How proposed taxes are likely to affect business

Apartments for rent. Government is proposing to have the assessment of rental tax more streamlined to deal with ‘errant’ property owners that have continued to default on taxes. PHOTO BY Michael Kakumirizi

What you need to know:

  • As Uganda draws near to the Budget, and at a time of slow economic activities, the ministry of Finance has made several tax proposals that will have big implications on business in the new Financial Year. Mark Keith Muhumuza & Eronie Kamukama explore the proposals and their likely impact to the common man and woman.

The Uganda government has an ambitious plan of raising about Shs14.5 trillion in the next financial year, with 90 per cent of that coming from tax revenues.

At a time of slowing economic growth due to low business performance, in the next financial year 2017/18, the ministry of Finance has made several tax proposals that will have implications on several businesses.
A closer look at the tax bills (Income Tax (amendment) Bill, 2017, Excise Duty (amendment) Bill, 2017 and VAT (amendment) Bill 2017) indicates the government is proposing some new tax measures and some exemptions on others.

Local production
The government recently launched the Buy Uganda Build Uganda (BUBU) Policy and the Local Content Bill is currently being drafted by a private member. The policy aims at encouraging Ugandans to purchase or use locally produced products. In the Excise Duty Bill, the government has made two proposals that tend to operationalise BUBU.
First, the government has proposed that fruit juice that has less than 30 per cent pulp made from Uganda will be subjected to 13 per cent or Shs300 per litre, depending on which one is higher.

Explaining the reason for this, Mr David Bahati, the State minister in the Finance ministry, noted that this was done in order to encourage local sourcing of raw materials, especially from fruit growing farmers. This is a new categorisation in the Bill and is expected to boost agricultural production.

However, the understanding by Daily Monitor from several processing companies that import pulp is the low productive capacity in the country and also, there have been concerns about the quality of the fruit processed. The fruit processing companies are expected to meet the Finance Committee of Parliament to express their views on the Bill.

In order to encourage local production and purchase of furniture, the government has offered more clarity that there will be no duty charged. In the Excise Duty (Amendment) Bill before Parliament, the government plans to impose a 20 per cent excise duty on furniture that is imported.
Additionally, the government has also offered some clarification that locally produced furniture does not include that which is assembled here. Uganda has seen a vast number of furniture shops that import and assemble their products in the country.

There is an expected backlash from these importers once they meet the Finance Committee in Parliament. However, for local carpenters, this is good news for them as they would now expect demand to shift to their side.
Insiders note the ministry of Finance and that of Trade have been particularly concerned about the flurry of furniture imports from China and Malaysia, yet the country has artisans that could benefit from this growing demand.
The government has also made a U-turn on the taxation of sugar confectionaries. The government has placed an excise duty of 20 per cent on these products that include chocolate, chewing gum, and sweets.
However, the concern here raised by the Tax Justice Alliance of Civil Society Organisations such as Oxfam, SEATINI, CSBAG, Uganda Debt Network, Action Aid International, among others, is that this reduction should only benefit companies that participate in the local confectionary production.
“...sugar confectionaries that are not locally produced should bear the previous 80 per cent excise duty whereas the locally produced confectionaries should benefit from the amendment, just like it has been done for furniture,” the position statement of the Tax Justice Alliance presented to Parliament, stated.

Tourism boost
In order to encourage irrigation and improved agricultural production, the government has made several Value Added Tax (VAT) exemptions. There is an exemption on wheat grain, which will boost the dealers and traders in the agricultural product. Several traders have been warehousing the grain, meaning that they could benefit from the 18 per cent exemption.
However, for traders to benefit from such an exemption, they will have to formalise their businesses – for those who are not.
Additionally, the government appears to have learned its lesson from the drought conditions affecting the country and decided to exempt 18 per cent VAT on extension services, irrigation works, sprinklers and ready to use drip lines.
For traders and companies dealing in such services, this comes as a boost. Several companies have set up shop in Uganda with imported irrigation products, but have been asking the government to provide a VAT exemption. They have finally been granted the exemption.
It is widely expected that this exemption will receive less opposition at the committee stage in Parliament.
The proposals from the Uganda Tourism Board and the lobby groups under the tourism sector appear to have yielded some results.
If the amendment is adopted, the supply of tourism services, access to tourism sites, tour guide and game driving services will be 18 per cent exempt from VAT.
According to Mr Bahati, this proposal was specifically made to boost the tourism sector with “service providers being able to use that 18 per cent in marketing and promotion.”

