By Uganda’s national Treasury is currently targeting additional taxes to help the taxman meet a Shs30 trillion target for the upcoming financial year. The Treasury is in a cash-crunch to meet both its current deficit budget and its upcoming 2024/2025 fiscal year Budget that is just a few weeks away from reading.
The public is deeply concerned about the government’s plan, though, with traders—who met President Museveni yesterday—and manufacturers raising the most alarm. The government needs an extra Shs5.64 trillion to fund its Shs58.3 trillion Budget for the fiscal year 2024/2025.
This would have been simpler if its tax collectors were bringing in enough money, but according to the Uganda Revenue Authority’s (URA) records, top taxpayers are disappearing from its list of remittances, arrears are growing, and traders are contesting a remittance of Value Added Tax (VAT), which is its second biggest source of domestic income.
The nation also aspires to self-sustain its financing needs following some of its foreign development patterns, such as the World Bank’s decision to stop issuing new concessional loans to it due to what they term at its “harsh anti-gay law.”
Deepening the tax base?
As part of its plan to reduce borrowing, the government put forth the proposals to make up for the anticipated revenue shortfall. Uganda has now put up a number of taxes on essential goods like building materials and fuel for the upcoming fiscal year.
Mr Henry Musasizi, the junior Finance minister, presented the proposals to Parliament in five tax Bill sets early this month. They include the Excise Duty Amendment Bill 2024, the Stamp Duty Amendment Bill 2024, the Income Tax Bill 2024, the Value Added Tax Bill 2024, and the Tax Procedures Amendments Bill 2024.
Minister Musasizi proceeded to tell the House Budget Committee that the government plans to use the proposed taxes to raise Shs1.9 trillion in order to accumulate cash for the proposed Shs58.3 trillion Budget for 2024/2025 fiscal year. The minister also disclosed that Uganda had canceled plans to borrow approximately $414m (Shs1.6 trillion) from foreign lenders to bridge the gap left by deficiencies in revenue collection because of the high-interest rates on the international credit market.
Other taxes in these Bills seek to increase the tax rates on a variety of items, including fuel, fresh juice, mineral water, opaque beer, and profits from the sale of company stock. But some lawmakers and tax experts have grown irritated with them, arguing that they unfairly target the majority of the impoverished and expose them to negative consequences like higher living standards.
They contend that expanding; not deepening the tax base is more important.
“The government is between a rock and a hard place. It’s disturbed by a low tax base. There are a few things that it can tax, but it needs efficiency in its tax collection so that its efforts for more money don’t instead hurt its people,” said Prof Augustus Nuwagaba, a macroeconomist.
According to the Private Sector Federation of Uganda (PSFU), taxes typically make up between 45 and 55 percent of the cost of a finished good. Ms Shirly Kongali, PSFU’s chairperson for policy advocacy, says the country must budget for excise duties for a period of three to five years. This, she adds, allows for adequate planning and the execution of investment plans by businesses.
Income Tax qualms
Among the most controversial proposed tax Bills is the Income Tax (Amendment) Bill 2024, which would impose a five percent tax on gains from the sale of nonbusiness assets once passed by the House. This means individuals who purchase shares of listed companies will pay five percent of capital gains in taxes, while non-individuals will receive 40 percent.
According to sources close to Uganda’s Capital Markets Authority, this is “bad” because the stock market is having a hard time surviving due to low liquidity and the withdrawal of foreign investors.
The Bill also states that profits from the gains from disposal of land in cities or municipalities other than primary residences and rental properties will be subject to this tax. If the payment is not made within the allotted 15 days, following the sale date, there will be a two percent interest rate applied.
Little wonder, the Institution of Certified Public Accountants of Uganda (ICPAU) informed the House that the legislation in question exempts any capital gain that is not included in business income and that additional amendments are required to eliminate the two incompatible provisions.
“We believe it is against the principles of taxation—to tax where a person has not been earning income from the assets,” the ICPAU states regarding the law’s current extension to non-trading activities regarding the disposal of non-business assets.
The statement adds: “The proposed amendment in its current form is anti-investment and will prevent people from investing and accumulating assets on top of creating enforcement challenges for URA with regard to who is liable to pay, the notification process.”
