VALUE ADDED TAX

MEANING OF VAT

VAT is a tax imposed on consumption expenditure that is collected through the production and
distribution of goods and services. It is an indirect tax charged on the production and distribution
of goods. VAT seeks to charge a tax on the value added on goods and services as they pass through
the production and distribution chain.

A person who purchases taxable supplies will have paid a tax on those supplies (in put tax) and
will seek to recover it when he sales them off (output tax). This implies therefore that the final
resting place of the tax (tax incidence) is on the person who fails to distribute the supplies further
up the chain.

VAT was introduced in Uganda in July 1996 to replace Sales Tax and Commercial Transaction
Levy (CTL). VAT is administered under the Value Added Tax (VAT) Act Cap 349, Laws of
Uganda.

ADVANTAGES /REASONS FOR INTRODUCING VAT IN UGANDA

1. To broaden the tax base so that more government revenue can be generated. VAT is
currently the biggest tax revenue earner for the government of Uganda. It brings in more
than the total of all direct taxes.

2. To remove the cost cascading effect associated with Sales Tax and CTL i.e. a tax was
charged on another tax. Through the mechanism of claiming or offsetting vat incurred on
business purchases and expenses (input tax) against vat collected (output tax) it eliminates
the unfairness of paying tax on tax by the taxable person.

3. To curb tax evasion; VAT is a self- policing tax; because one’s output is another’s input
tax. Whereas the seller who collects on behalf the Revenue authority would be persuaded
to evade, the buyer would be declaring the same in order to benefit from the input tax credit
or claim
 4. To improve the tax administration by reducing the administration and collection costs that
were associated with the collection of sales Tax and CTL. The tax is collected by registered
persons on behalf of the revenue authority.

5. VAT is less harmful to economic growth as it is neutral. The majority of the tax payers do
not notice when they are praying.

6. Vat is based on ability to pay approach. Those who cannot pay can postpone the
consumption of such commodity.

7. In the wake of economic integration, VAT was seen as one of the means of harmonizing
the operations of regional economies.

8. Promotes Exports; VAT on all exports is charged at 0% yet the exporters claim their VAT
incurred on business purchases and expenses. The zero rate charge also renders exports
more competitive on the international market.

9. VAT is difficult to evade. If a taxable person understates its output, it will be caught by the
disclosures of the firms buying inputs from it. This type of close auditing enables the
authorities to plug the tax leakages.

IMPORTANT CONCEPTS AND DEFINITIONS

❖ TAXABLE PERSONS
Taxable persons for VAT purposes are those either registered for VAT or those that are not
yet registered but are required to be registered. Such persons may be any of the following:
an individual, partnership, company, trust, Government as well as public or local authority
e.g. town council.
❖ TAXABLE SUPPLIES
This is a supply of goods or services other than an exempt supply, made in Uganda by a
taxable person for a consideration. A taxable supply is charged to VAT at either zero rate
or standard rate.
 ✓ Taxable supplies include goods and or services applied to own use or supplies for
no consideration
✓ a taxable supply includes a disposal of a business asset
❖ PLACE OF SUPPLY
For a supply of goods to attract VAT, the supply must be made in Uganda.

a) In the case of goods;

o The supply takes place in Uganda where the goods are delivered or made
available in Uganda by the supplier or
o Where the delivery involves transportation, the goods are in Uganda when
transportation commences.
➢ In the case of services, the supply takes place where the services are rendered.
Place of supply is vital in determining whether the supply is for export, import, standard
rated, or exempt. It also helps in locating the tax payer.
Section 15 of the vat act states that except as otherwise provided under the Act, supply of
goods takes place where the goods are delivered or made available by the supplier. In
another instance, the supply of thermal, electrical, heating, gas, refrigeration, air
conditioning, or water takes place where the supply is received.

Section 16 states that supply of services in connection with immovable property, supply
takes place where such immovable property is located. Supply of transport services or
services incidental to transport takes place where transport commences.

Section 17 states that supply of imports takes place where customs duty is payable, on the
date on which the duty is payable or in any other case when the goods are brought into
Uganda.

