Inside city traders standoff with govt

The traders’ leaders had been led to believe that they were scheduled to meet President Museveni on Friday. After State House officials confirmed that there was no meeting in the pipeline, the traders vowed to keep their shops under lock and key on Monday. 

This all comes after revelations that this week’s strike halted cross-border wholesale trade that connects directly with city traders, most of whom are importers, and with trading partners from nations such as South Sudan, Rwanda, and the Democratic Republic of the Congo (DRC).

By press time, we were unable to establish if President Museveni will meet the traders. What is clear, though, are the demands of the traders: manufacturing firms selling products at wholesale and retail prices in business centres causing unfair competition; high interest rates that have made doing business costly; high import duties on clothing and other related cargo and inflationary pressures that have made most household items expensive for the general public to purchase.

In addition, they contend that small and medium-sized businesses, many of which have failed due to operating costs, receive insufficient assistance from government. As a result, many have struggled to turn in a profit since post-pandemic, prompting those with bad loans to be auctioned by creditors. Observers say some of these problems are hard to be solved immediately. For example, the high cost of borrowing has also reduced returns in most of the commercial real estate.

A raw deal? 
Bank of Uganda reports that the average rate of bank lending on the market is 18 percent, but traders contend that particularly for their type of business, which does not require operational bureaucracies, they obtain bank lending rates that are typically 30 to 35 percent higher. 

This week, in response to mounting inflationary pressures and the weakening value of the local currency, the apex bank hiked the central bank rate by 25 basis points to 10.25 percent. The central bank is concerned that although inflation is currently below the country’s five percent target, it will increase to six percent over the course of the next 12 months from its current 3.4 percent.
According to Mr Stephen Kaboyo, the managing director of Alpha Capital, an asset management company, and financial markets analyst, this monetary tightening will undoubtedly raise lending rates and reduce consumer spending.
“This monetary tightening will unlikely offer a quick fix in [the current] circumstances and with the absence of other tools on the fiscal side, this is the best the Bank of Uganda could do,” Mr Kaboyo told the media this week.

The most disputed topic among traders is Uganda Revenue Authority (URA)’s use of EFRIS technology for VAT collection. They contend that they have not been made aware of the technology, and that since VAT is already collected at the factory and in supermarkets, it was not included in their tax plans.
The tax collector, however, argues that VAT is ineffective unless it is levied throughout the entire value-added chain to prevent tax gaps, and that the tax body is merely attempting to collect the tax from the final customer who is not reselling the goods.

Uganda charges 18 percent VAT, which is fully paid at the time the product is being imported or when it leaves the factory. After that, the tax collector gradually gathers the charge from the minor value-additions made by traders until the final customer eventually pays it off. 

“If you cut it at the factory and you don’t follow that trail, you actually don’t recover this 18 percent from traders, and that’s what these business people don’t know. The VAT is paid off by the final consumer. We can’t skip the traders because we will be losing the flow somewhere along the way, and this is how VAT works the world over until you recover it from the final consumer,” Mr John Musinguzi, the URA commissioner general, said.

It is available to companies that deal in taxable supplies of a gross turnover that’s more than Shs150 million. However, traders believe that this still qualifies as exploitation. 

According to URA data, only 600 of the more than 20,000 traders in the Kampala City business hub have implemented the EFRIS technology. 
“It could be fear of change, but there could be genuine challenges. And that’s why engagement is proper. When we investigated, we found that most of the people behind the demonstrations were not even businessmen,” Mr Musinguzi noted.

Significance of VAT
With its revenue target of Shs30 trillion—which is half of the current running budget of Shs60 trillion, including supplemental budgets—URA is working feverishly to collect each tax it can.
The VAT, which the taxman is focusing more on, is primarily responsible for the taxpayers’ arrears, which totalled Shs390.9 billion in the fiscal year 2022/2023.

The taxman’s criminal tax investigation unit is seeing an increase in VAT infraction cases as a result of increased VAT fraud and EFRIS abuse of excisable goods that are the target of digital tax stamps. This has resulted in a decrease in tax returns filed over the last three years, with the taxman noting a decrease from 23,532 in the 2020/2021 fiscal year to 6,217 in the 2022/2023 fiscal year, primarily from the wholesale and retail trade. And yet, VAT was Uganda’s second-largest source of revenue after direct taxes, generating Shs9.3 trillion in revenue in the most recent fiscal year as opposed to Shs8.96 trillion from the latter.

The tax collectors brought in Shs25 trillion in revenue across that 2022/2023 fiscal year. But the National Treasury now demands an additional Shs5 trillion.

The Ministry of Trade believes the parties at the centre of the strike—URA and the traders—are mulling their way to a consensus, and “we can only intervene if URA fails to reach an agreement with the traders,” Ms Irene Kiiza Onyango, the Trade Ministry’s spokesperson, told Saturday Monitor. She was quick to add that “at the moment the issue is entirely with the taxman.” 

