MAKERERE UNIVERSITY
COLLEGE OF BUSINESS AND MANAGEMENT SCIENCE
VALUE ADDED TAX SYSTEM AND DOMESTIC REVENUE
COLLECTIONS: A CASE STUDY OF UGANDA REVENUE AUTHORITY
BY
SAMA ROBERT
REG NO: 04/U/13928/EXT
SUPERVISOR
MR. KITALE CHRIS
A DISSERTATION SUBMITTED IN PARTIAL FULFILLMENT OF THE
REQUIREMENTS FOR THE AWARD OF A DEGREE OF BACHELOR
OF COMMERCE OF MAKERERE UNIVERSITY.
JUNE, 2011
i
TITLE PAGE
Value Added Tax System and domestic Revenue Collections: A case study of Uganda
Revenue Authority (URA)
ii
DECLARATION
“I SAMA ROBERT declare that this work is original and has not been submitted for the
award of a degree or diploma in any other institution”
Sign……………………………
Candidate
Date……………………………
iii
APPROVAL
The following research by SAMA ROBERT has been carried out under the title of the
“Value Added Tax System and Domestic Revenue Collections: A case study of Uganda
Revenue Authority” under my supervision and is now ready for submission to the
College of Commerce with my approval.
Signed…………………………….
Mr. Kitale Chris (Supervisor)
Date…………………………………
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DEDICATION
This piece of work is dedicated to my wife Acham Grace whose advice immensely
influenced my decision to enroll for this degree programme at MAKERERE
UNIVERSITY.
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ACKNOWLEDGEMENT
My special thanks go to the staff members of Uganda revenue Authority, Ministry of
Finance Planning and Economic Development and Price Water Coopers for their kind
permission to carry out this research with them and for other material support they
offered me.
My heartfelt gratitude is to my supervisor MR. Kitale Chris for accepting and sacrificing
his valuable time for my work. Also, I thank my research lecturer, Mr. Kajumbula
Richard for giving me invaluable insight into research methodology and designs.
My thanks go back to my family for the difficult times and inconvenience which I put
you through while attending my course. Your multiple support and assistance did not go
unnoticed especially my wife Acham Grace I really owe you a lot, thank you and may
God bless you.
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TABLE OF CONTENTS
TITLE PAGE ................................................................................................................... i
DECLARATION ............................................................................................................ii
APPROVAL ................................................................................................................. iii
DEDICATION ............................................................................................................... iv
ACKNOWLEDGEMENT ............................................................................................... v
TABLE OF CONTENTS ............................................................................................... vi
ABSTRACT .................................................................................................................... x
CHAPTER ONE ............................................................................................................ 1
1.1 The Background to the study ..................................................................................... 1
1.2 Statement of the problem ........................................................................................... 2
1.3 Purpose of the study .................................................................................................. 3
1.4 Objectives of the study .............................................................................................. 3
1.5 Research Questions ................................................................................................... 3
1.6 Geographical scope ................................................................................................... 3
1.7 Conceptual framework ............................................................................................... 4
1.8 Time scope ................................................................................................................ 4
1.9 Significance of the study ............................................................................................ 4
CHAPTER TWO........................................................................................................... 5
2.0 Literature review ....................................................................................................... 5
2.1 Introduction ............................................................................................................... 5
2.2 Taxable supplies ........................................................................................................ 9
2.3 Implementation of VAT........................................................................................... 10
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2.4 VAT versus Sales Tax and CTL regimes ................................................................. 10
2.5.0 VAT regimes ........................................................................................................ 11
2.5.1 Standard-rated goods and services ........................................................................ 11
2.5.2 Zero-rated goods and services ............................................................................... 12
2.5.3 Exempt goods and services ................................................................................... 13
2.6 Input VAT ............................................................................................................... 13
2.7 Output VAT ............................................................................................................ 14
2.8 Net VAT.................................................................................................................. 14
2.9 VAT threshold ......................................................................................................... 14
2.10 Refunds ................................................................................................................. 15
2.11 VAT administration in Uganda .............................................................................. 15
2.12 VAT registration .................................................................................................... 16
2.13 Domestic VAT for non-VAT registered importers ................................................. 18
2.14 Advantages of VAT ............................................................................................... 18
2.15 Political Context of Tax policy in Uganda ............................................................. 19
2.16 Uganda‟s Taxation Policy and implication on Economic Growth ........................... 20
2.17 Revenue performance in Uganda ........................................................................... 20
2.18 Legal and institutional framework for taxation in Uganda ...................................... 21
2.19 Tax reforms in Uganda .......................................................................................... 21
2.20 Importance of raising tax ....................................................................................... 22
2.21 Tax system ............................................................................................................ 23
2.22 Tax and its distributive effect ................................................................................. 23
2.23 The best approach to the tax system of a developing country ................................. 24
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CHAPTER THREE .................................................................................................... 25
3.0 METHODOLOGY .................................................................................................. 25
3.1 Introduction ............................................................................................................. 25
3.2 Study design ............................................................................................................ 25
3.3 Variables and their measures. .................................................................................. 25
3.4 Study population...................................................................................................... 26
3.5 Sample size selection method .................................................................................. 26
3.6 Sources of Data ....................................................................................................... 26
3.7 Data collection methods........................................................................................... 27
3.8.1 Data processing .................................................................................................... 27
3.8.2 Data Analysis ....................................................................................................... 27
3.9 Limitation of the study............................................................................................. 28
3.11 Time frame ............................................................................................................ 28
3.11 Budget Estimate .................................................................................................... 28
CHAPTER FOUR ....................................................................................................... 29
4.0 PRESENTATION, INTERPRETATION AND DISCUSSION OF FINDINGS ....... 29
4.1 Introduction ............................................................................................................. 29
4.2 Presentation ............................................................................................................. 29
4.2.1 DEMOGRAPHIC CHARACTERISTICS OF DATA ........................................... 30
Table 1: Gender of respondents ..................................................................................... 30
Table 2: Ages of respondents ......................................................................................... 30
4.4 Data Analysis and Testing ....................................................................................... 43
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CHAPTER FIVE ......................................................................................................... 45
5.0 SUMMARY, CONCLUSIONS AND RECOMMENDATIONS .............................. 45
5.1 Introduction ............................................................................................................. 45
5.2. Summary ................................................................................................................ 45
5.3. Conclusions ............................................................................................................ 45
5.4. Recommendations .................................................................................................. 46
REFERENCES ............................................................................................................ 48
QUESTIONNAIRE DESIGN ..................................................................................... 49
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ABSTRACT
The purpose of this study was to investigate the degree of VALUE ADDED TAX System
and domestic revenues collected by the Uganda Revenue Authority. The view was
inspired by the view that the researcher having read a series of literature on Value Added
Tax followed by gospel on the enormous contributions anticipated initially from VAT.
Studies by some authors reveal that VAT has led to substantive contributions to total
domestic collections in other countries and same was and is hoped to add amounts needed
to develop the economy and avoid debts leading to own dependence.
This, therefore, made the researcher to design research questions of the study basing on
the above foundation to prove whether or not VAT comes in handy with benefits and find
reasons why it still performs dismally. The instrument of Data collection used in the
study was questionnaire. The researcher used the questionnaire designed for the staff of
URA, MOFPED and Price WaterCoopers Audit Company, and a total of 30 items were
placed for inquiry. A five point rating scale was used to analyze and test the response to
the items seeking the significant impact of VAT System and Domestic revenues collected
by URA. A total of 26 out of 30 responded. Additional information was however
obtained through one- on-one interviews with some players and expansive literature
review. Thereafter, there was an item frequency count and a selection was made for the
questionnaire item to be tested and analyzed using X2 test.
Following all the findings and interpretations made thereon, the researcher had to come
out with among others; Government should undertake more simplifications of the VAT
approaches, the MFPED should carry out more technical reviews on the VAT on sale of
residential properties and tax investment incentives for international companies.
