Value Added Tax critical amendments explained

What you need to know:

  • In this explainer, Rolant Kule, a lawyer at Cristal Advocates, helps make sense of the proposed amendments to the VAT Act.

Value Added Tax (VAT) is an indirect tax charged whenever there is a taxable sale of goods or a supply of services. Presently, mostly rated at 18 percent of the value of the supply or sale, VAT is a tax borne by the final consumer of the goods or services.

What are the mechanics of VAT?
Whilst the reality might be different, VAT is not a price determinant for the sale or supply that is to be made by a taxable person. The operation of the VAT mechanism, simply put, is that a trader will be charged VAT when they buy their stock and in return charge VAT when they sell the goods. At the end of the buying and selling transactions, the trader has already recovered the VAT they paid. So, the trader, ideally, never bears the burden of VAT. Where the VAT the trader paid while buying the goods exceeds the VAT the trader charged while selling those goods, the trader can always recover the excess from URA.

Are all sales or supplies charged VAT of 18 percent?
No. Some supplies such as exports, and cereals grown and milled in Uganda are zero-rated. Other supplies are exempt from VAT, including the supply of unprocessed foodstuffs. An exempt supply implies that the trader dealing in such goods or services is not allowed to charge VAT, but may be paying VAT.

So what is the current hullabaloo all about?
As the practice is, tax laws, including the VAT Act, are amended annually. In the prevailing proposed amendments to the VAT Act, there has been a controversial proposal that has not only caused confusion but also been grossly misinterpreted to mean that employees will be charged VAT of 18 percent in addition to the already varying Pay-As-You-Earn (Paye) rates.

First off, the supply of services made by an employee to an employer because of employment is not a supply of services. Consequently, the VAT of 18 percent does not and cannot arise. What the VAT proposal seeks to introduce is to impose VAT on a benefit that is extended to an employee free of charge as long as the service or goods given to the employee is part of the employer’s business activities.

The implication is that if you work at a restaurant and the employer gives you lunch at no consideration then such an employer is deemed to have made a taxable supply and is expected to account for the VAT that arose from such a supply. Whilst the proposal is an affront to the employers’ motives for improving employee welfare, it does not in any way suggest that employers should deduct VAT from employees’ salaries. It is a proposal that should be dropped.

Secondly, Section 10(4) of the VAT Act is proposed to be amended so that the recipient of the auction proceeds, who in most cases are financial institutions, will be responsible for accounting for the VAT when goods are sold through an auction. This means if a financial institution sells a foreclosed item, by auction, the proposal deems the recipient of the proceeds of the sale to have made a supply and consequently charge VAT of 18 percent on such a supply of goods. The ripple effect is that financial institutions will have to charge this VAT to the buyer—a thing that will make recovery actions daunting, let alone the implementation of the amendment, culminating in controversy.

What do you reckon informed the aforesaid amendments?
The recovery action (auctioning of collateral) that banks and or financial institutions take while seeking to obtain repayment of the money arising from an advancement of credit to a customer is closely linked to the supply of financial services, which are already exempt under the same VAT Act (do not give rise to the VAT charge). Therefore, to treat the general financial services as an exempt supply and then recovery of loan amounts through auction, which is part and parcel of the financial services, as a taxable supply distinct from the supply of financial services, is not a proper alignment of the law but a recipe for tax disputes. It is, therefore, inescapable that the proposed tax changes need to be approached critically because they hold the potential to either stifle or propel the economy.