UGANDA CHRISTIAN UNIVERSITY - MUKONO

The Centre of Excellence in the Heart of Africa

Revenue and Taxation Coursework

COURSE: BACHELOR OF LAWS

YEAR: 4 STREAM B

LECTURER: MR.NGABIRANO SOSTINE

TUTORIAL ASSISTANT: MADAM IMALINGAT RITAH

GROUP 5 MEMBERS
1. AGABA LYNETTEE BS19B11/017
2. KAMAGYEZI FRANKLINE BS19B11/079
3. ATWIINE RITAH NYAKATO BS19B11/051
4. MATOVU ADOLF BS19B11/111
5. SSENTONGO EMMANUEL BS19B11/194
6. OWOMUGISHA SUSAN BS19B11/184
7. OBOTE GERALD BS19B11/171
8. WALUSIMBI MARK KEZAALA BS19B11/862

WEEK 5: DIRECT TAXES AND INDIRECT TAXES.

DIRECT TAXES AND INDIRECT TAXES.
Direct taxes are taxes that cannot be transferred or shifted to another person for example income
tax, an individual pays directly to the government. In this case the burden of the tax falls flatly on
an individual who owns a taxable income and cannot shift the tax to others. A direct tax is
presumed to be borne by the person upon whom it is assessed and not passed on to some other
person.1

Indirect taxes are taxes which can be shifted to another person. An example is the Value Added
Tax that is included in the bill of goods and services that you procure from others. The initial tax
is levied on the manufacturer or service provider who then shifts the tax burden to the consumers
by charging higher prices for the commodity by including taxes in the final price.

Both direct and indirect taxes are critical components of the government revenue and
consequently the economy.

Direct taxes are paid in entirety by a taxpayer directly to the government. It is also defined as the
tax where the liability as well as the burden to pay it resides on the same individual.

Major direct taxes include

1. Income tax levied on and paid by the same person according to the tax brackets as
defined by the income tax department.
2. Corporate tax paid by companies on corporations on their profits.
3. Wealth tax levied on the value of property that a person holds.
4. Estates Duty paid by an individual in case of inheritance.
5. Gift tax an individual receiving the taxable gift pays tax to the government.
6. Fringe benefits tax paid by the employer that provides fringe benefits to employees and
is collected by the state.
7. Pay As You Earn. This is a form of income tax that is deducted by employers from their
employees' salaries and remitted to the URA on their behalf. The rate of PAYE depends
on the employee's income and is calculated using a progressive scale.
Forms of indirect taxes

1
Blacks Law Dictionary, 9th Edition
 1. Excise duty payable by the manufacturer who shifts the tax burden to retailers and
wholesalers.
2. Sales tax paid by shopkeeper or retailer who then shifts the burden to Consumers by
charging sales tax on goods and services.
3. Custom duty import duties levied on goods from outside the country ultimately paid by
consumers and customers.
4. Entertainment tax liability is on the cinema owners who transfer the burden to cinema
goers.
5. Service tax charged on services rendered to consumers such as food bill in a restaurant.
Differences between direct and indirect taxes

Direct taxes are levied and paid by individuals, firms, companies whereas indirect taxes are
ultimately paid by the end consumer of goods and services.

The burden of the tax on the direct taxation cannot be shifted while the burden can be shifted
under indirect taxes.

Lack of administration and collection of direct taxes can make tax evasion possible while
indirect taxes cannot be evaded as the taxes are charged on goods and services.

Direct taxes can help in reducing inflation whereas indirect taxes may enhance inflation.

Direct taxes have better allocative effects than indirect taxes; that is to say, direct taxes put a
lesser burden over the collection of amount than indirect taxes where collection is scattered
across patches and consumers preferences of goods is distorted from the price variation due to
indirect taxes.

Direct taxes help in reducing inequalities and are considered to be Progressive while indirect
taxes enhance inequalities and are considered to be regressive.

Indirect taxes involve lesser administrative costs due to convenient and stable collections while
direct taxes have many exemptions and involve higher administrative costs.

