Wednesday June 21 2017

New tax measures: How they will affect business

A Chinese trader dealing in shoes in Kampala.

A Chinese trader dealing in shoes in Kampala. PHOTO BY STEPHEN WANDERA 

By Mark Keith Muhumuza

Kampala – In order for Uganda Revenue Authority (URA) to collect the required Shs15 trillion tax revenue, Parliament approved 72 amendments on income tax, excise duty, Value Added Tax (VAT) and EAC Common External Tariff. The tax measures, according to Ms Doris Akol, the URA Commissioner General, will enable the government to collect Shs400b during the financial year 2017/18. URA’s collection is up from the Shs13.1 trillion in 2016/17.

Landlords targeted
The government has tried several times to get landlords to pay tax on their rent earning but have failed on several occasions. At URA’s recently held dialogues on the proposed taxes in 2017/18, this issue of rental tax dominated most of the questions from business people in Mbale, Mbarara, Gulu, and Kampala. This proposal, according to Ms Akol is intended to ensure landlords are “complying with the law and are declaring fewer tax returns than the actual amount that they are getting from rentals.”

In the Income Tax Amendment Bill 2017, the requirement is for the Finance minister to issue a statutory instrument that will estimate the rent charged by landlords in a specific area. URA will use these estimates to estimate the income derived and then slap a tax on it. This, according to A tax note by PwC, would partly target those “who fail to file a return of rental income or whose return appears to be misleading and has been contested by the Commissioner.”
As part of the assessment and determining the rental income, tenants will be asked to provide receipts to officials.
However, according to Mr Everest Kayondo, the chairperson of Kampala City Traders Association, “landlords often tell us that when they issue receipts, it comes at an additional cost.”
This is likely to be one of the most controversial tax moves on a sector of the economy that remains unregulated.

Beer, soda price could increase
Despite the contestations from the beer industry players, the government has gone on to change the way it calculates the tax on beer. In the past, the government has been imposing a percentage rate depending on the local material content (excluding water) used in the manufacturing process. Any raw material used that is about 75 per cent of the ingredients attracted an excise duty rate of 30 per cent; whereas other malted beer (less than 25 per cent of locally sourced ingredients) attracted a 60 per cent excise duty rate. However, the amendment to the Excise Duty Act is for the government to charge 60 per cent or Shs1,860 per litre, whichever is higher on malted beer. On beer that has 75 per cent local raw material, the rate is 30 per cent or Shs650 per litre, whichever is higher.

David Kigongo at work in his workshop. All

David Kigongo at work in his workshop. All furniture made from the locally sourced raw material is exempt from tax whereas that which is imported will be charged a rate of 10 per cent. PHOTO BY DOMINIC BUKENYA

Mr Mark Ocitti Ongom, the managing director at Uganda Breweries Limited, says the shift from the ad valorem to specific excise tax did not result in an increase in the rates. However, as a result of the clause “whichever is higher” there will be an impact on the final taxes paid in respect of particular beer and spirit brands.
“For example, in the case of beer whose local raw material content is at least 75 per cent by weight of its constituents, the ad valorem rate of 30 per cent tax per litre could have been Shs500. Now as a result of the new rate of Shs650 per litre, the new tax will be higher so in this case, there is an increase in excise duty payable.”
This might push up beer prices. “With an increase in tax as a result of the introduction of the specific excise tax alternative, there might be a need to increase the prices of our products making them more expensive for consumers,” Mr Ociiti says.
According to URA, the adjustment was made because the current rating only considered the value in the calculation of tax but excluded the volume.

Mr Edgar Isingoma, a partner at KPMG, notes that the move by URA on beverage companies is meant to “plug the leakages experienced in calculating taxes as often the value doesn’t reflect the volumes.”
The price of beer (except for the Eagle Brand) has not changed in the last five years but that could change with the new tax regime.
For the soda beverage industry, the rate was previously 13 per cent but in the next financial year, it will be 13 per cent or Shs240 per litre, whichever is higher. The industry players here also contested this but it did not change and now this could have an implication on the final price of soda.

‘Buy Uganda Build Uganda’
The pronouncements by President Museveni that Uganda has become a supermarket economy and that there was a need to support local industry is visible in the tax measures that will come into force at the end of June 2017. All furniture made from the locally sourced raw material is exempt from tax whereas that which is imported will be charged a rate of 10 percent. The steel sector, which is reading itself to supply infrastructure projects like the Standard Gauge Railway, has also seen some new rates imposed on imported steel materials. For instance, imported flat-rolled products of iron will be charged a new excise duty rate.
“We have introduced a specific duty at a rate of $250 per metric tonnes so that the applicable rate is 25 per cent or $250 metric tonnes whichever is higher for one year. This is meant to support the steel sector in the country,” explains Mr Dicksons Kateshumbwa, the Commissioner Customs at URA.
Imported motorcycle tyres are now charged an import duty of 25 per cent from 10 per cent, in what URA said was a move to support local production.

Mr Gideon Badagawa, the executive director, Private Sector Foundation Uganda said the move to enhance local production was good but then went on to question whether that would actually boost the capacity of local producers.
“...we cannot add value to what we do not produce. Before we can talk about markets, we need to discuss the capacity to produce as a nation,” he said during a dfcu Budget breakfast last week.
In order to reduce production costs, Parliament approved a corporation tax exemption to Bujagali Hydro Power Dam and the government is also proposing to refinance it. That, according to Kateshumbwa, could see the cost of power from the dam drop to about 7 US cents from the current 13 US cents.

Boosting agriculture
The changes in Value Added Tax are dominated by incentives to the agricultural sector. In the amendments, the VAT exemptions to the sector include the supply of animal feeds, crop extension services, irrigation works, and sprinklers and ready-to-use drip lines. This was done in order to further the commercialisation agenda of the agricultural sector. Notably, anyone importing wheat grain will be liable to pay 18 per cent VAT; however, local wheat production and milling are zero rated. The aim will be to boost local production.
However, the effectiveness of these measures will only be seen by the test of time since the results are often measured on a two-three year basis.