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CHAPTER ONE
1.1 The Background to the study
The history of modern taxation in Uganda traces its roots in the hut tax (Okello, 2006)
that was introduced with the signing of the 1900 Buganda Agreement between the locals
and the British colonial masters who came in 1894 (Iga, 1996).
Taxation is the only practical means of raising the revenue used to finance government
spending on the goods and services that most of us demand Tanzi and Zee, 2001) and as a
practice goes back to early civilization. In biblical times, people were required to pay
one tenth of their crops to the king to be spent on helping the poor.
Nnopu (2009) described VAT as a consumption tax which works by charging a specific
percentage of the additional value being added by the supplier, manufacturer, retailer e.t.c
as the good or service passes through the supply chain. Oldman (1900:212) described
VAT as a multistage consumption tax levied on the difference between a firms sales and
the value of its purchased inputs used in producing goods. The tax is initially paid by the
manufacturer, supplier or business that eventually passes it on to the consumer through
the distribution chain by including the VAT in the price charged on the goods and
services at each stage and in indicating it on the invoice.
It is a tax levied on all s les of commodities at every stage of production and credits taxes
paid by enterprises on their material inputs against the taxes they must levy on their own
sales. At the end only the net value (Output less Input) of those final sales forms the base
of the tax (Liam Ebrill, et Al, 2002):
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The VAT was introduced in Uganda on the 1st July, 1996 as an indirect-consumer
expenditure tax (cap 349) to replace the Commercial Transactions Levy (CTL) and Sales
Tax regimes, (Aguolu, 2004) by an Act of parliament that provided for its imposition and
collection.
Generally Tax is the compulsory levy by government through its agencies on the income,
capital or consumption of its subject (Aguolu 2OO4). And is a means by which
Governments finance their expenditure by imposing charges on citizen‟s property or
citizens themselves and their activities.
Taxation can be used to encourage use of locally manufactured products by taxing
heavily those that are imported into the country. It can also be used as an instrument for
distribution by taxing heavily the rich and money from this source used to subsidize the
services required by ordinary citizens like Health. As Vladimir Lenin put it “The way to
crush the Bourgeoisie” (Middle Class) “is to grind them between the millstones of
taxation and inflation” Quoted from The Politics of Africa‟s Economic stagnation
(African Society Today) by Richard Sandbrook.
1.2 Statement of the problem
The government‟s primary objective of fiscal policy has been to raise more revenue
through Value Added Tax system in order to modernize and industrialize the country.
The Value Added Tax system has not improved the domestic revenue collections as
anticipated. The share of VAT as a percentage of total revenue increased slightly from
33% in 1997/98 to around 36% in 2007/08, 4.6% of GDP (Budget Reports 2007/08,
2008/09, 2009/10). There have been amendments onto the Act; computerization of VAT
management and extensive public education yet VAT has not significantly been reflected.
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The reasons could be that the economy has been witnessing increasing commodity prices,
intense political activities, enlarging claimable input VAT, tax evasion tendencies and
corruption. Perhaps, the tax authorities did not design an equitable and efficient VAT
system capable of complementing government expenditure.
1.3 Purpose of the study
To analyse why the Value Added Tax system has continued to decrease in percentage
terms on domestic revenue collections
1.4 Objectives of the study
To examine VAT system in Uganda
To assess the domestic revenue collections before and after implementing VAT system in
Uganda.
To analyse the effect of VAT system on domestic revenue collections in Uganda.
1.5 Research Questions
Is the Value Added Tax system appropriate in Uganda?
How much does the Uganda Revenue Authority realize as domestic revenues?
Does the current VAT system have significant effect on Domestic revenue collections?
1.6 Geographical scope
The research will be carried out in Uganda Revenue Authority offices in Nakawa, URA‟s
library located in Kololo, Ministry of Finance and Economic Planning and Price Water
Coopers Audit firm-communications house.
4
1.7 Conceptual framework
This explains either graphically, or in narrative form, the main things to be studied-key
factors, concepts or variables-and presumed relationship among them (Miles &
Huberman, 1994, P18).
VAT system influences domestic revenue collections positively or negatively, positively
by causing high level of domestic revenue collections and negatively by low collections.
1.8 Time scope
The study is intended to examine the impact of VAT on Domestic Revenue growth for
the last 14 years (1996-20 10). This research will be carried out between February 2011
and June 2011.
1.9 Significance of the study
The results of the study will help the policy makers have further critical analysis on what
need to be done to turn VAT a real vehicle in expanding domestic revenue collections
that in turn spur the development of Uganda‟s economy.
The research will help the researcher to understand in depth the VAT system in Uganda
and extend to which it can better the domestic revenue The findings of the study will be
used for future references and study purposes. It will enrich the existing literature which
will hugely facilitate other researchers to initiate, amend and recommend as situation may
demand.
VAT system
Government policy
VAT Act
Chapter three 349
Implementation of policy
Education of public
Domestic revenue
collection
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CHAPTER TWO
2.0 Literature review
2.1 Introduction
The literature review presents an overview on what has been published on VAT system in
Uganda visa viz the domestic revenue growth. A well taken review of the research
journals, books, dissertations and other sources of information will guide the researcher
on the methodology designs, the statistical methods through which validity of results can
be established and recommendations made (Lokesh, 1996).
Taxes are classified as Direct or Indirect, based on who bears the final burden of paying
the tax. Value Added Tax is an example of indirect tax. Is a tax levied on the value added
to a specific product or services? Many countries of the world adopt various kinds of
VAT as a revenue source and fiscal policy instrument available to the government.
The history of VAT dates as far back as 1918 and is attributed to a proposal by F. Von
Siemens who proposed it as a substitute for the then newly established German turnover
tax (R. Islam).
France was the first European country to introduce a very rudimentary VAT system
(Taxe sur laValeur Adjoutee-TVA) in 1954, implemented in 1968.
Many countries embraced the VAT system as a result of dissatisfaction with the General
Sales Tax (GST) mainly due to its cascading nature while others went for it due to
regional integration like the European Union (EU) and East African Community (EAC).
The regional integration often demands for implementation of similar policies by the
member states. For instance, the
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First Directive of April 11, 1967 (amended) compelled all member states of the EU to
replace their general indirect taxes with a common system of VAT.
The indirect taxation rely heavily on a value added tax (VAT), to replace turnover and
even sales taxes (Jenkins 1991; Gillis 1989, p. 503), should be levied at low and
relatively flat rates on bases that have been broadened through the elimination of
exemptions and other loopholes.
Lower, simpler taxes are seen as easier to collect and administer, and as creating less
inefficiency and countries should move away from their current heavy reliance on taxes
on trade, which are seen as being particularly inefficient (World Bank 1988, Aguirre et
a!, 1981, Anderson 1987).
Oldman (1990:212) described VAT as a multistage consumption tax levied on the
difference between a firm‟s sales and the value of its purchased inputs used in producing
goods. And because it is not feasible to collect the tax from each end consumer, the tax is
initially paid by the manufacturer, supplier or business that eventually passes it on to the
consumer through the distribution chain by including the VAT in the price charged on the
goods and services at each stage and indicating it on the invoice.
Value Added Taxes have been the main domestic „replacement‟ tax for tariffs and a wide
array of excises in many reforms (Gemmell & Morrissey, 2002). The VAT is more
complex to administer than trade taxes and typically required new capacity within the tax
administration. The VAT also tends to be a more visible tax than trade taxes, which can
make it politically difficult for Government to raise as much revenue through the VAT.
7
The introduction of VAT sparked a strike by traders lasting two months. Traders were
asking GOU to increase the vatable threshold. Although VAT is a more equitable tax, it
was initially resisted by the business community, notably participants in the informal
sector (Kayizzi Mugerwa, 2002). VAT administration pre-supposes the keeping of proper
records, which had not been the case for decades. There was fear that record keeping
might increase tax liabilities. There were also complaints that VAT of 17% would make
Ugandan products non competitive in regional markets, especially since neighbouring
Kenya, which is not landlocked with better infrastructure had a lower VAT rate of 16%.
