Read the passage below and then answer the questions that follow.
The Ugandan Revenue Authority (URA) is optimistic that the introduction of digital tax stamps,
a high-tech tool, will mitigate the challenges that the authority has been facing during collection
of revenue. This tool enables the URA to capture data on manufactured products at source in
order to cut revenue leakages. It is aimed at improving tax compliance habits in the industrial
sector and raising the country’s tax collection ratio to 16 percent of the Gross Domestic Product
by close of the year 2021.
The digital tax stamps were introduced in 2019 as part of the reforms unveiled by the Ugandan
government with the objective of deepening the country’s revenue base. The move was also
geared towards boosting the amount of domestic resources available in the national budget from
an average of 70 percent to 80 percent. In a bid to bolster these efforts, the Ministry of Finance,
Planning and Economic Development also launched a new tax mobilization strategy for the
period 2019-2034.
The desire to increase domestic revenue is necessitated by the immense decline of donor support
from 70 percent to 30 percent. This has forced the government to grow its capacity to take care
of its own affairs, thus the roll-out of the digital tax stamps. These digital stamps are expected to
yield positive results to the Ugandan economy in several ways.
To begin with, the stamps are expected to minimize cases of fraudulent tax returns filed by some
firms in the manufacturing sector. This is an attempt to slash costs, increase profits and boost
dividends paid to shareholders. Tax losses linked to such cases are estimated to be in the billions
of Uganda shillings. Another gain is that digital tax stamps will address challenges of illicit trade
and counterfeit products. Such products enter the Ugandan market from other countries without
the importers having paid the requisite tax.
In addition, the digital tax stamps will help fight unfair competition in the market. This is because
the stamps are used to track and trace taxable goods. As such, with this digitization, there will
be no need to manually follow up and calculate tax vis-a-vis sales. Under the digital tax stamp
system, locally manufactured goods are labelled with a tax seal before being transported from
the producers’ premises to be delivered to the distributors’ warehouses. Designated stamping
devices located in manufacturers’ premises are used to label the goods while product details are
immediately transmitted to the URA database in real time. This product data is consequently used
to verify manufacturers’ tax returns filed with URA under the VAT, excise duty and corporation
income tax categories. Further, the stamps will help the tax collectors to generate an extra Ush.48
billion out of the URA’s target of Ush.20.8 trillion for the 2019-2021 financial years. Moreover,
the digital tax stamps will enable URA to capture more accurate data of goods produced in local
factories and minimize tax losses.
Even though digital tax stamps may have an enormous contribution in reducing the rampant
smuggling activities associated with manufactured goods, they may fall short of the expectation
to yield much in revenue. This is because the excise duty base in the Ugandan economy is quite
small. It is also not yet clear how the manufacturers will absorb the cost of annual software
license fees charged by foreign technology firms that have supplied digital stamp equipment.
It is feared that the use of digital tax stamps will somehow raise the market prices of some goods.
This is because the regulation compels manufacturers to pay excise duty at source immediately
after the goods have left their premises. Furthermore, higher product prices may culminate in
consumer demand for some items going down. This problem will have a multiplier effect on
the economy as the Value Added Tax (VAT) and other income tax collections will be negatively
affected. Consequently, the economic growth will be adversely affected thus rendering the gains
of the digital tax stamps meaningless to both the Ugandan government and its citizens.
(a) State the meaning of each of the following words and phrase as used in the passage:
i) cut;
(ii) unveiled;
(iii) capacity;
(iv) verify;
(v) fall short of;
(vi) compels. (6 marks)July 2020
(b) In about 110 words and according to the passage, write a summary of the expected
results of digital tax stamps io the Ugandan economy. (8 marks)July 2020
(c) Highlight, according to the passage, why digital stamps may not yield much in new tax
revenue. : (4 marks)July 2020
(i) Cut: To cut means to reduce or decrease. In the passage, the phrase “cut revenue leakages” refers to reducing the amount of revenue lost through illegitimate means.
(ii) Unveiled: To unveil means to reveal or disclose something that was previously unknown or hidden. In the passage, the phrase “unveiled by the Ugandan government” refers to the government revealing or disclosing the reforms that included the introduction of digital tax stamps.
(iii) Capacity: Capacity refers to the ability or potential to do or achieve something. In the passage, the phrase “grow its capacity to take care of its own affairs” refers to the government’s ability or potential to manage its own affairs without relying on external support.
(iv) Verify: To verify means to confirm or establish the truth or accuracy of something. In the passage, the phrase “used to verify manufacturers’ tax returns” refers to using the data captured by the digital tax stamps to confirm the accuracy of the tax returns filed by manufacturers.
(v) Fall short of: To fall short of means to not reach or achieve a certain level or standard. In the passage, the phrase “fall short of the expectation to yield much in revenue” refers to the digital tax stamps not reaching or achieving the level of revenue that was expected.
(vi) Compels: To compel means to force or obligate someone to do something. In the passage, the phrase “regulation compels manufacturers to pay excise duty” refers to the regulation forcing or obligating manufacturers to pay excise duty.
(b) In about 110 words and according to the passage, write a summary of the expected
results of digital tax stamps io the Ugandan economy. (8 marks)July 2020
Digital tax stamps are expected to have several benefits for the Ugandan economy, according to the passage. They are expected to reduce cases of fraudulent tax returns filed by firms in the manufacturing sector, which result in significant tax losses. The stamps are also expected to address challenges of illicit trade and counterfeit products, which enter the Ugandan market without the necessary taxes being paid. In addition, the stamps are expected to help fight unfair competition in the market by tracking and tracing taxable goods, and to enable the Ugandan Revenue Authority (URA) to capture more accurate data of goods produced in local factories and minimize tax losses. The stamps are also expected to generate an extra Ush.48 billion out of the URA’s target of Ush.20.8 trillion for the 2019-2021 financial years. However, it is not yet clear how manufacturers will absorb the cost of annual software license fees charged by foreign technology firms that have supplied the digital stamp equipment, and it is feared that the use of digital tax stamps may lead to higher market prices for some goods.
(c) Highlight, according to the passage, why digital stamps may not yield much in new tax
revenue. : (4 marks)July 2020