❖ TIME OF SUPPLY
This refers to the date on which a supply is deemed to have taken place. It is useful for
VAT purposes because it helps to determine tax point and hence VAT period in which
output should be accounted for and input tax credit taken.
Section 14 defines the time supply for goods and services as follows;
 ➢ Where goods are supplied for own use, time of supply is the date on which the goods or
services are first applied to own use.
➢ In case of supplies by way of gifts, time of supply is the date on which ownership of goods
is passed on to another person or the date on which the performance of a service is
completed.
➢ In case of rental agreements or periodic payments, time of supply is the earlier of the
date on which payment is due or received for each successive payment.
➢ Under cash accounting system, time of supply is when one has paid cash and in order to
account for output tax.
➢ For goods where import duty is payable, time of supply is the date when the duty is
payable. Where duty is not applicable, time of supply is the date when goods enter into
country.
➢ Under normal circumstances, time of supply is the earlier of the following;
i. Invoicing date
ii. Payment date
iii. Delivery date
❖ TAX PERIOD
A tax period is one calendar month. It’s the period for which VAT must be accounted for.

❖ TAXABLE VALUE
The taxable value of a taxable supply is the total consideration paid in money or kind by all persons
for that supply excluding tax. Where goods have been applied to own use or have been supplied at
a reduced price, the taxable value is the fair market price of the supply at the time it is made.

The taxable value of an import is the sum of its value and the amount of customs duty, excise duty
and other fiscal charges on those goods.

❖ MIXED SUPPLIES
Under this VAT regime, supplies are categorized as either goods or services.

There are times when a supply of a good involves a supply of a service; or vice versa. This type of
supply where one is incidental to the other is referred to as a mixed supply.
Example

Uganda clays supplies clay tiles. But after one buys the clay tiles, Uganda Clays Ltd could offer
to transport for the customer at a subsided price quoted on the same invoice. The supply of
transport service would be incidental to the supply of goods (the tiles). In this case the whole
supply is considered a supply of goods.

In particular;

✓ A supply of services incidental to the supply of goods is part of the supply of goods
✓ A supply of goods incidental to the supply of services is part of the supply of services
✓ A supply of services incidental to the import of goods is part of the import of goods.

❖ THE SOPE OF VAT

VAT is chargeable on both local and imported taxable supplies (goods or services).

The three major categories of supplies where VAT is applied are;

➢ Every taxable supply made by a taxable person

➢ Every import of goods other than an exempt import
➢ The supply of imported services, other than an exempt service, by any person

❖ PERSONS LIABLE FOR VAT

These are persons required to pay tax under the VAT Act and include;

➢ In case of a taxable supply, Vat is to be paid by the taxable person making the supply;
➢ In case of an import of goods, it is to be paid by the importer;
➢ In case of a supply of imported services, other than an exempt service, is to be paid
by the person receiving the service.
❖ VAT RATES OF TAX
Under the current VAT Act, all supplies of goods or services made in Uganda are either
exempt or taxable for VAT purposes.

1. EXEMPT SUPPLIES
Exempt supplies are categorized into:
 ➢ Local exempt supplies
➢ Exempt imports
The following supplies are exempt from tax as per the 2nd schedule of the VAT Act

1. The supply of livestock, unprocessed food stuffs and unprocessed agricultural products.
2. The supply of postage stamps
3. The supply of financial services.
4. The supply of health insurance services
5. The supply of micro insurance services
6. The supply of re-insurance services
7. The supply of life insurance services
8. The supply of unimproved land
9. The supply by way of sale, leasing or letting of immovable property, other than;
✓ A sale, lease or letting of commercial property
✓ A sale, lease or letting for parking or storing cars or other vehicles
✓ A sale, lease or letting of hotel or holiday accommodation
✓ A sale, lease or letting for periods exceeding 3 months
✓ A sale, lease or letting of service apartments
10. The supply of education services.
11. The supply of veterinary, medical, dental, and nursing services
12. The supply of social welfare services
13. The supply of betting, lotteries and games of chance
14. The supply of goods as part of the transfer of a business as a going concern by one
taxable person to another taxable person.
15. The supply of burial and cremation services
16. The supply of precious metals and other valuables to the bank of Uganda for the state
treasury
17. The supply of passenger transportation services other than tour and travel operators.
18. The supply of petroleum fuels subject to excise duty (motor spirit, kerosene and gas oil),
spirit type jet fuel, kerosene type jet fuel and residual oils for use in thermal power
generation to the national grid.
 19. The supply of dental, medical and veterinary goods. For purposes of this paragraph goods
mean; dental, medical and veterinary equipment; ambulances; contraceptives of all
forms; maternity kits (mama kits); medical examination gloves; medicated cotton wool;
mosquito nets, acaricides, insecticides, and mosquito repellent devices and disapers.
20. The supply of photosensitive semiconductor devices, including photovoltaic devices,
whether or not assembled in modules or made into panels; light emitting diodes; solar
water heaters, solar refrigerators and solar cookers
21. The supply of machinery, tools and implements suitable for use only in agriculture. See
definition of machinery tools and implements.
22. The supply of life jackets, lifesaving gear, headgear and speed governors
23. The supply of any goods and services to the contractors and subcontractors of hydro-
electric power, solar power, geothermal power or bio gas and wind energy projects.