Proponents of VAT, argue that it would enhance efforts to mobilize much-needed tax
revenue, not only directly but through wider improvements in tax administration and
compliance.
Studies of VAT in developing countries have indicated that VAT is not an especially
regressive tax (Ebrill et al, 2002). Studies of Cote d‟Ivoire, guinea, Madagascar and
Tanzania have proved more progressive than the trade taxes it often replaced. Increasing
VAT while other taxes remained constant would increase the tax burden on the poor but
the non-poor households would continue paying more taxes relative to their expenditures
than the poor households (Ssewanyana & Okidi, 2007). Gemmell & Morrissey (2002)
show that while VAT is relatively low on the progressivity rankings; it tends not to be
regressive.
The telecommunication sector has become a major source of tax revenue for the
Government treasury (Hisali, 2007). The current usage tax on prepaid mobile services in
Uganda is 30% (18% VAT and 12% excise duty).
Minz (2003) notes that taxes on consumption are a better source of revenue for
developing
8
countries, they are easier to collect and more consistent with achieving economic growth
objectives. Uganda‟s tax system is dominated by indirect taxes which depend on goods
and services consumed. Direct domestic sources of revenue contributed 29% in 2007/08
while indirect taxes accounted for 71%. The share of VAT as a percentage of total
revenue has increased slightly from 33% in 1997/98 to around36% in 2007/08.
Uganda‟s domestic revenue collection is among the lowest in the East African region, yet
VAT has posed a powerful tool in harnessing funds in domestic markets enabling
countries to better meet the challenges facing them such as education, poverty
eradication, and provision of infrastructure etc. Countries like Sweden, Switzerland,
United Kingdom, Norway, Kenya and Ghana provide examples on how VAT can
enhance Domestic revenues.
Value Added Tax is an important component of Uganda‟s tax system contributing around
36% of the total domestic revenue. Increasing VAT when other taxes are hold constant
would increase the tax burden of the poor but the non-poor would continue paying more
taxes relative to their expenditures than the poor households (Ssewanyana & Okidi
(2007).
More efficient and equitable taxation regimes would change the distribution of income in
favour of poorer people and permit governments to raise more financial resources to
address poverty (Toye, 2000). Tax policy in Uganda has mainly concentrated on
simplifying the tax system, revenue generation and restricting people from consuming
certain commodities rather than directing protecting the poor. Tax policy through tax
exemptions, incentives and zero rating of commodities has been more supportive to the
pillars of human development and enhancing production, competiveness and incomes.
9
The removal of taxes on agricultural inputs and outputs is in line with enhancing
production, competiveness and incomes. Fertilizers, insecticides, fungicides and
herbicides attract no taxes, while implements like picks, mattocks, hoes and rakes are not
vatable. Loans to the agricultural sector were exempted from taxes in 2006.
2.2 Taxable supplies
Goods and services liable to VAT are called “taxable supplies”. If your business turnover
reaches the registration threshold, it must be registered for VAT and the business must
charge VAT on all taxable supplies. VAT does not apply to services such as insurance,
some types of education, training and loans, as these are deemed to be exempt.
Supplies are divided into supplies of goods and services. Supply of goods consists of
applying goods to own use, transferring the ownership and possession of goods, either
immediately (for example under a hire purchase agreement where ownership passes when
the goods are fully paid for), applying a treatment or process to another person‟s goods
and supplying any form of power, heat, refrigeration or ventilation.
On the other, supply of service is anything done for a consideration that is not a supply of
goods and includes the grant, assignment, or surrender of any right-the hire, lease and
rental of goods amount to a supply of services.
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2.3 Implementation of VAT
There is no standard implementation procedure of the VAT system and all countries
implement it in their own ways, partly because the laws that establish VAT are national
and each country has unique laws. The VAT rate is also greatly varied across countries
with Sweden and Denmark recording the highest VAT at 25%, while Switzerland
recorded the lowest rate at 7.6%. Most sub-Saharan African countries levy a VAT rate
that ranges between 15% and 20%. Some countries have multiple rates while some
maintain one standard rate while exempting or zero- rating others. Some countries
implement reduced and super-reduced rates to serve their equity needs. For instance,
although France has a standard rate of 20.6%, it also has a reduced VAT rate of 5.5% to
cover foods and non-alcoholic beverages, medical and educational materials while a
super-reduced VAT rate of 2.2% applies to newspapers, periodicals and some
pharmaceuticals.
2.4 VAT versus Sales Tax and CTL regimes
Although in Uganda the VAT replaced the Sales Tax and CTL regimes, (R.Islam, 1995)
points out that in Bangladesh, VAT replaced among others; an excise duty regime on
selected items and is mainly confined to the import and manufacturing stages. In other
countries, it is compulsory in both the wholesale and retail distribution of goods and
services (R. Islam, 1995).
Over the years VAT has evolved from its rudimentary form and transformed into what
some authors have termed as a “state-of-the-art tax on goods and services”. VAT in its
comprehensive form has become a major tax in over 120 countries contributing on
average 5.1% of the GDP (Bogetic & Hassan, 1993). The VAT has been claimed to e a
very efficient, broad based and revenue-productive tax system (IMF, 1998).
11
The sales tax rates that prevailed ranged from 10%, 20% and 30%, while the CTL rate
was 15%. VAT was introduced after a 2 year study period, during which a lot of research
and simulations were made to arrive at an appropriate tax rate of 18% which was
projected to at worst be revenue-neutral, at best more productive than its predecessors.
2.5.0 VAT regimes
The VAT system has exemptions and zero-rated commodities. Exempting an item from
the VAT means that no tax is charged on the final sale of that good or service. Normally,
an exemption is provided within a class that government wishes to promote
economically. VAT on zero-rated supplies is chargeable at a rate of 0% (URA, 2007). A
Person dealing in zero-rated supplies is entitled to claim input tax incurred in making the
zero-rated supplies.
In addition to equity concerns, certain sales are zero-rated for general development
reasons, e.g. passenger transport, educational and health services. Zero-rating of the key
taxable consumer items consumed by the poor in Uganda would have little fiscal
consequences. The amount of revenue foregone would be less than the Graduated Tax
(head tax) foregone (Ssewanyana & Okidi, 2007).
2.5.1 Standard-rated goods and services
The standard rate is 18% based on the tax exclusive value of the goods and services
supplied. This is equivalent to 18/118 of the tax inclusive value (VAT fraction) of the
goods or services supplied and are on all goods and services save for those at are exempt
or zero-rated. This same rate applies to imported goods and services.
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2.5.2 Zero-rated goods and services
Although these do not attract the standard VAT rate of 18%, input VAT is claimable on
any purchases and overheads (sec 25(4) that the firm may have incurred in the production
process provided VAT had been paid on those purchases. Notable among the zero-rated
category, are the exports- with an idea of promoting export growth which has world over
been emphasized as an engine in fostering economic growth. Notwithstanding, (Nyanzi,
2000) argues that this undermines the virtues of VAT as a broad based tax on
consumption expenditures. If goods and services are zero-rated costs are incurred by tax
authorities and enterprises in collecting and refunding. As a result avenues for fraud are
created which would not rise if the supply of these goods and services were exempted
from VAT. It is appropriate on grounds of social policy to allow special privileges to
specific producers or to goods and services outright.
Examples of zero-rated supplies entailed in Schedule III section 24(4) of the VAT Act,
Cap. 349 are: goods or services where the services are exported from Uganda as part of
the supply, international transport (by rail, road, water or air) of goods or passengers or of
goods or services in connection with the international transport of goods or passengers
(to, from and through Uganda, the supply of drugs and medicines, the supply of
educational materials and the supply of printing services for educational materials, the
supply of seeds, fertilizers, pesticides, and hoes; the supply of machinery, tools, and
implements suitable for use only in agriculture; the supply of milk, including milk treated
in any way to preserve it; the supply and installation of mobilet toilets, Enkoloo Toilets
and components made from polythene with effect from 1/07/2004; and the supply of
sanitary towels and tampons.
