Uganda’s Court of Appeal outlaws domestic VAT

The Court of Appeal (“COA”) has outlawed the imposition of domestic Value Added Tax (“VAT”) by the Uganda Revenue Authority (“URA”) on goods imported into Uganda. This decision overrules an earlier judgement of the High Court that upheld URA’s stance. The COA decision has been lauded by many taxpayers and practitioners who have for long, questioned why the URA was imposing a tax that lacked legal basis.

Facts

Margaret Akiiki Rwaheju and others collectively referred to as the Appellants filed a case in 2013 in the Commercial Division of Uganda’s High Court challenging URA’s imposition of domestic VAT at the importation of goods into Uganda. The Appellants disputed URA’s tax assessment that was not backed by any provisions of the relevant tax laws. 

URA has been charging two streams of VAT at importation of goods. VAT at the rate 0f 18 per cent is charged on eligible goods at importation. This is not contested by the taxpayers as there are clear provisions in the Value Added Tax Act backing its imposition.

URA additionally charged domestic VAT on imports of goods by non-VAT registered taxpayers whose value exceeded Shs4 million. In determining the chargeable domestic VAT, URA would apply a mark-up of 15 per cent on the taxable value of the imported goods and subject this to VAT at the applicable rate.

According to the URA, this mark-up represented a value add or profit that the importers would earn on the resale of goods to customers in Uganda which ordinarily would attract VAT at the standard rate of 18 per cent. However, these taxpayers would not VAT charge on their subsequent sales because they were not registered for VAT causing revenue loss to the government. Domestic VAT was therefore an anti-tax avoidance measure by the URA on the assumed future merchandise sales in Uganda by the importers.

Decision

Uganda’s High Court previous decision fell short of declaring URA’s imposition of domestic VAT as illegal despite the presiding Judge’s observation that it was odd and irregular for the URA to collect domestic VAT at importation on the supposed future sales of non-VAT registered importers. Dissatisfied with this, the Appellants sought the intervention of the COA for a pronouncement of illegality of URA’s collection of domestic VAT.

In a unanimous decision of three Justices, the Court of Appeal has overruled the earlier decision of the High Court. The COA has ruled that it is illegal for the URA to impose domestic VAT and further ordered the URA to refund the aggrieved taxpayers. The Justices cited the provisions of Article 152 of the Constitution providing that no tax in Uganda would be imposed except under the authority of an Act of Parliament. Relying on several decided cases, the COA noted that no one should be subject to tax unless the words of the relevant law ambiguously imposed the taxes.  It was not in dispute that eligible goods were rightly subjected to VAT at the rate of 18 per cent on importation. The imposition of domestic VAT at importation on the presumed future sales of non –VAT registered importers was however not only irregular but also illegal. This is because there was no basis in the law to impose the same.

Conclusion

Indeed, many eligible taxpayers are reluctant to register for VAT purposes. The imposition of domestic VAT by the URA was aimed at creating an incentive for qualifying persons to register. While it is understandable that the URA did this to plug tax leakages, it did not follow the due process of the law. URA is empowered under the law to compel the registration for VAT of eligible persons. By charging domestic VAT, URA created a new tax levy that was not backed by any legislation passed by Parliament. It, however, remains to be seen whether the victorious Appellants will be paid. It is likely that the URA may institute audits to ascertain whether the aggrieved taxpayers bear no further tax liability to the government.