Is e-taxation system a double-edged sword for businesses?

Tax accountants are spending sleepless nights trying to comply with the costly and labourious requirements of Electronic Receipting and Invoicing System (EFRIS), with many questioning whether compliance, especially for Value Added Tax (VAT) registered taxpayers operating businesses in the country, has become an illicit activity.     

The situation has hit Small and Medium Enterprises (SMEs) hard, which account for about 90 per cent of businesses in the country.

For example, a lunch-time stroll last week at one of the supermarkets was quite revealing that some local brands were conspicuously missing on the shelves.

Upon inquiring from the attendants, the suppliers stopped stocking the products weeks ago because they could not adapt to the new e-receipting requirement for each product that they transact.

Prosper Magazine’s investigation shows that the missing products are as a result of local providers’ inability to issue e-receipting.

This is because majority of the suppliers are small businesses that lack sufficient resources to procure e-receipting system, let alone enough time to understand the complexity of EFRIS, especially at a time when SMEs are struggling to keep afloat, following the Covid-19 effects on their operations. 

Already, URA has warned supermarket retailers and other business against dealing with suppliers that are not registered, impacting the policy of ‘Buy Uganda, Build Uganda’ (BUBU).

As a result of enforcement of EFRIS and URA’s warning against engaging unregistered members, some retail stores have lost up to 80 per cent of their local suppliers as a result of this development.

Should the supermarket retailers and many other businesses take the unregistered suppliers on board, it means they will have to account for their VAT tax obligations, a risky affair for businesses that heavily rely on suppliers’ goodwill.

Ideally, a person who carries out business and is registered for VAT is required to issue an e-invoice for every supply/sale made as part of his/her business activity regardless of whether the supply/sale is subject to VAT at a standard rate, zero rate or exempt.

Effective January 01, 2021 URA started implementing EFRIS for all VAT registered taxpayers operating businesses in the country.

With EFRIS, URA tax collection especially for VAT, an indirect tax on consumption, has never been that easy because the system records and generates receipts for transactions made which then allows the tax man to levy due taxes on businesses, some of which are SMEs that previously were not on the tax radar.

As for business, the system enables proper organisation and some sanity. With EFRIS, SMEs can, with some precision, know and track their transactions while making sense of them from a knowledgeable (business) point of view. Without encumbrances, the system helps in book keeping and revenue collection, an area that many SMEs have struggled with previously due to several reasons ranging from lack of book keeping knowledge to non-compliance or lack of motivation to do so among other factors.   

Owners and managers of several SMEs have pointed out that EFRIS has proven difficult to apply, thanks to the system’s many technical and administrative requirements.

“EFRIS is a nightmare,” says Mr Ronald Kulumala, a tax accountant with a leading media house in the country.

He continues: “It has increased the cost of operation and business in general because you need to bring in an expert to implement the system. You need to procure extra devices to integrate the two system—URA’s and your internal system and these are things that were not planned for.”   

Mr Kulumula’s trouble just like many in his position in several entities, is further compounded by the fact that the applicability of the system is yet to be fully understood by the users, urging the tax enforcers to deepen publicity around this integrated device.

As system users calls for increased publicity take shape, a more technical issue with the system needs to be quickly addressed.

“This system conflicts with accounting principles. It will reject credit notes the whole time because it was set in a way that it does not allow this provision yet this is something that in day to day operation of business is normal,” Mr Kalumala noted.

Credit notes rejected

By rejecting credit notes, it denies flexibility that businesses employ from time to time to either clinch or win a deal. URA demands that all credit notes should be accounted for at the time the transaction happened yet this is not always possible because in reality, that is not how business operates. This means as a business, you may lose money you should have gotten once because the system has no provision for such transactions.

Many times EFRIS rejects invoices because of compatibility issues and when you want help from the Tax Authority regarding these challenges, you will be lucky to get immediate help. Normally, you will have to wait for eternity to get some assistance.