This, the institution says, will increase the financial burden on taxpayers associated with the disposal of these assets, potentially reducing their gains arising from the sale of these investments.
Excise Duty questions
With the Excise Duty (Amendment) Bill, 2024, the government is attempting to recover a proposed tax of Shs1,550 per litre on motor spirit, Shs1,230 per litre on gas oil, and Shs500 per litre on kerosene (paraffin). Many tax experts reckon that this needs to be slightly lowered in order to maintain a healthy economy and reasonably low commodity prices.
Mr Nkajja stated in a notice that production costs are likely to surge due to heightened fuel expenses. Businesses, he further warned, will find themselves compelled to pass these additional costs onto consumers.
“This could lead to price hikes across various goods and services, exacerbating inflationary pressures and potentially dampening consumer spending,” he predicted, adding, “Moreover, such price increases could provide opportunistic businesses with a pretext to inflate their prices beyond what is justified solely by the fuel tax hike. Any increase in fuel prices invariably raises the cost of production, posing challenges for manufacturers who heavily rely on diesel as a supplementary power source.”
Many people still rely on paraffin for lighting in several rural areas that are currently off the national grid due to affordability and connectivity issues. Yet the Finance ministry wants to increase the tax on paraffin from Shs200 to Shs500, a 150 percent increase.
The Bill’s subclause 3(c) also proposes a 20 percent increase in the tax on spirits. A proposal has been made to impose an excise tax of 80 percent, or Shs1,700 per litre, on any undenatured spirits with an alcohol content of less than 80 percent by volume.
Additionally, an excise duty of 100 percent or Shs5,000 per litre, whichever is higher, will be applied to imported spirits with an alcoholic strength by volume of less than 80 percent.
Beer manufacturers say this tax will make beer products unaffordable to consumers, and ultimately leading to a decrease in sales volume. If the law is passed, they add, some traders might even use it to avoid paying taxes while flooding the market with smuggled goods. This, they conclude, would put the nation at the centre of stifling and distorting trade.
Digital Tax Stamps
In order to stop any excise duty payment leaks, the government implemented digital tax stamps (DTS) in the 2018/2019 fiscal year. However, this solution has severely impacted the private sector by raising the cost of doing business.
Consequently, businesses such as Nile Breweries Ltd have had to pay out Shs1.5 billion, in addition to another Shs9.7 billion in net sales loss, which they attribute to supply losses brought on by the 2021 digital tax stamp equipment outage.
“We recommend that the government re-evaluates the existing contract for the DTS system and renegotiates the cost of stamps considering the impact of these costs on the manufacturing sector,” says Ms Kongai.
Government under Clause 3 (g) of the Excise Duty (Amendment) Bill also seeks to introduce tax on adhesives, grout, white cement or lime of Shs500 per 50 kg bag. The Finance ministry says this is only to define these categories in the Act since its only cement that is cited there and cement producers will remain paying the same tax.
Real estate blues
Under another tax proposal in the Income Tax (Amendment) Bill, 2024, the national Treasury wants to impose a five percent levy on any gains on non-business assets, such as private company shares, land in cities or municipalities, rental property, and disposal gains that are not from someone’s primary residence.
If this tax is not paid within 15 days following the sale or transfer of a non-business asset, the taxpayer will be penalised with interest. Real estate developers argue that if it is added to the current tax laws, pertaining to stamp duty, property transfer taxes, and rental income tax, it would tremendously shrink returns from this business, which they already see as “struggling.”
This is because when transferring ownership of a property from one party to another, the buyer is required by the property transfer tax to pay the taxman one percent of the property’s value. Property owners must also pay the taxman 20 percent of their gross rental income in order to comply with rental income tax regulations.
Additionally, a stamp duty of one percent of the property’s value and 0.5 percent of the buyer’s annual rent is applied to property sales agreements. In the event of a lease, the sublease tenant is responsible for paying this tax.
“Every year, there is always a new tax on real estate. There should be some stability in the sector because uncertainty is growing, and when this arises, owners of properties and developers push that cost to the consumer. When the cost of land goes up, the cost of housing then goes up as well,” said Ms Kongai, who is also the president of the Association of Real Estate Agents Uganda (AREA-U).
