Elements OF Taxation Elements OF Taxation PDF

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ELEMENTS OF TAXATION

ELEMENTS OF TAXATION LECTURE NOTE

PRINCIPLE/CANONS OF TAXATION When taxes are imposed, certain conditions must be fulfilled and these conditions are known as principles/canons, guidelines of taxation. Therefore principles/canons of taxation are “signposts” in the economy, which should guide the taxation process. They punctuate a good tax system. (a)Adam smith’s four canons of taxation 1. The canon equality/equity. This is the most important principle of taxation. This principle explains that there should be justice in taxation where every individual is supposed to pay according to his or her abilities. The principle calls for equality of sacrifice or ability to pay tax in proportion with income received. This means the rich should pay more taxes than the poor. 2. The canon certainty. According to this principle, the taxes each individual is bound to pay should be certain and not uncertain. The tax payer should know how much, what tax, when, why and where the tax should be paid .this will enhance proper tax planning and fair assessment reducing corruption tendencies within the tax system. 3. The canon of economy. This principle requires the administration cost of collecting taxes to be as low as possible for both the taxpayer and the tax authority. To the tax authority the administration costs should not exceed 5% of the tax revenue (according to Adam Smith). To the tax payer, the compliance costs should be as low as possible and the tax payer should be left with enough disposable income. 4. The canon of convenience. ELEMENTS OF TAXATION NOTES- BY NDYABANAWE JACKSON (LECTURER)

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ELEMENTS OF TAXATION The principle requires the tax imposed should cause as little convenience as possible to the tax payer. What to pay, how much to pay and where to pay should be convenient to the tax payer. The canon therefore lays down that the time and manner should be convenient to the tax payer.

(b) Other canons of taxation include; 5. The canon of simplicity. This is the understanding of the structures of law and administration of taxes. A good tax system is one which is easy to be understood by the tax payers and tax administrators , the tax payer should know when to pay, how much to pay and they should also understand who si responsible for collection of tax and where to pay tax. 6. The canon of flexibility. The tax system should be flexible to be changed to meet the revenue requirements of the government and the same time to help employers to manage their business 7. The canon diversity To be sustainable, the tax system should have as many taxes as possible so as to raise enough revenue. This will further uphold the equity since people will not be strenuously taxed, as it would be in a simple tax regime. 8. The canon of efficiency and effective. A tax is said to be effective when it meets the objectives of the tax. A tax is effective when the collection and compliance cost are low. Revision question. 1. Explain the principles/canons of taxation

ELEMENTS OF TAXATION NOTES- BY NDYABANAWE JACKSON (LECTURER)

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ELEMENTS OF TAXATION

Important terms/concepts in taxation Tax holidays. This is where the government gives a grace period to an investor during which period the investor does not pay tax until the grace period is over. Tax havens. These are areas which offer low tax rates so as to boost their activities. Tax transformation. It refers to the substituting production of the taxed commodity with a non-tax commodity in order to avoid the effect/burden of the tax. Tax base This is an entity/person/firm on which the tax is levied or it refers to an entity that is subjected to taxation. Real burden of tax It refers to a sacrifice in terms of a commodity that a person incurs or makes as a result of tax Taxable capacity It is the extent to which the person can be taxed and still remains with a disposable income to maintain the reasonable standards of living. Prohibitive tax This imposed primarily not to raise revenue but to discourage production of consumption of certain commodities which are harmful. ELEMENTS OF TAXATION NOTES- BY NDYABANAWE JACKSON (LECTURER)

