Tax proposals: Is government closing revenue collection gaps?

Government’s effort to collect more revenue is well documented in the Tax (Amendment) Bill, 2019.
In the coming financial year (2019/20), the government is already projecting to collect Shs41 trillion, up from Shs34.3 trillion this financial year ending June, 2019.
Should the tax proposals contained in the Tax (Amendment) Bill of 2019 be passed in their current form, you will have to present your Tax Identification number (TIN) before getting a licence from any government agency.

A proposed amendment to Section 135 states that a local authority, government institution or regulatory body shall not issue a licence or any form of authorisation necessary for purposes of conducting any business in Uganda, to any person without a Taxpayer Identification Number (TIN).
This move aims at widening the tax net. This is because anybody involved in trade would be required to be tax registered before obtaining a licence. This will also be applied to those seeking annual licence renewals.

According to the Tax Bill presented to Parliament towards the end of March, the government is looking to thoroughly cash in on rentals. But the definition of “rental property” according to tax analysts, remains ambiguous.
However, the burden of compliance for property owners and real estate developers will be massive.

Islamic transactions
Additionally, regulations for Islamic financial transactions will finally be made. This will trigger operationalisation of Islamic banking and provide tax treatment of supplies made in the course of Islamic financial transactions. This will provide clarity on how VAT will apply to various Islamic banking products.

Interest on unpaid duty will also attract a penalty. The Bill introduces a uniform interest penalty of 2 per cent per month, compounded, on late payment of all excise duty. According to PwC, currently, the Act only provides for interest on unpaid duty in relation to manufactured or imported goods, with no penalty applying to excise duty on services.

Interestingly, the Bill is lenient towards those who voluntarily disclose their tax and related offences. The new Section 66(1a) allows compounding of an offence with waiver of interest or fines when a taxpayer voluntarily discloses the offence to URA prior to commencement of court proceedings and makes full payment of the outstanding tax. This will encourage voluntary disclosure of past tax omissions with reduced fiscal consequences.

But this was somewhat at the cost of payment made to informers. Should the Bill see the light of the day, the payment made to tax-informers who provide information to Uganda Revenue Authority, leading to recovery of taxes or duties, will reduce from 10 per cent to 5 per cent of the recovered revenues. The rate of 10 per cent was imposed under section 8 of the Finance Act 2014 which has been repealed. According to the government, the 10 per cent rate is too high.
And the Bill also proposes to set a fixed stamp duty rate of Shs100,000 for bank guarantees, insurance performance bonds, indemnity bonds and related debt instruments.

Bank guarantees are currently not listed separately and have been subject to duty of Shs15,000 while insurance performance bonds have been subject to a fixed rate of Shs50,000.
According to the PwC assessment of the Bill, the proposed amendment means that the duty applicable to these instruments will be adjusted upwards. On the other hand, indemnity bonds are currently subject to duty at the rate of 1 per cent of the total value.

The proposed amendment will provide a uniform duty rate for transactional documents issued by banks and insurance companies. However, it does not address the uncertainty between a “bond” and an “indemnity bond”, which has been a contentious issue for banks that issue these documents to their customers, according to tax experts.

Companies in the financial services sector are much more highly geared than other businesses (that is they have much higher debt: equity ratios and higher interest expenses).
“The 2018 change was unduly onerous for these companies and the Income Tax (Amendment) Bill, 2019 proposes to eliminate the cap on interest deductions for such companies,” Cristal Advocates notes.

Allocations
Despite the financial year 2019/20 budget increasing to Shs39.5 trillion from Shs32.7 trillion in the FY 2018/19, Civil Society Budget Advocacy Group (CSBAG) feels that several service delivery issues that have a direct impact on an ordinary person’s livelihood are likely not to be addressed.

But civil society is not convinced that the proposed budget is people centered, considering the regressive nature of the country’s tax regime. And for that, their focus is now on the allocations and not helping the already established businesses or any people wishing to start a business because of the regressive nature of the regime already enacted into or proposed allocations in the 2019/20 budget.
“We have since stopped assessing the budget by the spirit but by actual allocations. The spirit as set out in the budget strategy is often very good. But the allocations fall short,” the executive director, CSBAG, Mr Julius Mukunda said in an interview.

He continued: “For example, the NAADS budget will reduce from Shs244.8b in FY 2018/19 to Shs94.8b in FY 2019/20. Just as Ugandans are beginning to make good of inadequate and irrational supply of agriculture inputs, they get slashed; putting the increasing household income goal at risk.”
This is in addition to the health sector development budget which was also cut from Shs173.4b to Shs159.1b. According to Mr Mukunda, Lands, Housing and Urban Development Sector is only projected to receive only Shs168.25b in FY 2019/20.
Worse still, the Land Management and Administration sub sector meant to address the public outcries on land has only been allocated Shs14.862b.

“The highly celebrated Land Information System (LIS) and the constructed Ministry Zonal Offices (MZOs) are likely to collapse as the Ministry is experiencing a funding gap of Shs6.7 billion for maintenance. This illustrates, in many respects, that the budget is not people-centred,” he said.
Additionally, the Social Development sector budget was cut from Shs114.28b to Shs42.34b all coming from the Ministry of Gender, Labour and Social Development (MGLSD) and creating a Local Government expenditure gap of Shs33.18b. This move could be linked with the decision to move Youth Livelihood Programme funds from the MoGLSD to Local Government and State House.

Revenue collections

The financial year 2019/20 budget gets very ambitious on revenue collection, projecting a Shs2.99 trillion increment from the financial year 2018/19 projections. This is ambitious because the actual revenue between the financial year 2016/17 and 2018/19 increased only by Shs1.77 trillion. This is almost doubling this revenue increment in an economy that is growing below 10 per cent per annum and that according to Mr Mukunda is being ambitious beyond reach.

When interviewed for this article, the secretary to the treasury and permanent secretary at the ministry of finance, Mr Keith Muhakaniz wondered what’s wrong with being ambitious.
“Are you saying we shouldn’t be ambitious?” he rhetorically asked, before adding, “Looking at our focus and the achievements we have registered, so far we are confident that we are progressing.”

He was also of the view that efforts to increase the tax revenue to GDP ratio is working out well. He said the country is already at 16 per cent and looking to move to between 18-20 percent by the end of the year 2020.
Total tax revenue as a percentage of GDP indicates the share of a country’s output that is collected by the government through taxes.

LOSS-MAKING COMPANIES

Companies that will have carried forward losses for seven consecutive years will be required to pay income tax equivalent to 0.5% of ‘gross turnover. According to Cristal Advocates, the tax will apply in the eighth year and each subsequent year of loss carry forward.

The term ‘gross turnover’ is defined in section 2 of the ITA and includes not only revenue from regular business activities but also gains on disposals of capital assets. The Tax (Amendment) Bill, 2019, says a taxpayer who has carried forward losses for a consecutive period of seven years will be required to pay a tax at a rate of 0.5 per cent on gross turnover, starting in the eighth year. This will continue to apply for as long as the losses persist or until the shop (company) closes.

But Cristal Advocates notes that this is likely to “impact businesses which require significant up-front capital investments which may not fully utilize loss pools resulting from tax depreciation for several years after commencing operations. Companies involved in large, capital-intensive infrastructure projects such as pipelines, refineries and hydropower projects may be affected.”