Why government has paused withholding VAT

The dust can now settle for the business community as the Finance Minister of, Matia Kasaija on Friday issued a directive to halt the implementation of the recently amended Value Added Tax (VAT) amendment.

“It is true, we have given instructions to halt the law because it was causing uneasiness among businesses. We have not withdrawn it. It is under study. Those we asked to implement should hold on for the time being,” he said.

Chances of a resurrection of the law according to the minister, are narrow as he explains it will involve engagements with the private sector and possible tabling before the cabinet, among others.

“I cannot tell how long it will take because there are many stakeholders. We may have to go back to cabinet,” he says.

The halt comes a month after an August 16 letter inked by Mr Kasaija in response to correspondence from the Commissioner General URA, Ms Doris Akol, citing challenges in implementing the withholding VAT.

The Minister in the letter recognised constraints in implementation of the law forcing him to request a liaison between the office of the Solicitor General to effect the recall and preparation of an appropriate notice of withholding agents.

“You are accordingly requested to liaise with the Solicitor General to effect the recall and preparation of an appropriate notice of withholding agents to operationalise section 3 of the VAT amendment act 2018,” the letter read in part.

To this effect, the minister also directed URA to consult with the private stakeholders to come up with appropriate amendments within two weeks for further action.

Meetings between Uganda Manufacturers Association (UMA) along with the other private sector players during three months have led to the final temporal termination of the withholding VAT.

UMA executive director, Mr Daniel Birungi, had earlier advised manufacturers to hold on to implement the new tax law as they were engaging the ministry to review the withholding VAT law.

“It has been halted pending other discussions,” he spoke with relief.

What it was
The withholding Value added Tax (VAT) was a new form of paying Value added Tax which saw its birth on July 1, after it was passed in the VAT amendment law of 2018.

The law which revolutionalised taxation for the business community in Uganda, was introduced in an effort to limit tax leakages perpetuated by suppliers who were not complying with their VAT tax obligations.
URA subsequently proposed for government ministries, departments, agencies and designated persons to withhold VAT on taxable supplies.
The law imposed a duty on the minister to designate persons who would withhold 100 per cent VAT tax on a payment for a taxable supply. This implies that 100 per cent VAT (18 per cent) payable on a supply would be withheld by select agents put in power by the finance minister.

In the past years, a supplier of office material to Crown Beverages would sell his products and include 18 per cent of the selling price as Value Added Tax payable to Uganda Revenue Authority (URA).

According to the law, VAT is calculated at 18 per cent of the selling price of the item. In this case, paper sold at Shs1 million in April would attract Shs180,000 as VAT. The paper company would then charge Crown Beverages a total sum of Shs1,180,000 for the paper.

The Shs180,000 would then be remitted to URA on May 15 by the paper company.

However, the new yet halted law, dictated that contrary to the past where the paper company withheld the Sh180,000 to later remit to URA, now Crown Beverages only pays out Shs1 million for the paper to the company and retains the Shs180,000 which it would remit to URA on the 15th of the next month.

Crown Beverages was one of the 680 companies designated as withholding agents by the minister on June 29.

How it worked
The withholding agents at the point of payment for the supplies were to withhold the VAT and issue the supplier a tax credit certificate.

The tax credit certificate, a document certifying that a supplier’s VAT was withheld by a withholding agent is a prerequisite for claiming a refund after offsetting the supplier’s tax liability.
Tax liability means the amount of taxes an individual is required to pay to URA.

However, Mr Ian Rumanyika the manager public and corporate affairs URA, moments before the halting of the law, said that withholding VAT would have eased the tax payment process since any balance left after the supplier had filed his tax returns could have been pushed forward to cover the future tax liability or be reclaimed.

He added that the withholding VAT was introduced to strengthen compliance and increase Uganda’s tax base by curtailing evasion schemes by those who did not file VAT returns.

Blows to its paralysis
The law has, for three months, faced blows from the private sector who said it would have inadvertently affected the business continuity through restricted cash flow.

Private sector Foundation Uganda (PSFU) and UMA petitioned government to review the law saying it was going to stifle business.

As Mr Gideon Badagawa, the executive director PSFU explains, there would be a negative cash flow since businesses would need to pay VAT earlier than the payment period of suppliers which can go over three months.

Ordinarily, companies would be invoiced supplies and would pay over a specified period usually a threshold of three months. It would be after the supplier was paid that he would remit the VAT to URA.

With Witholding VAT, the customer- Crown beverages, would be required to clear the VAT even before the usual three months they would have taken to pay the supplier.

This would require businesses to have more capital to run and file VAT returns by the 15th of the next month.

“This will directly increase the costs of financing the operating capital for businesses due to now having to pay VAT earlier than the 30 to 90 days payment period they had with suppliers,” he said in the petition.

The cost of financing a business for withholding agents, the petition said, would have increased from 3 per cent to 5 per cent.

The law had come at a time when the cost of financing a business is high, a ripple effect of the high interest rates of loans and volatile economy.
The increase in cost of running a business would create unfair competition between withholding agents and non-withholding agents coupled with possible penalties for non- compliance when VAT accumulates.

Withholding agents
The law has been criticised by tax law experts who say it is vague and leaves out details on the basis of selecting withholding agents.

Mr Steven Mugisha, director tax services Ligomarc Advocates, in an interview said the process of selecting the withholding agents was unclear as the law dictates that the choice is at the discretion of the minister but not how he will choose.

In his response, Mr Rumanyika revealed that the decision to designate withholding agents was as the law dictated, taken by the minister but with the help of URA.

The tax man recommends compliant tax payers for consideration by the minister for withholding agents.

“We recommend a list of tax payers who, over the years, have proved their compliance but it is entirely upon the minister to designate those who will act as withholding agents,” he says.

Proposals for amendment
While the initiative could have been instrumental in widening the tax base and achieving the Shs16 trillion URA has targeted for financial year 2018/19, tax experts have raised concerns on why it might not be effective in Uganda.

Pricewaterhouse Coopers (PwC) in its analysis, says the law has potentially significant negative impact on the cash flow of compliant tax payers.

Proposals of a reduction in the stipulation to withhold all the 100 per cent of VAT to at least the 50 per cent as was slated in the bill was thought by Mr Mugisha as an alternative to reduce the negative impact it would have had on businesses.

PwC advises government to allow an exemption to the compliant tax payers such as the withholding agents and bolstering the refund system to ensure it is prompt and efficient.

Claims process

The claims refund process was also envisaged to create long delays for tax payers who essentially need the money to run their businesses.

According to Mr Mugisha, the public was skeptical on how long and effective the process of claiming a refund would take.

He says the process of computation from withholding agents to the suppliers will require extra man power and boosted capacity to ease the process.

Mr Rumanyika affirms that the Authority is capacitated to handle all refunds in a timely manner and has to that effect dedicated a section strictly to address tax refunds.

However, an ordinary supplier would have had to wait 30 days to receive a refund while a diplomat waits 19 days.

The time, Mr Rumanyika says is as a result of the processing time taken, documentation and approvals of the transaction.