customs union, including the legal, administrative and operations.

A.    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.
(ii) East African Customs Management Act
(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.
(vix)All other taxes and non-tax revenue as the Minister responsible for Finance may prescribe.

B.    Uganda’s Tax Structure
Figure 1: Uganda’s Tax Structure

 tax tree

Ref:
www.ura.org
Income Tax Act
http://qspace.library.queensu.ca/bitstream/1974/850/1/Kayaga_Lisa_200709_LLM.pdf

C.    Tax Treaties
Uganda is party to several bilateral tax agreements. If an individual or a corporate entity in another country has income from a source in Uganda, such a person may be liable to pay tax in Uganda and in that other country where the person is resident.
Double taxation agreements, sometimes known as double taxation treaties, are designed to protect against the risk of double taxation, that is, where an individual or a corporate entity is taxed twice by virtue of the same income being taxable in two states.
DTA’s rectify the issue of double taxation for the following categories of income:
•    Business profits
•    Dividends, interest, royalties and technical fees
•    Income from immovable property
•    Capital gains
•    Shipping and air transport
•    Independent personal services, and
•    Dependent Personal services

Uganda has signed such treaties with a number of countries, however, these are still very few in number. These are listed in the table below:

Table 1: Tax Treaties which Uganda of which Uganda is Part

Country

Dividends

Interest

Royalty

Mgt Fees

Date of Conclusion

Entry into Force

Effective Date

Belgium

5%

10%

10%

10%

Pending

 

 

China

7.5%

10%

10%

10%

Pending

 

 

Denmark

10%

10%

10%

10%

14/01/2000

08/05/2001

1/1/2002

EAC

5%

10%

10%

10%

30/11/2010

30/11/2010

Ratification

Egypt

10%

10%

10%

10%

31/10/1998

27/08/2004

Ratification

India

10%

10%

10%

10%

30/04/2004

27/08/2004

1/7/2005

Italy

10%

10%

10%

10%

06/10/2000

25/02/2005

1/1/1998

Mauritius

10%

10%

10%

10%

19/09/2003

21/07/2004

1/7/2005

Netherlands

10%

10%

10%

10%

31/08/2004

10/09/2006

1/7/2007

Norway

10%

10%

10%

10%

07/09/1999

16/05/2001

1/1/2002

Seychelles

10%

10%

10%

10%

Pending

 

 

South Africa

10%

10%

10%

10%

27/05/1997

09/04/2001

1/1/2002

UAE

10%

10%

10%

10%

Pending

 

 

UK

15%

15%

15%

15%

23/12/1992

21/12/1993

1/1/1994

Zambia

Exempt

Exempt

Exempt

N/A

24/08/1968

 

1/1/1964

Source: Income Tax Act
 
D.    Challenges Faced by Government in the Collection of Taxes
The current policy of the Government of Uganda is to move away from over reliance on foreign assistance to meet the annual National budgets, meaning most of the financing is collected locally through taxes. This said, however, the Uganda Revenue Authority (URA) faces numerous challenges in its bid to collect taxes. These challenges can be categorised under the different types of tax collected. They follow:

a)    Personal Income Tax (PIT)
Despite the fact that the PIT is generally very successful in mobilizing revenue when compared with other tax instruments, it suffers from obvious limitations in the context of developing countries such as Uganda.
1.    It yields little revenue because of its ineffective tax administration.
2.    Due to the effect of rate structures on tax payer behaviour there is inherent narrowness of the tax base.

b)    Corporate Income Tax (CIT)/Business Income Tax (BIT).
1.    Failure to target small businesses, which are the most in Uganda and at the same time informal leads to missing potentially large source of growth in the economy which are also sources of revenue.
2.    Ignores the opportunity to assist women in joining the formal economy and thus accessing resources to support the growth of their enterprises.

