General
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UNIT 3: TAXES IN BUSINESS
Key unit competence: To be able to analyze the role of tax towards economic
development of the country and pay taxes.
Introductory activity: A case study
Why Do You Have to Pay Taxes
Every year around, before and after June 15, everybody especially business
people will be discussing about tax changes in the national budget. This is
because tax reforms and new taxes introduced are announced on that day.
However, have you ever wondered why you and businesses need to pay taxes?
In Rwanda, there are arms of the government (ruling bodies) from the
village, sector, district, provincial and national levels. These bodies comprise:
Legislature (who make laws), Executives (who enforce laws) and Judiciary
(who exercise laws). The salaries that public servants receive to do their jobs
come from taxes. Paying taxes is considered a civic duty, although doing so isalso a requirement of the law.
Taxes take many forms too. When you work at a job to make money, you pay
income taxes. Depending on how much money you earn, a certain percentage
(part) of the money you make is withheld (kept out of your paycheck andsent to the government).
When you buy things at a store, you also usually pay sales tax, which is a
percentage of the cost of the item charged by the store. If you own property,you also pay property taxes on the value of your property.
Paying your taxes is considered a civic duty, although doing so is also a
requirement of the law. If you do not pay your taxes, the government agency
that oversees taxes — the Rwanda Revenue Authority or RRA - will requireyou to pay your taxes or else face penalties, such as fines or going to jail.
The money you pay in taxes goes to many places. In addition to paying the
salaries of government workers, your tax also help to support commonresources, such as police and firefighters.
Tax money helps to ensure the roads you travel on are safe and well
maintained. Taxes fund public libraries and parks. Taxes are also used to fund
many types of government programs that help the poor and less fortunate,as well as many schools!
Each year as the “tax day” rolls in, adults of all ages and businesses must
report their income to the RRA, using special tax forms. There are many laws
that set forth complicated rules about how much tax is owed and what kinds
of special expenses can be used (“written off”) to lower the amount of taxesyou need to pay.
For the average worker, tax money has been withheld from paychecks
throughout the year. On “tax day,” each worker reports his or her income andexpenses to the RRA.
Employers also report to the RRA how much they paid each worker. The RRA
compares all these numbers to make sure that each person pays the correctamount of taxes.
If you have not had enough tax money withheld from your checks throughout
the year to cover the amount of tax you owe, you will have to send more
money (“pay in”) to the government. If, however, too much tax money was
withheld from your paychecks, you will receive a check (get a “refund”) fromthe government.
From the passage answer the following questions:
What are the major changes expected by people especially business people
on June 15, every year?
What makes the business people so anxious to know the changes mentionedabove in a)?
Why do you think it is important for businesses to pay taxes to the government?
How do the following benefit from taxes?
i) Entrepreneur.
ii) Government.
iii) Society.
a) Identify and briefly explain at least two types of taxes paid in Rwanda?
b) What happens to businesses or people who do not pay taxes?c) What is the difference between tax and taxation?
3.1. Tax and business tax
Activity 3.1
1. Explain the meaning of the following terms used in taxation:
a) Tax b) Business tax
2. In your community, you have probably heard people and business
people complaining about the taxes they pay or charged to different
or similar items. Identify any 5 things you have heard normally
people complain about.
3. If you were the one determining or imposing taxes to people andbusinesses, mention any five things you would put into consideration.
3.1.1. Meaning of taxation concepts
Tax is a fee without direct exchange requested to the members of the community
by the State according to the law, to financially support the execution of the
government tasks.
Business tax refers to compulsory and non-refundable payments made by
the business to the government or local authority to raise revenue to finance
public expenditures.
Taxation is a system of raising money or revenue by the government from
individuals/businesses and companies by law through taxes.
Taxation is a system/practice of government collecting money from its citizens
to pay for public services.
Tax avoidance is a situation where a business person does not pay tax because
s/he has avoided the product or activity on which the tax is imposed. It is the
taxpayer’s exploitation of loopholes in the tax system there by paying less tax
than what they are supposed to pay.
Example of Tax Avoidance:
• Taking legitimate tax deductions to maximize business expenses and
thus lower your business tax bill.
Tax evasion is the illegal practice of not paying taxes by either not reporting
income, reporting expenses not legally allowed, or by not paying taxes owed. In
businesses, tax evasion can occur in connection with income taxes, employment
taxes, sales, etc.
Examples of practices considered as tax evasion:
• It is considered tax evasion if you knowingly fail to report income.
• Under-reporting income (claiming less income than you actually received
from a specific source).
• Providing false information to the RRA about business income or expenses, etc.