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ELEMENTS OF TAXATION Tax yield This is the net tax revenue from all taxes after all costs of collection have been deducted from total taxes collected. Incentive tax This is the tax that is adjusted by reducing tax in order to stimulate investments or business activity in the economy. Tax liability It is the amount of money the tax payer is expected to pay in the given period of time. Tax exemption This is where a tax liable person is allowed not pay a given tax due to some reasons for example insurance premiums and medical expenses can be exempted from tax in case of employment income. Tax avoidance This is a situation where the tax payer exploits the loopholes /weaknesses in the tax system to dodge tax charged to him or tries to see how or she can pay less or nothing at all as tax. Tax evasion This is the deliberate refusal by the tax payer to pay tax imposed or assessed on him. Reasons why people evade paying taxes in Uganda Poverty/low incomes among the tax payers. When people are poor that they cannot afford to maintain the current standards of living they will as well refuse to pay tax. Desire to retain all earnings by the tax payer. When people prefer to retain all the incomes they have earned, they will ignore paying taxes as well. Political instability, this prevents potential tax payers from earning enough income from which they can pay tax and a result they refuse to pay tax. ELEMENTS OF TAXATION NOTES- BY NDYABANAWE JACKSON (LECTURER)

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ELEMENTS OF TAXATION Lack of enough information about taxes. Inadequate information from the tax administrators about procedure of payment of tax, tax to be paid and the importance of paying tax can call for tax evasion among Ugandans. When the assessment is unfair. Un proper tax assessment by the tax administrators can as well lead to tax evasion, when tax administrators are corrupt and do not asses actual and uniform taxes on the tax payer it will lead to tax evasion. When payers are not contented with the provision of services by the government. When the government misuses tax payers money and does not provide the social services such as electricity, clean water ,roads, and health services then potential tax payers may deliberately refuse to pay tax. Revision question 1. Briefly define the following terms/concepts as used in taxation (a) tax avoidance (b) taxable capacity (c) prohibitive tax (d) tax base (e) tax transformation (f) tax evasion 2. explain five reasons why people evade taxes in Uganda.

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ELEMENTS OF TAXATION

INCOME TAX Introduction This is tax imposed on a person’s taxable income at specific rates. A person includes an individual, company, partnership, trustee, government and sub divisions of government. Income tax is charged on every person who has chargeable income for the year of income. Chargeable income is derived from three main types of income, namely; employment, business and property. Income tax is administered under the income tax Act (1997) cap 340 Taxable persons The term taxable person is one who has earned chargeable income during the year of income. The term taxable person is defined to include individual, partnership, company, government, and trustees. Taxable persons are categorized into resident and non- resident persons. These are covered under section 9 and 14 of the income tax Act. Resident individual (section 9) An individual is a resident in the year of income if that individual; (a) Has a permanent home in Uganda. (b) He or she is present in Uganda for a period of aggregate to 183 days or mor e than a two year period. (c) He or she is present in Uganda during the year of income and in each of the two preceding years of income for periods averaging more than 122 days in each year of income. (d) Is an employee or official of the government of Uganda posted abroad during the year of income. ELEMENTS OF TAXATION NOTES- BY NDYABANAWE JACKSON (LECTURER)

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ELEMENTS OF TAXATION

Resident company (section 10) A company is a resident company for the year of income if it; (a) Is incorporated or formed under the laws of Uganda (b) Has its management and control exercised in Uganda at any time during the year of income, or (c) Undertakes the majority of its operations in Uganda during the year of income. Resident trust (section 11) A resident trust means that; (a) The trust is established in Uganda, or (b) A trust of the trust is a resident person during the year of income , or (c) Management and control of the trust is carried out in Uganda at any time during the year of income Resident partnership (section 12) Resident partnership becomes a resident person when one of the partners within the partnership is a resident person during the year of income. Resident retirement fund. A retirement fund is a resident retirement fund if it; (a) Is organized under the laws of Uganda, or (b) Is operated for the principal purpose of providing retirement benefits to resident individuals, or (c) Has its management and control exercised in Uganda at any time during the year of income. Non- resident persons (section 14) ELEMENTS OF TAXATION NOTES- BY NDYABANAWE JACKSON (LECTURER)

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ELEMENTS OF TAXATION A person is a non- resident if that person is not a resident person.

Chargeable income of an individual Section 15 of the income tax Act defines chargeable income of an individual as the gross income of the person for the year of income less total deductions allowed to the person for that year of income. Section 18 states that the gross income for the person for the year of income is the sum of business income, employment income and property income. Gross income The gross income of a person for the year of income is the total amount of employment income, business income and property income derived during the year of income by the person other than income exempt from employment. The gross income of a resident person includes income derived from all geographical boundaries in Uganda.

