Celebrating the Love of Friends in a Loving World

Celebrating the Love of Friends in a Loving World
Red Roses for You, My Sweet Friends ... Total Love.

My Sweet Friends

My sweet friends,

We grow closer to each other;

When we interact together and share ideas;

The common faith that we share,

Binds our hearts in one accord.

For sweet friendships last a life time,

When built on mutual respect, humility and understanding;

Throughout each different season,

We find we are one in life.

Sweet friends are there through times of grief;

And times when hope is gone;

Always there with encouragement;

So we can carry on.

I thank the Lord for you,

My true and faithful friends;

To fondly speak with you, whether we agree or not,

On this, our beloved blog;

For sweet friends will stay, no matter what;

Giving support.

Together, our hearts and minds truly unite;

With the amazing love of sweet friends.

In the spirit of true friendship,

Best wishes, my sweet friends;

May the Lord bless you abundantly.

I remain, yours truly,

B.B. Bakampa.

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Saturday, February 11, 2012

Analyzing the Extent to Which Presumptive Tax and Rental Tax Conform to the Canons of Taxation under Uganda’s Income Tax Act

By Bakampa Brian Baryaguma
[Dip. Law (First Class)–LDC; Cert. PELD–NALI-K; LLB Student–Mak.]

February, 2012

‘But in this world nothing can be said to be certain, except death and taxes.’ Benjamin Franklin in a letter to Jean Baptiste Le Roy, November 13, 1789. [1]

1. Introduction

1.1. Definition of Tax

For all its socio-economic and political significance, the concept ‘tax’ is not properly defined in The Income Tax Act [2] (hereinafter ‘the Act’). Consequently, as the learned scholars, Professor Geoffrey Morse and Professor David Williams aver, ‘The question “What is a tax?” is surprisingly difficult to answer.” [3] Section 2(rrr) of the Act states that ‘“tax”’ ‘means any tax imposed under this Act’. This is not a useful definition for purposes of understanding the ordinary and natural meaning of tax.

However, some scholarly publications have offered helpful definitions of tax.

According to the Oxford Advanced Learner’s Dictionary of Current English, tax is defined as a ‘(sum of) money (to be) paid by citizens ... to the government for public purposes.’ [4]

On the other hand, the Oxford Dictionary of Law defines tax as ‘A compulsory contribution to the state's funds.’ [5]

For their part, the learned authors, Professors Geoffrey Morse and David Williams, define tax as ‘... a compulsory levy imposed by an organ of government for public purposes.’ [6]

The learned author, Professor David J. Bakibinga, considers ‘tax’ to be synonymous with ‘taxation’ and submits that, ‘Taxation is defined as the imposition of duties for the raising of revenue. It is a device used by government to extract money or valuables from people and organisations by the use of law.’ [7]

Apparently, two characteristics of tax can be deduced from the various definitions above:-

1. Tax is a compulsory payment.

This is the legal essence of tax because law requires that the payment be made by whoever it applies to. [8] The law stipulates the sources (i.e. either persons or property) of the tax amount required, the applicable rates, the time and form of levying and the mode of receipt and collection. [9]

In short, for tax to lawfully exist there must be an enabling law that makes it obligatory for it to be paid and collected, hence the saying that tax is a creature of statute. In Uganda, the cardinal enabling law is article 152(1) of the Constitution which states that, ‘No tax shall be imposed except under the authority of an Act of Parliament.’ [10]

2. Tax is imposed by government or the state for public purposes.

Tax collection must be justified by a public need(s) as therein lies the political essence for which the payments are made. [11] This is because:-

(i) tax revenues are chiefly for the supply of the public treasury and not for the supply of a private individual or enterprise. [12]

(ii) consequently, tax collections are meant to be spent on services of a general nature like education and social security benefits or the services which private enterprises cannot provide like defence and law and order. [13]

1.2. Definition of Presumptive Tax

Literally, a presumptive is something based on a presumption i.e. something presumed. [14] In law, a presumption is a supposition that the law allows or requires to be made. [15]

Strictly speaking, therefore, there is no such tax known as ‘presumptive tax’. Rather, it is just a method of tax assessment, involving the use of indirect means to ascertain tax liability, in total difference from the usual rules and procedures based on the taxpayer’s accounts.

