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…………………………………

iv

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

x

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.

1

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):

2

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.

3

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

5

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

6

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.

12

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.

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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

43

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