________________

On Tuesday, April 9, 2024, the Ministry of Finance, Planning and Economic Development presented five tax bills before the Parliament Committee on Finance for consideration for the amendment.

The Minister of Finance (General Duties), Henry Musasizi, told Members of Parliament (MPs) on the committee that the strategy aims to strike a balance between generating additional revenue and minimizing the impact on consumers and businesses.

Next week, the House is set to discuss the tax bills which include amendments to income tax, stamp duty, excise duty, tax procedures, and value-added tax (VAT). 

However, the tax bills have since raised concerns in the private sector. While appearing before the Parliament finance committee to give their views about the new tax proposals on Friday, Private Sector Foundation Uganda (PSFU), Uganda Manufacturers Association (UMA), and other stakeholders expressed concerns and asked Parliament to reconsider some suggestions.

Reacting to the amendments, Shirly Kongai, the Chairperson Policy Advocacy Committee of the Board, Private Sector Foundation Uganda said that the Tax Amendment Bills should be able the get the optimal tax revenue while at the same time promoting business formalization and growth.

She said that the tax regimes therefore should exhibit several characteristics including ensuring a predictable (stable) tax regime to enable proper planning and implementation of investment plans by enterprises.

“Any new tax measure should be thoroughly scrutinized to assess its impact on macro-economic stability and competitiveness of the sector in line with NDP III and the policy of export promotion and import substitution,” she said.

According to the Private Sector Foundation Uganda (PSFU), on average, tax accounts for between 45% and 55% of the price of a final product.

PSFU argued that the Excise Duty regime is reviewed on an annual basis and yet investment is planned for 3-5 years.

“Our proposal is that the Government develops an Excise Duty regime for 3-5 years to facilitate proper planning,” Kongai said.

Income Tax (amendment) Bill 2024

Clause 3 of the Bill introduces a tax of 5% on the gains from the disposal of a non-business asset.

The Bill defines a non-business asset to include a share in a private company, land in cities and municipalities except the principal place of residence, and rental property.

The proposal further provides for the tax as a final tax payable within 15 days from the date of disposal with interest of 2% per month in case of late payment.

Individuals who hold land which is not a business asset will start paying capital gains tax when they sell such land but this is exempted in the current law.

Individuals who invest in shares of private companies will pay a lower capital gains tax at 5% compared to the current rate which can be as high as 40% depending on the quantum of the capital gain. Non-individuals like companies will continue to pay capital gains tax at 30%.

UMA said the government should consider refining this amendment by extending the 5% capital gains tax to non-individuals such as companies. The association also proposed adjusting the time of paying the capital gains tax to 60 days after receipt of disposal proceeds.

Compared to regional peers, Uganda’s current capital gains tax rates are prohibitive, and this discourages the building of capital and investment in the country according to the business community.

Kongai said aligning the capital gains tax rate of 5% for both companies and individuals will help to address the challenge of high capital gains tax rates in the country and expand the tax base. “The payment timeline of 15 days is too short and does not consider the fact that disposal proceeds may be paid in instalments,” she said.

Value Added Tax (Amendment) Bill 2024

Clause 6 of the Bill increases the cash refund threshold from sh5 million to sh10 million of accumulated carried forward input tax credits.

This implies that taxpayers would not be required to apply for a VAT refund until the amount accumulates to sh10 million.

The business community suggested that the government refines the amendment by adjusting the refund threshold to sh50 million instead of the 10m included in the Bill.

In addition, the Bill proposes to amend Section 18 of the VAT Act by introducing the following provision immediately after subsection 18 (9):

“Subsection 18(10): The supply of goods or services by an employer who is a taxable person to an employee, for no consideration shall be regarded as the supply of goods or services for consideration as part of the person’s business activities.”

Employers on top of being required to account for PAYE, they will also be required to account for VAT at 18%.

The business community rejected the amendment since payee is already applicable on such transactions at 10%, 30% or 40% depending on the employees pay scale. They said adding an 18% cost for the employer could be over-taxation. i.e., an employee in the 40% pay bract will be paying 58% tax on such a transaction.

Excise Duty Amendment Bill 2024

Tax on beer concentrates also raised concerns. Clause 3 b(f) proposes Shs. 2500 per Kilogram of powder for reconstitution into beer. The business community argued that this is still an innovation that is not yet experimented on to the market.

They said the introduction of the tax will kill the innovation before infancy. “Drop the amendment until the product is introduced on the market. Once the product has been introduced, it will attract VAT, employ hundreds of Ugandans and support farmers of sorghum and Barry but also move a greater mile in managing illicit alcohol because of minimum price of the product,” Kongai said.

Tax on building materials

Clause 3 (g) of the Bill proposes to introduce a tax on adhesives, grout, white cement or lime of sh500 per 50kg. The business community said government should drop this amendment.

