college of education and external studies · acknowledgment i thank the almighty god for the gift...

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MAKERERE UNIVERSITY COLLEGE OF EDUCATION AND EXTERNAL STUDIES

SCHOOL OF DISTANCE AND LIFELONG LEARNING

BACHELOR OF COMMERCE EXTERNAL

INCOME TAX ADMINISTRATION AND PROFITABILITY OF SMALL

SCALE BUSINESS ENTERPRISES IN UGANDA

A CASE STUDY OF MAYUGE TOWN COUNCIL IN MAYUGE DISTRICT

NAMBOZO DOREEN

08/U/22152/EXT

SUPERVISED BY PASTOR YOEL SHALOM

A RESEARCH REPORT SUBMITTED TO MAKERERE UNIVERSITY IN

PARTIAL FULFILLMENT FOR THE A WARD OF BACHELOR OF

COMMERCE DEGREE OF MAKERERE UNIVERSITY

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Declaration

I, NAMBOZO DOREEN, declare that this research study has not been carried out by any one

else and that under my consent this is my own original work which has not been presented in any

institution for award of a degree. Where other peoples‟ work has been used, it has been

acknowledged.

Signature…………………………………………..Date………………………...

Nambozo Doreen

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Approval

This report Titled “Income tax administration and profitability of small scale business

enterprises: A case study o Mayuge Town Council ” has been submitted by Nambozo Doreen for

examination with my approval as the University Supervisor, and it‟s now ready for presentation

for the award of a Bachelor of Commerce Degree of Makerere University.

Signed: ……………………………….. Date:………………………….…

Pastor. Yoel Shalom

(Supervisor)

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Dedication

I dedicate this research project to my beloved parents, brothers and my only sister who have been

so supportive and guided me to fulfill my dreams.

Thank you for your courageous words and your prayers, which taught me to live a blessed life.

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Acknowledgment

I thank the almighty God for the gift of my life and for having brought me thus this far to enable

me accomplish this research project.

I would like to acknowledge the assistance and role played by all persons mentioned here under

for providing an enabling environment for the success of this research work.

My sincere thanks go to my supervisor Mr. Yoel Shalom for providing me with professional

advice, encouragement and for having sacrificed his time whenever I called on him for

supervision.

Special gratitude goes to my Dad Mr. Gidudu Richard and Mum Nambi Betty for having

continuously guided me, encouraged me and supported me financially through out my education.

, I thank you for sacrificing the little you had, in thick and thin and invested in my education. The

sacrifice that you made failed in other peoples‟ homes. Thank you for looking after me and

enabling me to acquire a lifelong investment. Not forgetting my sister Maureen Nabukwasi who

has also supported me financially and morally through out my study.

I also appreciate the support rendered by Mr. Bayole Stanley the chairperson L.C.111 Mayuge

town council and staff for having provided me with right full information for this dissertation.

I also thank the support and encouragement of my group members, Florence Nakinjoba, Dan

Tabu, Irene Njeri, Juliet Kyakyo, Richard Tumwine to mention but a few, thank you for the the

team work and my God bless you.

I would like to extend my sincere gratitude to the URA officials and the business community for

their support and openness.

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Table of Contents

Declaration ....................................................................................................................................... i

Approval ......................................................................................................................................... ii

Dedication ...................................................................................................................................... iii

Acknowledgment ........................................................................................................................... iv

List of tables ................................................................................................................................... ix

List of figures .................................................................................................................................. x

List of Acronyms ........................................................................................................................... xi

Abstract ......................................................................................................................................... xii

CHAPTER ONE ............................................................................................................................. 1

1.1 BACKGROUND OF THE STUDY ................................................................................ 1

1.2 STATEMENT OF THE PROBLEM ............................................................................... 4

1.3 PURPOSE OF THE STUDY ........................................................................................... 4

1.4 OBJECTIVES OF THE STUDY ..................................................................................... 4

1.5 RESEARCH QUESTIONS .............................................................................................. 5

1.6 SCOPE OF THE STUDY ................................................................................................ 5

1.6.1 Geographical scope ....................................................................................................... 5

1.6.2 Subject scope ................................................................................................................ 5

1.6.3 Time scope .................................................................................................................... 5

1.7 SIGNIFICANCE OF THE STUDY ................................................................................. 5

REVIEW ON CHAPTER ONE .................................................................................................. 6

CHAPTER TWO ............................................................................................................................ 7

LITERATURE REVIEW ............................................................................................................... 7

2.1 INTRODUCTION ............................................................................................................ 7

2.1.0 DEFINITION OF TERMS ................................................................................................. 7

2.1.1 The concept of taxation ................................................................................................... 7

2.1.2 Tax ................................................................................................................................... 7

2.1.3 Classification of taxes ..................................................................................................... 8

2.1.4 Income tax ....................................................................................................................... 8

2.2.0 INCOME TAX ADMINISTRATION IN UGANDA ........................................................ 9

2.2.1 Approaches to tax administration .................................................................................... 9

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2.2.2 Small scale business ...................................................................................................... 10

2.2.3 Problems encountered by small-scale businesses in trying to comply with tax policies

................................................................................................................................................ 12

2.2.4 Tax payer‟s knowledge ................................................................................................. 13

2.2.5 Negative effects of income tax administration .............................................................. 13

2.2.6 Fines and penalties ........................................................................................................ 14

2.2.7 Problems faced in income tax administration ............................................................... 15

2.3.0 PROFITABILITY OF SMALL SCALE BUSINESSES.................................................. 16

2.3.1 Relationship between income tax administration and profitability of small scale

business .................................................................................................................................. 17

REVIEW ON LITERATURE SOURCES ................................................................................ 19

CHAPTER THREE ...................................................................................................................... 20

METHODOLOGY .................................................................................................................... 20

3.1 INTRODUCTION ............................................................................................................... 20

3.2 RESEARCH DESIGN ......................................................................................................... 20

3.3 SURVEY POPULATION ................................................................................................... 20

3.4 SAMPLE SIZE .................................................................................................................... 20

3.5 SAMPLING DESIGN AND PROCEDURE ..................................................................... 21

3.6 DATA SOURCES ............................................................................................................... 21

3.6.1 Secondary data collection.............................................................................................. 21

3.6.2 Primary data collection ................................................................................................. 21

3.7. DATA COLLECTION INSTRUMENTS AND METHODS ............................................ 21

3.7.1 Questionnaire ................................................................................................................ 21

3.7.2 Interview method........................................................................................................... 22

3.7.3 Observation method ...................................................................................................... 22

3.8.0 DATA PROCESSING AND ANALYSIS ....................................................................... 22

3.8.1 Data processing ............................................................................................................. 22

3.8.2 Data presentation, analysis and interpretation............................................................... 22

3.9.0 LIMITATIONS OF THE STUDY ................................................................................... 23

REVIEW ON METHODOLOGY AND METHODS ............................................................... 24

CHAPTER FOUR ......................................................................................................................... 25

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PRESENTATION, ANALYSIS AND DISCUSSION OF FINDINGS .................................... 25

4.0 Introduction ......................................................................................................................... 25

4.1 General findings .................................................................................................................. 26

4.1.1 Age of respondents ........................................................................................................ 26

4.1.2 Gender of the respondents ............................................................................................. 27

4.1.3 Category of respondents ................................................................................................ 28

4.1.4 Findings on the marital status of the respondents ......................................................... 29

4.1.5 Level of education attained ........................................................................................... 30

4.1.6 Nature of business ......................................................................................................... 31

4.1.7 Period in business .......................................................................................................... 33

Objective review: (To establish how income tax administration is administered and imposed on

small-scale business enterprises in Uganda) ............................................................................. 34

4.2 How income tax administration is administered among small-scale businesses in Uganda 34

4.2.1 They normally assess your business for income tax purposes ...................................... 35

4.2.1.1 The tax assessment forms ....................................................................................... 35

4.2.1.2 Assistance from tax authorities ............................................................................... 36

4.2.2 Income tax returns and computations ............................................................................... 37

4.2.3 Range of tax paid annually ............................................................................................. 39

4.3 Profitability of small-scale businesses in Uganda .......................................................... 40

4.3.1 Capital employed ........................................................................................................ 40

4.3.2 Average daily sales ..................................................................................................... 42

4.3.3 Daily expenses ............................................................................................................ 43

4.3.4 Range of profits .......................................................................................................... 44

4.4 Relationship between income tax administration and the profitability of small-scale

businesses in Uganda ................................................................................................................. 46

4.4.1 Causes of trend performance ......................................................................................... 46

4.4.2 Performance review....................................................................................................... 47

4.4.2.1 Improvement on performance .................................................................................... 47

4.4.3 Strength of the relationship ........................................................................................... 48

REVIEW ON CHAPTER FOUR .............................................................................................. 50

CHAPTER FIVE .......................................................................................................................... 51

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SUMMARY, CONCLUSION AND RECOMMENDATIONS ............................................... 51

5.0 Introduction ......................................................................................................................... 51

5.1 Summary Of Findings ......................................................................................................... 51

5.2 CONCLUSION ................................................................................................................... 52

5.3 RECOMMENDATIONS..................................................................................................... 53

5.4 AREAS FOR FURTHER RESEARCH .............................................................................. 54

REFERENCES ............................................................................................................................. 55