COMPUTATION OF VAT TAX LIABILITY

➢ INPUT TAX
This is the VAT a taxable person is charged on taxable purchases and expenses incurred
for business purposes. The purchases could be from local sources or imported or VAT
paid by a registered person on purchases from another registered person.
➢ OUTPUT TAX
This is the VAT a taxable person charges upon making taxable supplies or Tax charged
upon selling taxable goods and services.
➢ TAX RATE AND FRACTION
o Tax rate Is the percentage that is applied to the consideration for a transaction or
taxable value, so as to determine the VAT amount. For example: if the consideration
or taxable value is shs1,000,000 and the VAT rate is 18% (18/100), then VAT =
1,000,000 x 18/100= shs180,000
o Tax fraction refers to the ratio used to determine the amount of VAT where the
consideration is inclusive of VAT. The fraction is given by the formula:
r/r + 100 = 18/118
Where r is the rate of tax
Example

A registered person sells goods at shs1, 000,000 (invoice value inclusive of VAT). To find the
VAT charged on the sale, apply the tax fraction on the total invoice value. 1,000,000x18/118=
152,542.4

➢ TAX PAYABLE/ LIABILITY OR CLAIMABLE

This is the difference between output tax and input tax.

Where output tax > input tax= tax payable

Where output tax < input tax = tax claimable.

➢ OUTPUT VAT
As earlier defined Output VAT is the VAT a taxable person charges upon making taxable
supplies. The tax charged upon selling taxable goods and services.

There are circumstances where a taxpayer charges output VAT on its supplies but the goods are
returned, sales are made at a discount and or the supply turns out to be a bad debt.

➢ INPUT TAX CREDIT

VAT payable = output tax – input tax credit
CONDITIONS FOR ALLOWING INPUT TAX CREDIT

There should be documentary evidence as follows;

✓ For local purchases and expenses, there should be an original tax invoice for the supply.
In case of persons on cash accounting basis, a cash receipt for a taxable supply may be
used.
✓ For imports, there should be the customs bill of entry, URA tax receipt or other form of
evidence for payment, Airway bill, bill of landing and other documents prescribed under
the customs Management Act.
✓ Purchases and costs ought to be for business use only. No credit is allowed for input tax
not related to the business. e.g. utilities for domestic use
 ✓ Shared supplies should be apportioned, allowing only a percentage that relates to business
of a particular taxpayer.
▪ APPORTIONMENT OF INPUT TAX

Where a taxable person deals in both taxable and exempt supplies, input tax credit should be
apportioned as provided by the VAT Act.

The Act provides for two methods below;

a) STANDARD METHOD
Input tax credit allowed = AX B/C

Where:

A is total input tax for the period

B is total taxable supplies in the period

C is total supplies (both taxable + exempt supplies)

✓ Where fraction of B/C < 5%; taxpayer may not claim any credit
✓ Where fraction of B/C > 95%; taxpayer may claim all input tax credit in the period.
b) STANDARD ALTERNATIVE METHOD
Under this method, input tax credit is determined as follows:

✓ Allow all input tax credit is determined as follows:

✓ Disallow all input tax credit that is directly attributable to exempt supplies.
✓ Apportion [as in (a) above] all input tax credit that is not directly attributable to either
taxable or exempt supplies.
❖ VAT REGISTRATION ELIGIBILITY
Any person conducting a commercial enterprise or intending to conduct a commercial
enterprise may apply to be registered for VAT. However, if the taxable turn over (excluding
VAT Tax) of the enterprise exceeds shs;150 million or for three consecutive calendar
months exceeds or are likely to exceed shs 37.5 million, then the person conducting the
 enterprise must register for VAT. Turnover in this case also includes the value of supplies
in form of gifts, those taken for own use, and those under barter trade.