Real estate data shows that the value of its products is already up. In fact, for the past five years or so, the majority of Ugandans have been unable to afford to buy or rent a home within their disposable incomes, as a result.
A number of economists contend that the reason for the sharp increase in the price of real estate, including land and houses, is that many people have been driven to invest exclusively in real estate as a result of the lack of experience with investing in assets that would appreciate the value of their investments like treasury bonds.
They observe that over time, as a result of the ever-increasing demand for properties, their value has increased and their prices have risen to levels that most Ugandans cannot afford.
“Now when you have a tax on the transfer of assets when I am not doing a trading activity, it will go beyond the principle of taxation because there are so many people who are merely keeping their retirement money in the form of real estate assets. For instance, when they sell their homes and use the proceeds to buy another, the government will take a portion, yet it’s what they will use to get a new home. That’s overreaching, to me. I don’t think it’s a good tax in that sense,” Mark Ruhinda, a tax lawyer, told local the media recently.
The real estate sector is already grappling with financing. Banks don’t want to lend it because of the associated loan defaults and low occupancy rates, and the few that do charge the developers of construction and works with relatively high interest rates of above 20 percent.
According to data from the Uganda Bureau of Statistics, this has been exacerbated with the high input costs used in civil engineering and works.
Tax procedures code
The government is proposing that a taxpayer who disagrees with a tax decision made by the Commissioner may apply to the Commissioner for resolution of the dispute using the alternative dispute resolution procedure within seven days of receiving the tax decision. Many tax experts, however, propose an amendment that would increase the period of time to 40 days.
They contend that the taxpayer’s seven-day window to gather information and present it in order to file an application for an alternative dispute resolution procedure, which would challenge the objection decision, is insufficient.
Additionally, per Mr Nkajja, “there is confusion for the taxpayers as to when to start counting the days as whether they receive an email or a physical copy of the letter of the tax decision has been delivered to them.”
The rationale behind this is that a taxpayer opting for the alternative dispute resolution process ought to have the option to set a deadline for applying to the Tax Appeals Tribunal for a review of the objection decision.
Under the current regulation, the taxpayer’s deadline for filing an application with the tribunal or a lawsuit with a court remains unaffected in the event that an alternative dispute resolution procedure is initiated between the taxpayer and the commissioner.
According to ICPAU, in order to prevent any inconvenience to the taxpayer, the taxpayer must file with the tribunal as well as the alternative dispute resolution procedure.
This way, the taxpayer will not lose the opportunity to file in the tribunal to contest the objection decision in the event that the alternative dispute resolution procedure is not completed within the 30-day period that the taxpayer must apply to the tribunal.
To emphasise the value of the alternative dispute resolution procedure and boost taxpayer confidence in the process, ICPAU argues that it is necessary to standardise and streamline the process before the tribunal in order to resolve the tax dispute.
VAT queries
The other proposal, found in Clause 5 of the Value Added Tax (Amendment) Bill, 2024, states that if an employer, who is subject to taxation, provides goods or services to an employee, for no consideration, tax authorities will consider it as a part of the employee’s business activities. And that the employer will account for it through an 18 percent VAT.
The addition of this to the Pay-As-You-Earn (Paye), which ranges from 10 to 40 percent depending on an individual’s pay scale, is anticipated to be “very taxing” for a large number of people in the job market. Should a transaction of this kind take place, the paycheque recipient will be significantly impacted by two different types of taxes.
A taxable supply, as defined by the current VAT law, is one that is made by a taxable person for consideration as part of their business activities. This indicates that the supplier must actively seek payment from the recipient, either directly or indirectly, either in cash or in kind.
This also indicates that the proposed clause’s implementation challenges may be exacerbated by the difficulty of establishing an agreement between an employer and employee.
To “avoid the government and URA being seen to be working so hard to collect more taxes from the existing compliant taxpayers”, Mr Derick Nkajja, the ICPAU chief executive officer, argues emphatically that all employment-related transactions should be excluded from the VAT.