APPENDIX 1 ................................................................................................................................ 56

RESEARCH QUESTIONNAIRE ............................................................................................. 56

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List of tables Table 1: showing small business tax payer rates ............................................................................ 3

Table 2: showing Sample distribution .......................................................................................... 20

Table 3: Showing the respondents‟ age ........................................................................................ 26

Table 4: Showing gender of the respondents ................................................................................ 27

Table 5: Showing the category of respondents ............................................................................. 28

Table 6: Shows marital status of the respondents ......................................................................... 29

Table 7: showing the level of education of the respondents ......................................................... 30

Table 8: Showing the nature of business and products ................................................................. 31

Table 9: Showing period worked in business ............................................................................... 33

Table 10: showing the assessment of business for income tax purposes ...................................... 35

Table 11: showing responses on the tax assessment forms .......................................................... 35

Table 12: showing form of assistance rendered by tax authorities ............................................... 37

Table 13: showing Income tax returns and computation .............................................................. 38

Table 14: Showing average amount of tax paid annually ............................................................. 39

Table 15: showing capital employed in the business. ................................................................... 40

Table 16: showing average daily sales.......................................................................................... 42

Table 17:showing daily expenses ................................................................................................. 43

Table 18: showing the range of profits ......................................................................................... 44

Table 19: showing the causes of trend performance ..................................................................... 46

Table 20: Performance review ...................................................................................................... 47

Table 21: showing improvement on performance ........................................................................ 47

Table 22: Showing the relationship between income tax administration and profitability .......... 48

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List of figures Figure 1: graph showing percentage of respondents in relation to age......................................... 27

Figure 2: A pie chart showing percentage of respondents in relation to gender........................... 28

Figure 3: A pie showing category of respondents ........................................................................ 29

Figure 4: A graph showing marital status percentage of respondents .......................................... 30

Figure 5: A graph showing percentage of respondents in relation to level of education .............. 31

Figure 6: A graph showing percentage of respondents in relation to business operation............. 32

Figure 7: A graph showing percentage of respondents in relation to period covered .................. 34

Figure 8: A graph showing responses of tax assessment forms in percentages............................ 36

Figure 9: A pie chart showing percentage of respondents in relation to tax awareness ............... 37

Figure 10: A graph showing income tax returns of respondents in percentage ............................ 38

Figure 11: A graph showing percentage of respondents in relation to tax paid ........................... 40

Figure 12: A graph showing percentage of respondents in relation to capital employed ...... Error!

Bookmark not defined.

Figure 13: A graph showing average daily sales in terms of percentages .................................... 42

Figure 14: A graph showing average daily expenses in terms of percentages ............................. 44

Figure 15: A graph showing range of profits in (millions) ........................................................... 45

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List of Acronyms URA Uganda revenue authority

SSB‟S Small-scale businesses

PBIT Profit before interest and tax

PAIT Profit after interest and tax

MoFPED Ministry of finance, planning and economic development

USSIA Uganda small scale industries association

% Percentage

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Abstract This study was to establish the relationship between income tax administration and profitability

of small-scale business enterprises in Mayuge town council, Mayuge district. The study aimed at

assessing the profitability of business enterprises in Mayuge Town Council; finding out if

taxpayers are aware of all their tax obligations, know how income tax is administered, policies

and problems affecting them as well as their businesses.

The study was guided by the following research objectives; to establish how income tax

administration is administered and imposed on small-scale business enterprises, to assess the

profitability of small-scale business enterprises, to establish the relationship between income tax

administration and profitability of small-scale business enterprises in Uganda.

The study applied both qualitative and quantitative research designs where interviews and

Questionnaires were used. Data was collected from both primary and secondary sources. Data

was processed and analyzed using formal tables, pie charts, graphs, narrative text, and

correlation to find out the relationship between income tax administration and profitability of

small scale businesses. A total of 50 respondents were considered out of the entire population in

the Town Council.

The findings revealed that income tax administration is poor and this was shown in the findings

that indicated that the business community is not adequately sensitized, tax rates are at times

high and they are based on estimates. Tax rates do not take in to account the circumstances in

which small businesses operate, that has negatively affected the profitability of the small scale

businesses leading to low capital employed, high expenses incurred, low sales made and the

average amount of taxes paid annually being so high.

In conclusion, therefore, URA needs to carry out an extensive survey-based analysis of small

firms‟ profit margins to determine presumptive tax rates, which will not affect the small business

earners.

The researcher therefore, recommended that, URA; should supply tax assessment forms in time,

intensify on the sensitization campaigns of the taxpayers, employ competent staff, educate the

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business community about its different tax rates and introduce a scheme that allows taxpayers to

pay the tax obligation in installment to better the profitability of small-scale businesses. There is

therefore need for more research on firms‟ management techniques, the role of bookkeeping and

profitability of small and mid-size enterprise.

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CHAPTER ONE 1.1 BACKGROUND OF THE STUDY

Income tax was introduced in Uganda in 1939 as part of the common income tax regime that

which was replaced with the east African tax management act which was also applicable to

Kenya, and Tanzania.

In 1958, the act was repealed and replaced with the east African management act No 10, which

was later in 1970 replaced with amore comprehensive east African income tax (management)

act.

This act governed the basic structure of income tax while national laws, which are for Uganda it

was the income tax act of 1970, governed the rates of tax exemptions and personal allowances.

As the relation ship amongst the east African states collapsed in 1977, the three east African

states had to introduce their own laws. In Uganda, the first income tax law was the income tax

decree No 1 of 1944 which remained the country‟s income tax law till 1997 when the income tax

act (ITA) was enacted.

The ITA adopted a model of income tax laws developed by the fiscal affairs department of the

international monetary fund, which was published as act No 11 of 1997, in acts supplements No

8 to the Uganda gazette, No 81, dated 31 December 1997. Until an updated version was

published in 2000 as CAP 340 of, the statute and this version incorporated all amendments to

2000.

Income tax is therefore defined as; a 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 every year of income.

Chargeable income is derived from three main types of income, namely; business, employment

and property.

In addition, a tax is referred to as a non-quid pro quo, implying that a tax is paid by assesses with

out corresponding returns in form of social goods and services from the government. Justice

Holmes described tax as the price for civilization. Ismail Kintu (2011).

A tax is a financial charge or other levy imposed on an individual or a legal entity by a state or a

functional equivalent of a state Tumuhimbise M (2000). A tax is a compulsory levy imposed

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upon the tax assesses who may be individuals, groups of individuals or legal entities. It is

compulsory upon to whom it is imposed and they have to pay the sums so levied irrespective of

any corresponding return of services or goods by the government, Balunywa, (1988).

When carrying out tax administration, three distinct functions are performed. These are

enumeration, assessment of tax payable and the collection of tax dues. In Uganda, Uganda

revenue authority (URA) Kibwika P (2004) performs the tax administration function.

Taxation is defined as a process by which government or public body raises money to fund its

operations or the impact an investment has or the investor‟s liability for the payments of local

and state taxes. Muwanga J (2004).

Profitability has been defined as an organizations ability to earn revenues in excess of expenses

over a period. Pandey noted that, a company should earn profits to survive and grow over a long

period. Firms must earn profits to maximize their shareholders wealth, to generate income for

expansion and to finance their daily operations. Pandey, (1998).

“Profitability can also be defined as a company‟s ability, to generate revenue in excess of the

cost in producing those revenues or is a measure of business success through comparing profits

made with amount sold or invested.” Hanson I, Earnest (1982).

The income tax act defines small business taxpayer for income tax purposes as a resident

taxpayer whose gross turn over from all businesses earned by such a person a year is more than

5million shillings but less than 50million shillings. Income Tax Act, ITA (1997) laws of

Uganda. Taxpayer whose gross turn over does not exceed fifty million shillings a year may pay

taxes at presumptive rates. This is not applicable to a person providing professional services.

Section 4(2) of the ITA shows the application of the relevant rates of tax determined to be

charged on the incomes of the tax payer for the year of income and from the resulting amount

are subtracted any tax credits allowed to the tax payer for the year of income.

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Table 1: showing small business tax payer rates

Gross turn over Tax payable

Where the gross turn over of the taxpayer

exceeds shs5million but does not exceed shs

20million per annum.

Shs 100,000


exceeds shs 20million but does not exceed shs

30million per year.

250,000/= or 1% of gross turn over which ever

is the lower.


exceeds shs 30million but does not exceed shs

40million per year.

Shs 350,000 or 1% of the gross turn over which

ever is the lower.

Where the gross turn over exceeds shs 40million

but does not exceeds shs 50million per year.

Shs 450,000 or 1% of the gross turn over which

ever is the lower.

Source; Ismail Kintu (2011)

Taxation has played a big role in helping the government to intervene in the market mechanism

in order to perform the functions of allocation, regulation, distribution and stabilization.

However, the existence of multiple taxes has been a major barrier to the operations of small-scale

businesses.

The multiplicity of taxes whose burden also falls on small-scale enterprises has a negative effect

on their performance. In addition to the above, the existence of a large number of minor taxes

such as residue taxes on non-citizens and car benefit taxes on all cars owned by these firms has

also affected their performance. Notably, the rationale of these taxes is questionable and their

implications have to be fully considered before they are imposed. Thus, taxes impede the natural

evolution of successful and dynamic small-scale firms into ones that are more efficient because

they reduce the firm‟s profits and hence saving and investment potential, winters and McKay,

(2002).