As all that plays out, the system does not recognise that there are instances when businesses may not necessarily close their books once the month comes to a close, but could opt for a week or so extension to reconcile a number of things that are due or occasioned to that specific situation. In other words, the system does not recognise post backs (making entries to a previous accounting period as long as the period status is not closed) that is due to a specific period. As a result of that rejection, there are variances between the URA system and those of different entities, triggering future compliance queries with the tax man.

According to the businesses, the system does not print out the entire data that is provided, causing a mismatch that is difficult to justify. This is in addition to the fact that only EFRIS invoices can be claimed yet it is still marred with several technical and administrative irregularities.  

Damn if you do, damn if you don’t

When contacted, Mr John Walugembe, the executive director of the Federation of Small and Medium Entreprises-Uganda (FSME), noted that EFRIS is a “double edged sword” for businesses at all levels and more so for SMEs.

He is of the view that for the government, it will increase the tax base, considering the transparency that is in embedded in the system, making it difficult to avoid or evade taxes, hence enforcing tax compliance. For small businesses, it eases book keeping.

The problem, however, according to Mr Walugembe is that the system requires a certain level of knowledge which many SMEs don’t have. According to him, the reason URA is struggling to have businesses appreciate this system is because it didn’t factor in the fact that this could be a costly affair in terms of knowledge gap and complexity surrounding the application of the integrated technology.

He says the system is not working as efficiently as earlier expected due to low Internet access and power outages in the country. This may result into unnecessary penalties.

“The benefit will take time to be evident. What is needed is more education as well as putting in place infrastructure that can enable the system to work beyond Kampala effectively.”

He continued: “URA doesn’t have to look at SMEs as tools for paying taxes, the tax body and the government need to see how to introduce some development support before rolling out some of these initiatives.”

Business es lose suppliers

In an interview with Prosper Magazine last week, Mr Francis Akankwasa, the general manager of Mega Standard Supermarket, re-echoed what all other players have said. He noted that EFRIS has proven difficult to comply with.

He told Prosper Magazine that the system has challenges because it is not in conformity with their operations.

It demands that retail supermarket chains categorise their items in a certain way that is different from their internal ways of paying suppliers. The new system introduces additional costs.

“We have about 80,000 items but integrating them with EFRIS will take us nearly half a year,” Akankwasa says.

Uganda Revenue Authority is convinced that EFRIS is good to go.

When contacted, URA’s Acting Assistant Commissioner Public and Corporate Affairs, Mr Ian Rumanyika, said the tax body is cognisant that there will be emerging issues during the implementation phase of EFRIS. But URA is committed to making it work and we will go to great lengths to ensure that they facilitate business by addressing all the encumbrances that pop up

He said: “We are engaging with stakeholders as we fix the problem and we shall continue doing this. We acknowledge the fact that some products may not be configured because of new terminologies. But once that comes to our attention, we step in and solve the problem.

“We shall always try to sort out any issues that demand our attention regarding EFRIS because we are not turning back. The grace period is over and we have observed at least 97 per cent in compliance.”  

Tax laws

Tax procedure Code Act Section 73(B)

1.A tax payer specified in section 73A(2)& General notice 595 of 2020 who doesn’t use an electronic fiscal device is liable to pay a penal tax equivalent to the Tax due on goods or services or four hundred currency points( Shs8m) whichever is higher.

2.A tax payer specified under section 73A(2) who does not issue an e invoice or e receipt for goods and services or who tempers with an electronic fiscal device is liable to a penal tax equivalent to the tax due on goods or services or Three hundred currency points(Shs6m) whichever is higher.

3. A person who acquires a device that is not linked to the centralised invoicing and receipting system or authenticated by URA  is liable on conviction to a term of imprisonment not exceeding three years or a fine not exceeding three hundred currency points(Shs6m) or both

NOTE: One currency point is equal to Shs20,000.

EFRIS

E-taxfiling system                                                                                  

• Electronic Receipting and Invoicing System (EFRIS) is an automated compliance system introduced by the URA as part of its Domestic Revenue Mobilisation Strategy which is intended to manage the issuance and centralised tracking of all invoices and receipts by specified taxpayers in Uganda.