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2.5.3 Exempt goods and services
Whereas exemptions erode the tax base and cause breaks in the credit chain, some items
mostly basic needs are totally exempt from VAT. While one can claim input tax on zero-
rated supplies, not on exempts? The assumption that all the VAT liabilities are fully
passed forward, the exempted purchaser of the taxed inputs pays the tax but cannot claim
from the government. Second Schedule, sec 19, cap 349 provide the following under this
category: unprocessed foodstuffs, including agricultural livestock; postage stamps;
financial services; unimproved land; lease or letting of immovable property (other than
lease or letting of commercial premises, hotel or holiday accommodation, for periods not
exceeding 2 months, for parking or storing cars or other vehicles); education services;
medical, dental, and nursing services; social welfare services; betting, lotteries and games
of chance; goods as part of a transfer of a business as a going concern by one taxable
person to another taxable person; burial and cremation services; precious metals and
other valuables to the bank of Uganda for the state treasury; passenger transportation and
petroleum fuels subject to exercise duty.
2.6 Input VAT
The input VAT is what a proprietor is charged by a supplier on his or her business
purchases and expenses both in Uganda and abroad. It includes VAT on raw materials
and on goods bought for resale and VAT charged on overheads such as office equipment,
electricity, telephone charges etc. It is recoverable in full by the trader who makes a zero-
rated or standard-rated supply. A company can claim input tax or have it credited on the
Output VAT so that the tax payer pays less. But, credits are not claimed on passenger
automobi1, repair and maintenance of passenger automobiles and entertainment-
”passenger automobiles” refers to road vehicles purposely designed for transporting
14
sitting passengers whereas “Entertainment” includes provision of food, beverages,
tobacco, accommodation, amusement and recreation or hospitality of any form.
2.7 Output VAT
This is total VAT payable before the input tax is deducted. It is the outcome of the
taxable sales/turnover value multiplied by the rate.
2.8 Net VAT
This is the difference between the Output and Input VAT. This is actually what is
recorded as VAT revenue collected from the local good or service. When analyzing this
net VAT, it is clear that although the VAT rate is 18%, the effective duty rate or average
tax rate tends to be much lower depending on the level of input tax claims. VAT paid on
inputs is claimed and credited against output VAT and returns are filed every 15th day of
the following month.
2.9 VAT threshold
This is the annual turnover below which a taxpayer is not obliged to register for VAT.
The threshold which was Ushs 20 million in July 1996 was increased to Ushs 50 million,
in November the same year, following a trader‟s strike against the new system. The strike
bordered on natural resistance to change (fear of unknown) to lack of understanding of
the intricacies of the VAT system. Over time and with continued sensitization, traders
have come to appreciate the VAT system and quite a number have registered voluntarily.
15
2.10 Refunds
The advent of the VAT had refund implications. The biggest amount of the refunds goes
to the exporters. Because exports are zero-rated, exporters are allowed to claim any VAT
they may have paid on the raw materials used in the production of exports. Suppliers of
zero-rated items do not have output VAT (their output VAT equals zero) and thus they
are continual claimants since their input tax claims will always exceed their output tax
which is zero.
2.11 VAT administration in Uganda
VAT was introduced after a 2 year preparatory period of intensive sensitization of the
taxpayers and the tax collectors. At start, its assessments and collections were under the
VAT department. In December 1998, with the establishment of the Large Taxpayers
Department, collection of the local VAT from the large taxpayers was placed under it. In
April 2000, the VAT Department was made to be part of the Internal Revenue
Department. As at 1st July 2002, the Audit and Assessment functions of VAT on local
goods and services were placed under the responsibility of the Domestic Indirect Taxes
Department, while the collection function was placed under the Expansion and collection
department. The VAT on imports is collected by the customs department because all
taxes are collected at one point. It is therefore paid at the point of clearing goods in the
customs department. If the goods are imported for taxable business purposes, one is able
to claim credit for the tax paid on the VAT return.
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2.12 VAT registration
There is compulsory registration of sole proprietors, companies, partnerships, joint
ventures and any other unincorporated body, or any non-resident company supplying
taxable goods and
services as long as they exceed an annual turnover of Ushs 50 million. The small
taxpayers are left out partly because of poor record as involving them would greatly
increase the administrative costs.
Some firms which fall below the threshold can voluntarily register for VAT if the
majority of supplies of the firm are made to businesses that are VAT registered. Suppliers
of zero-rated supplies can also apply for voluntary registration even if they fall below the
threshold. Voluntary registration has two advantages: the company can claim input tax,
and the possession of a VAT registration certificates adds credibility of the firm.
The voluntarily registered taxpayers are obliged to prepare and submit returns.
Companies can deregister when they fall below the threshold. Any company bidding to
supply goods or services to the government of Uganda is also obliged to register for
VAT.
When applying for the registration for VAT, applicant fills VAT Form 101, main features
being; Tax Identification Number (TIN), the name of the business to be registered for
VAT, Physical address of business, postal and physical address of business branches,
names and addresses of the directors or partners or members and turnover for the (next 3
months and 12 months) accompanied by the certificate of registration, memorandum and
articles of association. Upon satisfactory presentation, the applicant is then given a VAT
17
registration which bears the VAT Number of the taxpayer. This certificate is supposed to
be displayed in the business premises in public view and the registered VAT taxpayer is
obliged to quote the Vat in any tax transactions.
18
2.13 Domestic VAT for non-VAT registered importers
Domestic VAT is charged on goods whose value is four (4) million shillings and above
imported by non VAT registered persons and it came into effect on 1st March 2002. such
goods must be standard rated and not personal effects or motor vehicles. This tax is paid
at customs entry point together with the other customs taxes at the designated banks at
18% on the 15% mark up on the customs VAT.
2.14 Advantages of VAT
VAT completely avoids tax cascading as only charges tax on the Value Added. VAT can
also provide temporary financing for producers and service providers-by law, all vatable
persons are required to deduct the input VAT from the output VAT and remit the
difference to the tax authorities monthly or every two months, so such organizations can
utilize such funds to meet their working capital needs.
For the Government, VAT is a veritable source of revenue, its broad base can generate
more revenue for the government; and secondly, its ease of collection (little or no cost)
makes it more economical. VAT serves as a fiscal policy instrument available to the
government and can increase or reduce VAT rate to redistribute income and check the
consumption of harmful commodities such as cigarettes and alcohol.
VAT does not discourage production, or work since it is not a tax on income or profit,
taxes on profits might actually discourage investments.
Generally, VAT has posed a powerful tool in harnessing funds in domestic markets
enabling
19
countries to better meet the challenges facing them such as education, poverty
eradication, and provision of infrastructure etc.VAT helps developing economies to be
fully integrated in the international economy as being championed by IMF, World Bank
etc. Uganda will need to broaden her sources of revenue if it is to catch up with
developed counterparts. As IMF and other world economic organizations insists on
removing trade barriers, the only option left is to use VAT to increase the revenue base.
2.15 Political Context of Tax policy in Uganda
The way states raise revenue has major implications for state formation. In contemporary
Organization of Economic Cooperation and Development (OECD) countries, issues of
taxation remain central and important-especially around elections (Fjeldstad & Rakner,
2003). Hale (2002) describes tax systems as the political constitution that defines the
powers and limits of government and the rights of citizens. The principles of the tax
system reflect a loose and evolving political consensus on social and economic priorities.
The politics of taxation demand that government strive for a system that seems fair to
most people. Political power is particularly important when it comes to special-interest
groups‟ politics: concentration of public policy (Persson & Tabellini, 2002).
Democracy and its underlying principles are crucial for the wellbeing of all Ugandans
because of the turbulent history that the country has gone through. In the last two
decades, the country has held three successful general elections with the last one in 2006,
under a multiparty setting. In the 2001 elections, graduated tax was one of the campaign
issues. Tax policy has had a strong component of development partner perspectives and
the current tax policies have been closely
intertwined with trends in international development assistance.