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Income tax administrators have been faced with confusion interpreting the law. In most cases,

the administrators have not followed the law or followed it but interpreted it to favor them selves

to the disadvantage of the taxpayers, which has brought about friction between the taxpayers and

the administrators. Poor tax administration involves poor assessment of taxes and tax liability,

computation based on estimates leading to over charge of small-scale business enterprises. Since

tax is a cost and has to be paid out, poor tax administration greatly reduces the firms would be

profits, Musgrave R, (1980). Therefore there should be a political will to make tax systems work

and all tax payers should be treated fairly but not equally for a more transparent tax system.

1.2 STATEMENT OF THE PROBLEM

Income tax administration plays a pertinent role regarding revenue collection as well as

profitability of any business entity. In an effort for the government to increase its tax base, the

tax burden for many firms increases. However, the tax administration system is poor as at times,

the tax liability computation is based on estimates, records of many small business firms are

incomplete, and some miss out completely leading to tax over charge. In return, this directly

affects the profitability of the enterprise and may threaten its survival because taxes are paid out

of profits. Therefore, failure to have an effective tax administration system adversely affects the

profitability of small-scale businesses.

1.3 PURPOSE OF THE STUDY

The purpose of the study was to establish the effect of income tax administration on the

profitability of small-scale business enterprises in Mayuge town council.

1.4 OBJECTIVES OF THE STUDY

The study was guided by the following research objectives;

i. To establish how income tax administration is administered and imposed on small-scale

business enterprises in Uganda particularly Mayuge town council.

ii. To assess the profitability of small-scale business enterprises in Mayuge town council.

iii. To establish the relationship between income tax administration and profitability of

small-scale business enterprises in Uganda.

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1.5 RESEARCH QUESTIONS

The study was guided by the following research questions;

i. How is income tax administered and imposed on small-scale business enterprises in

Mayuge town council?

ii. What is the profitability of small-scale business enterprises in Mayuge town council?

iii. What is the relationship between income tax administration and profitability of small-

scale business enterprises in Uganda?

1.6 SCOPE OF THE STUDY

1.6.1 Geographical scope

The study was carried out in Mayuge town council, Mayuge district.

1.6.2 Subject scope

The study covered small-scale businesses in Mayuge town council; specifically the study

investigated the impact of income tax administration on the profitability of small-scale

businesses.

1.6.3 Time scope

The study considered a period of 3 years, 2008-2011. This period was selected to enable the

researcher come up with coherent information from the respondents as it would enable the

respondents to give responses that are typical of their opinion from the observations made over

this period.

1.7 SIGNIFICANCE OF THE STUDY

i. The findings will enrich the available literature on the study of income tax administration

and profitability of small-scale businesses.

ii. The study will assist the tax administrators in Uganda to design and formulate tax

policies that will improve on the profitability of small-scale business enterprises.

iii. The accomplishment of the study will enable the researcher to acquire hands on the skills

about processing of research work and data analysis. This proficiency will enable the

researcher to handle such related with a lot of precision and proficiency.

iv. The study is vital for the public as it brings out the effect of taxes on investment, which

will serve as a basis for future.

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REVIEW ON CHAPTER ONE

If I had to redo this chapter, my objectives would be;

To assess the role of tax education as a tool for improved tax revenue collection.

To find out importance of income tax administration in relation to businesses.

To establish the relationship between income tax administration and revenue

collection in Uganda.

Therefore, future researchers are encouraged to put the above into consideration.

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CHAPTER TWO

LITERATURE REVIEW

2.1 INTRODUCTION

This chapter looks at income tax administrationm and its impact on the profitability of small

scale business enterprises in uganda particularlly in Mayuge town council. It consists of existing

literature on income tax administration and profitability by different schollars/research studies

from magazines, textbooks, journals, and news papers and internet.

2.1.0 DEFINITION OF TERMS

2.1.1 The concept of taxation

This refers to assessment, collection, administration and management of taxes in Uganda. It deals

with raising public revenue, managing public expenditure and public debt. It is the responsibility

of URA (Manasseh, 2000). The general idea behind taxation is the provision of public goods

and services. However, the benefits received by taxpayers from the government are not related to

or proportionate to the tax paid. (Bhatia, 2002).

Taxation is a payment, which cannot be avoided without attracting a punishment, and in return,

of which the government promises no gain/quid pro-quo to the taxpayer (Balunywa, 1988). The

government is responsible for providing to its citizens certain public facilities and services like

roads, hospitals, schools, and market securities. There are two main tax authorities; the local

government authority and the central government authority through Uganda revenue authority

(URA).

2.1.2 Tax

It is defined as a compulsory and non-refundable contribution executed by government for public

purposes. Payment is not followed by concurrent benefit in return. A tax is generally referred to

as a compulsory levy imposed by the government upon the assesses of various categories. A tax

is paid without a corresponding return in terms of goods or services from the government and

hence it is referred to as a non-quid proquo payment (Income Tax Act, 1997). A tax is also

defined as a contribution levied on any person, property or business for supporting local or

national government. Muwanga J, (2004).

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2.1.3 Classification of taxes

According to Manasseh (2000), taxes are classified as direct versus either indirect or proportional

versus progressive tax.

a. Direct versus indirect

1. Direct taxes are those that affect the individuals/firms directly through a

deduction from earnings. Examples include; individual income tax, corporation

tax, taxes on property and others.

b. Indirect taxes are those taxes that are paid to government by an intermediary and then

passed on to the final user by including the tax in the final price. Examples include;

export and import duties, excise and local production, value added tax (VAT) and others.

c. Proportional versus progressive tax

Based on equity, taxes are classified as proportional/progressive. A tax is said to be

progressive when with increasing income the tax liability not only increases in absolute

terms but also proportionate to income.

2.1.4 Income tax

Income tax is a tax on income and is charged for each year of income upon all the income of a

person whether resident or non-resident which accrued in or was derived from Uganda. Where a

resident person partly with in and partly outside Uganda carries on a business. The whole of the

project of that business is deemed to have accrued in or be derived in Uganda. The gross income

of a resident person includes income derived from all geographical sources.

Income tax is a compulsory levy on a person‟s income. Income tax is a portion of a person‟s

income that is paid to government or central authority as a tax upon generation of income.

Income tax is that part of direct taxes levied on income of individuals, Balunywa, (1988).

Subject to the Income Tax Act 1997 part II sec, 5(1) a tax to be known as income tax shall be

charged for each year of income and is here by imposed on every person who has chargeable

income for the year of income.

9

The income tax payable by a taxpayer for the year of income is calculated on the individual‟s net

assessable income after making allowance for deductible expenses. The sources of assessable

income for individuals include employment, business and property. However, different tax rates

apply depending on whether the individual is a resident or non-resident of Uganda for tax

purposes.

2.2.0 INCOME TAX ADMINISTRATION IN UGANDA

2.2.1 Approaches to tax administration

According to Bird (1974), tax administration refers to the identification of the taxpayer,

assessment of tax payable, collection of taxes and enforcement of tax liability. According to

Olman (1967), tax administration refers to a structure/procedure of identification of potential

taxpayer, collection and laws governing taxation.

RoyBahl (1988) says that much attention should be paid to critical aspects of tax administration,

training, procedures, staffing, collection and use of information. The weaknesses in tax

administration are mainly caused by lack of relevant information about the taxpayer, continued

criticism of the tax and its structure. The tax structure should be simple in order to avoid tax

evasion.

Income tax is affected by the complexity of the rules and procedures to be followed in the

calculation of tax bands. This hinders tax administration in the economy and consequently the

performance of the business sector, Melville (1999).

i. Identification of the tax payer

This is where tax administration begins. The identification of taxpayer is done with

reference to natural or artificial person who earns an income. According to the lord

Macnagten, “income tax if I may be pardoned for saying so, is tax on income. It is not

meant to be anything else it is one tax not collection of taxes, essentially

distinct...,”Kibwika P (2004).

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However, for the purpose of this research we shall confirm our selves to business as a

taxpayer. Business is defined as any trade, profession, vocation or adventure in the nature

of trade but does not include employment (Act, 1997). Business income means any

income derived by a person in carrying on a business (sec19 (1)). The income tax act

1997 S.22 (1) lists a number of incomes exempted from tax.

ii. Assessment of tax payer

Income Tax Act (1997) section 3 (a), defines assessment as the ascertainment of the

chargeable income and the amount of tax payable on it by the tax payer for a year of

income. Assessment of tax is a process of ascertaining the amount of tax to be levied on a

person/business according to his/its income.

According to the income tax Act (1997) section 96 (1) the commissioner is required to

make an assessment of the chargeable income based on his returns and on any other

information available within seven days from the date the return was furnished. However,

small-scale businesses are not required to submit in any return to the commissioner.

2.2.2 Small scale business

According to the Income Tax Act (1997), small-scale businesses are those with growth turn over

of less than 50 million shillings per annum.