❖ WHO QUALIFIES FOR VAT REGISTRATION?

A person supplying taxable supplies (goods or services) for consideration as part of his or
her business activities qualifies to register for VAT;

➢ FORMS OF VAT REGISTRATION

The VAT Act expressly provides for three ways through which a person can be registered
for VAT namely;
1. Compulsory registration
2. Voluntary registration
3. Forced registration
COMPULSORY REGISTRATION

This is a form of registration where a person is required or obliged to apply for VAT registration.

These include;

➢ Persons whose annual taxable turnover exceeds the statutory threshold. However,
determining that a person is required to apply for registration is based on a quarterly
threshold rather than annual threshold. This is done by carrying out;
o Historic test; it provides that a person must apply to register within 20 days following a
“period” of three consecutive calendar months, if in that period the person’s taxable
turnover exceeds a quarter of the annual threshold – which currently is 37.5 million e.g.
if the threshold was exceeded in the period July 2022- September 2022 then the duty to
apply would arise in the tax period of October 2022; hence the person shall apply for
registration by 20th October 2022 and the effective date of registration would be 01st
November 2022
o Future test; it provides that a person is required to apply for registration at the beginning
of a period of three calendar months, if that person expects to make taxable supplies that
will exceed a quarter of the annual threshold – which currently is 37.5 million. E.g. if
 the threshold is expected to be exceeded in the period July 2022- September 2022 then
the duty to apply would fall in the period of July 2022; hence the person shall apply for
registration on 1st July 2022. At the beginning of any tax period of more than 3 calendar
months where there are reasonable grounds to expect the total value of taxable supplies
(exclusive of VAT) will exceed annual threshold.
VOLUNTARY VAT REGISTRATION

As explained here above, a person who is not compulsorily obliged to register for VAT i.e. does
not make an annual turnover of taxable supplies amounting to shs; 150 million may voluntarily
register for VAT under the following cases;

1. A person supplying goods or services for consideration as part of his or her business
activities but who is not required to apply for registration, may apply to the commissioner
General to be registered for VAT. The person must be making taxable supplies, and such
a person may include a person making zero rated supplies.
2. Intending or investment traders; any trader intending to deal in taxable supplies and has
acquired an investment license from Uganda Investment Authority may apply to be
registered for VAT even before making taxable supplies. This implies that the trader will
get refunds of input VAT on purchases in the course of setting up his/her business. The
VAT regulations lay down the following conditions to manage the scheme;
c) A person shall be registered as an intending trader for a period not exceeding four years
during which he or she shall be expected to commence making taxable supplies and must
register normally.
d) An intending trader shall abide by all the duties and regulations of a registered person,
including the duty to keep proper books of accounts and file regular and reliable returns.
e) The intending shall give an undertaking to the CG together with such security as the CG
may require for the payment of all the taxes refunded to him or her during his or her tenure
as an intending trader.

3. The following persons may also apply to be registered by the commissioner general.
a) A license undertaking mining operations
b) A person undertaking the construction of a petroleum refinery or petroleum pipeline
 c) A person engaged in commercial farming
d) A person undertaking midstream operations a defined by the petroleum (refining,
conversion, transmission and midstream storage) Act 2013.

4. FORCED REGISTRATION
Like already stated, the Act expressly provides for two ways of getting registered for VAT.
However, by implication, a person may also be forced to register for VAT; hence forced
registration.

The CG may register a person if there are reasonable grounds to believe that the person is required
to apply for registration but has failed to do so.

In case of forced registration, effective date of registration is the date specified in the certificate of
registration.

