Trading stock (loosely referred to as “stock” or “inventory”) generally refers to any property (whether land or other property) which is sold in the ordinary course of the trade or would be so sold if it were mature or its manufacture, preparation or construction were complete, or any materials used in the manufacture, preparation, or construction of any property.

In the services industry, more so the professional services firms, “trading stock” is a common nomenclature and includes any services performed in the ordinary course of the trade–the performance of which is wholly or partly completed at the time of the cessation, and for which, 

it would be reasonable to expect that a charge would be made if there were no cessation and, in the case of partly completed services, their performance was fully completed.

While the former definition largely considers “tangible/physical” trading stock or goods”, the latter focuses on what might be described as “intangible” trading stock.

Under the Income Tax Act, trading stock is defined as “[to] includes anything produced, manufactured, purchased, or otherwise acquired for manufacture, sale, or exchange, as well as consumable stores”. 

Again, this definition alludes to “tangible” trading stock, which is the subject of the discussion in this article. 

Trading stock being one of the important assets that generate regular cashflows and spurs business growth, it is worth having proper records to ensure accountability and avoid any business losses. 

This, therefore, requires regular stock-taking/counting. For example, where an entity’s assessment of internal controls on stock management is somewhat weak, it is recommended to the extent applicable to have routine stock counting, say daily or weekly, to mitigate the occurrence of any issues of pilferage that could adversely impact the business. 

In a manufacturing setup, more often than not, the stock count would take place before month close, and any appropriate adjustments considered, which might result in either stock write-offs or restatement of earlier understated stock balances. 

In the past, stock write-off or destruction for that matter, has been a pain area to taxpayers in case of tax audits, whereby tax administrator insisted on prima facie evidence or support documentation in form of destruction reports, a witness report as well as certificate of destruction, before allowing such write-offs as business losses, especially for taxpayers dealing in exercisable goods i.e., goods manufactured in Uganda and imported into Uganda and are liable to a duty under the Excise Duty Act.

This practice was in the past premised on the fact that the URA deployed staff at the manufacturers’ premises, especially those dealing in excisable goods, which was stopped a couple of decades ago. 

A witness report meant that the URA officer then, present at the destruction site, would make a report, and issue a destruction certificate.  

In the wake of disbanding this practice, it became impractical for many of the affected taxpayers to have in place witness reports and/ or destruction certificates. 

Against the above backdrop, the controversy between taxpayers and the tax authority has always been on the issue of law i.e., whether there is a legal basis for any evidence required beyond internal accounting records to support stock write-offs. The fact of the matter is that this has been a grey area thus posing a lacuna in the tax law, regarding an appropriate procedure for stock destruction. 

With the proposed tax bill under the Tax Procedures Code Act (“TPCA”), it is evident that this inherent gap in the tax laws, where the tax authority relied on internal administrative procedures to deal with the matter is being clarified.

The proposed amendment is to the effect that “ A taxpayer who intends to claim a deduction of or credit for the goods destroyed as a result of – (a) damage of trading stock; (b) expiry of trading stock; (c) damage of manufactured stock; (d) expiry of manufactured stock; or (e) obsolete stock, shall inform the Commissioner in writing, using the form prescribed under section 70 of this Act, before destroying the goods”. 

As is, the details of the form being referred to under Section 70 of the TPCA, are yet to be in the public domain. It is expected that the tax authority will provide further guidance on the particulars contained in this form once the draft bill has finally been assented to by the President. 

Considering the level of automation by the tax authority, this form should be configured into the e-tax/EFRIS to ease access, electronic transmission and for future reference purposes by both taxpayers and tax administrators.

The draft bill further underpins the importance of compliance in this regard- whereby “a taxpayer who fails to inform the Commissioner [as highlighted above], shall not claim for deduction of or credit for the destroyed goods.”

The amendment is a welcome call to taxpayers as it clears any ambiguities and subjectivity hitherto existed on the scrutiny of support documentation required on stock write-offs but also signifies the attribute of the simplicity of a tax regime mainly for manufacturers whose stock write-offs are so frequent that on a daily basis one must do stock destructions. 

The simplicity in this case would align with what might be the requirements of other regulatory bodies where applicable, such as the National Environment Management Authority (NEMA), Uganda Bureau of Standards (UBOS) who may require certain manufacturers to have destructions scheduled on routine basis for hazardous products under their close monitoring in a controlled environment. 

Moreover, this bill if passed into law would harmonize and accord the same procedure to all taxpayers irrespective of whether they are trading or manufacturing excisable goods or not.

The writer is a Senior Manager, Tax at EY, Kampala. The above are his personal views and not those of Ernst & Young.