In Uganda, it is not only income tax Act that has tried to define small-scale businesses; there are

also institutions, which have tried to define small-scale business (SSB) such as; Ministry of

Finance Planning and Economic Development (MFPED), the Uganda Small Scale Industries

Association (USSIA). The MFPED defines SSB as a unit with a capital investment not

exceeding US$ 300,000.

The USSIA defines SSB as those with employees between 1-25 people and assets and capital

exceeding US$ 1,000,000.

The study is to assume a small-scale business as one with the following features;

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i. A business which employees 1-50 people.

ii. Has a capital investment of less than shillings 40 million.

iii. Has average annual revenue/sales of less than shillings 50 million.

Tax assessment has adverse effect on business performance and profitability thus it is

important that assessment be carried out accurately so that taxpayers are not excessively

assessed. The tax bill if excessive will greatly affect the profitability and performance of

the business, Wagner, (2002).

iii. Collection of the Tax due

According to the Act, tax may be paid as either provisional or final tax (S. 104. 112 and

113).

a) Provisional Tax

A business taxpayer is required to pay provisional tax at two intervals;

The first installment is required to be paid on or before the date when the

provisional return is due for filling which is the last day of the 6th

month of the

year of income, which includes a substituted year of income. The second and the

last installment are due on or before the last day of the year of income. The

amount of each installment of provisional tax is computed using the following

formulary.

50percent (A-B) where;

A is the estimated tax payable by the tax payer for the year of income and B is the

amount of any tax withheld under any provisions of the Act, prior to the date of

payment of the installment from any amounts derived by the tax payer during the

year of income which will be included in the gross income of the tax payer for

that year.

b) Final tax

Every taxpayer shall furnish a return of income for each year of income of the

taxpayer not later than four months after the end of that year.

According to the act;

12

i. Where the taxpayer files the final income tax return, payment of any unpaid tax relating

to the assessment for the year of income is due or before the date when the income tax

return is due for filling, for tax payers published in the self-assessment list. In any other

case tax charged in any assessment is payable not later than 45 days from the date of

service of the notice assessment (S. 104(1) (b)). By virtue of s.95 (5) tax payers, other

than those listed under self-assessment are not deemed to have assessed their chargeable

income when they make their final income tax return.

ii. Where assessment is raised by the revenue authority and served upon the tax payers, the

tax payable in accordance with that assessment is due not less than 45 days from the date

of service of the notice of assessment (s.104(2)).

2.2.3 Problems encountered by small-scale businesses in trying to comply with tax policies

Most businesses in Uganda are owned and managed by persons who are unskilled in the

profession of accounting and thus do not keep proper books of accounts. These are especially

sole proprietors and family businesses or partnerships. These generally do not keep books of

accounts; have low sales turn over and change hands and business very often (Ravenous, 2005).

Mugulusi (2001) found out that a large proportion of business community is ignorant about

taxes they pay, how these taxes are computed, lack of knowledge is attributed to the poor

methods of sensitization used by URA.

According to Ravenous (2005), the following are some of the problems faced by taxpayers;

i. There is unfair treatment of taxpayers, some of which are not necessary tax

obligations and thus not met because of this process.

ii. Taxpayers have little understanding of the obligation because of lack of tax

education. It is said that URA would get fewer problems with taxpayers if they

were able to understand how their liabilities come about.

13

2.2.4 Tax payer’s knowledge

Most Ugandans have poor/lack understanding of the rationale of taxes and knowledge of

different taxes imposed on them (Coping with taxes 1996). As a result, the tax compliance in

Uganda is still very low. Besides that, various surveys conducted on small scale businesses in

Uganda suggest that about 60% of them keep no records at all, while 25% keep partial records

making it difficult to assess taxes (Ndandiko, 2000).

Alwedi (2002) found out that most SSBs are managed on unprofessional lines (poor or no

business records) thus there is great uncertainty among traders in Uganda as regard to tax matters

and to some extent due to their own making.

Ludega (2002) asserts that, many traders have expressed ignorance about taxes imposed on their

businesses. They say that this is highly attributed to the poor work being done by the tax

authorities leaving traders ignorant about issues like the way taxes are assessed, advantages of

paying taxes and the use to which it is put. Therefore there is a need to sensitize the public

especially business owners. The sensitization should be done on different taxes that impact the

business owners and the rationale that underlines the imposition of taxes, because tax payers are

not aware of the reasons for paying taxes, evasion of tax duties, laws and regulations are very

rampant. (World Bank Survey, 1994).

2.2.5 Negative effects of income tax administration

These are effects that result from the poor assessment of tax on the small businesses by the

administrators. They occur because of poor tax administration.

Muwanga J (2004), stated the following effects which are because of poor tax

administration.

Some of the taxes levied are complicated and not simple to understand and this has brought a

lot of confusion for instance the value added tax that adversely affects the business activities

in the formal sector. Thus leading to low profits hence reduced performance.

There is always poor assessment of tax since many business people do not give correct

information concerning their business in fear of paying higher taxes.

14

Tax administrators and collectors at times base on estimation to compute the tax liability on

small-scale business. This implies that participants in the informal sector may either be over

charged hence causing loss to these businesses.

Poor tax administration leads to social, economic and political unrest, this has been common

in Uganda and even in other developing countries. The increase in the tax rate erodes

disposable income and people may react against the government hence affecting the

economic activities. Kallist Okello, (2000).

2.2.6 Fines and penalties

A provisional tax payer whose estimate or revised estimate of chargeable income for the year

of income under section 112 is less than 90% of the tax payer‟s actual chargeable income

assessed for that year, is liable for penal tax equal to 20% of the difference between the tax

calculated in respect of the tax payer‟s estimate, as revised, of chargeable income and the tax

calculated in respect of 90% of the tax payer‟s actual chargeable income for the year of

income.

Failure to pay any tax, including provisional tax, to pay any penal tax or to pay the

commissioner any tax withheld or required to be withheld by the person from payment to

another persons, on or before the due date for payment is liable for interest at a rate equal to

2% per month on the amount un paid calculated from the date on which the payment was due

until the date on which payment is made.

Failure to furnish a return or any other document with in 15 days of being so required under

the ITA commits an offence and is liable on conviction to a fine not exceeding 15 currency

points. And if the person convicted of an offence of failing to furnish a return as above, fails

to honor the fine with in the period specified by the court, that person commits an offence

and is liable on conviction to a fine not exceeding 20 currency points.(sections 137-144

stipulates the offences and section 145 shows the penalties ).

Poor tax administration may lead to reduced incentives to work hard because when the

business profits or sales increases, the tax levied also increases therefore the small business

owners may decide to work less harder so as to lessen the tax and thus in the long run may

affect the performance of the informal sector. Besides that taxation being a cost, it decreases

the level of savings, profits and thus low level of capital accumulation.

15

2.2.7 Problems faced in income tax administration

Taxation, sensitive as it is, has had laxity in its administration and the policy makers seem to

under mine the role of proper tax administration for harmonious tax system. The American

institute for tax administration (1988), identifies three major areas of tax administration

namely tax law, tax policy and tax administration.

Musgrave R (1980) observes that while policy and tax laws are being taught, the area of tax

administration that transforms the tax policy and law in to reality has been neglected.

In most cases, tax policy and law are taken with out regard as to how they relate to tax

administration. This starts a chain of development with far reaching desirable results since in

large measure, it is effectiveness of the administration of a tax system that controls

compliance with in that system and this is common in many countries of which Uganda is not

an exception.

As a result, primary concern should shift to the area of tax administration. If one cannot

administer a policy of a law then all the other effort involved in the exercise will be futile.

Not only will such effort fail to bring the desired revenue but also such an approach will in

the due course bring disrepute to the fiscal authority and the government. (American

institute of tax administration, 1988).

It is therefore worth noting that the three phases of taxation are independent and the

achievement on the overall sound system requires greater awareness of this independence.

Even those with legal bias now recognize that the quality of tax administration is as

important as its legal framework.

Zake (2001) tries to explain the nature of man, which may also explain the UN willingness

of people to pay taxes. Some taxpayers in Uganda always try some means of dodging to pay

taxes despite the fact that it is through taxes that the government receives the revenue

required to provide protection and security.

Kibwika P (2004) suggests that unwillingness of people to pay tax depends to some extent

on the tax system. He identified the cannons of taxation that must be followed for the

administrators to realize the intended objectives, and these are equality, certainty and

convenience.

16

The nature of taxation In Uganda that is regressive that makes poor people pay relatively

more than the rich. There are indicators to show rural dwellers especially growers of cotton

and coffee pay substantially higher proportion of their income in taxes than the middle

income and upper income urban dwellers. With the different intensity in the tax burden

because of difference in incomes, the Marxism of equality is difficult to achieve thus

dissatisfaction and discontents are likely to arise.

In the case of Uganda, the tax levied has not been convenient and yet every tax ought to be

levied at the time and in the manner in which it is most convenient for contributors to pay.

The costs of collection have to be balanced with the convenience of the taxpayers. (kibwika

2004).

There is un certainty regarding the amount to be paid to avoid squeezing too much from the

tax payers. It is the role of the tax administrators to make sure that the tax assessed is certain.

The tax, which each individual is bound to pay, ought to be certain and not arbitrary at the

time of payment, the manner of payment, the quantity to be paid out, all should be clear and

plain to the contributors and every other person.

