The ongoing fight between small-scale traders and the tax authorities is a clear indication that the administration of Value Added Tax (VAT) has glaring gaps, which must be addressed to promote national development.

In simple terms, VAT is a ‘consumption tax’ (paid by the final consumer), which is levied on products or services whenever value is added at each stage from production to the point of sale. So, in an ideal situation, producers and big companies pay VAT when they buy inputs to produce their goods or services and also collect VAT on their sales along the value chain.

But because the final consumer ultimately bears the entire burden of the VAT, it's included on the final price that he/she pays for the goods or services. Okay, let me use the example of the National Water & Sewerage Corporation (NWSC) - supplying clean water to a Company X that makes juices and bottled drinking water - to explain the VAT process.

• NWSC incurs VAT when it purchases raw materials such as chemicals, equipment, services, and other inputs that are necessary for its clean water-production processes. This VAT, which is paid on the inputs, is called ‘input’ VAT.

Now, when NWSC sells its ‘value-added’ piped water to Company X to make the juice and mineral water, it adds 18% VAT and collects it from Company X. That is called ‘output’ VAT. In an ideal situation, the value of output VAT should eventually be higher than that of input VAT because of the value- addition aspect.

Now, the difference between the output VAT, which NWSC collected from Company X and the input VAT that it paid on its inputs, represents the VAT liability of the producer (NWSC) and must be remitted to the tax authority. Similarly, after Company X has used NWSC water to produce ‘value-added’ juices and mineral water, the input tax it paid to NWSC when buying the piped water will be deducted from the output VAT paid by VAT-registered businesses that buy juice and mineral water from Company X to sell to the final consumers and remit the difference to URA.

• Should the input VAT exceed the output VAT at a certain point, then the producer gets a VAT ‘refund’ in form of a tax credit. In practical terms, this entire system becomes self-regulating as producers will want to supply their goods and services only to VAT-registered companies in a bid to reduce on their tax liability. From the above example, it is important to note that VAT only makes sense if there is ‘value added’ to a product or service along the value chain.

But apart from local products and services, VAT may also be applied on imported goods - intended to ensure that imported and locally-produced products can compete on a level playing field in terms of price competitiveness.

Therefore, as soon as say a bale of used clothes arrives in Uganda from abroad, it is assumed that value has been added to the goods, so the importer has to pay VAT of 18% as required by law. If it is a large-scale importer who is going to distribute the bales of clothes to other VAT-registered companies that sell them to other VAT-registered businesses, the input/output VAT process must happen as discussed above.

That’s where the feud between URA and the small-scale trader operating a shop in kikuubo comes into the picture. Of course, should the trader be a small-scale businessman who imports his/her goods directly from China, he/she would have to pay the mandatory 18% VAT as required by law when clearing the goods at the Customs clearance point.

But should the small traders who buy bales of used clothes from him to sell to final consumers also be subjected to the input/out VAT process again? I mean, what value has been added to the imported used clothes so as to warrant further payment of VAT at the lower level of the distribution chain? Technically, that would amount to double taxation, because the VAT was already paid at the Customs clearance point!

• Realistically, any subsequent transactions involving finished imported products at the lower levels of the distribution chain must be inclusive of VAT. That is why the shopkeeper near your home does not remit VAT. She does not give receipts and the retail price you pay for a padlock is VAT-inclusive and so you can’t accuse her of evading VAT.

• I'll contend that demanding VAT payment from small traders is ‘double taxation,’ which only serves to raise the prices of imported goods, to the utter disadvantage of citizens and eventually, national development. If the prices of essential goods become too high, citizens cannot save, which negatively impacts aggregate savings in the economy.

If indeed the intension of the tax policy is to make imports unattractive, ostensibly to support import substitution, then we might be barking the wrong tree. The Government must instead create a more conducive environment to support local investment. Take the example of the Government’s own Teso Juice factory in Soroti. To what extent is it supporting import substitution for juices?

But most importantly, curtailing importation carries the unintended consequence of reducing employment opportunities for citizens. For example, importing just one container of used clothes does provide jobs for several people including; clearing agents, drivers and turnboys, truck owners, loaders, and traders at various levels.

If it ain’t broken, don’t fix it, as our American friends would say.