The term ‘presumptive’ indicates a legal presumption that the taxpayer’s income is no less than the amount resulting from the application of the indirect method of assessment. Presumptive methods can be rebuttable or irrebuttable and they include administrative approaches to reconstructing the taxpayer’s income. These approaches may or may not be specifically stated in the enabling law.

1.3. Definition of Rental Tax

Rental tax is a form of tax imposed on rental income. In the first place, though, it should be noted that rental income is income derived from rent. Therefore, it is pertinent to first understand what is meant by both rent and rental income.

According to section 2(ddd) of the Act, ‘“rent” means any payment, including a premium or like amount, made as consideration for use or occupation of, or the right to use or occupy, land or buildings.’

On the other hand, section 2(eee) of the Act provides that, ‘“rental income”, in relation to an individual for a year of income, means the total amount of rent derived by the individual for the year of income from the lease of immovable property in Uganda by the individual with the deduction of any expenditures and losses incurred by the individual in respect of the property.’

No doubt, the above provisions are quite instructive and helpful in understanding rental tax but a thorough comprehension of this concept is impossible without reference to the charging section i.e. section 5(1) of the Act. It states that, ‘Subject to, and in accordance with this Act, a tax shall be charged for each year of income and is imposed on every individual who has rental income for the year of income.’

It follows therefore, that rental tax may be defined as a compulsory payment made by natural persons, to the state, out of profits derived from their letting of land or buildings in Uganda. It is the profits on income, raised from the renting of land or buildings that constitute the tax base i.e. the amount on which the tax is raised.

2. The Canons of Taxation

A canon is a general standard or principle by which something is judged. [16] Therefore, by canons of taxation, is meant the theories, standards, maxims, yardsticks, principles, tenets or criteria upon which a good tax system (and indeed the particular taxes) is determined and measured.

The first proponent of these tenets was a former British customs officer called Adam Smith, in his book, The Wealth of Nations, first published in 1776. [17] Adam Smith propounded that a viable tax system should conform to four basic standards namely,

(a) people should contribute taxes in proportion to their incomes and wealth;

(b) taxes should be certain, not arbitrary;

(c) taxes should be levied in the most convenient way; and

(d) the costs of imposing and collecting taxes should be kept minimal.

To this list, economists and other tax experts have added a fifth one, that

(e) taxes should be neutral.

2.1. Revisiting the Canons in Detail

There is no Chinese wall, per se, between the above canons of taxation. Consequently, it may be no surprise that they substantially cut across one another, such that it is very difficult to draw a hard and fast line between them. Nevertheless, in a way, they espouse different ideas as shown below.

1. Proportionality of Taxes to Incomes.

Adam Smith stated that people should contribute taxes in proportion to their incomes and wealth. Here, Smith was arguing that, "The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state." [18]

In other words, taxation should be seen to be fair and equitable, lest it stood the risk of taxpayer revolts, once it is perceived to be essentially unfair or discriminatory. The rationale is that people in equal circumstances should pay equal amounts of tax while those in different circumstances should pay appropriately different amounts of tax. While the former refers to horizontal equity, the latter refers to vertical equity. [19]

With horizontal equity, the argument is that people with similar levels of income should pay similar levels of tax. This is premised on two reasons: the ability-to-pay argument (those with equal ability to pay should pay equally) and the benefit argument (taxes should be paid according to the benefits got thereof).

The problem with horizontal equity is that its reliance on economic wellbeing, (exemplified through taxable income) as the only measure of fairness or equity, totally disregards other relevant social considerations like the fact that taxpayers of similar earnings, have different financial obligations – for example, varying numbers of dependants.