Indirect taxes are oriented more towards growth as they discourage consumption and help
enhance savings. Direct taxes reduce savings and discourage investment.
Additional indirect taxes delivered on harmful Commodities such as cigarettes alcohol dissuades
over consumption there by helping the country in a social context.

ADVANTAGES OF DIRECT TAXES

1. Promotes equality. Since direct taxes are based on the ability of a person to pay, it promotes
equality among payers and citizens. Every person is charged a different amount, depending on
how much they make or earn.

2. Promotes certainty. The good thing about direct taxes is that they are determined and made
final before they are even paid. In the case of income tax, the annual tax is the same every year
as long as the salary does not change.

3. Promotes elasticity. Taxes are the earnings of the government, and when they fluctuate, the
earnings also change. They can go higher or lower.

4. Saves time and money. The government does not need to spend on the collection of taxes
because they are already taken right at the source of the income. Some companies use automatic
payroll deduction systems, which help save time and money.

5. They are very productive. As a community grows in numbers and prosperity, the return from
direct taxes expands automatically. The direct taxes yield large revenue to the State.

6. It creates civic sense since a person knows that he is paying a tax, he feels conscious of his
rights. He claims the right to know how the Government uses his money and approves or
criticizes it. Civic sense is thus developed. He behaves as a responsible citizen.

DISADVANTAGES OF DIRECT TAXES

1. Inconvenient. Direct taxes do not conform to the canon of convenience as returns of income
tax, wealth tax, etc., are to be filed in time and complete records are to be maintained up-to-date
by each individual tax payer. Moreover, it is very inconvenient to pay these taxes as they are
collected in lump-sum.
2. Evasion and Corruption. Since the assessment of direct taxes depends upon the voluntary
declaration of the tax payer about has income, wealth, etc., there is great scope for tax evasion by
concealing real income. Thus, in fact, under direct taxation, honesty is taxed while dishonesty is
rewarded. Tax evasion in effects leads to corruption also.
3. Uneconomical: Direct taxes are not economical as they are claimed to be. They are
uneconomical when the tax base is narrow. Further, elaborate machinery is required for their
collection as each and every assesse has to be contacted individually and properly checked to
prevent tax evasion. Nevertheless, it must be permitted that direct taxes are generally more
productive of revenue than indirect taxes. Moreover, indirect taxes, too, are uneconomical in this
respect.
4. Narrow based. Direct taxes are generally narrow based; therefore, a large section of masses
remains untouched and to that extent, they fail to achieve their objective of promoting civic sense
among the citizens. Especially, the poor section of the community remains untouched under
direct taxes.
5. Arbitrary: The nature and base of direct taxes are arbitrarily decided by the exchequer. The
Finance Minister uses his own value judgments in determining the taxation potential of the tax
payer. There is no scientific formula or base for evolving the mode of gradation and progression
in direct taxation.
6. Disincentiveness. Direct taxes being based on income and wealth, if they are excessive may
discourage savings and kill the incentive to work hard. In evaluating all these demerits, we may,
however, find that they are the result of administrative difficulties and inefficiencies rather than
any economy principle.
ADVANTAGES OF INDIRECT TAXES.

1. Convenient. Usually indirect taxes are very normal and levied as part of the purchase
price of a good or commodity hence consumers don’t feel the pinch while paying them.
Also levying indirect taxes is easy since the sellers incorporate it into the selling price.
2. No tax evasion. Many people avoid paying income tax being a populous country. It is
very difficult to track and penalize tax evaders however there is no way to evade an
indirect tax because every time someone buys a commodity a tax is paid.
3. Tax participation of the entire country. Direct taxes like income tax are levied upon
people from certain income brackets only. There is a large part of the population that
 does not pay income tax. However, indirect taxes are applicable to anyone who purchases
goods or commodities regardless of their income bracket. This makes indirect tax an
inclusive taxation model.
4. Collection is easy. Unlike direct taxes where document need to be accomplished and
filing is required. Indirect taxes are paid the moment a consumer buys a product. The tax
is collected by a supplier and paid to the government.
5. Discourages consumption of harmful products. Alcohol and cigarettes are heavily
taxed. By taxing such products, people are discouraged by their price thereby saving
them from consuming harmful items.