3.1.2 Characteristics or principles of a good taxation system
A good taxation system can contribute a lot to the economic development of a
country and its national treasury. Equitable taxation system bears a significant
role in bringing harmony in the lifestyle of the population of the country. A good
tax system should consist of taxes which conform to the canons of taxation. Thecanons or principles of taxation are explained as follows:
1) Convenience: Places, periods and seasons in which the tax dues are
collected should be convenient to the taxpayer. For example, the convenient
time to a trader is when s/he has made a profit. For a farmer, is when s/she
has sold his/her products.
2) Simplicity: The type of tax and the method of assessment and collection
must be understandable by both the taxpayer and tax collectors.
Complicated taxes may lead to disputes, delays and high costs of collection
in terms of time and resources.
3) Certainty: The taxpayer must know the nature, base and amount of tax
without doubt. Unpredictable taxes discourage investment and reduce
work effort. Simply the tax should not be arbitrary.
4) Economy: The cost of collection and administration of tax must be much
lower than the tax collected
5) Elasticity: A tax should change directly with a change in the tax base. If the
tax base increases, the tax charged on the tax base should also increase.
6) Productivity: The fiscal authorities should be able to predict and forecast
accurately the revenue a particular tax would generate and at what rate it
would flow in.
7) Equity: Tax assessment should be in such a way that taxpayers bear a
proportionately equal burden. I.e. people who earn more income should
be taxed more than those who earn less income.
8) Diversity: This canon requires that there should be a number of taxes of
different varieties so that every class of citizen may be called upon to paysomething towards the national priorities
Application Activity 3.1
1. Why is it important to have principles of taxation?
2. Referring to the principles (characteristics) of a good taxation system
you know, briefly explain why each is important to the taxpayer and
tax authority (RRA).
3. With examples, differentiate
a) Tax and Taxation
b) Tax avoidance and Tax evasion
4. Do you think tax evasion is good? Give reasons to support your response
3.2. Importance of paying taxes
Sources: http://www.kigalicity.gov.rw
Figure 3.2 Taxes help the government to build infrastructures
Activity 3.2
1. With examples from your community or Rwandan community at
large, why do you think people and business enterprises need to pay
taxes to the government?
2. As an entrepreneur to be or referring to the activities of entrepreneurs
in your community, how do you think businesses or entrepreneurs
benefit from paying taxes?
3. In general, how does your society benefit from paying taxes? Give
examples to support your views.3.2.1. Importance of paying taxes to an entrepreneur
• Paying taxes by the entrepreneur helps the business activity to continue,
as it does not face penalties and associated costs from the RRA for non
payment.
• When an entrepreneur pays taxes, it improves his/her reputation or
public image which may result in increased customers and better services
from the government.
• To avoid inconveniences of closure of the business and its associated
costs: when entrepreneur fails to pay assessed taxes, his/her business is
subject to penalty even closure to some cases.
• Business needs certain infrastructures to operate successfully such as
roads to move raw materials, finished goods, workers; security for their
enterprises, among others, and all these are provided by the government
from taxes.
• Paying taxes means contributing money to government agencies or
departments such as Development Bank of Rwanda (BRD), Business
Development Fund (BDF), which support entrepreneurs to operatebusiness activities through soft loans and other financial support.
3.2.2. Importance of paying taxes to the government
• Source of government revenue: taxes are the main source of government
revenue to finance its public expenditure. So taxes enable the government
to pay its workers, construct roads, maintain security, provide health care,
education among others.
• Taxes benefit the Rwandan government to meet its objectives and goals
such constructing affordable houses to the citizens which helps improve
the standards of living
• Taxes help the government to finance its policies especially on poverty
alleviation through programs such as “GIRINKA”, “VUP”, “UBUDEHE”
among others.
• Taxes enable the government to regulate the prices of goods and services
in the country hence ensuring a low cost of living and maintaining the
standards of living of the citizens.
• Taxes enable the government to maintain a balance between the poor
and rich. The government uses the taxes from business people to provide
services needed by the poor, which otherwise the rich could not provide.
• Taxes enable the government to promote its policy industrialization
through reducing products from other countries that would otherwise
outcompete the home industries.
• Taxes enable the government to ensure that the citizens have enough
products. This can be through taxes charged to reduce products moving
out of the country or removing taxes on goods needed in the country. Thishelps maintain a high standard of living.
3.2.3. Importance of paying taxes to Society
• There are reduced rates of poverty among the community due to a
significantly equal distribution of income through various activities and
projects set by the government.
• Improved wellbeing among the vulnerable and elderly as they benefit
from the different government programs financed through taxes.
• Reduced infant mortality rates and increased life expectancy due to
improved access to health facilities and services.
• Increase in the percentage of the population that completes secondary
and TVET education, reducing the literacy levels, improving on the
peoples’ skills through programs such as 12YBE.
• Increased community/social solidarity, general happiness, life satisfaction,
and a significant more trust among the community members and for
public institutions.