❖ EFFECTIVE DATE OF REGISTRATION

Under compulsory registration, a person is effectively registered from the beginning of the tax
period immediately following the period in which the duty to apply for registration arose i.e. it is
the first day of the month following the month in which an application was made or was due,
whichever is earlier

E.g. if the duty to apply for registration arose in the month of October 2022, then the effective date
of registration would be 1st November, 2022.

REQUIREMENTS FOR VAT REGISTRATION

✓ A fixed place of abode or business

✓ Ability to keep proper accounting records
✓ Ability to submit regular & reliable tax returns
✓ Is fit and proper person to be registered

❖ DEREGISTRATION FOR VAT

A taxable person registered for VAT can deregister/be deregistered for VAT if;
 1) He has ceased to make supplies of goods and services for a consideration. Upon
application in writing by the taxpayer such a person may be deregistered.
2) With respect to the most recent period of three calendar months, his taxable supplies do
not exceed shs.37.5 million. Upon application in writing by the taxpayer such a person
may be deregistered.
3) The commissioner general cancels his registration due to any of the following ;
i. Lack of fixed place of abode;
ii. Failure to keep proper accounting records relating to any business activity carried
on;
iii. Failure to submit regular or reliable returns;
iv. The commissioner in his/her opinion thinks he is not a fit and proper person to be
registered.

Note;

A taxable person who voluntarily registered for VAT cannot deregister until after two years have
elapsed since registration.

❖ PENALTIES
1. Failure to apply for registration. A person who fails to pay for registration as required
by the VAT Act is liable to penal taxes equal to double amount of tax payable during the
period commencing on the last day of the application period until the date of registration
2. Failure to file a return on time. A person who fails to lodge a return within the required
time is liable to penal tax amounting to the greater of 200,000 or 2% compound interest
per month for the period the return is outstanding.
3. Interest on outstanding tax; A person who fails to pay tax imposed before the due date
is liable to pay interest at a rate of 2% compound interest per month on the unpaid tax.
4. Failure to maintain proper records; a person who fails to keep proper records in a tax
period is liable to pay penal tax equal to double the amount of tax payable by the person
for the tax period.
5. False or misleading statement; the penalty for knowingly or recklessly making a false
or misleading statement to an officer of URA, or omitting from such a statement any
 matter or thing without which the statement is misleading in a material particular is
double the amount of the excess tax, refund or claim.
Effective Date of deregistration

Cancellation of registration takes effect at the end of the period (month) in which the registration
was cancelled. E.g. if cancellation is made on 25th January 2022, cancellation would be effective
31th January 2022.

➢ DUE DATE OF FILING VAT REETURN

Taxpayer lodges a return for each tax period with the CG by the 15th day of the month following
the end of the tax period.

➢ VAT REFUNDS
All VAT refund claim from URA are applied for through monthly returns.

o A refund of overpaid tax shall be made within 1 month of lodging the return, after which
a refund attracts interest at a rate of 2%
o No refund shall be made in relation to taxable supplies made to non-taxable persons.

➢ WHEN AND HOW DO REFUNDS ARISE

a) Input Tax Exceeds Output Tax; however, the amount of refund is less than 5
million; CG shall offset that amount against the future liability of the taxable
person.
However, the above does not apply in case of a licensee and persons mainly
dealing in zero rated supplies.
Where the refund/excess is 5 million or more, the CG may, with consent of the taxable person,
offset that amount against the future liability of the taxable person, or apply it in reduction of any
tax not in dispute due from the taxpayer.

b) Loss of goods in stock due to theft or fire

o Provided input tax was paid on them
o There must be evidence that the goods are lost and cannot be recovered.
c) Bad debts (as discussed earlier)
 d) Overpaid output tax; this may arise as a result of-

✓ An objection decision
✓ A decision of TAT or high court
✓ Actual overpayment of tax.
Purchases by Diplomats/diplomatic missions

o This is a relief to diplomats and diplomatic missions but not to a citizen or permanent
resident of Uganda,
o Any claim shall be made on such a form and at such time prescribed by CG.
NOTES;

▪ Only a letter is written to Commissioner attaching all invoices and evidence of payment
of output tax.
▪ The taxpayer shall be audited before payment is effected to the claimant.
▪ The minister may make regulations specifying conditions to be met or restrictions to
apply for claiming or granting of tax refunds.