Regarding vertical equity, the argument is that the rich or better-off should pay more tax than the poor. The assumption is that the rich stand to benefit more from public purpose services, like defence and law and order (especially concerning protection of their property), than the poor who probably only benefit from universal services like education, which the rich also get, anyway.

Vertical equity is not without its shortcomings either. It is highly controversial as to how much more should people in upper income brackets pay in proportion to their counterparts in lower income brackets. For instance, how much more should a person earning three million shillings pay as compared to his/her counterpart earning two million, five hundred thousand shillings?

In view of the above, it is apparent that in tax matters, proportionality or better still, fairness or equity is an ideal that is extremely difficult to define and measure. Whereas proportionality is desirable for tax legitimacy, the truth is that it is really difficult to attain and satisfy. Hence, sometimes courts have disowned the invocation of equity in tax matters. For instance, in the case of W.T. Ramsay Ltd Vs Inland Revenue Commissioners; Eilbeck (Inspector of Taxes) Vs Rawling, [20] the Court stated that, a subject is only to be taxed upon clear words, not upon the equity of an Act.

It should also be noted that it is this very dispute that is, substantially, at the heart of the current Occupy Wall Street Movement in the United States of America, where some ordinary Americans are saying that they feel that the stinking-rich are not paying enough to meet their national obligations.

The raging debate on horizontal and vertical equity underscores the need for equality in tax matters; such that this semblance of sameness can be used ‘... to protect the taxpayer from being over-taxed or under-taxed and the government is enabled to extract tax from all its subjects who are liable.’ [21]

2. Certainty of Tax.

A tax is a burden on both the taxpayer and tax enforcer/collector. As such therefore, the legal provisions stipulating this burden must, as far as possible, be clear, precise and concise, in order to avoid arbitrariness, confusion and difficulties.

The taxpayer should be able to tell in advance how much tax he must pay, when and how to pay it, while the tax collector should be able to read from the law, the appropriate tax to be collected, when to collect it and the requisite methods to employ in so doing, so as to be consistent and universal. [22] For the requirement of certainty to be satisfied, the relevant rules should be understood by all concerned lest, "Where it is otherwise, every person subject to the tax is put more or less in the power of the tax-gatherer, who can either aggravate the tax upon any obnoxious contributor, or extort, by the terror of such aggravation, some present or perquisite to himself. The uncertainty of taxation encourages the insolence, and favours the corruption, of an order of men who are naturally unpopular, even where they are neither insolent nor corrupt." [23]

In short, for a tax to be certain, it must address: (i) certainty of incidence; (ii) certainty of liability; (iii) chances of evasion and avoidance; and, (iv) fiscal marksmanship.

In the 1921 case of Cape Brandy Syndicate Vs Inland Revenue Commissioners, [24] the Court stated that in a taxing Act, one has to look merely at what is clearly said. Court emphasized that there is no room for any intendment. This view was restated in the 1981 case of W.T. Ramsay Ltd Vs Inland Revenue Commissioners; Eilbeck (Inspector of Taxes) Vs Rawling, [25] where the Court said that, a subject is only to be taxed upon clear words, not upon intendment.

In Uganda, the High Court (Geoffrey Kiryabwire J.), in the case of Stanbic Bank Uganda Ltd & Ors Vs Uganda Revenue Authority, [26] has held that where the law is unclear and ambiguous, the ambiguity should be construed in favour of the taxpayer, since court cannot be expected to choose between alternative duties.

3. Tax Convenience

Convenience is synonymous with compliance. A good tax regime should strive to ensure that its tax obligations can be fulfilled by both taxpayers and tax collectors at the lowest possible cost, in terms of paying, collecting, accounting for and remitting tax revenues, to the final tax authority (in Uganda’s case, the Uganda Revenue Authority (URA)).

