Kampala — The Local Governments (Amendment) Bill 2008 introduced two taxes, the Local Services Tax and the Local Hotel Tax.
These taxes are to be levied, collected and charged by local governments to provide new sources of revenue for local governments.
People in gainful employment, practicing professionals, business people and large-scale commercial farmers are supposed to pay these taxes.
Employers have a statutory duty to deduct the Local Service Tax in four monthly installments and paid to the local governments where the employees reside.
The Local Government Amendment Act provides that the Local Service Tax will be computed and deducted after Income Tax in terms of Pay as You Earn (PAYE).
This means the tax is taken from an employee's take home. Take-home salary is gross salary after deducting PAYE. However, the Income Tax Act was amended to accommodate the Local Service Tax. In other words, Local Service Tax is an allowed deduction and should, therefore, be calculated before computing PAYE.
Payroll managers should deduct Local Service Tax from gross pay before computing taxes. For instance, if someone earns sh1m gross and Local Service Tax is sh90,000 (ignoring NSSF), taxable pay is sh910,000m on which PAYE should be charged. This way, PAYE will be sh195,500, leaving a net take-home pay of sh714,500.
Using the same gross salary and following the Local Government Amendment Act, Local Service Tax is determined after PAYE has been deducted. This means the employee earning sh1m gross will pay sh222,500 as PAYE, leaving a take-home pay of sh777,000. Local Service Tax will be deducted from the sh777,000,leaving a net pay of sh707,500. In the latter example, Local Service Tax has reduced from sh90,000 to sh70,000. I have deducted the Local Service Tax in one month for simplicity, otherwise it should be deducted in four installments.
The two amendments contradict each other. Which one should take precedence over the other? MPs should assist in harmonising these two legislations.
The writer is the Managing Consultant of GoldStead Associates, a Managing Partner of AA&L Associates and a Member of the Uganda Tax Institute