Francis Kamulegeya
21 October 2008
Following the abolition of graduated tax by the government in 2006, a tax known as Local Service Tax (LST) was introduced by the government and is contained in the Local Governments (Amendment) Act, 2008.
This tax is payable by all people in gainful employment with effect from 1 July 2008.
However, currently there appears to be a conflict between the Income Tax (Amendment) Bill, 2008 and the Local Governments (Amendment) Act, 2008.
According to the Local Governments (Amendment) Act, 2008 the LST will be deducted from an employee's monthly take home salary, that is their net income after Pay As You Earn (Paye). Whereas this may be the case at the time when the LST was first introduced by the Local Governments (Amendment) Bill, 2007, the situation is now different following the proposals contained in the Income Tax (Amendment) Bill, 2008.
According to Section 5 of the Income Tax (Amendment) Bill, 2008, the ITA is to be amended in order to make LST a tax deductible payment. What this means is that LST will be paid out of the gross income of employees and not net (taxed) income.
The objective of this is to avoid paying tax (LST) on income that has already been subject to tax (Paye) as this would tantamount to subjecting the employee's income to tax twice. Therefore the correct position is that LST should be deducted from the employees' gross salaries before Paye and not on their net salary after Paye.
The new LST applies to all salaried employees with effect from 1 July 2008, and shall be deducted by their employers and remitted to their respective local authorities where they live. The LST shall be paid in four equal monthly instalments, that is July, August, September and October.
This means that the LST payable by an employee for the 2008/09 financial year must be collected by the employer from the employees monthly salaries during the months of July, August, September and October.
The obligation to deduct the LST from salaried employees is on the employer, and it must be remitted to the appropriate local authority by the 15th day of the following month.
In addition, the four instalments deducted from the salaries or wages of all employees must be remitted to local government authority by not later than the 15th day of November. LST is to be charged on all persons who are in gainful employment or who are practising any profession or on business persons and commercial farmers producing on a large scale.
Certain categories of persons are exempt from LST, and these include; unemployed persons, petty food vendors, petty artisans, boda-boda cyclists, jua-kalis who are not fully established and are not business entities, peasants and people living in poverty i.e. those who are unable to earn a minimum income to access basic necessities of life.
Other exempted persons include: members of the Uganda Peoples' Defence Forces; members of the Uganda Police Force; members of the Uganda Prisons Service; members of the Local Defence Forces; and members of diplomatic missions accredited to Uganda.
Mr Kamulegeya is a tax partner in PricewaterhouseCoopers francis.
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