ELEMENTS OF TAXATION NOTES- BY NDYABANAWE JACKSON (LECTURER)

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ELEMENTS OF TAXATION

INCOME FROM EMPLOYMENT Meaning of employment Employment is defined in section 3 of the income tax Act , it means; (a) The position of an individual in the employment of another person, or (b) A directorship of a company; or (c) A position entitling the holder to a fixed or ascertainable remuneration; or (d) The holding or acting in any public office. Employment income Section 19(1) defines employment income to mean any income derived by an employee from any employment. That is any income incidental to employment qualifies to be employment income. Sources of employment income (a) Any wages , salaries, leave pay, payment in lieu of leave, overtime pay, fees, commission, gratuity , bonus, or the amount of any travelling,entertainment,utilities,cost of living, housing, medical, or any other allowances. (b) The value of any benefit granted; benefits are often provided to employees as part of their remuneration. The range of such benefits varies from employer to employer and normal varies with the level of seniority of the employee. Examples of such benefits include; 1. Motor vehicle benefit. Where the employee is provided with a motor vehicle for use both to perform the duties of the employer and partly for private purposes , the value of the benefit is calculated using the formula.

ELEMENTS OF TAXATION NOTES- BY NDYABANAWE JACKSON (LECTURER)

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ELEMENTS OF TAXATION

Motor vehicle benefit = (20%*A*B/C)-D 

A

is the market value of the vehicle at the time it was first provided to the employee

for private use. 

B

is the number of days in the year of income during which the car was used for

private purposes by the by the employee for all or part of the day. 

C

is the number of days in the year of income (365 days as per income tax Act)



D

is any payment made by the employee to qualify for the benefit.

Example 1 Calculate the value of benefit derived by employee who was given a company vehicle to use for office work and partly for private purposes. The vehicle hard a cost of 20,000,000 at the time it was given to him he used it for 165 days of in the year of income for his benefit, contributing 600,000 in that year for the use of the vehicle. Example 2. You use 10,000,000 vehicle benefit for official and private purposes on equal day basis, paying 5000 per month. Calculate the vehicle benefit. 2. Meals, refreshments and entertainment benefit.Where the benefit provided by an employer to an employee consists of the provision of meals, refreshments or entertainment. The benefit is the cost of employer reduced by any consideration paid by the employee for the meals, refreshment, or entertainment. 3. House keeper,chauffeur,gardener, or domestic assistant.Where the benefit provided by an employer to an employee consists of the provision of house keeper, chauffeur,gardener or domestic assistant, the value of the benefit is the total employment income paid to the domestic assistant in respect of the services rendered to the employee, reduced by any payment made by the employee for the benefit. ELEMENTS OF TAXATION NOTES- BY NDYABANAWE JACKSON (LECTURER)

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ELEMENTS OF TAXATION 4. Utilities.These include water bills,electricity bills. Where the benefit provided by an employer to an employee consists of the provision of the utilities in respect of the employees place of residents. The value of the benefit is the cost of the employer reduced by any payment made by the employee for the utilities. 5. Loan benefits.Where the benefit provided by the employer to an employee consists of a loan not exceeding shs.1,000,000 in total at a rate of interest below statutory rate (bank of Uganda rate) the value of the benefit is the difference between the interest rate paid during the year of income as statutory rate. Example 1. Paul took furniture loan of shs. 10,000,000 on 1st October,2001 at an interest rate of 5% . the statutory interest rate as at 1st july 2001 was 15%. Determine the loan interest benefit for the month . Loan benefit= (statutory rate-loan interest rate)*loan amount 6. Property/ services. Where the benefit provided by an employer to an employee consists of the transfer or use of the property or provision of services , the value of benefit is the market value of the property or service produced by any payment made by the employee for the benefit. 7. Accommodation. Where the benefit provided consists of providing accommodation or housing other than housing allowances or reimbursement of housing expenses. The value of benefit is the lesser of the market rent of accommodation or housing reduced by any payment made by the employee for the benefit. INCOME EXCLUDED FROM EMPLOYMENT INCOME Section 19(2) of the income tax excludes the following from employment income (from being taxed) 1. Passage costs incurred by the employer in respect of the employee’s appointment or termination of employment where the employee; 

Was recruited or engaged outside Uganda.

