The Economics behind Environmental Levy on Used cars.

The proposed increment in environmental levy rates contained in the Finance Bill (Amendment), 2015 is primarily on the principle of Environmental policy other than Fiscal policy. Article 3.7.4 of the National Environment management policy (1995) requires the use of Economic incentives and disincentives to change people's behavior and the tax structure should provide for disincentives for actions which compromise social welfare. This is the principle upon which environmental levy is charged.

Amendment 2 of the Finance Bill, 2015 proposes for an amendment in the Second Schedule through an increment in the Environmental levy rate for motor vehicles (excluding goods vehicles) which are between 5-10 years old from 20% to 25% of the CIF value and motor vehicles (excluding goods vehicles) which are 10 years old or more a levy of 35% of the CIF value.

Environmental Levy emanates from a concept developed by a British Economist Arthur C. Pigou in his book The Economics of Welfare (1920) and it is commonly referred to as the “Pigouvian/ sin tax”. According to the Organisation for Economic Co-operation and Development (OECD) Glossary of terms (2001), A Pigouvian tax is a tax levied on an agent causing an environmental externality (environmental damage) as an incentive to avert or mitigate such damage. Pigou observed that costs imposed on others are not taken into account by the person taking the action. He argued that the existence of externalities is sufficient justification for government intervention. If someone is creating a negative externality, such as pollution, for instance, he is engaging in too much of the activity that generated the externality. Pigou advocated for a tax on such activities to discourage them and this is where the policy makers are coming from with regard to increment in environmental levies. For example when the driver of an old car that is emitting carbon into the environment, the government has to intervene by imposing such a tax to correct the social externality and hence protect the environment through its environmental policy.

Motor Vehicle taxation is premised on the provisions of the East African Community Customs Management Act (EACCMA, 2004) specifically with regard to Valuation and classification for customs purposes. The Uganda Revenue Authority has a Motor Vehicle value guide that is used to levy uniform taxes and therefore the Value of the car determines the taxes to be paid not the Environmental levy, more to that,  there are other taxes which apply uniformly regardless of the nature (new or old) like import duty, Import value added tax etc.  The calculation of taxes in based on International trade Inco terms and the common one is Cost, Insurance and Freight (CIF). It is the value of the CIF that will dictate the amount of taxes payable at importation, a new car with a higher CIF pays more taxes than an old car with a lower CIF even when the old car is charged an Environmental levy than the new car. The CIF is always calculated in the standard US dollars as per customs motor vehicle indicative value guide which is then translated into Uganda shillings. The value of the car is then subjected to different tax rates. There are various CIF guides for various car types can be accessed on the URA website (www.ura.go.ug) under the A-Z topics.

 According to the proposal, Environmental levy will be charged on vehicles which were manufactured before 2010 at rates between 25 - 35%. However this does not make used cars more expensive in comparison to new cars neither does it discourage importation of used cars as the business community has perceived it. This is therefore is an indicator than environmental levy is more of an environmental policy aiming at reducing carbon emission and preservation of the environment.

In Kenya the law is very strict about importation of used cars due to the environmental reasons and according to the Kenya Bureau of Standards , Standard KS 1515:2000. For example, for the year 2015, only vehicles manufactured in or after 2008 are allowed. I therefore urge the business community to support the government in the implementation of this Environment policy and preserve the environment for both the present and the future generations.

For God and My Country.

Andrew Kyambadde

Tax Consultant.

The Benefits in Voluntary VAT Registration For Small Businesses.

Value Added Tax (VAT) is an indirect domestic tax which is imposed on goods and services at each stage of production, starting from raw materials to the final product. Therefore VAT is levied on the value additions at different stages of production.

According to the Organization for Economic Co-operation and Development (OECD), A German businessman Wilhelm Von Siemens is credited for coming up with the idea of VAT in the 1920s which idea was later developed by the father of VAT Maurice Lauré in 1954, who was then the joint director of the French tax authorities. In Uganda, An act was enacted called the VAT Act Cap 349 Commencing 1^st July 1996 to provide for the imposition and collection of Value Added Tax and for other purposes related to VAT. Section 4 of the VAT Act commonly known as the charging section requires that  Value added tax be charged on every taxable supply made by a taxable person, every import of goods other than an exempt import and the supply of imported services other than an exempt service by any person, this gives the scope of Value added tax.

The VAT Amendment bill, 2015 proposes that businesses with a turnover in excess of One hundred and fifty (150) million Uganda shillings which is the proposed VAT registration threshold are required by law to apply for registration under section 7(1) of the VAT Act. Businesses that fail to do so after reaching this threshold commit an offence under section 51(1) (a). Once a business is VAT registered it can charge VAT on goods and services sold to customers and also reclaim VAT charged on goods and services purchased for the business from other businesses, suppliers. VAT registration is therefore an important part even to the small business.

However in a context of a Small business as legally defined by the Small Business Administration (SBA) of the United Sates of America, the proposed VAT threshold might be too high for it to meet at the time the desire to register for VAT arises. Section 7 (4), provides a solution which is voluntary registration and encourages a person supplying goods and services for a consideration as part of his or her business activity but doesn’t not met the compulsory registration threshold to apply to the commissioner General to be registered if the commissioner is satisfied that the small business has a fixed place of abode, good record keeping system among other factors.

There’re benefits of voluntary VAT registration which make it quite appealing for small businesses.

·         Avoiding Financial Penalties. If you don’t keep a careful eye on your turnover then you might not notice when it creeps over the VAT registration threshold. The obvious advantage of voluntary VAT registration is you won’t have to worry about passing the threshold or notifying URA in time.

·         Boosting Your Business Profile. Starting out as a small business or new limited company it can be tough to compete against the big and already established businesses. So voluntarily registering your business for VAT might give the impression that your business is bigger and more successful than it actually is especially when involved into open domestic and internal biddings evaluations yet in other cases, lack of registration for VAT purposes denies a small business chances of winning that contract.

·         VAT Refunds. Another advantage of voluntary VAT registration is the ability to claim VAT Credit on goods and services purchased for your business. If you are selling one sort of VAT Rated product for example standard rated, zero rated while buying another standard rated or zero rated you may actually receive money back from the URA in VAT refunds under section 42 of the VAT which will ease your business cash flows.

·         Reclaiming the Past. Voluntary VAT registration allows you to reclaim VAT from the last 6 months. So if you’ve been in business for a while, but not yet reached the threshold you can still reclaim VAT as long as you have kept the proper VAT records and invoices among other benefits.

Once voluntarily registered for VAT you need to abide by the same rules as other VAT registered business. This means keeping proper records and invoices, notifying the commissioner in case of change of address, and submitting VAT returns every 15^th date of the following month and payment of any excess Output VAT collected from taxable supplies made.

In conclusion, I encourage small businesses to register for VAT in order to boost tax revenue collection and also reap from the benefits of VAT registration.

Andrew Kyambadde M.

andy.kyambadde@gmail.com

Tax Consultant.