• Taxes are charged on some products to discourage their production
and usage hence controlling over-exploitation of resources as well asprotecting the environment which is vital for the existence of the society.
Application Activity 3.2
1. By giving specific examples from your community, how does your
society benefit from taxes?
2. What do you think would happen in the country if taxes were not paid?
3.3. Calculation of taxes
Activity 3.3
1. Do you think it is important for an entrepreneur to know how to
compute the amount of tax he/she is supposed to pay? Give reasons.
2. What do you think the term “Pay-As You-Earn (PAYE) tax means”?And how is it calculated?
There is a variety of taxes that a business has to pay such as corporate income
tax, trading license tax, professional income tax or PAYE (Pay-As-You-Earn),
rental income tax, fixed asset tax, Value Added Tax (VAT), Sumptuary tax, etc.
but here, an emphasis is made on:
1. Pay- As- You Earn (PAYE) and
2. Value Added Tax (VAT
3.3.1. Pay-As -You-Earn (PAYE) tax or professional income tax
The tax law requires that when an employer makes available employment
income to an employee the employer must withhold, declare, and pay the PAYE
tax to the Rwanda Revenue Authority within 15 days following the end of the
month for which the tax was due.
PAYE: is composed of Wages, salaries, leave pay, sick pay, medical allowances,
pension payment etc. Pay-As-You-Earn tax is computed as follows:
Example:
The following relate to monthly salaries of Kanyarwanda enterprise employeesfor year 2018.
a) Rukundo earns 450,000Frw
b) Karinganire earns 89,000Frw
c) Keza earns 28500Fwd) Buzima earns 12,5000Frw
Required:
Calculate the total PAYE for above employees that Kanyarwanda enterprisepays to RRA every month.
Solution:
a) Rukundo :
Total TAX for Rukundo = 14000+105000= 119,000Frw
b) Karinganire:
Total tax for Karinganire is 11,800Frw
c) Since Keza earns less than 30000Frw she does not pay PAYE. Her total tax =0(28500*0)
d) Buzima:
Total tax for Buzima =14000+7500=21,500Frw
Total PAYE for Kanyarwanda enterprise every month
= (119,000+11,800+21,500)Frw= 152,300Frw
Note:
Exemption for PAYE is that every person who earns income less than 30000
does not pay PAYE to RRA.
The “casual laborer” means an employee or worker who performs unskilled
labour activities, who does not use machinery or equipment requiring special
skills, and engaged by an employer for an aggregate period not exceeding thirty(30) days during the tax period.
3.3.2. Value Added Tax (VAT)
Value Added Tax was introduced in Rwanda in 2001. VAT is a tax on the added
value achieved by a firm. This is the difference between the buying price (ofraw materials) and the selling price of the product in whatever forms it is sold.
Value added = F.P – I.C where F.P is final product, IC is intermediate costs
Tax rate
The VAT rate is applied to duty-free goods. Several rates can be applieddepending on the nature of products. The standard rate is usually 18%
Example 1:
UTEXRWA industry bought cotton from a local farmer worth 1200, 000Frw to
use in production of blankets;170 blankets were manufactured and sold to a
wholesaler at a cost of 4,000,000Frw who later supplied it to LEMIGO hotel
at a value of 8,000,000Frw VAT included. Calculate the value of VAT paid onblankets.
Possible solution
Step 1 VAT paid by local farmer:
VAT =1,200,000Frw*18% = 216,000Frw
Step 2 VAT paid by wholesaler:
VAT = FP -IC where FP is final product and IC is intermediate cost
Value added =4,000,000Frw-1,200,000=2,800,000Frw
VAT paid by wholesaler =2,800, 000Frw*18%= 504,000Frw
Step 3 VAT paid by LEMIGO hotel:
VAT paid by LEMIGO hotel= 8,000,000-4,000,000Frw=
(4,000,000Frw*18%)=720,000Frw
Therefore, total VAT =216,000+504,000+720,000 =1440, 000Frw
Alternative:
VAT is calculated on sales.
VAT =sales *18%
Which is equal 8,000,000Frw*18%=1,440,000Frw
Example 2:
A students’ business club has sold goods to XY enterprise at 100,000 Frw VAT
excluded.
Calculate:
a) VAT receivedb) The price VAT included
Solution:
OR
The price VAT excluded= Price VAT included-VAT paid= 1,000,000Frw- 152,542.37Frw = 847,457.63Frw
Exemptions on Value Added Tax
The following goods and services shall be exempted from value added tax:
1. Services of supplying clean water and ensuring environment treatment
for nonprofit making purposes with the exception of sewage pump- out
services;
2. Goods and services for health-related purposes: (health and medical
services, equipment designed for persons with disabilities, goods and drugs
appearing on the list made by the Minister in charge of health and approved
by the Minister in charge of taxes.