Betting houses, winners
The government has imposed a 15 per cent withholding tax rate on winnings from sports betting and pool betting as a measure to raise revenue but also make it less lucrative for those that participate. The withholding tax is imposed on the winnings, meaning that licensed companies will collect the tax from anyone who wins by automatically deducting 15 per cent from the amount and remit it to URA.
URA will be monitoring this on a weekly basis. In total, the licensed betting companies will be required to remit 35 per cent to tax bodies of which 15 per cent will be tax from the winners.

More tax on cigarettes
The government has continued its annual ritual of increasing taxation on cigarettes in line with moves to discourage usage. The government has proposed an increment of Shs5,000. The excise duty on soft cap cigarettes will increase from Shs50,000 to Shs55,000 per 1,000 sticks in order to increase revenue on one hand, but also drive up the final price in order to reduce smoking.

Appearing before the Finance Committee in Parliament, Mr Paul Sine, the finance director, British American Tobacco Uganda, protested this measure, noting that it would reduce government revenue. Mr Sine explained that excise duty increments in 2015 and 2016 were already reducing sales and translating into less revenue for the government. He proposed to MPs a blanket Shs52,000 per 1,000 sticks on all cigarettes but the MPs were having none of it. Increased taxation and the eventual coming into force of the Anti-Tobacco law will affect trade in cigarettes going forward.

Power tariff controls
In the income tax amendments, the government is proposing a corporate income tax exemption for the Bujagali Hydro Power Plant to 2033. The corporation tax exemption of 30 per cent would de-risk the power plant and control the potential of any increment based on the structure of the power purchase agreement.
If the exemption had not been granted, the cost of power generated from Bujagali would have increased from $0.11 cents per unit to between$0.13 and $0.16 cents per unit. This would have been passed on to consumers and further increased the power tariff, which some still consider very high.
The government had explored two other options: Buying the dam and providing subsidies for the consumers, but these were abandoned for the corporation tax exemption. This, they considered the least cost option to manage the power tariff.

Property in trouble
In the Income Tax amendment Bill, the government is proposing that “for purposes of assessing rental tax…, the minister shall issue an instrument to prescribe the estimates of rent based on the rating of the rental property in a specific location.” The explanation for this proposed amendment is to deal with “errant” property owners that have continued default on taxes.
In essence, the minister will provide an estimate of the income of property owners in a given geographical area. It is from this, that then the rental tax will be determined. This, according to the ministry of Finance will take away under-declarations of income.
However, the minister will not be able to determine costs incurred by landlords, which will still make the work of the tax collectors harder.
The only way for landlords to avoid such estimates is to formalise their business and file annual returns. With better books of accounts kept, property owners will be assessed fairly basing on the books.

Tough on betting

There is societal pressure on the government to ban betting and gambling companies from operating in Uganda. The government is, however, thinking and planning differently. It is using high taxation as a form of prevention to make it expensive for companies to set-up, operate and recruit new gamblers. One of the challenges Uganda Revenue Authority (URA) was facing in collecting revenue from gambling companies was that there were under-declarations by betting businesses. The ministry of Finance is recommending through the Amendment of Tax Procedures Act 2014, licensed companies through the Lotteries and Gaming Act, 2016 will have to file both weekly and monthly returns. That means URA will be able to track the returns by companies and be able to collect taxes from them.