The principle of convenience demands that tax law should be cost-effective and tailor-made to suit the day-to-day situation in which the tax regime operates. For instance, it should, as much as possible, serve to eliminate all hardships, thereby creating freedom from difficulty or worry. This is simply because, ‘The effectiveness of a tax system is partly a matter of success in enforcement, and partly a matter of the total cost of running it and complying with it.’ [27]

Both monetary and non-monetary costs are involved here. Monetary costs include, for example, records keeping and filing of returns expenses. On the other hand, non-monetary costs may be psychological, for example, anxiety due to inability to understand complicated laws. These are hidden costs incurred in the process of paying taxes. The bottom line is that taxes should be imposed in a manner and at a time when they can most easily and cheaply be complied with by taxpayers and collected by revenue officials.

4. Tax as an Economical Levy

A good and legitimate tax system should not impoverish taxpayers. Much as it should aim at collecting what is sufficient to support the state’s needs, it should nevertheless, take as little as possible from the people. [28] In essence, ‘Every tax ought to be so contrived, as both to take out and to keep out of the pockets of the people as little as possible, over and above what it brings into the public treasury of the state.’ [29]

Further, from the tax man’s viewpoint, this canon demands that as little as possible should be spent on collecting the levied taxes. Therefore, utmost care should be taken to ensure that there is careful spending of money, time and other vital resources in the process of paying and collecting them. In other words, taxation should not be a wasteful exercise. Adam Smith taught that the costs of imposing and collecting taxes should be kept minimal, in the sense that the costs of tax administration and compliance are low.

5. Tax Neutrality

The prevailing tax system should not influence the economy, so as to encourage or discourage people or a section thereof, from either consuming some commodities or engaging in some forms of work, especially believing that a lot more will be unnecessarily paid. [30]

As Kay and King say, people should not be deterred from engaging in extra work on the ground that more tax would be paid on the additional wages than on the slice of income immediately below them. [31]

Therefore, the tax system should be neutral as between alternative consumption choices or businesses. It should refrain from distorting or altering the costs – and consequently attractiveness – of alternative commodities, investments or activities.

3. Presumptive Tax and Rental Tax Vis-a-vis the Canons of Taxation

Having understood the meaning of both presumptive tax and rental tax, as stipulated in the Act and further, having carefully analyzed the import of the different canons of taxation, the million-dollar-question is, To what extent do these taxes conform to the canons of taxation? This part of the essay sets out to address this question.

3.1. Presumptive Tax

In the Act, presumptive tax is most prominently dealt with under sections 4(5) and 4(7). Section 4(5) provides that, ‘... where the gross turnover of a resident taxpayer for a year of income derived from carrying on a business or businesses is less than fifty million shillings, the income tax payable by the taxpayer for the year of income shall be determined in accordance with the Second Schedule to this Act ....’

The Second Schedule of the Act inter alia gives four gross turnover brackets, of varying incomes, together with their corresponding tax rates, regarding small business taxpayers’ tax rates.

This section conforms to the canon of certainty as it leaves no traces of doubt whatsoever as to who is amenable to this tax and to what extent. It is clear that the taxpayer must be resident; he/she must be carrying on a business or businesses; whose gross turnover is less than fifty million shillings.

It also complies with the canon of proportionality in so far as it gives the different tax rates in the Second Schedule because it recognizes that even small business taxpayers earn differently and therefore should pay different tax rates in a fair and equitable manner.

It is also neutral because it does not seek to target any particular business or businesses. Apparently, the nature of business is irrelevant under the section and so, it neither encourages nor discourages any particular economic ventures.

Section 4(5) is also highly economical because it strives to take the lowest amount possible from the taxpayers’ gross turnover. For example, according to the Second Schedule, the lowest income bracket ranges from excess of five million shillings but not exceeding 20m shillings per annum and the tax rate is 100,000 shillings. The highest bracket is in excess of 40m shillings but not exceeding 50m shillings and the tax rate is ‘450,000 shillings or 1% of the gross turnover, whichever is the lower’. So, this section is economical in the sense that it avoids impoverishing taxpayers. In fact, under paragraph (a) of section 4(5), it is provided that this ‘... this tax shall be a final tax on the business income of the taxpayer.’ [32] Final tax is not defined in the Act but it seemingly means that this income shall neither be amenable to further taxation nor can a taxpayer complain of over taxation after due assessment.