DISADVANTAGES OF INDIRECT TAXES.

1. Indirect taxes are regressive in nature. Indirect taxes are not equitable, they are not
levied based on the income of the tax payer. They are standard across the rich and poor.
While the rich people might not mind paying indirect taxes, the poor can feel the burden.
Since these taxes are usually applied to basic necessities such as food, clothes among
others, people cannot escape from paying them hence the poor people end up paying a
large proportion of their income on these indirect taxes hence many people perceive
indirect taxes as being regressive.
2. Indirect taxes tend to be inflationary. This is because they increase the prices of the
commodities taxed especially when they are imposed on essential commodities. Indirect
taxes can lead to inflationary pressures on the economy as the increase in the price of
goods and services can lead to an increase in the cost of living for consumers. This can
lead to a decrease in the purchasing power and a decrease in economic growth.
3. Indirect taxes involve high administrative costs. Collecting indirect taxes can be
expensive for the government as it requires a complex system of taxation and
administration. This can lead to high administrative costs and inefficiencies which can
ultimately lead to a decrease in revenue.
4. Indirect taxes encourage black market activity. Indirect taxes can encourage black
market activity and tax evasion, as consumers may seek to purchase goods and services
from unregulated markets to avoid paying taxes.
5. Indirect taxes encourage uneven tax burden. Indirect taxes can result in an uneven tax
burden as some industries may be subject to higher taxes than others. This can lead to
market distortion and a less efficient allocation of resources.
6. Indirect taxes are also harmful to industries. They discourage industries if the raw
materials are taxed. This will raise the cost of production and impair their competitive
capacity. Also, intermediaries tend to charge a high tax at every point of transaction, from
the raw materials to the finished product hence increasing the price of the commodity.
7. Indirect taxes do not raise civic consciousness. These taxes do not develop civic
consciousness because many times the tax payer does not even know that he is paying tax
and this is because the tax is concealed in the price.
8. Indirect taxes violate consumer sovereignty. This is because they increase the prices of
consumer goods which forces the consumers to opt for cheaper inferior goods.
CASE LAW.
PACIFIC INSURANCE COMPANY VS SAULE 7 WALL .433 (1869)
The issue in this case was whether an insurance company was required to pay a tax on its
gross premiums under the internal Revenue Act of 1864. The tax established the “source
rule”. This case involved the Pacific Insurance company, a New York based corporation,
which conducted business in California and was subject to a California tax on its
premiums. The company argued that the tax was unconstitutional because it violated the
commerce clause of the USA Constitution.
The court found that the tax was constitutional and that the company was required to pay
it. The court further held that the tax was not a direct tax but rather an exercise tax on the
privilege of doing business and therefore constitutional, and therefore, the tax did not
violate the commerce clause of the Constitution because it applied equally to all
companies doing business in the US. It’s this case that established that Congress has
broad powers to impose taxes on various forms of economic activities.
In Uganda this principle is embodied in the Income Tax Act 2014 part V of the ITA.
Section 83,that talks about income derived by non-resident from source within Uganda is
subject to tax. Furthermore, in Section 97 provides for withholding tax on payment made
to non- resident for services rendered within Uganda. This section requires the person
making the payment to deduct and remit the applicable tax to URA.
Uganda cases that have elucidated this are URA vs M/S Total E & P Uganda BV where
court held that the source rule applied to income derived by non- resident companies
from sale of its shareholding in Uganda subsidiary. This was the same in the case of URA
vs Shell Uganda Ltd.

POLLOCK VS FARMERS’ LOAN AND TRUST CO. 157 US 429(1895)

The case dealt with the constitutionality of a federal tax law.
BIBLIOGRAPHY.

TEXTBOOKS.

1. Revenue Law in Uganda, David J.Bakibinga

2. Blacks Law Dictionary, 9th Edition

CASE LAW.

1. PACIFIC INSURANCE COMPANY VS SAULE 7 WALL .433 (1869)

2. POLLOCK VS FARMERS’ LOAN AND TRUST CO. 157 US 429(1895)