20
2.16 Uganda’s Taxation Policy and implication on Economic Growth
The politics of taxation is generally limited to involve a few specialized interest groups,
and tend to take place in non-public arenas. The peasants and elites are not represented in
tax policy formulation but the elites have the alternative of airing views through the
media. One such organized group is the Uganda Manufacturers Association (WMA)
which has been very vocal in protecting local industries.
2.17 Revenue performance in Uganda
Uganda‟s revenue collection is among the lowest in the East African region. The low
revenue performance has been attributed to the structure of Uganda‟s economy. Uganda
has a significantly large agricultural sector, accounting for 21.4 per cent in 2007/09. The
phenomenal increase of the service sector may not be significantly contributing to
revenue mobilization (i.e. real estate activities which have overtaken the posts and
telecommunications sector). The inputs and outputs in the sector do not attract taxes. The
tax system is dominated by indirect taxes which depend on goods and services consumed.
Direct domestic sources of revenue contributed 29 per cent in 2005/2006 while indirect
taxes accounted for 7 per cent. The share of international trade taxes in total domestic
revenue has declined from 61 per cent in 1996/97 to 51 %in 2007/08. While pay-as-you-
earn (PAYE) has had the highest increase from 1 %of the total revenue in 1988/89 to
14%in 2007/08. Non tax revenues have almost remained constant at around three percent
or less since the early 1 990s.
21
Tanzi et al (2001) argues that modern means of raising revenue, such as income taxes and
consumer taxes, play a diminished role. In Uganda, revenue collection as a percentage of
GDP increased slightly from 11.3% in 1995/96 to 13.1% in 2007/08. Uganda‟s revenue
collection is among the lowest in the East African region; Kenya‟s revenue collection as
percentage of GDP averaged 21.2% in the financial year 2003/04. The average tax to-
GDP ratio in sub-Saharan Africa was around 21% in 1999 and that of OECD countries
averaged about 32% (Fjeldstad & Rakner, 2003).
2.18 Legal and institutional framework for taxation in Uganda
The broad legal framework as laid out in the constitution of the republic of Uganda
mandates Parliament of Uganda to impose taxes but this may be subject to a presidential
veto. Parliament‟s powers are restricted in financial matters. The URA is the central body
for the assessment and collection of specified tax revenue, administering and enforcing
the laws. In 1998, a Large Taxpayer Unit (LTU) was established within the tax
administration to monitor the activities of 100 taxpayers and their subsidiaries that pay a
significant share of total taxes to ensure compliance among the largest taxpayers. Tax
disputes that arise between URA and the taxpayers are handled by the Tax Appeals
Tribunal (TAT). The MFPED is responsible for the formulation of tax and non-tax
policies aimed at generating domestic revenue and promoting investment, consumption
and savings. The broad tax policy objectives are contained in the budget speeches
followed by the details in tax related laws like the Finance Act, 2003.
2.19 Tax reforms in Uganda
Taxes are frequently distinguished as „direct‟ and „indirect‟. Personal taxes, such as the
22
individual income tax, are direct, such as sales and excise taxes (Musgrave, 1989). Under
direct taxes we have PAYE, withholding tax and corporate tax; and indirect taxes include
excise duty, sales tax and VAT. The goals of tax reforms in Uganda have been fourfold:
broaden tax base; increase efficiency of collection; create incentives for the private
sector; and ensure equity of taxation. They were generally in line with the IMFs
recommendations: a broadly-based VAT with a standard rate of 18% and minimal
exemption exemptions and incentives. Sales tax before reforms was structured as 0%,
10%, 30%, 70% and 150% (MFPED, 1991). Excise duties have been reduced from 70%,
in 1991 to 25% in 2006.
Care should be taken that the effectiveness of tax systems depends not only on the design
of tax policies but also on effectiveness of tax administration (Stepanyan, 2003). Once
governments have their tax policies appropriately designed, the tax administration plays
the main role by securing the effective implementation of the policies.
Also, administrative discretion in applying tax laws must be limited (Stepanyan, 2003).
In addition, the IMF (2007) urges that tax expenditures which are revenues forgone as a
result of selective provisions in the tax code should be compared with policy purposes to
assess their relative effectiveness. They include exemptions from the tax base, allowances
deducted from gross income, tax credits deducted from tax liability, tax rate reductions,
and tax referrals.
2.20 Importance of raising tax
In many ways the raising of tax revenues is the most central activity of any state. Most
fundamentally, revenue from taxation is what literally stains the existence of the state,
providing the funding for everything from social programs to infrastructure investment.
As
23
Nicolas Kaldor, (1963: 417) put it, “No underdeveloped country has the manpower
resources or the money to create a high-grade civil service overnight. According to
Wasylenko (1980), those who shape state and local fiscal policy have had a sustained
interest in the role that taxation plays in the economic development of states, regions,
cities and special districts or zones.
2.21 Tax system
“The tax system constitutes one of the most important instruments of development policy
in any country” (Bird 1992). Revenue should be adequate to finance basic services such
as security and primary education, to permit the government to help finance public
investment, and to obviate the need for inflationary financing. Government should also be
financed in an efficient way, using a well-designed tax system not overly reliant on taxes
on trade. There should be consistent, prudent public finance policy (Lindauer and Roemer
1994, World Bank 1993, 1994).
2.22 Tax and its distributive effect
Taxation plays an important role in shaping the distribution of benefits. This is achieved
through the mechanism of redistribution from those with the highest incomes to those
most in need, and allows government to encourage certain activities and discourage
others by altering their relative prices. It is also linked to good governance, which
encompasses the capacity, responsiveness and accountability of government.
According to Wilson Prichard in his research paper on Ghana (April, 2009), “In the realm
of capacity, taxation lies at the administrative heart of government and provides the
foundation for the provision of public goods and the implementation of effective
24
regulation. As importantly, taxation is the venue through which citizens are most
intimately connected to the state and can be
an important catalyst for public demands for responsiveness and accountability.
2.23 The best approach to the tax system of a developing country
The role of taxation and fiscal policy in the development strategy of a country should
take note of the primary function of a tax system in relation to economic development as
to raise revenue for the government for its public expenditure; reduce inequalities through
a policy of redistribution of income and wealth; social purposes such as discouraging
certain activities which are considered undesirable; ensure economic goals through the
ability of the taxation system to influence the allocation of resources; increase the level of
savings and capital formation in the private sector partly for the borrowing by the
government and partly for enhancing investment resources within the private sector for
economic development; protect local industries from foreign competition through the use
of import duties, turnover taxes, VAT and excises and seventhly stabilize income by
using taxation as an instrument of demand management.
25
CHAPTER THREE
3.0 METHODOLOGY
3.1 Introduction
This chapter will deal with how data is collected and analyzed. It describes the research
design used, justify area of study and population sampling design appropriate, sample
size and constitution, sources of data required, data processing, analyzing and limitations
of the study. It is a very critical chapter and forms the entire basis on which the other
chapters rest on. The researcher will handle it well to realize the best out of this research
focusing on the contribution of VAT System and Domestic revenue.
3.2 Study design
The research is a cross sectional study design aimed at analysing the VAT system and
domestic revenues collected by the Uganda Revenue Authority. The qualitative and
quantitative data will be analyzed and used to find out the relationship between the two
variables. The researcher opted for cross-sectional design because it is appropriate basing
on the population to be reached. To gain further understanding key informant interviews
will be conducted with senior officers in URA and Ministry of Finance.
3.3 Variables and their measures.
The variables in the study are the Value Added Tax System and Domestic revenue
collections by URA. VAT system is the independent while Domestic revenue is the
dependent variable. VAT system is measured by compliance to the Act, number of
persons and corporate that have registered, Output and Input collections, default cases
26
whereas the domestic revenues shall be measured by the nature of accounting for VAT
system, per cent contribution, contribution of other domestic sources.
3.4 Study population
The researcher will collect data from respondents in Uganda Revenue Authority
(Department of Large Taxes, Internal Audit and Tax Investigation); Ministry of Finance
and Economic planning
(Departments of Tax policy, Budget policy and Evaluation, Treasury services and
Financial Management services). There are around 65 people in the areas mentioned
above and the respective departments will be involved in the project.
