LSC S2:Taxation

Introduction
Paying taxes is your responsibility as a citizen. It is one of the ways you participate in the development of the country. Taxes are the blood which enables government to provide for the needs of the community like education, health, constructing roads, ensuring security and investing in productive activities like industrialization and agriculture. In this chapter, you will appreciate your role in the development of your
country as an honest taxpayer.

Reflective questions
1.Do you pay taxes?
2.Which types of taxes do you know?
3 .What taxes do you pay?
4 .How have you benefited from taxes collected by the
government?

Understanding Taxation and Its Origin
Taxation has a very long history. It evolved from various civilizations, notably religion, politics and culture. Taxation is as old as humanity.

Reading about the origin of taxation
Activity 5.1
In your group,

1. Read the following passage carefully about the origin of taxation.
2. Summarise it by pointing out the key points.
3. Use a flipchart to present the key points to the class.
   Who knows the origin of taxation in Uganda?
   Collection of taxes from citizens by governments was started in Uganda and East Africa by the British colonial rulers. The colonialists first introduced taxation through a system of compulsory public works such as road construction, building of administrative headquarters and schools, as well as forest clearance and other similar works.
4. The first tax in the form of money was the hut tax which was introduced in 1900. This was when the first similar tax systems were introduced in both Kenya and Uganda.
5. Ugandans also started paying customs duty as an indirect tax. This involved charging tax according to the value of the imported product at a rate of 5% on all goods entering East
   Africa through the port of Mombasa and destined for Uganda.

A similar tax was imposed on goods imported to Uganda through German East Africa (Tanganyika), through Dar-es- Salaam and Tanga ports. This gave rise to revenue which was

given to Ugandan colonial rulers. The colonial government financed its activities by using
taxes they collected on imported goods at the ports of Mombasa, Tanga and Dar-es-Salaam.
Though the colonial government collected taxes on imports, the indigenous Africans were not engaging in activities that would increase the growth of the monetary economy (where

money is used for buying and selling goods and services). Accordingly, the government introduced another tax called poll tax that was imposed on all male adults above 18 years. The

requirement to pay tax forced the indigenous Ugandans to enter the market sector of the economy through either selling their agricultural produce or hiring out their services. In 1919, the first tax law was introduced. This increased the tax burden by introducing an additional tax called local-
government tax. It was collected and used to finance activities in local communities.

Income tax was introduced in Uganda in 1940 by a protectorate ordinance. It was mainly payable by the Europeans and Asians but was later on extended to Africans. In 1952, a new tax law was introduced. It was named the East African Income Tax Management Act, which laid down the basic legal provisions found in

Uganda’s current income tax law. In 1953, graduated personal tax was introduced to finance
local governments. The collection of both income tax and customs duty was done by departments of the East African Community (EAC) until its collapse in 1977. Under the EAC system, there were regional taxing policies And uniform administration but the partner states retained

the right to define tax rates. After the break-up of the EAC, the tax departments were transferred to the Ministry of Finance with the transfer of the Income Tax Department in 1974, followed by the Customs
Department in 1977.

In 1991, the function of administering central government taxes was shifted from the Ministry of Finance to the Uganda Revenue Authority (URA), a body corporate established by an
Act of Parliament. The EAC was re-established in 1999 by Tanzania, Kenya and Uganda. Rwanda and Burundi joined the EAC in 2007. The EAC, in December 2004, enacted the East African

Community Customs Management Act 2004 (EAC-CMA). The Act governs the administration of the EA Customs Union, including the legal, administrative and operations functions.5.1.1 Key terms used in taxation
Sometimes people refuse to pay taxes because they do not understand the terms used. Having an understanding of the different meanings can make taxpayers ably interpret the taxes they are paying and this to some extent, prompts them to willingly pay. The key terms used in taxation include:

Taxation: This refers to the legal compulsory transfer of money from individuals and companies to the govemment as a source of revenue.
Tax: This refers to a compulsory payment to the government by the public.
Tax burden: This is the effect of a tax on the taxpayer.

Tax impact: This refers to the first resting place of a tax or the burden suffered by the person/company that initially pays the imposed tax.
Tax base: This refers to the items/activities or income on which tax is imposed to raise tax revenue.

Taxable income: This is a portion of an individual or company’s income that is subjected to income taxation after all tax-free allowances have been deducted from the original income.
Taxable capacity: This refers to the extent to which a taxpayer is able
to pay the tax assessed on him and yet remain with enough disposable Income.
Tax evasion: This is where the taxpayer refuses to pay tax assessed on him or her.

Tax avoidance: This is where the taxpayer uses the weakness of tax administration to dodge paying the tax assessed on him or her.
Tax exemption: This is allowance given to a person/corporation not to pay a given tax.
Tax shifting: This is the transfer of either part or the whole amount of the tax imposed on a taxpayer or other party.
Tax threshold: This is an amount of money that the government has declared to be tax free.
Tax holiday: This is a temporary reduction or elimination of a tax.