In most developing countries, the lack of a clear picture of the scope of the tax system and

the different tax rates imposed may lead to a single commodity or transaction being subjected

to a number of taxes.

2.3.0 PROFITABILITY OF SMALL SCALE BUSINESSES

Profits can be defined and measured in terms of gross or net profit to sales. In this case the total

profits of a firm including the cost of materials and other expenses will be compared to total

sales to get the net profit of a firm.

The emphasis will be put on the ratio of profits before interest and taxes (PBIT) to total revenue

or sales times 100%.

Thus PBIT/Sales x100%

Business performance can be measured in terms of market shares, sales volume and profitability,

Handerson Vernon J and Poole William (1991).

17

Poor profitability of small-scale enterprises can be attributed to credit problems, which Is caused

by inadequate or poor management, Drucker Peter (1999).

Poor profitability has also been attributed to general lack of credit ethics. People acquire credit

but do not pay back, and even if they pay back, they do not pay as scheduled, Michael Mc Cord,

(1998).

Many business people complain and probably with justification that high taxes interfere with

their opportunities to reinvest their profits in their businesses. Gordon and Dawson, (1987).

Fitzgerald et al. (1989), explains the performance of small-scale business in the following ways;

Financial performance concentrating on profitability, liquidity, capital structure,

efficiency and market share.

Innovation is assessed in terms of both innovation process ad success full individual

innovations.

Resource utilization, considers how efficiently resources are being utilized.

Flexibility is an apt heading for assessing the organizations ability to deliver at the right

time to respond to precise customer specification and to cope with fluctuation demand.

For the purpose of this research study performance was only limited to profitability

performance.

2.3.1 Relationship between income tax administration and profitability of small scale

business

In our definition of tax, it is clearly illustrated that a tax is not a price paid by the tax payer

for any definite service or benefit from government, and tax payers have no right to any

benefit from public expenditure on the ground that they are paying taxes.

However to distinguish a tax from government receipts that may contain an external of

compulsion the concept of guide pro-quo is used is used as an illustration .the absence of a

quid pro quo is necessary for a payment to qualify as a tax, Balunwya, (1996).

The regime and authorities make management of micro and small enterprises very difficulty

where by for example lump sum pre payment and estimated assessments are imposed on the

entrepreneurs.

The existence of multiple taxes of operational businesses in general and to small business

sector in particular has been ranked as second barrier after capital to entry into small business

sector, Kibwika P, (2004).

18

Taxes tend to stifle the growth of small private sector and especially hinder the graduation of

the informal sector firms to visible small and medium scale firms Siminyu Nicholas, (1992).

The multiplicity of taxes whose burden also fall on the micro and small scale enterprises has

a negative effect on their performance by reducing the firms profits and its savings and

investment potential, Desoto (1989).

19

REVIEW ON LITERATURE SOURCES

If I were to re do this chapter, I would use more of the following sources;

Journals

Internet and other government publications

Text books by various authors

Therefore, future researchers are encouraged to use more of the relevant data sources to enrich

their literature review.

20

CHAPTER THREE

METHODOLOGY

3.1 INTRODUCTION

This chapter highlights the procedures that were followed in the whole research process. It

discuses the research design, the study population, sample size, data collection methods and

instruments, data processing, analysis and presentation and finally the limitations of the

study.

3.2 RESEARCH DESIGN

The researcher used a cross sectional survey design basing on the use of descriptive and

quantitative designs that were used to establish the relationship between income tax

administration and the profitability of small-scale business enterprises. This design was used

for estimating, predicting and examining associative relationships. Cross sectional studies

easily provide a quick snapshot of what is going on with the variables for the research

problem.

3.3 SURVEY POPULATION

The study comprised of a population of over 3000 small-scale enterprises, which included

retail shops, hard ware shops, groceries, and dealers in general merchandise and URA tax

administrators.

3.4 SAMPLE SIZE

The major participants in the informal sector that is to say the small-scale business was too

wide so there was a need to choose a few manageable respondents to participate in the study.

The researcher obtained data from the 50 (fifty) respondents and these included the small-

scale businesses in Mayuge town council and the tax administrators.

Table 2: showing Sample distribution

stratum Size of the population

Tax administrators=a 15

Small scale business=b 35

Total=c 50

a + b= c that is 15+35 = 50

21

3.5 SAMPLING DESIGN AND PROCEDURE

The researcher used simple random sampling and purposive sampling techniques. Simple

random sampling approach was used during the study because of its advantages like

minimization of bias results. This implies that all participants in the study population had

equal chance of being selected. Purposive sampling was also used to select only those

respondents with importance attached to their office. This means that data was obtained from

the key informants about the subject matter. A combination of these two techniques gave a

wide range of response.

3.6 DATA SOURCES

Data was obtained from both secondary and primary data sources.

3.6.1 Secondary data collection

Roston (2001) defines secondary data as that kind of data that is available, already reported

by some other scholars. Secondary data included policy documents and abstracts of the

various scholars relating to the topic of discussion in question. Secondary data for this study

was got from sources like libraries, archived records from the Town Council, records of

selected small-scale enterprises, government publications, online information, text books,

news papers, and unpublished research reports. This was because it was readily available and

easier to comprehend, as it comprised of extensively researched work.

3.6.2 Primary data collection

According to Roston (2001), primary data is that kind of data that has been gathered for the

first time, it has never been reported anywhere. Short comings of secondary data sources

such as out datedness and inadequacy in terms of coverage, necessitated the use of primary

source for first data. Self-administered questionnaire was used and this enabled the

researcher to cover a large population quickly and at are reasonable cost.

3.7. DATA COLLECTION INSTRUMENTS AND METHODS

3.7.1 Questionnaire

A questionnaire is a reformulated written set of questions to which respondents record their

answers, usually within rather closely defined alternatives. The questionnaire was equally

used because the information had to be collected from a large sample in a short period yet

some of the respondents could not read and write which necessitated interviews. The

questionnaire was used in collection of data from respondents (owners of small-scale

22

businesses). The questionnaires consisted of both open and close-ended questions

administered to respondents of Mayuge Town Council.

3.7.2 Interview method

The researcher also administered interviews. An interview is a dialogue between an

interviewer and interviewee. It is an organized conversation aimed at gathering data about a

particular topic. This is a method where a researcher interviews respondents to obtain

information on the issue of interest. In this case, the interviews during this research were

structured and were specifically administered to staff of Mayuge Town Council.

3.7.3 Observation method

The researcher observed the tickets from the tax council that the business operators had

pinned in the shelves of the businesses as well as counter books that were used to record the

customers who took goods on credit. However, the observation method revealed that the

respondents never used the counter books to record all the transactions made implying that

they have poor records keeping system.

3.8.0 DATA PROCESSING AND ANALYSIS

3.8.1 Data processing

The data collected from the field was subject to processing for easy interpretation and

understanding. Data collected was checked for completeness, categorized, coded, and entered

into a computer where it was summarized into frequency tables edited and tabulation by use

of percentages.

3.8.2 Data presentation, analysis and interpretation

The data got was analyzed using ms word and ms excel. Spearman‟s correlation coefficient

was used in order to correlate income tax administration and profitability of small-scale

businesses. Ranks were selected in order to measure the degree and direction of relationship

between the variables.

Quantitative data was presented in form of descriptive statistics using frequency tables.

Qualitative data was sorted and grouped into themes. The researcher thereafter evaluated and

analyzed the adequacy of information in answering the research questions through coding of

data, identifying categories and parameters that emerge in the responses to the variables of

the study. Qualitative data was presented using narrative text.

23

3.9.0 LIMITATIONS OF THE STUDY

Financial constraints: Financing the research study was too costly in terms of transport

costs, feeding and processing of the proposal and research report.

Limited time: Inadequate period required for a detailed research study. Comprehensive

research study involves a great deal of collecting, analyzing and processing that requires a lot

of time.

Non-response: Owners of businesses were busy attending to their customers and rarely

spared time for the researcher.

24

REVIEW ON METHODOLOGY AND METHODS

If I were to re-do this chapter, I would consider the use of other research methods and

methodologies like;

Clustered sampling and predictive research

Focus group discussions

Use more documentation reviews

Multiple research designs

Therefore, future researchers are encouraged to use more research methodologies to collect

just enough data to reach at a good analysis of the findings, conclusions and

recommendations of the study.

25

CHAPTER FOUR

PRESENTATION, ANALYSIS AND DISCUSSION OF FINDINGS

4.0 Introduction

This chapter presents findings on income tax administration and profitability of small-scale

businesses in mayuge town council. The findings were from both primary and secondary

sources. The findings are presented in conjunction with the objectives that the study was set

to achieve.

Review of objectives

4.2 To establish how income tax administration is administered and imposed on

small-scale business enterprises in Uganda. This is based on the following factors;

4.2.1 Tax assessment

4.2.2 Filling of income tax returns and computation

4.2.3 Average amount of tax

4.3 To assess the profitability of small-scale business enterprises in Uganda. This is

also determined by the following factors;

4.3.1 Capital employed in business

4.3.2 Average daily sales

4.3.3 Daily expenses

4.3.4 Range of profits

4.4 To establish the relationship between income tax administration and profitability

of small-scale business enterprises in Uganda. The researchers aim is to consider

those factors which could lead to a change between the two variables and these

include;

4.4.1 Causes of trend performance

4.4.2 Performance review

4.4.3 Strength of the relationship

26

The analysis is based on the objectives of the study and the presentation and the

interpretation done with the help of tables, charts, and narrative text as follows.