c)    Value Added Tax (VAT)
VAT has become the workhorse of the revenue system in Uganda because direct taxation continues to be relatively inefficient (Kayaga, 2007). However, Uganda’s VAT has become clearly less efficient as a revenue producer.
1.    VAT is incomplete in one aspect or another, leading to less revenue being collected. Some of the reasons for the VAT not meeting its revenue targets include; an incomplete design of the VAT; the complexity of VAT assessments; the existence of numerous exemptions; the presence of the informal sector; and the use of multiple VAT rates (Ibid).
2.    It is not understood by most taxpayers and tax authorities alike because it is a complicated tax. And in Uganda and other developing countries where even basic record keeping abilities may be limited, this presents a problem in VAT implementation.
3.    Government’s inability to give prompt refunds of excess credits to certain taxpayers, particularly exporters, reduces the effectiveness of VAT because it is zero-rated.

d)    Excise Tax
1.    Excise tax is inappropriate in broad coverage of products, which is driven by the search of revenue.
2.    Weak administration makes it difficult to raise sufficient revenues due to having unskilled tax administrators with no knowledge of accounting.(Kayaga, 2007)
e)    Challenges in broadening the tax base
1.    Most workers in Uganda are typically employed in agriculture or in small, informal enterprises. Economic activities in these sectors of the economy is generally unrecorded which means that many people who work and earn a livelihood here are not taxed thereby keeping a potential portion of the tax base out of the tax net. (Kayaga 2007).

2.    It is difficult to create an efficient tax administration without a well-educated and well-trained staff, when money is lacking to pay good wages to tax officials and to computerize the operation (or even to provide efficient telephone and mail services), and when taxpayers have limited ability to keep accounts. While the URA is developing computerized systems of operation for example the e-tax, such operations are still not widely appreciated by the public. As a result, the government has often taken the path of least resistance, developing tax systems that allow them to exploit whatever options are available rather than establishing rational, modern, and efficient tax systems.

3.    Because of the informal structure of Uganda’s economy and because of financial limitations, statistical and tax offices have difficulty in generating reliable statistics. This also means that national income statistics cannot be relied upon to define the state of the country’s economy. This lack of data also prevents policymakers from assessing the potential impact of major changes to the tax system. As a result, marginal changes are often preferred over major structural changes, even when the latter are clearly preferable. This perpetuates inefficient tax structures thereby affecting the broadening of the tax base.

4.    The HIV/AIDS epidemic. While it is fundamentally a health issue, the impact of HIV/AIDS goes far beyond health because of its widespread human, social and economic effects. The impact of HIV/AIDS on mortality, morbidity, and the resulting demographic changes has the potential of eroding the economic benefits which Uganda has achieved since 1986 (Kayaga 2007). Sub-Saharan Africa which has just over 10% of the world’s population, is home to more than 60% of all the people living with HIV/AIDS (UNAIDS; Report 2006). The magnitude of the epidemic and its devastating impact on every sector of the economy

5.    Corruption is yet the fifth major challenge to broadening the tax base in Uganda. In the area of public service such as tax collection, the incentives to engage in corrupt behaviour are high for both officials who can enrich themselves, and bribe payers who evade taxes (U4 Anti-Corruption Resource Centre).

6.    In the same way, corruption leads to mistrust in the system by taxpayers which in turn de-motivates them from meeting their tax paying duties and instead encourages vices such as tax evasion and avoidance which further shrink the tax base.

7.    Uneven income distribution. Uganda’s income is unevenly distributed, and so is the case within other developing countries. Although raising high tax revenues in this situation ideally calls for the rich to be taxed more heavily than the poor, the economic and political power of rich taxpayers often allows them to prevent fiscal reforms that would increase their tax burdens. This explains in part why many developing countries have not fully exploited personal income and property taxes and why their tax systems rarely achieve satisfactory progressivity (in other words, where the rich pay proportionately more taxes). In the same way, the tax incidence of the income taxes falling mainly on the richer households or businesses mainly in Kampala is a motivator for tax evasion as these groups feel that the system is unfair.

Source: Towards Taxation for Development: Challenges and Opportunities; The case of Uganda. SEATINI – UGANDA November 2010
www.seatiniuganda.org/downloads/…/SEATINI%20TAX%20BOOKLET.pdf