Mixed response greets proposed tax changes

The latest tax proposals by the Finance ministry, currently before Parliament, have split Ugandans down the middle.
The mixed picture highlights the importance of understanding and analysing the proposals’ potential impact on the economy, as well as careful consideration of alternative solutions that might achieve the same goals with fewer adverse effects.
In seeking approval from the House, Finance minister Matia Kasaija said the proposals contained in the Value Added Tax (Amendment) Bill, 2023 will streamline the imposition of capital gains tax on the purchase of assets, expand the exceptions to the provision for limiting interest deduction to include microfinance deposit taking institutions, among other things.
The Bill proposes that any capital gain will no longer be treated as business or employment income, and, likewise, there will be no deductions for capital losses. Instead, a final Withholding Tax of five percent will apply to the gross proceeds. These modifications could have notable consequences for individuals involved in investment activities.
“The proposed withholding tax of five percent on the gross proceeds from the disposal of assets is going to have far-reaching consequences for ordinary Ugandans. It is not a tax on income, but a tax on wealth,” a source who has analysed the Bill, told Sunday Monitor. 
Our source, who requested not to be named, added: “Assume you purchased a car a year ago at Shs10m and, as you know, cars depreciate the minute they leave the bond. If you sell it after June 30 for Shs5m, the new law will require the purchaser to withhold five percent from the sale proceeds, which is Shs250,000. This is regardless of the fact that you wouldn’t have earned any income from the car as you would have sold it at a loss.”
“What’s more,” our source added, “there are very few exceptions to this tax-proceeds from the sale of personal property such as your home and its furniture will be subject to this tax except if the disposal is to a spouse or part of a divorce settlement. In effect, you are going to be taxed when you sell your bed.”  
Several experts Sunday Monitor spoke to have urged Parliament to take closer scrutiny of the tax proposals, including this proposal that another source says “is not a tax on income.”
Presented with the concern, Finance ministry Permanent Secretary Ramathan Ggoobi sought to play down the fears.
“The proposal is actually intended to make taxpayers’ lives easier. Currently, disposal by a company is 30 percent of the gain and 40 percent for individuals, which has been discouraging declarations,” Mr Ggoobi said, adding, “Although taxpayers were required to prove the cost of the asset before a deduction could be made to arrive at the gain. The five percent on gross sale is lower and easier to comply with.”
One of our sources was, however, not convinced, insisting that the measure abrogates tax principles. The source explained that if the particular amendment is adopted by the House and assented to by the President, it will affect the cost of doing business in the country. This will cause a compliance burden to many.
New targets
By introducing a five percent and 15 percent withholding rate on the profits (interests or dividends) derived by members/ participants in a collective investment scheme (unit trust), the Finance ministry is directing the taxman to get the government a piece of the pie from the schemes that have been erstwhile untaxed. Collective investment schemes per the proposal will be unconditionally exempt from income tax.
A unit trust fund is a way for investors with similar goals to combine their money and invest in various market opportunities, including stocks, bonds, and securities. This allows investors to diversify their portfolios without needing significant cash reserves. By pooling funds from many people, everyone benefits from the economies of scale provided by the pooled funds. The amount invested earns income through interest, dividends or capital gains depending on where it is allocated. As an investor in a unit fund, you receive profits proportional to your ownership of units in the portfolio.
Critics of the proposal that is essentially about taxing the interest (profit) one makes from their savings argue that it will lower public interest in the saving schemes whose popularity was rising because they are tax exempted. Previous attempts by the Uganda Revenue Authority (URA) to impose a tax on the schemes were met with resistance. 
Parliament’s approval of the move would necessitate collective investment scheme managers to exert more effort in generating robust returns. This is crucial to prevent their portfolios from experiencing losses and protect investor profits from dropping substantially, which could potentially lead to an exodus.
Mr Ggoobi said the proposal is not a new tax but an “alignment.”  
“Return on investment is always taxed. If you invest part of your net salary in shares and you get dividends, it’s taxed at 15 percent. If you save it and get interest, it’s taxed at 15 percent. If you invest in bonds and securities, you pay withholding tax at 10 to 15 percent, depending on the type of securities,” he revealed, adding, “Taxation should not be used to prefer one investment to another or distort choices on where a person invests his money. That’s all this measure is intended to achieve.”
Mr Ggoobi, who is also the Secretary to the Treasury, concluded: “Currently, the law provides a 30 percent tax on the CIS (collective investment scheme) if it doesn’t distribute the money with accumulation of investment but the investor receives tax-free income when it’s paid to him. It’s this anomaly we are proposing to correct.”