In the meantime, the National Treasury feels that traders should pay their fair share of taxes due to the nation’s expanding budgetary requirements. Moreover this comes at a time when the nation is being hurt by an anti-homosexuality law that forced international financial institutions such as the World Bank to halt granting low interest rate loans. 

“We hope that these parties resolve the issue at hand and go back to business. There is no reason for the Ministry of Finance to intervene. We believe that this is an operational issue that the parties are handling,” Mr Jim Mugunga, the Finance ministry spokesperson, said.

Tax breaks
The grievances of traders, who claim to have suffered for long until they vented their frustrations in Parliament and via strikes, also involve unfair competition from most foreign-owned industries that are enjoying tax breaks.
“This is hurting our returns really because we incur more costs and the Chinese investors don’t pay a tax at all. We get less revenues, for them it’s a windfall,” said Geoffery Musasizi, a city medium scale trader in metal and plastics.

In order to remove obstacles to competition among traders that had previously been addressed at the sectorial level, the Trade ministry presented a Bill in Parliament in 2022. President Museveni signed it into law this February.
Among other things, the Act aims to prevent actions that could harm competition in the Ugandan markets and to encourage and maintain fair competition. It covers practices that hinder competition, agreements that hinder competition, abuses of dominant positions, mergers, acquisitions, and joint ventures that negatively impact competition.

It will only take effect after the gazette, a process whose delay compounded by the absence of a commencement date, is driving traders insane.
The best way to address trader grievances, according to Mr Dickson Katashumbwa, a legislator and former URA Commissioner of Customs and Domestic Taxes, is to thoroughly examine whether local traders and industries have the capacity to supply sufficient demand to the populace for them to qualify for incentives like tax breaks. 

“We need to look at all these issues and come up with serious policy guidance to avoid strikes. Otherwise, having a strike in the city is not good because it leads to revenue loss as well,” he told the House on Tuesday.

Double taxation
It has also come to light that the traders’ own actions, in an attempt to evade paying import duties by using middlemen, are contributing to the double taxation issue. 

According to the taxman, a number of traders have been duped during this process because they are required to pay large amounts of money to individuals who import cargo in consolidated containers on their behalf. Sadly for the traders, the taxman also charges these import duties, which to them feels like double taxation.

Most finished products are subject to a 25 percent import duty, while intermediate products face a 10 percent levy. These imports are also charged a VAT of 18 percent and a 15 percent withholding tax, which is not reclaimable.
Only raw materials, that are not foodstuffs and capital goods, may still be permitted to enter duty free.

Mr Musinguzi said: “Our investigations show that there is nothing like double taxation, but there has been a group of middlemen that offer a service to bring cargo that has been bought by small businesses from a country like China and load all these goods in one container, then they come and clear them on their behalf, and they charge traders a premium for the service.”

He added: “This group has not been managing that process professionally or with integrity because it represents itself to URA as the importers of the entire container, gets assessed and assessed a fair tax from the tax authorities, and then proceeds to charge the cargo owners a different tax.” 

 “So our advice to the traders is to know that it’s your responsibility and right to deal with URA directly. Anybody who imports for you these goods, even if they say they want to pay your taxes, please insist that you want to know what you have paid, and this is demonstrated with receipts from URA,” Mr Musinguzi said.
According to URA’s investigations, this process has been going on for a while unmonitored. These container leaders pay, the taxman discloses, Shs50 million for a full container, and then charge the cargo owners, Shs100 million total, keeping their share of the difference. 

“The people who are supposed to do this are called cargo consolidators; they are registered, licensed, and regulated; they consolidate cargo and bring it. Now the difference between a cargo consolidator and a container leader is that one provides us with what we call a house bill with a detailed list of what is in the container, and each one is assessed their fair share of tax. But the container leader, who has not been very transparent, says it’s his; then we assess him, and then he goes and assesses double of what we have assessed; and I think that’s what has been causing double taxation,” said Mr Musinguzi.

“The other risk that happens is that when these people charge the taxpayers some amounts that are exaggerated, they also want to compromise our tax payment systems to cheat taxes. Now, when they are caught, because they don’t have goods in that container, they abandon the containers. So we stay with goods uncleared, and we don’t know the real owners except this person who has registered his own name,” he added.

Way forward
The tax collector has spoken with trade associations and the Private Sector Foundation Uganda about these concerns, but it wants to fine the traders in question before releasing the seized goods. But many have been compelled to leave their cargo unattended by the tax authorities.

The House Finance and Trade committees advised the taxman to gather a petition from traders for review and then bring it up for discussion.
House Speaker Anita Among contends that since tax bills are what are causing friction between traders and tax authorities, the other option is to wait for next week’s discussion of tax bills on the floor of Parliament.