At first impression, section 4(5)(b) may appear to be harsh and inconsiderate of presumptive taxpayers since it prohibits any deductions for expenditures and losses incurred in the production of the business income. But this is justifiable, considering that presumptive taxpayers, generally, do not keep books of account such that any alleged expenses and deductions are rendered untenable and would result in violation of the canon of economy.

Section 111(4) provides for payment of tax in instalments, otherwise known as provisional tax. It provides that, ‘A provisional taxpayer who is an individual is liable to pay four instalments of provisional tax, on or before the last day of the third, sixth, ninth and twelfth months of the year of income, in respect of the taxpayer’s liability for income tax for that year.’

This section is alive to the socio-economic realities of Uganda, by recognizing that, it is possible for the taxpayer not to have the tax amount due in a lump sum and therefore permits part-payment. Thus, it conforms with the canon of economy in so far as it gives taxpayers the opportunity to settle their tax obligations without risking destitution, through the device of payment in instalments.

It also conforms to the canons of convenience and certainty because of the fact that the payment periods are clear and fairly spaced. Conformation to certainty is reinforced by section 111(5) which is the calculating section of the amount of each instalment of provisional tax payable.

3.2. Rental Tax

Rental tax is imposed by section 5 of the Act. Subsection (1) provides that, ‘Subject to, and in accordance with this Act, a tax shall be charged for each year of income and is imposed on every individual who has rental income for the year of income.’

Subsection (2) provides that, ‘The tax payable by an individual under this Section for a year of income is calculated by applying the relevant rates of tax determined under Section 6(2) to the rental income derived by the individual for the year.’

Section 6 concerns the rates of tax for individuals. Subsection (2) reads as follows, ‘The rental income of a resident individual for a year of income is charged to rental tax at the rate prescribed in Part VI of the Third Schedule.’

Part VI of the Third Schedule provides the rate of rental tax. It states that, ‘The rate of tax applicable to an individual for purposes of Section 6(2) is 20% of the chargeable income in excess of shs. 1,560,000.’

First, the above provisions of the Act largely conform to the canon of certainty because they are clear and elaborate as to who is amenable to rental tax and to what rate. Section 5(1) clearly provides that it is only individuals and not for instance, companies, upon whom rental tax is imposed and further, the individuals in question are only those with rental income. The other provisions i.e. section 5(2), section 6(2) and Part VI of the Third Schedule clarify section 5(1) by stating the applicable calculation and tax rate.

Second, the canon of convenience is also conformed to especially, from the tax collectors’ perspective because of the clear text of the provisions which make it easy for the taxmen and women to assess the tax payable with sufficient accuracy.

Third, Part VI of the Third Schedule conforms to the canon of economy because it takes, from the taxpayers’ pockets, a fairly minimal amount of tax i.e. 20% of their chargeable income; meaning that they are literally left with 80% to put to their own use and benefit. Moreover, this 20% tax rate is on that amount that is in excess of shs. 1,560,000! All this ensures that the taxpayers are left with sufficient disposable income to spend on their peculiar and personal needs. The tax collector also spends less on collecting this tax.

However, sections 5(3)(b) and 22(1)(c) have the effect of negating the certainty of the above provisions. Section 5(3)(b) states that, ‘The tax imposed under this Section on an individual is separate from the tax imposed under Section 4 and expenditures and loses incurred by the individual in the production of rent shall be allowed as a deduction under this Act for any year of income only as provided in Section 22(1)(c).’

The said Section 22(1)(c) reads as follows, ‘Subject to this Act, for the purposes of ascertaining the chargeable income of a person for a year of income, there shall be allowed as a deduction in the case of rental income, twenty percent of the rental income as expenditures and losses incurred by the individual in the production of such income.’

The confusion and uncertainty ushered in by these sections is that they contradict the definition of rental tax in so far as it is imposed on rental income after ‘... the deduction of any expenditures and losses incurred by the individual in respect of the property’ as provided under section 2(eee) of the Act.

