In Uganda, and as known globally VAT in full is ‘Value Added Tax’

Like many other governments, Value Added Tax (VAT) is a core revenue stream used by the government to fund public operations, such as infrastructure development and civil service salaries.

While VAT was originally conceived in Uganda in 1996, it gained significant momentum in the early 2000s. This shift occurred as the central government sought to address revenue deficits created by the abolition of graduated tax, which had previously funded local government operations. By emphasizing VAT, the government aimed to collect more substantial revenue to sustain critical public services but also bridge the gap created for local government funding.

VAT can be explained simply using the example of a soap manufacturer.

Consider a businessman who uses water, electricity, and machinery to transform raw materials into finished soap. As a producer, he does not intend to consume the soap himself; rather, his goal is to add value to those raw materials and sell the final product to customers who will enjoy it.

True to its name, Value Added Tax (VAT) is a tax levied specifically on the value the businessman adds during the manufacturing process. By design, VAT is a consumption tax meant to be paid by the final consumer. While the businessman creates the value, he does not "suffer" the tax; instead, the customer who ultimately enjoys the product pays for the tax on the value added.

The key word is value. It is tax on the value added paid by the consumer.

VAT is tax on the value added at each stage of production or services provided. This tax is borne by the final consumer and thus sometimes termed as consumption tax.

Note the business man in the whole process acts as an intermediary or as an agent who collects the tax from the consumer and normally this is done by adding an amount on the selling price. (18% of the selling price in Uganda’s case)

Rightly, based on the principle that VAT is a consumption tax, it is intended to be suffered only by the final consumer, not the producer or the business owner.

As a business there is room to recover from the tax authority all the VAT suffered in the process of doing business given the tax is designed to land on the end-user, the business is acting merely as a pass-through entity, ensuring that the tax paid on inputs does not become an additional cost to the producer but is passed on to the consumer.

Continuing with the soap example, assuming the business paid for water Ushs 1,180 (cost 1000+ VAT 180) then the business only considers Ushs 1,000 as actual cost of water.

Then Ushs 180 shall be refunded by URA or allowed as a credit to the business. Assume the businessman now makes soap and sells the soap at Ushs 2,360 (selling price 2,000 and VAT 360)

Effectively Ushs 360 is not money earned by the business but tax collected from the consumer on behalf of the government which should be paid to the government.

But remember as a business, they paid Ushs 180 VAT in the process of making the soap, and we indicated they are to receive or they received the amount from URA. However now that the business has also received Ushs 360 from the customer which it is expected to take to URA, depending on whether the business had been refunded the Ushs 180 or not, the business has a discretion or is allowed to offset the Ushs 180 from the 360 it has collected from the consumer.

I.e. (360-180 = 180) or pay the entire Ushs 360 to URA if it had been refunded the input.

This implies that the business received inputs worth Ushs 1000, with the attached VAT of Ushs 180 (that is intended to be passed on to the final consumer), but the business has created additional value of Ushs 1000 to ultimately make a soap product selling for Ushs 2000. Consequently, the Ushs 360 VAT charged on the final sale is composed of two parts, the VAT input of Ushs 180 VAT originally paid on inputs by the business and the VAT on the value created by the business of Ushs 180.

Assuming for unforeseen reasons, the businessman sells the soap at 600 (selling price 600 and VAT 108)

This would mean the businessman has collected less VAT than what he paid for water, water being an input for making soap. So, VAT input is more than VAT output.

I.e. (180 -108=72)

This implies that the businessman shall claim 72 from the government. The government shall pay the business Ushs 72 being VAT he suffered as ‘a business’ in purchasing water.

From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the value added to a product, material, or service.

Look at it in another way, if you are a retailer and you buy a box of plates at Ushs 5,900 (cost 5,000 and VAT 900) and you sell the box at the same price of Ushs 5,900 (cost 5,000 and VAT 900) to a final consumer, you will compute VAT as follows (VAT on sale i.e. output 900 – VAT on purchase i.e. 900 = 0)

What does this show, you bought plates no ‘value’ was added and you sold them at the same price. So in the chain no VAT was created on the plates while in your hands

Look at where the impact of 900 has landed, the final consumer of the plates has actually paid it, he can’t recover it from any where or net it off as the businessman did.

The producer or seller or service provider remits to the government the difference between these two amounts, and retains the rest for themselves to offset the taxes they had previously paid on the inputs as elaborated above.

The narration above is a very simplified explanation to help understand VAT

In practice it can move form complicated to very complicated. Normally having to apply the law guiding VAT also makes it a very tricky area for businesses and tax practitioners.

 One has to be in business in the first place either supplying goods or services or importing to encounter VAT.

Being a business is not enough for one to worry about accounting for VAT. A certain threshold has to be reached in terms of sales made. So not all businesses shall be required by law to account for VAT

After attaining the threshold then one is required to register for VAT

You are eligible /required to register for VAT:

1. When your taxable supplies in 1 quarter (3 months) exceeds 1/4  of the threshold of  150M (starting 2015/2016) then you are required to register within 20 days after the end of that quarter
2. Or if at the start of a quarter (3 months) you  anticipate your  taxable supplies to exceed 1/ 4 of the 150M threshold, then you register at the start of that quarter

1. After registration you are required to file a return every month by the 15th date of the following month following the month of supply.
2. In the return you declare all your sales and purchases categorizing them as Zero rated and Standard rated sales (being the taxable sales) and Exempt sales and as per the Act
3. VAT at 18% is charged on all standard rated sales and this is called output tax on sales
4. For sales that are zero rated VAT is charged at 0%
5. For sales that are exempt no VAT is charged at all
6. As noted earlier, VAT at 18% incurred on all purchases in a business that deals in standard supplies is allowed to be offset fully on the VAT output.
7. Expenditure inputs/ Administrative expenses that relate to standard and zero rated supplies are also allowed as in puts and offset against the output
8. All VAT input on over heads relating to exempt supplies are disallowed
9. Companies dealing in mixed supplies i.e. taxable and exempt supplies have to take note on the input tax claimed as there are detailed guidelines on how to claim the input.
10. After offsetting the input tax and output tax, you are in either in a payable position or claim position
11. A payable position comes about when the VAT output tax exceeds the VAT input tax claimed whereas a claim position comes about when VAT in put tax exceeds VAT output tax as illustrated in our soap example above

This is put this way primarily due to the impact on the treatment of input and output VAT depending on the classification.

A business may supply or make sales of both standard, zero rated and exempt supplies.

In our earlier soap example, when making soap a business suffers VAT in many aspects not only on the direct raw materials for soap. For instance, VAT is charged on transporting raw materials to the factory, VAT is charged on the warehouse costs for storage etc.

If soap was an exempt supply input VAT (VAT suffered by the business) on transportation and warehousing wouldn’t be recovered.

However, if soap was a zero rated supply all input VAT relating to the manufacture of the soap would be fully recovered.

Therefore businesses do not want their products to be scheduled as exempt supplies by the government in annual tax amendments because the cost of producing such products goes high as they can’t recover VAT suffered

Once registered, a business must manage VAT through monthly filings and specific accounting categories.

Returns must be filed with the URA by the 15th day of the following month. In this return, you declare all sales and purchases categorized by their tax status.