How tax changes will affect small businesses

Parliament recently passed the 2021 Tax Amendment Bills which introduced a number of changes that will impact on both businesses and individuals. The tax changes are geared towards increasing tax revenue, as the government grapples with sourcing adequate funds to service the increasing debt burden, as of April 2021 standing at around Shs 68 trillion. The government expects to raise about Shs460 billion from the proposed tax amendments. These tax changes are effective July 1, 2021 so it is important that businesses get ready to comply to avoid falling on the wrong side of the law. 

As part of its revenue mobilisation strategy, the government has shifted its focus towards widening the tax base, especially through use of technology. At the start of the current financial year,   the Electronic Fiscal Invoicing and Receipting System (“EFRIS”) platform was rolled out requiring the issue of e-invoices and enabling the URA to receive information about taxpayers’ transactions in real time with the aim of curbing Value Added Tax (VAT) fraud. Other measures like the use of the Digital Tax Stamps (“DTS”) have also been recently rolled out, initially focusing on alcoholic beverages, water and cigarettes. However, with effect from April 1, 2021, the requirement to fix digital tax stamps has now been extended to imported and locally manufactured cement and sugar.

VAT refund

In order to incentivise the use of these digital platforms the government has proposed a VAT refund to non-VAT registered taxpayers spending at least Shs 10 million within a month (30 consecutive days) where the purchases are supported by e-invoices. The proposed refund amount is 10 per cent of the VAT incurred, which equates to around 1.5 per cent of the total purchase price. In addition, there are a number of new penalties aimed at curbing violations of the EFRIS and DTS initiatives. 

Another measure that is aimed at enhancing tax compliance is a mandatory requirement for all local authorities, government institutions and regulatory bodies to only issue licences or other authorisations to conduct business, to persons with Tax Identification Numbers (“TINs”). This amendment will push small business operators to obtain TINs and thereby become part of the formal economy within closer view of the URA. 

The Bills also contain various measures to increase tax rates or impose new taxes, which will add to the cost of conducting business.

12% levy on Internet data

From an excise duty perspective, Internet data will now be liable to duty at a rate of 12 per cent (previously nil). While there is an  exemption for data that is used for provision of medical and education services, it remains uncertain how the telecommunication companies  are expected to make this distinction at the point the data is sold, for example where  an individual may subsequently use it partly for education and partly for another purpose. This change also comes in at a time when many businesses continue to incur high internet costs for  staff who are working remotely due to the Covid-19 pandemic.

However, there is some good news in that the Over the Top (“OTT”) tax will be repealed at the same time.

In addition, excise duty on fuel will increase from Shs1,030 to Shs1,130 per litre for diesel and Shs1,350 to Shs1,450 per litre for petrol. These increases are intended to replace the proposed annual vehicle license fees that were subsequently scrapped. 

The proposed introduction of a Shs100 per kg excise duty on wheat grain was rejected by the Parliament as this was feared to result into an increase in smuggling of wheat which is one of Uganda’s imported basic food commodities.

From an income tax perspective, there were proposed changes to the taxation of rental income, targeted at redressing the perceived under-declaration of income by landlords.  The tax rate for rental income was to be set at 30 per cen for individuals, up from the current rate of 20 per cent and matching the rate already paid by companies. 

At the same time, both individuals and companies were to be allowed a standard deduction for related expenditure equal to 60 per cent of the gross rental income. This would mean that landlords incurring actual expenses in excess of the 60 per cent limit would be disadvantaged, and the effective tax rate on gross rental income would be 12 per cent.

Rental tax

It was also proposed that landlords with more than one building should pay the 30 per cent rental tax on each building separately.  This measure is aimed at ensuring that landlords do not offset expenses from loss-making buildings or buildings under construction against the rental income of profitable buildings. However, if the 60 per cent deduction limit was applied to all rental buildings (regardless of their current rental return) then such a separation does not seem to be necessary. 

These changes were proposed at a time when landlords are already having to pay property tax of up to 12 per cent to the local government authorities such as Kampala Capital City Authority (KCCA).  There is a likelihood that landlords would seek to compensate by increasing rent, thereby increasing the cost of housing in Uganda.

The above rental proposals have previously been rejected twice by Parliament and we have seen Parliament reject them again this year.  If the President signs off on the Bill as passed, then the proposals will have been dropped for a third time.

Another income tax proposal that will affect businesses is the discontinuation of the concurrent deduction of initial allowance and depreciation deductions of assets in the same year of acquisition. In addition, motor vehicles and other automobiles will be subject to a tax depreciation rate of 20 per cent (rather than the current 30 per cent or 35 per cent) thus prolonging the period within which a business is able to get a full deduction of the related cost of investment especially those with significant vehicle fleets.

Exception on liquefied petroleum gas

From a VAT perspective, some exemptions have been removed such as that for clinker used in the manufacture of cement.  This will have an impact on the cost of cement which may adversely affect the growth of the real estate and construction industries.  At the same time, there is a new exemption for liquid petroleum gas (LPG), which should make this product cheaper. This exemption had been passed by parliament last year but it was omitted from the VAT Act.

While the government is keen on mobilising adequate domestic revenue to cover the budget gap, it is important to consider various attributes that make a good tax regime. This includes stability and predictability, especially at this point when the economy is still recovering from the impact of Covid- 19. Businesses and individuals value certainty when they are making investment decisions, especially long-term commitments. In contrast, frequent and unexpected changes to the business tax regime can deter long-term investment.

The author is a tax manager at PwC.