The 2007/08 budget introduced a new tax called Local Service Tax. The tax is provided for in the Local Government Act (Amendment) Bill 2007 now before Parliament. The tax has sparked mixed reactions with protest from workers.

In a petition to the Speaker of Parliament, the workers said although they were not opposed to taxation as a principle and the need for additional resource mobilisation for local governments, there was need for a fair taxation policy to all citizens. They demanded that government drops the proposed service tax. They argued that it would lead to exploitation and double taxation.

Do the workers have a point? To evaluate the suitability of the tax and the taxation policy in Uganda generally, I have sought reference to Adam Smith's economic theory in his book, The Wealth of Nations (1776). He sets four maxims or canons of taxation.

Equity/ability to pay principle that advocates taxation according to the taxpayer's abilities- horizontal and vertical equity; Certainty principle, which indicates that each individual's tax liability ought to be certain and not arbitrary as regards the time of payment, the manner of payment and the quantity to be paid.

Convenience; that every tax ought to be levied at the time or in the manner in which it is most likely to be convenient for the payer to pay it. Efficiency principle; which emphasises low cost per revenue collected- revenue collected net of administrative costs should be closer to the taxes collected from the taxpayers due to low collection costs.

Lambert's Modern Principles of Taxation include among others that taxation must; be simple, certain and neutral to production, consumer spending and savings; the costs of determination/collection of taxes should be the lowest possible; there must be no double taxation, all taxes should be levied at source where possible and be legally levied on the persons by whom they are economically borne; the points at which taxation ceases or starts to be payable should be drawn along borders of economic substance not legal form, the action by reference to which taxation is levied must correspond with reality and taxes should be payable at times convenient to taxpayers. Armed with the above principles, we can adequately appraise the Local Service Tax.

However, we also need to understand why the tax was introduced. Government scrapped Graduated Tax (GT) without seriously looking at alternative sources of revenue for local governments.

Currently local governments are faced with significant shortages of locally generated revenue hence their reliance on central government, a significant threat to decentralisation. The above situation hasn't been helped by the rampant creation of new local government units especially districts, most of them not economically viable.

The result has been increased cost of public administration and unless the above trend is checked, Ugandans should brace themselves to pay many other taxes of a similar nature. For instance, it has been reported that in a bid to fill the gap created by suspension of GT, Sironko District Local Government (DLG) plans to levy a new tax on traditional and church marriages.

This follows a resolution passed barely a year by Bududa local government to tax traditional marriage (Kwanjula) ceremonies. The local service tax is therefore meant to salvage the desperate situation currently obtaining in most local governments but the implementation of the tax seems tricky. The tax is not much different from GT and one wonders why government should re-introduce GT in a new form.

The service tax is to be levied on wealth and incomes of people currently falling in the brackets of direct taxes collected by the central government. The service tax is a direct tax on incomes of taxpayers and in principle falls in the same category as income tax collected by Uganda Revenue Authority.

The sole source of income of these people is being subjected to two direct taxes, the only difference being that the taxes are collected by different bodies. This is clearly double taxation - taxing the same income twice.

The assessment and collection of the service tax will still be costly, inefficient and inconvenient especially to people not in formal employment. It will negatively affect consumer spending and savings given the low income levels of most Ugandans.

For those in formal employment, the collection of the service tax will be easy and they will definitely compensate for the former category. The lack of capacity at local governments regarding skilled tax collectors will definitely affect the administration of the not-so-simple service tax.

In my opinion the logical solution lies in cutting public administration expenditure and not introducing the tax which will not be any better than GT and should be dropped without hesitation.

The writer is an Associate Consultant at Q-Sourcing Ltd, with 10 years experience in taxation