4.1 General findings

The researcher sought to establish the general characteristics of the respondents who did fill

the questionnaires and this section presents the findings.

4.1.1 Age of respondents

In order to attest the credibility of the responses, the respondents were asked to indicate their

age bracket and the response was shown bellow.

Table 3: Showing the respondents’ age

Age Frequency Percentage (%)

20-29 5 10

30-39 15 30

40-49 10 20

50-59 11 22

60 and above 9 18

Total 50 100

Source: primary data

The table above shows that 10% of the respondents were in the age group of 20-29, 30%in

the age group of 30-39, 20% between 40-49, 22% between 50-59 and 18% in the age group

of above 60 years. This implies that the majority of the respondents are between 30-39 years

of age an indication that they can make independent decisions.

27

Figure 1: graph showing percentage of respondents in relation to age

0

5

10

15

20

25

30

35

20-29 30-39 40-49 50-59 60 and

above

Age

Pe

rce

nta

ge

Percentage (%)

4.1.2 Gender of the respondents

This seeks to establish gender balance in the study.

The table and graph below clearly indicates what the researcher found out concerning the

gender of the respondents in Mayuge town council.

Table 4: Showing gender of the respondents

Gender Frequency Percentage (%)

Male 30 60

Female 20 40

Total 50 100


The study population was selected in away that avoid gender bias. As illustrated in the pie

chart below, 60% of the respondents were male while 40% were female. This indicated that

most of the respondents were male.

28

Figure 2: A pie chart showing percentage of respondents in relation to gender

60%

40%Male

Female

4.1.3 Category of respondents

Table 5: Showing the category of respondents

Category Frequency Percentage (%)

URA officials 10 20

Business community 40 80

Total 50 100

Source: Primary data

Table 3 above shows that 20% of the respondents were Uganda revenue authority (URA)

officials while 80% was the small-scale business community and this is as well represented

in the graph below.

29

Figure 3: A pie showing category of respondents

20%

80%

URA Officials

Businesscommunity

4.1.4 Findings on the marital status of the respondents

Here respondents were asked if they were married, single, separated widow and the results were

as follows;

Table 6: Shows marital status of the respondents

Marital status Frequency Percentage (%)

Single 5 8

Separated 14 28

Married 27 54

Widow 4 10

Total 50 100

From table above, 8% were single, 28% separated, and 54% were married while 10% were

widowed. This implies that most of the small-scale business enterprises in Mayuge Town

Council were operated by married people, widowed and separated. This finding is related to the

30

pressing domestic responsibilities that compel people to find out avenues of funding for their

families including opening up small-scale businesses.

Figure 4: A graph showing marital status percentage of respondents

0

20

40

60

Single Seperated Married Widow

Marital Status

Pe

rce

nta

ge

Percentage (%)

4.1.5 Level of education attained

This seeks to establish the level of education of the respondents. The respondents were asked to

indicate their level of education and the response bellow was got.

Table 7: showing the level of education of the respondents

Level of education Frequency Percentage (%)

Not educated 3 6

Primary level 10 20

„A‟/‟0‟ Level 22 44

Diploma 8 16

Bachelors degree 5 10

Masters degree 2 4

PHD - -

Total 50 100


31

The table above shows that majority of the respondents are “A”/”0” level with 44% followed by

primary level, diploma holders, bachelor holders, others did not have any education background

and only 4% had masters degree and there were no PHD holders. This indicates that most of the

respondents did not have enough knowledge about income tax.

This information is also represented in the graph bellow.

Figure 5: A graph showing percentage of respondents in relation to level of education

4.1.6 Nature of business

The respondents were asked about the nature of their business and the products they deal in.

Alongside interviewing, the researcher used observation method to identify the nature of

products they deal in. variety of businesses were identified which include; retail shops, bars and

lodges, kiosks and eating places, restaurants, posho mills, coffee factories, grocery, petrol

station, tailoring, Sacco‟s, among others which are charged a trade license and operation permits

according to their nature of business operated.

Table 8: Showing the nature of business and products

05

101520253035404550

Not educa

ted

Primary

leve

l

"A"/

"0" l

evel

Diplo

ma

Bachelo

rs d

egree

Mast

ers d

egree

PHD

Level of education

Perc

enta

ge (%

)

32

Nature of business Number of respondents Percentage (%)

Retail shops 8 16

General merchandise 25 50

Restaurants 7 14

Hard ware 5 10

Others 5 10

Total 50 100


From the table above we observe that most of the respondents deal in general merchandise with

50% of the products followed by those who deal in retail shops, restaurants and the rest in the

different kinds of businesses.

Figure 6: A graph showing percentage of respondents in relation to business operation

0102030405060

Re

tail

sho

ps

Ge

ne

ral

me

rch

and

ise

Re

stau

ran

ts

Har

d w

are

Oth

ers

Nature of business

Pe

rce

nta

ge

Percentage (%)

33

4.1.7 Period in business

Besides testing for maturity and integrity of the respondents, respondents were also asked to

indicate how long they had been in business so as to establish the level of understanding of the

operations of the business environment, how businesses are taxed and to know their level of

profits for the given periods in business. Bellow is the response obtained.

Table 9: Showing period worked in business

Period Frequency Percentage (%)

Less than a year 9 18

1-4 years 21 42

5-10 years 15 30

Over 10 years 5 10

Total 50 100


The table above shows that most of the respondents have been in business for a period of 1-4

years and 5-10 years an indication that majority of them understand the taxation system and the

business cycles that may lead to a change in profitability of the business.

34

Figure 7: A graph showing percentage of respondents in relation to period covered

0

5

10

15

20

25

30

35

40

45

Less than

a year

1-4 years 5-10 years Over 10

years

Period

Per

cen

tage

Percentage (%)

PART 1

INCOME TAX ADMINISTRATION

Objective review: (To establish how income tax administration is administered and imposed

on small-scale business enterprises in Uganda)

4.2 How income tax administration is administered among small-scale businesses in

Uganda

The research question tries to answer the three major components of tax administration, which

include; identification of the taxpayer, assessment of income tax, and finally collection of tax

dues, which are the bases upon which income tax, is administered.

35

4.2.1 They normally assess your business for income tax purposes

The respondents were asked if they usually assessed their business for income tax purposes. This

also shows how often they are supplied with the tax assessment forms. The response was

tabulated using tables and the graph as shown bellow.

Table 10: showing the assessment of business for income tax purposes

Response Frequency Percentage (%)

Strongly agree 28 56

Agree 15 30

Disagree 7 14

Strongly disagree - -


From the table above, it was identified that most of the respondents are usually assessed their

business for income tax purposes with 30%-56% agreeing that income tax is carried out on

their businesses. This implies that Mayuge town council carries out assessment of the small-

scale businesses before the tax they are meant to pay is levied.

4.2.1.1 The tax assessment forms

Table 11: showing responses on the tax assessment forms

Period Number of respondents Percentages (%)

July to October 11 22

November to February 17 34

March to June 22 44

Total 50 100


36

From the table it can be revealed that most of the tax payers 44 % receive the tax assessment

forms between march to June, 34% of the respondents receive tax assessment forms between

November to February and 22% between July to October. This implies that there are delays

in delivering the tax assessment forms.

Figure 8: A graph showing responses of tax assessment forms in percentages

0

5

10

15

20

25

30

35

40

45

50

July-Oct Nov-Feb Mar-Jun

Period

Pe

rce

nta

ge

Percentage (%)

4.2.1.2 Assistance from tax authorities

The respondents were asked if they had received any form of assistance as regards tax awareness

from the tax authorities.

37

Table 12: showing form of assistance rendered by tax authorities


Yes 19 38

No 31 62

From the table above, 62% did not receive any form of assistance and 38% said they received

some assistance. Those who had received said it was in form of manuals, radio talk shows,

meaning that there were very few workshops, which could have been more effective in terms of

creating awareness to the taxpayers. This information is also represented in the chart.

Figure 9: A pie chart showing percentage of respondents in relation to tax awareness

38%

62%

Yes

No

4.2.2 Income tax returns and computations

The respondents were asked how often they make income tax returns and if they are aware of

income tax computations. This was shown using a graph and tables showing the percentages of

respondents.

38

Table 13: showing Income tax returns and computation

Period Number of

respondents

Percentage (%)

Weekly - -

Monthly 17 34

Quarterly 8 16

Half yearly 6 12

Yearly 7 14

Do not know 12 24

Total 50 100


From the above table, 24% do not know how to compute income tax returns. This is mainly

due to lack of sensitization. 14% of the respondents make income tax returns yearly. 12%

half yearly, 16% quarterly, 34% monthly and none of the respondents make returns weekly.

This implies that the period for filling returns is too short.

Figure 10: A graph showing income tax returns of respondents in percentage

39

0

10

20

30

40

Weekly

Month

ly

Quarterly

Half ye

arly

Yearly

Do not k

now

Period

Pe

rce

nta

ge (

%)

Percentage (%)

4.2.3 Range of tax paid annually

The respondents were asked about how much on average the amount of tax they pay

annually. The response bellow was got.