ELEMENTS OF TAXATION NOTES- BY NDYABANAWE JACKSON (LECTURER)

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ELEMENTS OF TAXATION 

Is in Uganda solely for the purpose of serving the employer, and



Is not a citizen of Uganda

2. Reimbursement or discharge of medical expense. This should however not be confused with medical allowance which is taxable, and medical expenses includes medical insurance premium. 3. Insurance premium paid by a tax paying employer for the benefit of the employee or his dependents. 4. Value of meals or refreshments provided to all fulltime employees in the premises operated by or on behalf of the employer for the benefit of all employees on equal terms or relatives of an employee. 5. Any benefit whose value is less than 10,000 a month. Do not add all the benefits and then compare them with 10,000, pick one category of the benefits. 6. Any contribution or similar payment made by an employer to a retirement fund for the benefit of employee or his dependents. PAY AS YOU EARN (PAYE) SYSTEM PAYE is not tax but rather a system of collecting income tax on incomes from employment. The employer is mandated to withhold appropriate amounts from individual monthly employment incomes. The appropriate amount is computed using individual income tax rates provided in part 1 of the third schedule. The employer is supposed to remit the tax withheld to Uganda Revenue Authority by the 15th day of the next calendar month. The accountability and payment of PAYE is the responsibility of the employer and any underpayment is recovered from the employer as if she /he was actually the tax payer.

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ELEMENTS OF TAXATION

INCOME TAX RATES (a) Annual resident individual tax rates Chargeable income

Rate of tax

Not exceeding shs.1,560,000

Nil

Exceeding shs.1,560,000 but not

10% of the amount by which chargeable

exceeding shs.2,820,000

income exceeds shs.1,560,000

Exceeding shs.2,820,000 but not

Shs.126,000 plus 20% of the amount by which

exceeding shs.4,920,000

chargeable income exceeds shs.2,820,00

Exceeding shs.4,920,000

Shs.546,000 plus 30% of the amount by which chargeable income exceeds shs.4,920,000

b) Monthly resident individual tax rates Chargeable income

Rate of tax

Not exceeding shs.130,000

Nil

Exceeding shs.130,000 but not exceeding 10% of the amount by which chargeable shs.235,000

income exceeds shs.130,0000

Exceeding shs.235,000 but not

Shs.10,500 plus 20% of the amount by which

exceeding shs.410,000

chargeable income exceeds shs.235,000

Exceeding shs.410,000

Shs.45,500 plus 30% of the amount by which chargeable income exceeds shs.410,000

(b) Annual non –resident individual tax rates Chargeable income

Rate of tax

Not exceeding shs.2,820,000

10%

Exceeding shs.2,820,000 but not exceeding Shs.282,000 plus 20% of the amount by which shs.4,920,000

chargeable income exceeds shs.2,820,000

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ELEMENTS OF TAXATION Exceeding shs.4,920,000

Shs.702,000 plus 30% of the amount by which chargeable income exceeds shs.4,920,000

(c) Monthly non-resident individual tax rates Chargeable income

Rate of tax

Not exceeding shs.130,000

Shs.23,500 plus 20% of the amount by which chargeable income exceeds shs.235,000

Exceeding shs.235,000 but not exceeding Shs. 23,500 plus 30% of the amount by which shs.410,000

chargeable income exceeds shs.410,000

Computation of tax on income from employment Example 1. mr. ounda is a resident employee with Bananda investments, a resident tax paying company and he works as a general manager and the year ended 31st December 2001 the following transpired; (a) Basic salary shs.500,000 (b) Entertainment allowances shs.100,000 per month (c) Accommodation :rent shs.6,000,000 p.a paid by the company to the landlord. (d) He drives a prado (cost 20 million) for both private and official use. It is estimated that 100 days in a year are for private use errands. (e) The school fees for his children are met by B...