3. Educational materials, services and equipment; books, newspapers and
journals
4. Transportation services by licensed persons:
5. Lending, lease and sale: (sale or lease of land, sale of a whole or part of a
building for residential use, renting or grant of the right to occupy a house
used as a place of residence of one person and his/her family) etc.
6. Financial and insurance services:
7. Precious metals: sale of gold in bullion form to the National Bank of Rwanda;
8. Any goods or services in connection with burial or cremation of a body
provided by an Order of the Minister in charge of finance;
9. Energy supply equipment appearing on the list made by the Minister in
charge of energy and approved by the Minister in charge of taxes;
10. Trade union subscriptions;
11. Leasing of exempted goods;
12. All agricultural and livestock products, except processed ones. However,
milk processed, excluding powder milk and milk derived products, is
exempted from this tax;
13.Agricultural inputs and other agricultural and livestock materials and
equipment appearing on the list made by the Minister in charge of agriculture
and livestock and approved by the Minister in charge of taxes.
14. Gaming activities taxable under the Law establishing tax on gaming
activities;
15. Personal effects of Rwandan diplomats returning from foreign postings,
Rwandan refugees and returnees entitled to tax relief under customs laws.
16. Goods and services meant for Special Economic Zones imported by a zone
user holding this legal status;
17. Mobile telephones and SIM cards;
18. Information, communication and technology equipment appearing on the
list made by the Minister in charge of information and communicationtechnology and approved by the Minister in charge of taxes.
Application Activity 3.3
1. A students’ business club (SBC) in one of the TTCs has the following
regular employees. Their salaries are in accordance with theirappointment as follows:
Calculate the PAYE tax on each individual employee
2. The PAYE tax to be withheld and paid by the business club to RRA2.
Using the information available on the below EBM issued receipt,
compute the following:
a) Price VAT excludedb) VAT to prove the amount appearing on the receipt.
3.4. Penalties of not paying tax
Activity 3.4
1. Identify instances through which a taxpayer may undergo various
penalties.
2. What do you think may happen to an entrepreneur if he/she does not
comply with the tax obligations?
The penalties of not paying tax include:
• Fines and interest: A taxpayer who fails to comply with the provisions
of law determining and establishing a tax shall be liable to a fine. The
fines will vary according to types of taxes.
Example of Penalties and Interest on not paying PAYE
A taxpayer who fails to pay tax within the due date is required to pay interest
on the amount of tax. Interest is calculated on a monthly basis at the inter-bank
offered rate of the National Bank of Rwanda plus 2 (two) percentage points. For
example, if the inter-bank rate is 9%, interest is imposed at 11% annually.
• Imprisonment: A tax fraud’s punishment in Rwanda, is the jail for a
period between six (6) months and two (2) years; even the Minister’s
order determines an award given to any person who denounces a
taxpayer who engages in that act. Failure to pay tax withheld: this
undertakes 100% penalty and 3months to 2years in jail.
• Closure of the business for 30 days;
• Cancellation or withdrawal of registration certificate;
• Banned from public tenders;• Exposure in the media
Application Activity 3.4
1. Discuss why RRA charges fines and penalties?
2. What do you think will happen if taxpayers don’t pay both taxesassessed and fines/penalties?
Skills lab 3
1. Justify the following statements with concrete examples:
• “Taxes are more of a benefit than a cost to an entrepreneur”• “ Tax evasion is a shortcut to business growth”
2. A business club at one of the TTCs has 3 regular employees namely
KALISA, KALIZA and BERWA with monthly salaries of 35,000Frw,
40,000Frw and 20,000Frw respectively. On top of that the business
made sales of 300,000Frw VAT exclusive, and the input VAT is
34,000Frw.
a) Calculate the total amount of tax that the business club has to pay
to RRAb) Advise the above business on how the above taxes would be paid.
End of unit 3 Assessment
1. It is said that “tax is the free money to central or local authorities from
taxpayers” do you agree with this statement. Justify your answer
2. Describe any four characteristics of a good taxation system.
3. How are taxes used by government to:
a) Support Entrepreneurs
b) Support the community
4. Fill in the missing gaps, with the most appropriate term:
a) …………. punishment is the jail for a period between six (6) months
and two (2) years; even the Minister’s order determines an award
given to any person who denounces a taxpayer who engages in that
act.
b) …………. is the compulsory and non-refundable payment made by
the business to the Government or Local Authority so as to raise
their revenues.
c) …………. is the one that is exempted from VAT.
d) …………. is one of the taxes vested to the local government (Districts).
e) The degree to which the taxpayers meet their tax obligations
as set out in the appropriate legal and regulatory provisions
is……………………….
f) The………………. means an employee or worker who performs
unskilled labour activities, who does not use machinery or
equipment requiring special skills, and engaged by an employer for
an aggregate period not exceeding thirty (30) days during the taxperiod.