“This will certainly increase the price of these construction inputs thus deterring private sector investment in affordable housing,” they argued, adding that, “Uganda has a housing deficit of 2.5 million facilities which undermines the standard of livening of the citizens. The private Sector is working to close this gap. These materials (adhesive, white cement and grout and lime) are used or utilized in this industry.”

Increasing tax rates on these materials will increase the cost of construction which translates into increased rental fees charged to the consumers. According to Konga and is likely to undermine government policy of decent and affordable housing.

Taxes motor spirit and gas oil

Clause 3 section (h) part (a) and (b) proposes to increase Motor spirit (gasoline) to sh1550 per litre and Gas oil (automotive, light, amber for high-speed engine) to sh1230 per litre.

According to the business community, this proposal will lead to an increase in fuel prices which will accelerate the rise the prices of goods and services consumed by all citizens.

They argued that high inflation rates in most cases have a negative impact on attraction of Foreign Direct Investment (FDI) which further wipes the foreign exchange reserves which are on a declining trend.

Tax on spirits

Sub-clause 3(c) (c) proposes a 20% tax increase on spirits. The close indicates that any other un-denatured spirits that is locally produced of alcoholic strength by volume of less than 80% - 80% be charged excise at a rate sh1700 per litre whichever is higher or that is imported of alcoholic strength by volume of less than 80% - 100% be charged excise at a rate sh5000 per litre whichever is higher.

According to the private sector, the implication is that when prices of spirits are further increased, people will resort to illicit alcohol which has dangerous health implications and increases Uganda’s health bill.

The private sector proposed that locally produced alcohol of alcoholic strength by volume of less than 80% - to be charged excise at a rate of 60% or sh2000 per litre whichever is higher, and alcohol that is imported of alcoholic strength by volume of less than 80% - to be charged excise at a rate of 80% or sh1500 per litre whichever is higher.

The business community said that proposing a 20% tax increase on spirits in Uganda may backfire, potentially reducing government revenue.

It's estimated that this could lead to a loss of sh49.7 billion from the total industry and sh 28.5 billion from Uganda Breweries.

Additionally, the high tax rates contribute to Uganda's 65% illicit alcohol trade rate, costing the government further.

Compared to other East African Community (EAC) countries, Uganda's excise duty on imported spirits is already significantly higher.

Accordingly, the business community said that maintaining current excise rates could yield an additional sh48.2 billion in revenue, ensuring sector growth and sustained government income.

Increase of excise duty on mineral water, bottled water, and other water

Clause 3(g) of the Bill changes the excise duty rate from 10% to 10% or sh75 per litre whichever is higher.

The amendment implies that excise duty will be paid based on the ex-factory price or volume, whichever is higher.

To take into account the unique model applied with mineral water pricing and packaging, the private sector asked that Parliament refine the excise duty to 10% or sh35 whichever is higher.

They noted that the form of the Bill does not consider the fact that mineral water pricing involves larger units of mineral water containing more water at a lower price per litre.

“Applying the higher of 10% or sh75 per litre will result in the tax of certain water products with larger volumes increasing by about 95%. This outcome would not be sustainable as such products will be loss-making, thus affecting the production of such products, taxes collected (excise duty, VAT, income tax) as well as employment,” Kongai said.

Other PSFU recommendations

• Strengthen the capacity of URA (Uganda Revenue Authority) in tax administration through effective Private Public Partnerships. PSFU said that the rate at which the private sector is growing cannot be matched with continued recruitment of staff. “The established online systems need information to support the efficiency which is still provided by people. Through this Public Private Partnership (PPP), Government would partner with Private Sector Tax experts to conduct tax assessments and audits for the general business community while the URA concentrates on regulation. This could support closing tax leakages and generate information in areas such as real estate and other opportunities to widen the tax base and increase collections,” Kongai argued.
• As the private sector continues with the civic responsibility of paying taxes that facilitate government to ensure the delivery of social services, there are prevailing tax leakage areas which undermine the hard-earned efforts of the citizenry. Our appeal in this house is to strengthen the accountability function of Parliament over and beyond budget appropriation to delivery, monitoring, and evaluation of the delivered services. This has a direct correlation with tax compliance amongst the population.
• Develop a tax policy that promotes the use of electric and hybrid vehicles. An example is the exemption of VAT on supply of electric and hybrid vehicles and accessories such as fast-charging batteries. A tax policy that supports the use of electric vehicles and green energy is much needed considering the risks of climate change. The business community believes that if the above proposals are considered, we shall be able to grow businesses both directly and through value chains, increase in tax revenue, and provide more employment thus contributing to the country’s vision of prosperity for all. We once again thank the Parliament of the Republic of Uganda for continued support and consulting with the private sector on matters that affect us.