Activity 5.2 Explaining the key terms In taxation In your group,

1. Select two from among the above key terms as indicated in5.1.1.
2. Explain them to the class.

5.1.2 Types of taxes
There are two types of taxes: Direct and Indirect tax.
Direct tax: This is a tax imposed on the income and property of individuals and business entities. The burden of the tax is wholly borne by the taxpayer. Common examples of direct taxes include; corporation tax, individual income tax, withholding tax, employment income tax and rental income
tax, among others. When a trader makes sales and earns Sh 4,000,000, he/she is required to pay a certain percentage of the earned income to the government as tax. For example, when government charges a tax rate of 10% of the income of the trader, the trader will pay Sh 400,000 (10/100

Indirect tax: This is a tax imposed on the consumption of goods and services. It is paid by an individual or business entity when buying the goods and services. The burden of the tax can be shifted by one
taxpayer to another party.
Indirect tax is not directly collected by the government but indirectly through intermediaries who are usually business people. Indirect taxes

include customs duty, excise duty and Value Added Tax (VAT), among others. When you are about to go back to school, your family buys for you materials to use such as books, pens, school uniform and shoes,
among others. Your family pays for services such as airtime, television subscriptions electricity, salt, soap

and other necessities. When you buy these products, you indirectly pay taxes. The price you are charged has a of a tax that traders pay to the government. For example, when you buy a shirt at Sh12,O()O, the tax of 18% is charged and this means that the amount of tax you
pay on buying the shirt will be (18/100 x 12,000) =

5.1.3 Advantages and disadvantages of direct and indirect taxes
Direct taxes positively and negatively affect both taxpayers and the
government.
Advantages of direct taxes

1. They are fair because a taxpayer is charged depending on the amount of income that he/she earns.
2. The government is able to charge a high tax on individuals with high income and low tax on dividuals with low income.
   Disadvantages of direct taxes
3. They are a burden to the taxpayer since they are on their incomes.
4. They discourage saving by taxpayers since they take away part of their income.
   Indirect taxes, just like direct taxes, have both advantages and disadvantages.
   Advantages of indirect taxes
5. Indirect taxes have several benefits, like less evasion.
6. This implies that the taxpayers cannot easily escape paying taxes andthis is good for the government since it is able to earn revenue. Since they are paid when buying products, indirect taxes have a wide coverage.

3. They can enable the government to generate more revenu than
   from direct taxes which are charged on income.
   Disadvantages of indirect taxes
   Indirect taxes, however, have a number of disadvantages:
   Indirect taxes make customers pay higher prices since they are imposed on price.
   Indirect taxes are also unfair to the poor because they pay the sametaxes as the rich. The tax is imposed on prices of things that both the rich and poor need.

Discussing the advantages and disadvantages of Activity 5.3

direct and indirect taxes In your group,
I. Use the internet and any other source of information to find
out and discuss the advantages and disadvantages of:
a) Direct taxes.
b) Indirect taxes.
2 Do a write-up of what you have discussed and present it
to the class.

5.1-4 Rights of a taxpayer
Just like human beings or animals have rights, taxpayers equally have rights, stated by the law as they pay taxes assessed on them. An
entitlement, therefore, available to a taxpayer as provided by law is referred to as a right.
Activity 5.4 Analysing the rights of a taxpayer In your group,

1. Carefully study the table below.
2. Carry out research on the rights whose details have not been given and fill them in.
3. Present your findings to the class.

You should realize that obligations differ from rights in a sense that obligations are terms and conditions to be fulfilled by a taxpayer as required by tax law. These obligations include:
Registration: Taxpayers must ensure that they voluntarily register with Uganda Revenue Authority. This requires a taxpayer to obtain a Taxpayer Identification Number (TIN) which is given free of charge to every applicant and is a taxpayer’s unique identifier for all tax purposes. A taxpayer can apply for a TIN online through URA’s e-services.

Filling returns and entries: A taxpayer can file correct tax returns, customs entries or any forms relating to taxes and other revenue related obligation at the right time and place as required by law. This can also be done through URA e-services. Cooperation with the authority: In handling tax matters, a taxpayer and his/her appointed agent(s) must deal and cooperate only with the authority’s authorised staff.
Disclosure: A taxpayer must be honest with URA and treat URA staff fairly and with courtesy. A taxpayer should let URA know if he/she needs an interpreter.

File accurate tax returns: Make customs entries or any forms relating to taxes and other revenue related obligations at the right time and place as required by the law.
Pay the correct taxes at the right time and place as required by the relevant laws.
Be honest and make full disclosure of information and a correct declaration of all transactions at all times.
Use the services of a licensed customs agent to complete customs entries and related clearance formalities when importing or exporting cargo, declare the goods on arrival and have them ready for nspection.

Note: Uganda Revenue Authority has a taxpayer’s charter. This can be accessed on the URA website. The taxpayer’s charter is a form of agreement that spells out and binds both the URA and the taxpayer,
and spells out the rights and obligations of each party .

Sample Activity of Integration Context
Residents of Kayunga town council are committed business people. They faithfully pay taxes as imposed on them. This is because URA talks to them and explains to them their obligations. However, sometimes, they are harassed by tax collectors, over-charged and delay in getting information regarding the taxes they pay.

Task
Prepare a speech on what taxpayers in that area should deliberately do to be in harmony with URA and overcome some of the challenges they are facing out of ignorance.

Chapter Summary
In this chapter, you have learnt:
what taxation is and its origin.
the key terms used in taxation.
the types of taxes.
the advantages and disadvantages of direct and indirect taxes.
the rights of a taxpayer.
the obligations of a taxpayer.