Whereas it appears from the definition section that the taxpayer is entitled to deduct all expenditures and losses from the total amount of rent, before being taxed, this right is effectively taken away by the 20% limit on allowable deductions under sections 5(3)(c) and 22(1)(c) which, ultimately renders the exact tax payable uncertain. This is a classic situation where the law gives with one hand and takes away with another.

There is need to harmonize these provisions of the Act, for the sake of clarity and certainty. For instance, the definition of rental income should be amended by deleting the word ‘any’ and adding at the end, immediately after the word ‘property’ the following phrase: in accordance with Section 22(1)(c).

4. Conclusion

As can be seen from above, to a large extent, presumptive tax and rental tax, as stipulated in The Income Tax Act, conform to the canons of taxation. True, there are some loopholes and ambiguities in the Act, but these are not necessarily fatal. I am convinced that, if the opinion of Adam Smith’s spirit were to be sought, on the question at hand, the above provisions of the Act would receive a nod of approval.

Notes and References

1. David R. Salter, Julia L.B. Kerr, Easson: Cases and Materials on Revenue Law (1990), at 1.

2. Cap. 340 (Laws of Uganda)

3. Geoffrey Morse and David Williams, Davies: Principles of Tax Law (2000), at
3.

4. A.S. Hornby, A.P. Cowie, A.C. Gimson, Oxford Advanced Learner’s Dictionary of Current English (1983), at 902. It should be noted though, that the duty to pay tax, is not restricted to citizens; it is a duty to borne by all qualifying people, living within the territory of Uganda, irrespective of whether they are Ugandans or not.

5. Elizabeth A. Martin (Ed.), A Dictionary of Law (2003), at 491.

6. Geoffrey Morse and David Williams, supra note 3.

7. D.J. Bakibinga, Revenue Law in Uganda (2003), at 1.

8. Geoffrey Morse and David Williams, supra note 3.

9. D.J. Bakibinga, supra note 7.

10. Constitution of the Republic of Uganda, 1995.

11. Geoffrey Morse and David Williams, supra note 3.

12. D.J. Bakibinga, supra note 7.

13. Geoffrey Morse and David Williams, supra note 3, at 4.

14. A.S. Hornby, A.P. Cowie, A.C. Gimson, supra note 4, at 671.

15. Elizabeth A. Martin (Ed.), supra note 5, at 377.

16. Ibid., at 124.

17. Geoffrey Morse and David Williams, supra note 3, at 5.

18. David R. Salter, Julia L.B. Kerr, supra note 1, at 1.

19. Geoffrey Morse and David Williams, supra note 3, at 6.

20. [1981] 2 WLR 449, at 456.

21. D.J. Bakibinga, supra note 7, at 8.

22. Geoffrey Morse and David Williams, supra note 3, at 7; D.J. Bakibinga, supra note 7, at 6.

23. David R. Salter, Julia L.B. Kerr, supra note 1, at 2.

24. [1921] 1 KB 64, at 71.

25. [1981] 2 WLR 449, at 456.

26. HCT-00-CC-CA-170-2007 AND 792-2006 (CONSOLIDATED) (unreported), at 12.

27. Geoffrey Morse and David Williams, supra note 3, at 8.

28. D.J. Bakibinga, supra note 7, at 7.

29. David R. Salter, Julia L.B. Kerr, supra note 1, at 2.

30. D.J. Bakibinga, supra note 7, at, at 8.

31. J.A. Kay, M.A. King, The British Tax System (1986), at 18.

32. It should be noted that according to section 4(7) of the Act, ‘Subsection (5) does not apply to a resident taxpayer who is in the business of providing medical, dental, architectural, engineering, accounting, legal, or other professional services, public entertainment services, public utility services, or construction services.’ This subsection recognizes that much as presumptive taxpayers are generally known to be illiterate, operating small and scattered businesses and more often than not unable to keep books of account, there are, nevertheless, exceptional ones who are skilled and are professionals in the stated fields such that they are literate and smart enough to keep books of account, either as a matter of law or prudence.