3.5 Sample size selection method
The study will cover a total of 30 respondents drawn from the above departments. The
study population will be divided into different categories (strata) in form of departments
then simple random basis will be adopted. The justification is that these institutions have
departments handling specific functions in part of the whole range of activities.
3.6 Sources of Data
Data sources are going to be both primary and secondary
Primary sources
The researcher will use questionnaires. Questionnaires will be designed to specifically
acquire information from selected officers while who may need sufficient time to avail
credible information. Questionnaires will be designed in a way that sufficient data is
obtained.
27
Secondary sources
These will be basically the VAT Act, Cap 349; Income Tax Act, Cap 340, East African
Community Customs Law, URA Annual performance reports, periodicals, newspapers
especially articles on finance and Internet.
3.7 Data collection methods
The researcher will administer structured questionnaires and interview guides to obtain
information on the contribution of VAT system and Domestic revenue collected by URA.
3.8.1 Data processing
The purpose of the data processing will be to ascertain whether respondents will have
answered questions as required by the researcher. The data collected will be arranged in
tables and edited to eliminate errors. All questionnaires will be scrutinized and edited to
ensure accuracy.
3.8.2 Data Analysis
Data will be coded to bring identical response together and then tabulated. Data will be
analyzed
using frequencies, percentages and chi-squares statistical test to establish the relationship
between VAT System and Domestic revenue, where chi-square is given by:
X2 (0-E)
2/E X
2-Chi-Square
0-Observed frequency
E-Expected frequency
28
3.9 Limitation of the study
In the process of conducting this research, the researcher is likely to face the following
limitations.
Lack of funds for transporting the researcher, typing the work and cost of gathering the
required information. The research will be entirely funded by the researcher.
The researcher is likely to meet the problem of rigidity from some officials in terms of
willingness to answer the questions.
Time allocated to complete the research may not be sufficient for the researcher to fully
exhaust the scope of the study. Nonetheless, no effort will be spared to complete the
report in time.
3.11 Time frame
Activity Duration(weeks)
1
2
3
4
5
Questionnaire design
Data collection
Data Analysis
Draft report
Final report
2
3
2
2
2
3.11 Budget Estimate
The researcher will spend about Ushs. 300,000 on the entire research project, besides the
immeasurable time.
29
CHAPTER FOUR
4.0 PRESENTATION, INTERPRETATION AND DISCUSSION OF FINDINGS
4.1 Introduction
This chapter presents findings of the study using figures, tables and frequencies. The
findings are categorized and presented in line with the research questions.
VAT System is desired to bring enormous success to the URA in terms of increasing the
domestic revenues which are highly needed to boost our GDP. Originally, VAT System
was designed to meet every stockholder‟s interests, like maximize revenue collections to
the government at the lowest inconvenience possible to the tax payer.
The main objective of the study is to find out the relationship between the VAT System
and increase in the domestic revenues hence the GDP. In order to draw out accurate
conclusions, the researcher endeavored to collect key players‟ opinions.
4.2 Presentation
The study will be organized in meaningful categories so that it is easy to analyze and
interpret. The data processing will be done by the researcher and will consist of editing,
coding and very often tabulation. The researcher edited all the questionnaires after they
were answered by each respondent. This is intended to see that appropriate questions
were answered, detect and as far as possible eliminate errors in the answered
questionnaires. With coding, the purpose is to classify the answer to question into
meaningful categories, so as to bring out essential pairing. Tabulation on the other hand is
to bring together data into tables, undertake statistical analysis. This was done after
„sorting out which table would be needed.
30
4.2.1 DEMOGRAPHIC CHARACTERISTICS OF DATA
Table 1: Gender of respondents
Gender Frequency Percentage
Male 19 73.1
Female 7 26.9
Total 26 100
Source: Primary Data (question 3)
The respondents were drawn from URA (Department of Large Taxes, Internal Audit and
Tax administration), MFPED (Department of tax policy, Budget policy and Evaluation,
Treasury services and Financial Management services) and Price Water Coopers Audit
firm‟s department of Research and Development.
Table 2: Ages of respondents
Age group Frequency Percentage
20-30years 3 11.5
31-40 years 14 53.8
Above 40 years 9 34.6
Total 26 100
Source: Primary Data (question 4)
The majority was adults and informed to take self initiatives and able to understand the
VAT System visa-viz other tax systems and impact on the domestic revenues in one hand
and GDP on the other.
31
Table 3: Duration of respondents in service
The correspondents see VAT System as a turning point in tax management in Uganda.
Perhaps their sense of judgment stems from the fact that VAT System does no distort
32
production processes since it is levied on all sales of commodities at every final stage. It
has no cascading effect “tax on tax” and efficiently and effectively manageable.
The researcher also asked whether the threshold of Shillings 50 million is too high.
Table 6: Response on threshold
Response SA A NS D SD Total
Frequency 3 14 5 4 - 26
Percentage 11.5 53.8 19.2 15.4 - 100
Source: Primary Data (question 8)
The respondents could be suggesting that the threshold is high. This leaves out many
small businesses that would reasonably register for VAT. The VAT Act Cap 349 makes it
mandatory for sole proprietors, companies, partnerships, joint ventures and any other
unincorporated body, or any non-resident company supplying taxable goods and services
register as long as its annual turnover is and above the 50 millions, those below could
register voluntarily. The idea behind this is that small taxpayers cannot maintain records,
besides, bringing them on board increases administrative costs. However, URA will
continue losing a lot of money bearing in mind that our economy is still dominated by the
informal sector.
The researcher attempted to realize if there were any problems with the former tax
regimes (CTL & ST)
Table 7: response on former tax regimes
Response SA A NS D f SD
Total Frequency 2 10 2 8 4
26 Percentage 7.7 38.5 7.7 30.8 15.4
Source: Primary Data (question 9)
There was no clear cut suggestion that former regimes were flawed. Those disagreeing
could argue that the contributions from STL and ST were much higher and felt than the
33
revenues from the VAT regime comparatively. Those who think otherwise could have
their reasoning impeded on the fact that in CTL and ST, taxes could be collected
throughout the production process which in the end caused tax on tax effects.
Additionally, VAT System is practically easy to manage.
The investigator felt need to know if the VAT Sytem promotes laziness in the society
Table 8 captures response on laziness
Response SA A NS D SD Total
Frequency 4 13 - 9 - 26
Percentage 15.4 50 - 34.6 - 100
Source: Primary Data (question 10)
The response tend to appreciate that the low class citizens will feel a lot relieved when
they are not tasked to pay their taxes directly since VAT System depends on ones
consumption habits. This brings in a big difference with the now abolished graduated tax
where citizens would directly feel the burden and probably have pride in contributing for
the development of their motherland albeit its weaknesses. However, on equitable
grounds, VAT Sytem is the best because it charges tax on those who have more and
government uses the very money to provide products and services for all regardless of
who consumed what and who did not consume thereby narrowing the gap between the
haves and have not. Furthermore, VAT System encourages the consumption of the
locally manufactured products as well as the exportation of the same which helps to
narrow the balance of payment (B.O.P) for good of the country indiscriminately.
The investigator looked at whether the costs incurred in realizing VAT revenues could be
more.
34
Table 9: Response on Costs versus Revenues
Response SA A NS D SD Total
Frequency - 9 - 14 3 26
Percentage - 34.6 - 53.8 11.5 100
Source: Primary Data (question 11)
Over 60% of the correspondents have a view that the costs incurred are far less than the
revenues realized. Well, URA has maintained a revenue collection ratio of less than 4%
since Financial Year 1993/1994 for domestic revenues as a whole. In 1997/98, the
revenue collection ratio was 3.54%, a total of 29.06 billion was spent of which
28.O0billion was recurrent expenditure and 1 .O6billion in capital expenditure. To be
noted, in the 4% the VAT ratios were 1.89 and 1.17% respectively. Notwithstanding,
slightly above 30% of the respondents take a thinking that costs are as high as revenues,
arguably, there are many departments involved in formulating policies, managing the
VAT System whose immeasurable time can not be quantified and put in money terms.
