How SMEs will reap from tax incentives in Budget
A shoe making factory in Wandegeya. PHOTO by Eronie Kamukama
What you need to know:
Ugandan Small and Medium Enterprises (SMEs) whose investment is valued at $1m (Shs3.7b) will now be exempt from income tax for 10 years from the date of starting business. Prosper magazine’s Eronie Kamukama explains that much as it is a step in the right direction, most SMEs are grappling with raising this kind of capital.
It is five days since Mr Matia Kasaija, Minister for Finance, Planning and Economic Development delivered the budget speech for the financial year 2019/2020 themed: “Industrialisation for Job Creation and Shared Prosperity.”
Speaking during the KPMG budget dinner on Thursday, Mr Peter Kyambadde, director tax and corporate services, described this year’s budget as “investor friendly” because its tax incentives are geared towards attracting investment into the country.
“These incentives, I believe if taken on, will bring in more capital within the economy which would ensure that we have more jobs created and encourage growth because they are saying if you come in as an investor, make sure you employ 60 per cent Uganda, use 50 per cent local raw materials,” Mr Kyambadde said.
Incentives for SMEs
In the budget, the Minister handed businesspeople a number of incentives within the industrial parks, including those on Value Added Tax (VAT), Excise Duty and Income Tax.
One private and three public industrial parks are already operational at Kapeeka, Namanve, Luzira and Bweyogerere. At Namanve, development is 40 per cent complete and will be fully serviced in the medium term, according to Mr Kasaija.
Development of industrial parks in Mbale, Soroti, Iganga, Mbarara and Jinja is ongoing. All these parks are part of the 22 planned by government. Fourteen free zones to promote exports have also been licensed including those in Arua, Jinja, Kalungu, Mpigi, Mukono, Wakiso, Tororo, Kampala and Buikwe.
Local investments in industrial parks
According to the KPMG budget brief 2019, government has exempted income derived by a person letting or leasing facilities whose investment is at least $50m (Shs187b) in the case of a foreigner or $10m (Shs37.4b) for a citizen, in an industrial park or free zone for a period of 10 years from the date of commencement of construction. For existing investors, the exemption begins on the date the additional investment is made as explained above.
The brief explains that this change possibly will grow investment in industrial parks and free zones by spreading the tax incentives to taxpayers involved in letting or leasing facilities as well as extending the exemption period for existing developers who make more investments.
East African citizen
For tax purposes, the meaning of citizen was changed to include people who are citizens of any East African Community (EAC) partner state. Also, so is a company or group of people incorporated under the laws of a partner state, in which at least 51 per cent of shares are owned by a citizen of an EAC partner state.
Local investors
Another tax holiday was granted so the income of an operator in an industrial park or free zone or other business outside the industrial park or free zone whose investment capital is at least $10m (Shs37.4b) for a foreigner, up from $5m (Shs18.7b).
Income tax exemption
Ugandan citizens whose investment is $1m (Shs3.7b) will now be exempt from income tax for 10 years from the date of commencement of business.
An existing investor who sinks more money, equivalent to the amounts aforementioned, in their business will also be exempt. Beneficiaries of this exemption are required to at least use 50 per cent locally made raw materials and employ 60 per cent citizens and who processes goods and assembles medical supplies.
However, there was no specification on the duration of this tax holiday and according to the tax audit firm, it appears to apply indefinitely.
Manufacturers’ view
With some of the figures in these tax exemptions are less than what lay in budget papers previously, manufacturers welcome the step but say they will get back on the drawing board with the Ministry of Finance if the amendments do not work.
“The question we should be asking is how many micro, small and medium enterprises have ever seen $1m? Yes, there are Ugandans who will be able to tap into it. But it still retains these incentives for the higher echelons of our society. We know countries like South Korea have been built on MSMEs. I do not think it speaks to them (our MSMEs). But it is a step in the right direction because last year, it was $5m,” Mr Daniel Birungi, executive director Uganda Manufacturers