Table 14: Showing average amount of tax paid annually

Annual tax payments Frequency Percentage

Zero 0 0

100,000-190,000 40 80

200,000-290,000 8 16

300,000-390,000 2 4

Total 50 100


From table above, it has seen that no business does not pay taxes and most of the small-scale

businesses fall in the range of 10,000-190,000 shillings with 80% of average tax payments.

The implication is that basing on the working capital that small-scale businesses employ and

the kind of merchandise they deal in, the above results show that the small-scale businesses

in Mayuge town council were paying more money in taxes.

40

Figure 11: A graph showing percentage of respondents in relation to tax paid

020406080

100

Zero 100,000-

190,000

200,000-

290,000

300,000-

390,000

Average annual tax

Per

cen

tage

Percentage (%)

PART 2

PROFITABILITY

Objective review: (To assess the profitability of small-scale business enterprises in Mayuge

town council.)

4.3 Profitability of small-scale businesses in Uganda

4.3.1 Capital employed

This seeks to determine the size of the business and the level of profits that would be

estimated from a given business venture. The results were shown in the table bellow.

Table 15: showing capital employed in the business.

Capital employed in

Ugandan shillings ( shs)

Frequency Percentage (%)

Less than 500,000 5 10

600,000-800,000 8 16

900,000-1,000,000 22 44

41

Above 1,000,000 15 30


From the above table, 10% of the respondents employ capital of less than shs 500,000, 16%

employ capital of 600,000 to 800,000/= and 44% employ in the range of 900,000 to

1000,000/= and those above 1,000,000/= are 30%. This indicates that the businesses

operated are on small scale

Figure 12: A graph showing percentage of respondents in relation to capital employed

0

10

20

30

40

50

Less

th

an

50

0,0

00

60

0,0

00

-

80

0,0

00

90

0,0

00

-

1,0

00

,00

0

Ab

ove

1,0

00

,00

0

Capital employed

Per

cen

tage

percentage (%)

42

4.3.2 Average daily sales

The respondents were asked about sales made by their businesses and the results were as

follows.

Table 16: showing average daily sales


Less than 10,000 2 4

10,000-29,000 6 12

30,000-49,000 28 56

50,000-69,000 11 22

Above 70,000 3 6


From the table above, it is shown that most of the businesses in Mayuge town council

have an annual turn over of less than 50 million Uganda shillings. This agrees with

income tax act (1997) which characterizes small-scale businesses as those with an annual

turn over of less than 50 million Uganda shillings. Thus, taxes to be paid should be in the

range of small-scale enterprises as stated in the income tax act (1997).

Figure 13: A graph showing average daily sales in terms of percentages

43

0102030405060

Less

than

10,000

10,000-

29,000

30,000-

49,000

50,000-

69,000

Above

70,000

Average daily sales in shillings

Per

cen

tage

Percentage (%)

4.3.3 Daily expenses

This also helped to determine the performance and size of the business.

Table 17: showing daily expenses


Less than 10,000 22 44

10,000-19,000 13 26

20,000-39,000 9 18

44

40,000-49,000 4 8

50,000-59,000 2 4


The table shows that these business units spend less money because their daily sales are

averagely low with 44% of the respondents spending less than 10,000 Uganda shillings

given the fact that they employ little capital and make small sales on a daily basis. This

information is presented in the graph below.

Figure 14: A graph showing average daily expenses in terms of percentages

01020304050

Less than

10,000

10,000-

19,000

20,000-

29,000

30.000-

39,000

40,000-

49,000

Average daily expense in shillingfs

Per

cen

tage

Percentage (%)

4.3.4 Range of profits

The respondents were asked to identify the range of profits earned per annum. The response

was tabulated as follows.

Table 18: showing the range of profits

45

Range of profits per

annum( millions)

No of respondents Percentage (%)

Above 50 - -

50-40 2 4

40-30 10 20

30-20 18 36

Bellow 20 20 40

Total 50 100

From the table above, it shows that none of the respondents earns above 50 millions, 4% of

the respondents earn a profit between 50-40 millions, 20% earn between 40-30 million, 36%

earn between 30-20 million and 40% are bellow 20 million.

Figure 15: A graph showing range of profits in (millions)

0

5

10

15

20

25

30

35

40

45

Above

50

50-40 40-30 30-20 Bellow

20

Range of profits in (millions)

Pe

rce

nta

ge

Percentage (%)

PART THREE

Objective three: (To establish the relationship between income tax administration and

profitability of small-scale business enterprises in Uganda)

46

4.4 Relationship between income tax administration and the profitability of small-scale

businesses in Uganda

Respondents were asked as to whether income tax affects their level of performance

(profitability). The researchers aim was to find out the relationship between income tax

administration and profitability as the major objectives of the study. The responses bellow

was got.

4.4.1 Causes of trend performance

The researcher was interested in finding out if income tax administration impacted adversely on

the performance of small scale businesses and how it affects profitability of the business. The

response was as follows.

Table 19: showing the causes of trend performance

Causes Number of respondents Percentage (%)

Stiff competition 11 22

Unfavorable economic

conditions

6 12

Poor income tax

administration

29 58

Political environment 2 4

Others 2 4


Table 19: shows that the variations in the trend performance is mainly attributed to the different

causes of poor business performance which may arise due to some of the above factors which

show that 22% of the respondents are affected by stiff competition, 12% by unfavorable

economic conditions, 58% by poor tax administration system, 4% by political environment

whereas others are affected by other factors which could be seasonal in nature. It is identified

47

that most of the respondents are affected by poor tax administration which has greatly affected

their profitability levels.

4.4.2 Performance review

As per the budgetary performance review of FY 2010/2012, local revenue collections over the

past three years were as follows;

Table 20: Performance review

Financial year (FY) 2008/09 (shillings in

millions)

2009/10 (shillings in

millions)

2010/11 (shillings in

millions)

Budgeted 71.6 79.0 42.9

Actual 27.3 38.1 31.4

% out turn 57.5% 48.2% 73.2%


From the above review it is observed that the town council did not meet its targets as budgeted

and this is attributed mainly to poor tax administration since at times tax liability computation is

based on estimates.

4.4.2.1 Improvement on performance

The respondents were asked as to what should be done to improve on the income tax

administration to increase on the profitability of small-scale business enterprises in Uganda. The

response bellow was got.

Table 21: showing improvement on performance

Response Number of respondents Percentage (%)

48

Sensitizing the masses 6 12

Expanding the period of

income returns

16 32

Reduction in other taxes 19 38

Banning importation 9 18

Source: P primary data

From the table above, it is noticed that most of the respondents argue in favor of income tax

reduction while 32% think that they should adjust on the period for filling in returns, 18% prefer

that they should ban taxes on imports and 12 % argue that sensitizing the masses would be the

best option. However, all the above views would impact positively on the improvement of tax

administration though the reduction in other taxes would really increase on the profitability of

small scale businesses.

4.4.3 Strength of the relationship

Table 22: Showing the relationship between income tax administration and profitability

Response Rating on

income tax

administration

Rating on

profitability

Rank 1 Rank 2 d d2

Strongly

agree

21

15 1

1

0

0

Agree 14 12 2 2 0 0

Strongly

disagree

6 10 4 3 1 1

Disagree 7 7 3 4 -1 1

Uncertain 2 6 5 5 0 0


Basing on the spearman‟s coefficient where r is the coefficient of correlation, d is the difference

between ranks and n is the number of columns.

49

It was established that r = 0.9. This shows that there exists a strong positive relationship between

income tax administration and profitability of small-scale business enterprises in Mayuge town

council. This implies that to have an accountable, transparent tax system and good public

governance, income tax administration should plan, manage and coordinate registration, audit,

assess, collect and account for taxes due as administered by small scale enterprises.

Using coefficient of determination, r2 = 81%. This implies that 81% of the variation in

profitability of small-scale enterprises is explained by the variation in income tax administration

that shows a strong relationship between the two variables.

50

REVIEW ON CHAPTER FOUR

Re doing, this chapter would necessitate the use of more data sources specifically;

Primary data from the field

Secondary data sources for example, internal sources like, records with in the

organization, Accounting and financial records and external sources like, trade and

industrial reports held by the government and private agencies, publications from

international bodies that is to say, world bank, news papers, among others.

Pearson‟s correlation coefficient would be preferred to spearman‟s correlation in

terms of determining the relationship between the two variables.

Therefore, future researchers are encouraged to use more primary data and secondary data to get

enough information that would be used to reach at the right presentation and analysis of the

study.

51

CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.0 Introduction

This chapter covers the summary of the findings, conclusions based on the findings and

recommendations based on the conclusions.

Objective review

1) To establish how income tax administration is administered and imposed on small-

scale business enterprises in Uganda.

2) To assess the profitability of small-scale business enterprises in Mayuge town

council.

3) To establish the relationship between income tax administration and profitability

of small-scale business enterprises in Uganda.

5.1 Summary of Findings

Objective one: (To establish how income tax administration is administered and imposed on

small-scale business enterprises in Uganda.)