This sounds a warning bell for those concerned not to be over-possessed but reevaluate
the system more critically.
The researcher thought that it was important to ascertain that VAT System was imposed
on Ugandans
Table 10: response on the assertion
Response SA A NS D SD Total
Frequency - 8 - 16 2 26
Percentage - 30.8 - 61.5 7.7 100
Source: Primary Data (question 12)
A large number of correspondents (6 1.5%) do not favour the idea that VAT System was
imposed on Ugandans. Probably, they feel the timing was appropriate as the country
needed suitable tax mechanism to spur her economic agendas, those opposing largely
lack merit that could have bordered on natural resistance to change and lack of
understanding of the intricacies of the VAT system. Not to trash their ideas, the
opponents of VAT System could have drawn their contentions on the excuse that VAT
System was an IMF product since
35
it provided input into its design spiced up by the demonstrations in Kampala in the initial
stages of VAT System against the threshold of 20 million later revised upward to 50
million
The researcher wanted to deduce whether requirements for VAT System registration are
so detailed that creates distress.
Table 11: Response on requirements
Response SA A NS D SD Total
Frequency - 10 - 12 4 26
Percentage - 38.5 - 46.2 15.4 100
Source: Primary Data (question 13)
The response points out that the VAT System registration requirements bear no much
influence on taxpayers. A reasonable percentage of 38.5% feel affirmative-this could be
expected since it is relatively new and people fear to open to it.
The researcher also inquired whether the mandatory monthly VAT returns play a role in
VAT under- performance.
Table 12: Response of monthly returns
Response SA A NS D SD Total
Frequency 4 14 - 8 - 26
Percentage 15.4 53.8 - 30.8 - 100
Source: Primary Data (question 14)
A good percentage think that the monthly returns presents a burden to taxpayers and in
the long-run loses out on irreplaceable valuable resources like time taken technocrats.
They may abandon VAT related issues to save their time and stand no risk of penalties
36
that come with late filings of returns, of course with total disregard to benefits that can
accrue to the company when VAT registered. However, it is a legal
requirement and any company whose turnover is above 50million or imports items worth
4million or more provided they are not exempt should and must register with URA.
While URA has got the legal backing, it may not do much until it wins the will of the
taxpayers.
The respondents were asked to state if the degree of relationship is anywhere strong:
Table 13: response on relationship
Response SA A NS D SD Total
Frequency 1 19 - 6 - 26
Percentage 3.8 73 - 23 - 100
Source: Primary Data (question 15)
The response (over 75%) suggests that VAT System greatly contribute to the growth of
domestic revenue. The 18% rate helped to generate 1,138.3billion in 2007/2008 upward
from a mere shillings 26.93billion in the initial stages. The hope placed on the VAT
System is somehow overzealous; it appears VAT System has been contributing well to
the domestic revenues.
The researcher wanted to know if the VAT System was designed to serve URA-
Government at the detriment of taxpayers.
Table 14 shows the response
Response SA A NS D SD Total
Frequency - 11 - 14 1 26
Percentage - 42.3 - 54 3.8 100
Source: Primary Data (question 16)
37
About 60% feel that the statement could have been over-geira1ized. The VAT appears to
have served to the interests of the government and taxpayers. Obviously, the taxpayers
are to a lesser level inconvenienced through the monthly returns required by law. But
then government needed better means of realizing revenues from own citizens to offer
better and reasonable services to Ugandans. As can be appreciated, VAT System has
made transactions a lot easier for taxpayers since they pay as a final consumer.
The researcher wanted to find out if the VAT System contribution has been significant
Table 15: Response on VAT System contribution
Response SA A NS D SD Total
Frequency - 17 - 9 - 26
Percentage - 65 - 35 - 100
Source: Primary Data
Overwhelming 65% think that the VAT System brings in substantial amounts into the
domestic revenues basket.
The researcher wanted to gauge whether evasion in VAT System is that severe
Table 16: VAT System Evasion
Response SA A NS D SD Total
Frequency - 22 - 4 - 26
Percentage - 85 - 15 - 100
Source: Primary Data (question 17)
85% buy into the argument that VAT System could have not increased as anticipated
largely because of evasion. The possible methods of evasion comes in through non-
registration despite being above the threshold, under-declaration of income or turnover
thereby suppressing sales and output tax-resulting in low VAT payable and false
accounting based on filing of VAT returns with figures of imports/local purchases
38
exaggerated. A case in point, in the quarterly report for the period 1st April30th June
2003, T/A SuperStar Auctioneers/Bailiffs suppressed their records whose tax was
subsequently identified at shillings 52,390,859.
The investigator thought of evaluating whether VAT System is a more visible tax than
any other
Table 17: Perception on visibility
Response SA A NS D SD Total
Frequency 1 17 - 8
- 26
Percentage 4 65 - 31 - 100
Source: Primary data (question 18)
The impression is that VAT is easily felt by the taxpayers and presents serious challenges
politically for the government to raise it. The VAT System is highly reflected in the
prices of basic items and virtually all consumables and the citizens can question the
rational of any price increases.
The researcher asked if the categorization of VAT System into the standard rated, zero-
rated and exempt could have worked against URA in terms of collections.
Table 18: Response on categorization
Response SA A NS D SD Total
Frequency 1 7 - 12 6 26
Percentage 3.8 26.9 - 46 23 100
Source: Primary Data (question 19)
There is sufficient indication that the categorization serves no purpose. URA would need
to be assisted to employ one single agreeable rate cutting all through with improved
monitoring. It would be easy for evaders to abate tax where there are many arenas to play
the game in thus causing losses in collections.
39
The researcher wanted to know if the booming sector has helped to save matters.
Table 19: Response on service sector
Response SA A NS D SD Total
Frequency 3 11 - 9 3 26
Percentage 11.5 42.3 - 34.6 11.5 100
Source: Primary Data (question 20)
There is nearly indifference. Ideally the booming sector should have made URA realize
increased VAT collections. The undoing could be that these companies like MTN
Uganda, Stanbic Bank Uganda limited are multinational institutions controlled from
outside. They will for own and at times justifiable reasons import a lot of equipment for
repairs and therefore eligible to input VAT drawbacks besides the generous subsidies
offered to them in the name of attracting investors.
The researcher felt need to ascertain whether the inputs claimable taxes on purchases and
overheads bear negative impact on VAT System.
Table 20: Response on claimable input tax
Response SA A NS D SD Total
Frequency 4 12 - 8 2 26
Percentage 15.4 46 - 30.8 7.7 100
Source: Primary Data (question 21)
A reasonable percentage of 61% think that the input tax claims work against the URA‟s
desired performance. In March 2011, VAT taxes on cement registered a shortfall of
shillings 2.9lbillion because Hima cement returned an offset while Tororo cement
returned higher input tax credit of shillings 3.3billion in addition to higher imports for
renovations of the plant.
40
The investigator wished to establish whether issues in the A4t especially paying VAT on
applying goods to own use are reasonable.
Table 21 shows the response
Response SA A NS D SD Total
Frequency 2 8 - 13 3 26
Percentage 7.7 38.8 - 50 11.5 100
Source: Primary Data (question 22)
The response appear to suggest that there are certain sections in the Act which may need
revision or deleted and efforts directed at workable and practical sections thus
minimizing trivial issues.
The researcher inquired whether the large informal sector could explain the low VAT
Table 22: Response on informal sector
Response SA A NS D SD Total
Frequency - 7 3 16 - 26
Percentage - 27 11.5 61.5 - 100
Source: Primary Data (question 23)
The response resoundingly tells us that the many Ugandans in the informal sector do not
affect VAT. The reason could be that anyhow they pay VAT through consumption. The
typical characteristics of the sector are; small profits, geographically dispersed and
inaccurate and insufficient accounts or file returns. The biggest dilemma though is that
the small businesses that make a turnover of and above 50million can never be brought
on board.
The researcher picked interest in knowing if the exemptions allowed in the Act lures
smart business persons into evasion.
