Has Local Service Tax been good replacement of Graduated Tax?

Wednesday March 18 2020


By Ann Barnshaw Kengaaju

Many years ago, a good Ugandan vowed to abolish an atrocious tax if voted into the highest office in the land.

This was Graduated Tax, a form of income tax levied on all able-bodied adults, especially males. Graduated Tax was imposed on their actual or presumed income derived from all sources and was harshly enforced by the district and urban authorities.

The cruel enforcement mechanisms used by the authorities, coupled with the wide sentiment among taxpayers that the revenue collected were not used to fund local services and the high cost of collecting the tax, made it unpopular.

No wonder the promise to abolish it caught the attention of all politicians and eventually the tax was abolished. Following the abolition of Graduated Tax, local governments sought an alternative source of income to fulfil their obligations.

This desire culminated into the amendment to the Local Governments Act in 2008, which inter alia, introduced Local Service Tax (LST). This tax is levied on the wealth and incomes of all persons in gainful employment, self-employed and practicing professionals, artisans, businessmen and women as well as commercial farmers.

LST is charged on employees’ salaries with the exception of members of the security agencies and diplomatic missions.


It is also imposed on monthly income of self-employed, practising professionals and artisans as well as the monthly turnover of businesspersons. However, peasants, unemployed persons, boda boda riders, etc, are exempted from paying LST.

The various rates for LST are explicitly stipulated in the Local Governments Act and the tax is payable at the beginning of the financial year after assessment.

For salaried employees, the Act permits employers to remit LST in four equal incitements. Since the normal financial year of income runs from July 1 to June 30, LST is generally due between July and October every year. However, if an employer obtains a substituted year of income, then the tax gets due within the first four months of that year of income.

This tax is computed based on the salaries of employees after deducting Pay As You Earn. As such, all employers are withholding tax agents for this purpose and are obliged to withhold LST and remit it to the authorities.

If the law was followed to the letter, all employers would have to remit LST to the various districts, town councils or municipalities where each of their employees resides. However, this would defeat the tax canon of convenience since it is rare to find a company whose employees all reside in the same area and so are liable to pay LST to the same district, town council or municipality.

The practice has often been to remit LST to KCCA revenue offices where the employer trades, which will then distribute the revenue to other local governments.