From the review of the study, income tax administration is administered in three major ways,

that is to say, identification of the taxpayer, assessment of income tax, and finally collection of

tax dues.

The findings of the study showed that tax payers were identified on the basis of their operation,

however it was noticed that there were delays in the processing of assessment forms and

collection of the tax dues was not easy since some of the tax payers defaulted on payment and

others were given penalties. The researcher found out that local government often plays a

critical role in the tax administration of small operators. However, municipal levies inhibit the

creation of formal enterprises. For example, it was found out that licensing costs and

requirements are a key driver of continued informality. Coordination between government

agencies is usually very poor with inconsistent local and central government policies and

52

multiple non-transparent taxes, fees, and non-regulatory “licenses” at the local level. This

increases firm‟s compliance costs and the administrative costs of local authorities.

Objective two: (To assess the profitability of small-scale business enterprises in Mayuge town

council)

The findings of the study showed that the profit margins of the firms were too small to improve

on the scale and size of the business. This is due to the high taxes imposed on these small firms

that they could hardly have enough capital to re invest.

Other factors that affect the profitability of small-scale business enterprises apart from income

tax administration include business location, seasonal variations and other types of taxes.

Objective three: (To establish the relationship between income tax administration and

profitability of small-scale business enterprises in Uganda)

The study focused on establishing the effect of income tax administration on small-scale

business enterprises.

The following is the summary of the major findings

Most of the respondents were unsatisfied with the income tax rate based on the sales turn over

and some of the respondents did not fully understand income tax and its computation.

The findings of the study showed that the introduction of income tax has adversely affected the

profitability of small-scale industries according to the responses strongly agreed that income tax

affects the profitability of their businesses.

The study showed that sensitizing the people about income tax and extending the period of

income tax return could improve on the profitability of small-scale enterprises with out

necessarily adjusting the income tax rate.

5.2 CONCLUSION

Objective one

The administration of small firms is an afterthought for income tax administration and technical

assistance programs. This is due to the low benefit-cost ratio of administering small contributors

53

from a revenue perspective. Therefore creating successful small business administration is thus

closely linked to the decentralization agenda.

Objective two:

Constructing appropriate indicators and setting an appropriate tax rate is challenging. It requires

extensive analysis of profit margins and will usually be disputed by some in the business

community. Small businesses are not necessarily small earners; rates need to be high enough to

encourage firms at the upper end of the threshold to join the general system and low enough to

encourage informal entrepreneurs to comply. This process requires extensive survey-based

analysis of small firms‟ profit margins to determine presumptive tax rates, which will not affect

the small business earners.

Objective three:

Income tax administration has greatly affected the profitability of small-scale businesses.

Uganda revenue authority needs to intensify on the sensitization campaigns since the business

communities do not take the education of income tax seriously.

5.3 RECOMMENDATIONS

The researcher made the following recommendations as a way of reducing the burden of income

taxes on SSBs as well as to increase the revenue of the Mayuge town council.

Mayuge town council should find a way of assessing the tax in that the SSBs should pay early in

the financial year in order to give enough time to the businesses to pay their dues rather than

make an assessment and demand for payment spontaneously.

Mayuge town council should introduce a scheme that allows taxpayers to pay the tax obligation

in the installments over a given period as opposed to lump some at once.

The URA should reach out and educate the business community about its different tax rates and

mode of payment. The study revealed that the biggest problem with the tax paid is in fact that the

54

SSBs community does not understand how the tax is arrived at as well as how it is paid but not

because it is too high.

The URA should improve on the methods of collecting the taxes. It should adopt the closure of

business premises on default only as a last resort after all the other methods of collection have

failed. This should be an exception and not a rule.

The URA should improve awareness amongst the taxpayers of the need to pay taxes and how

their tax liability is determined and the time process of the tax assessment.

5.4 AREAS FOR FURTHER RESEARCH

The researcher carried out this study in order to examine the impact of income tax administration

on the profitability of small-scale businesses in Mayuge Town Council as a case study but the

study was not exhaustive owing to constraints in terms of scope, time and finance. Further

research is therefore needed in areas such as;

i. Government policy and profitability of small scale businesses

ii. The effect of firms‟ management technique on the performance

iii. The role of book keeping in the growth of small business sector

55

REFERENCES

Kintu Ismail (2011) understanding Uganda‟s tax system

Balunywa W. (1988) income tax administration in Uganda (Makerere University, Uganda)

Bhatia H. L. (2000) public Finance 23rd

Edition

Bird R. (1989) Tax administration on Tax reform in developing countries (London- UK)

Drucker peter (1999) the practice of management professional publishing ltd.

Government of Uganda (1997) income tax act (Uganda)

Handerson Venon. J. and Poole William (1991) principles of economics (1st edition)

Kibwika P. (2004) challenges in the growth of small enterprises (Kampala Uganda)

Musgrave R. (1980) public finance and policy

Muwanga J. (2004) Tax reform in Uganda

Okello Karlist (2006) principles of taxation 1st edition (Uganda)

Pandey M (1995) financial management 7th

edition

Tumuhibise Manasseh (2000) introduction to taxation in Uganda (Makerere University, Uganda)

Zake (2001) Journal of income tax and its administration in Uganda

Engelschalk, Michael (2007) designing a tax system for micro and small businesses

Gordon and Dawson (1987) Taxation and Small Scale Businesses in Kampala

H.L Bhdia (2002), Taxation and SME, USSIA Marketing Centre Buganda Road

Income Tax Act 1997 (Oct 11, 1997), LDC Publishing Printing Press, Kampala Uganda,

Kalist, M. (2002) Taxation and Performance of Small Scale Business a case study of Nakawa

Division Businesses

Pius (2001), Income Tax in Uganda

SARs (2005/2006) Tax guide for small-scale business

56

APPENDIX 1

RESEARCH QUESTIONNAIRE

Dear Respondents,

I am a student of Makerere university carrying out an academic research on the topic

“Income tax administration and profitability of small scale business enterprises in Uganda”,

as part of the requirement for partial fulfillment for the award of the degree of Bachelor of

commerce of Makerere university. I therefore humbly request you to spare a few minutes of

your time and fill in this questionnaire. Please do note that whatever information you will

provide here will be strictly for academic purposes and will be treated with utmost

confidentiality.

I take it prudent upon myself to thank you for your time.

SECTION A

Respondents background information.

In this section tick in the box or fill in your response in the space provided as appropriate

1. Age of the respondents

20-29 30-39 40-49 50-59 Above 60

1. Gender

Male Female

57

2. What is your marital status?

Married Single

Separated Widow

3. Level of education

No

education

background

Primary

level

A/O level Diploma Bachelors

degree

Masters

degree

PHD

4. What is the nature of your business?

General merchandise

Hard ware

Groceries

Garments and clothes

If others please specify………………………………………………………………………..

58

5. For how long have you been in business?

Less than a year 1-4 years 5-10 years Over 10 year

6. What is the type of your business?

Sole proprietorship

Partnership

Limited company

Uncertain

7. Does your business keep books of accounts?

Yes No

SECTION B

Income tax administration

1) What is the basis used for computing income tax?

Sales turn over

Estimate

59

Profits

I do not know

2) How often do you pay your taxes?

Weekly Monthly Quarterly Half yearly Yearly I don‟t

know

3) Do they normally assess your business for income tax purposes?

Strongly agree Agree Disagree Strongly agree

4) What is the range of tax that you pay annually?

Zero 10,000-

190,000

200,000-

290,000

300,000-

390,000

Others specify

5) How do you feel about the income tax rate?

Satisfied

Fairly satisfied

UN satisfied

I do not know

60

6) Have you ever been fined or charged a penalty for tax default?

Yes No

7) What has been the major cause of this trend?

Stiff competition

Unfavorable economic cycles

Poor income tax administration

Political environment

If others please specify…………………………………………………………………

8) Income tax administration is the major cause of business stagnation in terms of profitability

of small-scale business enterprises in Uganda.

Agree Strongly agree Not sure Disagree Strongly

disagree

61

9) Has the tax authority given you any assistance as regards to tax awareness?

Yes No

10) If yes, what form of assistance / what kind of assistance?

Manuals Work shops

Others specify……………………………………………………………

11) What do you suggest the government should do to improve income tax administration? (at

least two)

i.

………………………………………………………………………

ii. ………………………………………………………………………

SECTION C

Profitability of small-scale businesses

12) What is the capital employed in your business?

Less than 500,000

600,000-800,000

900,000-1,000,000

Above 1,000,000

62

13) What are the average daily sales of the business?

Less than 10,000 10,000-29,000 30,000-49,000 50,000-69,000 Others specify

14) What are the daily expenses of the business?

Less than

10,000

10,000-

19,000

20,000-

39,000

40,000-

49,000

50,000-

59,000

Others

specify

15) Were the profits received same as budgeted?

Strongly agree agree disagree Strongly

disagree

Not sure

16) Do you at times make losses?

Yes No

17) The level of income in your business is………………..

Very high High Low Very low Moderate

18) The level of expenditure in this business is ……………..

Very high High Low Very low Moderate

63

19) What are your suggestions of improving profitability of small-scale business enterprises in

Uganda?

…………………………………………………………………………………………

…………………………………………………………………………………………

………………………………………………………………………………

Thank you for your cooperation

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