41
Table 23: Response on exemptions
Response SA A NS D SD Total
Frequency - 20 - 6 - 26
Percentage - 77 - 23 - 100
Source: Primary Data (question 24)
As high as 77% of the respondents tend to agree that elaborate exemptions provided for
in the Act have and will continue to disadvantage the URA VAT System collections.
Ideally, exemptions were considered when formulating VAT laws in support of poverty
reduction efforts through creating more growth and reducing the costs of goods and
services consumed by the poor especially agricultural inputs like hoes, fertilizers and
alike.
The researcher wanted to establish whether unstable foreign exchange rates can impact
positively or negatively on VAT collections.
Table 24: Response on FOREX
Response SA A NS D SD Total
Frequency 1 19 - 6 - 26
Percentage 3.8 73 - 23 - 100
Source: Primary Data (question 25)
A large portion (76.8%) answered in affirmative that the depreciation of a shilling has
multiple effects on the cost of doing business such as increased input costs of raw
materials, merchandise and capital equipment. The depreciation is mainly attributed to
increased demand for foreign currency from both corporate and offshore investors,
energy and the manufacturing sectors, declining export earnings and reduced earnings
and reduced remittances. The end result is that URA will pay more input tax claims. Even
the base dollar will have to be changed more often. Indeed, on 1/07/2011, „KACITA‟
42
announced they were going to close their shops on 6-7/07/2011 in protest of the
seemingly unabated appreciation of the dollar. They also want the URA to adopt shillings
2000 per USD effective the month of July.
The investigator had interest on knowing whether interest rates have influence on VAT
collections.
Table 25: Response on interest rates
Response SA A NS D SD Total
Frequency - 17 - 9 - 26
Percentage - 65.4 - 34.6 - 100
Source: Primary Data (question 26)
The response demonstrates that interest rates have increased cost of finance. This makes
it rather difficult for the business community to plan. Of recent, commercial banks have
been raising their lending rates between 1 and 3 percentage points. The lending rates
remain high (between 20-28%) with the introduction of new products for their clients,
such as school fees, housing among others at even much higher rates. In effect, the
borrowings are used to purchase inputs which will attract repayments.
The investigator wanted to appreciate if inflation rates can affect the VAT System
Table 26: Opinions on inflation rates
Response SA A NS D SD Total
Frequency - 25 - 1 - 26
Percentage - 96.2 - 3.8 - 100
Source: Primary Data (question 27)
Impressive 96% suggest that inflation rates bears implication on VAT collections. For
example, the implication of a stagnant VAT threshold in the face of inflation implies that
more and more small traders are being dragged into the VAT chain leading them to incur
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high VAT compliance costs. The high commodity and fuel prices have continued to
erode peoples purchasing power resulting into reduced consumption, this in turn reduce
VAT collections, in March 2011 alone, domestic indirect taxes including VAT and excise
duty registered a shortfall of shillings 12.05billion.
4.4 Data Analysis and Testing
Table 27 is the contingency table showing observed and expected frequencies
Response
Agree Disagree
Department (O) (E) (O) (E)
Internal Audit & tax investigation 2 1 1 0
Tax policy 6 9 5 3
Budgetary policy & Evaluation 3 3 1 1
Department of Large Taxes 5 4 3 5
Compiled by the researcher
Table 28 showing calculation of results
Observed frequency Expected frequency O-E (O-E)2 (O-E)2/E
2 1 1 1 1
6 9 -3 9 1
3 3 0 0 0
5 4 1 1 0.25
1 0 1 1 0
5 3 2 4 1.33
1 1 0 0 0
3 5 -2 4 0.8
SUMMATION 4.38
Source: Compiled by the researcher
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Chi-square (X2 calculated) of 4.38 from the table above when compared with the critical
X2 of 3.841 at 0.05 level of significance i.e. 95% indicates that the results are statistically
significant and that there is significant relationship between the VAT System and
domestic revenues collected by the Uganda Revenue Authority.
Critical x2 (1 degree of freedom) 3.841
Calculated X2=4.3 8
Since critical X2 is less than calculated X2 at 95% confidence level, there is dependence
between VAT and the domestic revenue collections.
Consequently, the hypothesis that VAT System do not have any effect on the domestic
revenues losses ground.
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CHAPTER FIVE
5.0 SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
5.1 Introduction
This chapter presents summary of findings, conclusions, recommendations and suggested
areas for further research.
5.2. Summary
The study aimed at establishing the effect of VAT System and the domestic revenue
collections by the URA. There were a number of objectives that were formulated to assist
the investigator as indicated in chapter one. In an attempt to get answers to those
objectives, the researcher was able to identify the critical areas in the VAT System. The
results of the study were analyzed and interpreted in due consideration to questionnaires
answered by relevant persons. The implications of VAT System have been exhaustively
discussed in chapter four. The results of the chi-square show a significant relationship
between the variables.
5.3. Conclusions
Following the thorough discussion in chapter four, it has been established that to ensure
increased efficiency of URA, VAT System as a new tax law enacted in 1996 to replace
the CTL and ST. A flat rate of 18% is applied to both imports and local products. The
VAT System is necessary for broadening the tax base and increased fairness in both the
exports and imports. The sales tax had been discriminatory because it applied only to
manufacturing sector. Although Uganda‟s revenue performance has improved
remarkably in nominal terms from 1986 to date as a result of tax changes, it is still
comparatively low and clearly does not meet Uganda‟s needs as measured against
46
optimal levels of public expenditure for the country. It is therefore accurate to add 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 in 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 without reach.
5.4. Recommendations
Having considered the outcomes of the research, the researcher realized that the VAT
System is destined to contribute fundamentally to the domestic revenues. Therefore for
VAT System to live up to the expectation, the researcher feels the recommendations
below are necessary.
Government should undertake more simplifications of the VAT System approaches
including markedly reducing tax exemptions, deduction and privileges that cause losses
to the treasury as well as breeding corruption tendencies. A comprehensive document on
tax Policies and administrative measures undertaken by government should be published
to improve on tax administration and also encourage voluntary compliances.
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The MFPED should carry out more technical reviews on the VAT System on sale of
residential properties and tax investment incentives for international carriers. This would
help in avoiding problems of reliance on nuisance taxes and abuse of tax incentives.
The tax body should investigate and register all VAT taxpayers above the gazette
threshold, taking care to identifying those taxpayers who are splitting their turnover with
an intention of evading the VAT System process.
Government should encourage business entities and alike to build structures that ensures
self-governance in line with the Uganda laws, consistently and in a most effective and
transparent way possible.
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REFERENCES
1. Value Added Tax (Amendment) Act 2005
2. Uganda Revenue Authority (January-June, 2011): Monthly Performance
Reports:URA
3. Gerald, N. (2009, 12/March/2009). Impact of VAT on your business. The Daily
Monitor
4. World Bank & African Development (2009). Africa Competitiveness reports
5. PriceWaterCoopers (2009). Overview of VAT in Africa
6. SEATINI (2010). Towards Taxation and Development: Challenges and
Opportunities: The case of Uganda.
7. Ssewanyana,S.N. and Okidi, J.A. (1999-2003). A Simulation of the Uganda tax
system
8. Daily Monitor (21/April/20 11): Inflation affects URA,s Domestic Revenue
9. Cambridge (2005): Improving tax administration: A case study of the URA
10. Budget Speech (2011/2012): “Promoting Economic Growth, Job creation and
improving service delivery.
11. Budget Speech (2010/20 11): “Strategic Priorities to Accelerate growth,
employment and socioeconomic Transformation for prosperity
12. Iga Bukenya. Taxation and Development. The case for VAT in Uganda LLM
Thesis MUK, Facalty of law , 1996.
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MAKERERE UNIVERSITY
QUESTIONNAIRE DESIGN
Dear Sir/Madam;
This research project is purely for academic purposes focusing at “Value Added Tax
System and the domestic revenue collections by Uganda Revenue Authority”. The
information I am seeking from you will be treated with utmost confidentiality. The