What you need to know:
Some money lenders evade paying taxes by disguising their businesses through doing other small businesses that may not be taxable.
They earn huge sums of money by charging exorbitant interest rates on money loaned yet some don’t pay a single penny in form of income tax to Uganda Revenue Authority.
These are money-lenders, whose operations have left many Ugandans desperate for quick loans in tears for being fleeced of their properties that are staked as collateral.
Unlike the formal lending institutions like commercial banks that have strict rules and procedures to access loans that may include having a business plan, money-lenders do not ask for any of that.
This is because they are most interested in the borrower’s assets which can either be movable or immovable property such as cars, buildings, land titles and laptops, among others, depending on the loan amount which must be staked to get the money.
The instant loan could be a little as Shs10,000 to solve a small financial problem or as much as over Shs500 million.
This convenience, however, comes with exorbitant interest rates ranging between 18 and more than 35 per cent per month, a rate that is far higher than commercial banks’ lending rates, which currently average at 20 per cent.
The rate is also higher than the 24 per cent maximum mandated by the Money Lenders Act as amended in 2000.
Growth of money lenders
Due to the high interest rates, the money-lending business has grown into a profitable business, with players making huge profits from interest income monthly.
Despite earning huge profits and securing business permits to operate, URA is unable to impose income tax on their operations as stipulated in the Income Tax Act, 2000, thereby robing government a lot of revenue in uncollected taxes.
“Money-lenders are making a lot of money, in addition to forcefully taking people’s properties but they don’t pay income tax and this is unfair to other businesses,” said Mr Anatoli Kamugisha, Akright Projects managing director.
Money-lenders’ evasion of taxes could be attributed to the informal nature of their transactions, where millions of daily transactions are undocumented, making it difficult to ascertain how much they make.
However, Mr Henry Saka, the commissioner domestic taxes, URA dismissed the allegations that money-lenders don’t pay income tax, saying the revenue body taxes everyone who must be taxed.
He, however, admitted that some evade paying taxes since some disguise to be doing other small businesses that could not be taxable.
“We (URA) tax everyone who must be taxed and if we discover that you have been evading paying taxes, we force you to pay and also penalise you,” Mr Saka told Prosper magazine last week.
Income tax is collected from individuals and is imposed on different sources of income such as labour, pensions, interest and dividends, among others.
Mr Saka added that URA is currently deploying a number of measures using its investigative team to unearth all businesses that have been evading taxes.
It should be noted that the tax body has been raiding business areas around Kampala for the past two weeks and closing them until they pay taxes.
Money-lenders who evade taxes cause unfair competition with other formal money-lenders like commercial banks that pay the tax.
“It is unfair that the playing field is not leveled in the credit business, while legitimate firms are extending credits subject to government regulations, the money-lenders run off with big, untaxed income,” said a source in a bank who asked not to be named because of the sensitivity of the matter.
Despite the convenience of these quick loans, several people have been fleeced and lost properties worth millions of Shillings which the opportunistic money-lenders mortgage and sell in the name of recovering their money.
This happens when a client fails to pay the interest and the principle in the agreed period, even if it is by a single month.
Among the key figures that have fallen victims of money-lenders is Pakistani Consul to Uganda Bonny Katatumba, who is currently involved in a dispute with businessman Mukesh Shukla over the ownership of Shumuk House (former Blacklines House).
It is said Mr Katatumba used his property as security for the about Shs1.1 billion ($420,000) he took from Shukla.
Despite the increasing number of people losing property to money lenders, more people are still borrowing from them.
Accessing credit informally
A 2013 FinScope Survey report, for instance, indicates that 20 per cent of Ugandans still access credit from informal institutions such as money-lenders.
The secretary to the treasury and permanent secretary ministry of finance, Keith Muhakanizi, however, said government is trying all possible means to have the Money Lenders Act strengthened to keep money-lenders in check and guarantee security of borrowers’ properties.
“The Money Lenders Bill received approval from cabinet recently and is being drafted to strengthen the Money Lenders Act so as to rescue unsuspecting Ugandans from being fleeced of their properties,” he said.
If amended, the Act will also give Bank of Uganda powers to regulate money-lenders, who are currently unregulated because the Central Bank has no mandate to regulate them.