PS renews plan to tax farmers in Uganda

Traders sell cattle at Lwemiyaga Cattle Market in December 2019. Officials say URA’s revenue collection target would be made that much easier if commercial agriculture was pulling its weight. PHOTO/WILSON KUTAMBA.  

What you need to know:

  • A top Finance ministry official says attempts to broaden the country’s tax base merit “a candid conversation”.
  • Shs2.8 trillion is lost to tax exemption and related incentives, according to Parliamentary Budget Committee Report for 2022/2023.  

The top technocrat in the Finance ministry says a careful reconsideration of Uganda’s tax regime is due as the country’s tax revenue continues to lie at 13 percent of gross domestic product (GDP).

Mr Ramathan Ggoobi told a post-budget dialogue held under the auspices of NTV Uganda and ABSA Bank on Friday that attempts to broaden the country’s tax base merit “a candid conversation.” 

This came after President Museveni publicly criticised the taxman for superintending over a low tax-to-GDP ratio. 

“If we want more tax revenue, we must have a candid conversation on how we can tax commercial agriculture,” Mr Ggoobi, the Finance ministry Permanent Secretary/ Secretary to the Treasury, said of the domestic resource mobilisation, adding, “We are investing Shs2.7 trillion in that area, but it is not paying tax.” 

Uganda Revenue Authority (URA) has marginally improved its tax-to-GDP ratio by 0.2 percent compared to the performance during the 2021/2022 financial year after the Finance ministry set its target of Shs25.55 trillion.

Low tax revenues have meant that the government has been able to fund only the most basic services, while also sourcing for loans to make ends meet. 

“Lower-than-expected tax revenue is a risk which we need to manage. Uganda’s economy is structured in a way that makes it very difficult to tax,” Mr Ggoobi said.

The Finance ministry has moved the taxman’s revenue collection target closer to the Shs30 trillion mark.

“Domestic revenues for the FY2023/2024 are projected to amount to Shs29.7 trillion, of which Shs27.4 trillion will be tax revenue and Shs2.3b will be non-tax revenue. This represents a revenue effort of 14.3 percent of GDP,” Finance minister Matia Kasaija disclosed in his Budget speech on Thursday.

Tax exemptions
Mr Kasaija further revealed that focus in the next financial year that starts on July 1, will be placed on “improving tax administration, including use of ICT to fight tax evasion, and rationalising tax exemptions to improve their effectiveness and reduce revenue leakage.”

Empirical evidence shows that the government lost nearly Shs3 trillion in potential tax revenue to exemptions and deferrals during the ongoing financial year that ends on July 1. 

While Mr Ggoobi agrees that the government has to be more discerning when awarding tax exemptions, he told the post-budget dialogue that they have to ensure fair taxation.

Specifically, he reasoned that the work of the taxman would be made that much easier if commercial agriculture was pulling its weight.

“Most people are farmers and the farmers are the policymakers,” he noted, adding, “They do not want to tax themselves.”

A proposal by Mr Paul Omara—the Otuke County lawmaker—to introduce a tax on animal sales was met with sustained protests in April.

Mr Frank Tumwebaze, the Agriculture minister, who was bitterly opposed to the idea, reasoned that “taxing milk, yogurt, ghee, [and] beef makes sense.”

On June 16, Mr Ggoobi appeared to throw his weight behind a tax on animal sales. 

He said it smacks of unfairness “to sell cows without paying a tax.” Observers say the PSST’s comments reflect plans by the government to realise the full potential of domestic resource mobilisation. 

“URA will be aggressive in a good way in the next financial year,” he said.

Revenue loss
Mr Kasaija indicated in his Budget speech that the government will spare no effort in restricting arrangements and deals that expose the country to revenue loss during the 2023/2024 financial year.

Besides rationalising tax exemptions, provisions in the tax laws that provide deductions for accelerated wear and tear on plant and machinery have been repealed. This means normal depreciation will apply. 

Exemptions on Value Added Tax (VAT) for diapers, inputs for processing hides and skins into finished leather, and inputs into iron ore smelting into billets have also been repealed. 

The tax laws have been amended to improve the tax system and ensure fairness. It is believed that these measures will generate Shs615b in additional revenue next financial year. 

Meanwhile, the Income Tax Act has been amended to allow taxpayers who obtain credit facilities from Saccos, non-deposit taking microfinance institutions, self-help groups, and community-based microfinance institutions to deduct the entire interest on loans as a business expense.

This is the practice for taxpayers borrowing from commercial banks and micro-finance institutions.

The objective of this measure as per Mr Kasaija is to extend this benefit to borrowers of microfinance institutions and moneylenders. 

This, the Finance minister noted, will support low-income individuals and groups to enable them access financial services and improve profitability and survival rate of SMEs.

Elsewhere, withholding tax of 10 percent has been imposed on commissions paid to agent bankers to equalise their tax treatment with other agents operating similar businesses such as mobile money agents. 

VAT reforms
The VAT Act has also been amended to exempt the supply of concentrates and seed cake from paying VAT.

This is to incentivise local manufacturing of animal feeds and premixes, allow non-resident taxpayers to file returns and pay tax in United States Dollars to facilitate compliance of non-resident taxpayers operating in Uganda.  

It will also require foreign remote providers of electronic goods and services to account for VAT on goods and services sold in Uganda.

The goals of this undertaking, government functionaries say, is to bring e-commerce transactions into the tax system. 

In addition, the scope of electronic services on which VAT is applicable has been expanded to include, among others, films, games of chance, advertising platforms, streaming platforms, cab-hailing services, cloud storage and data warehousing.

Mr Kasaija also noted that Parliament has enacted the Convention on Mutual Administrative Assistance in Tax Matters (Implementation) Act 2023 meant to increase cooperation among tax authorities in the participating countries to tackle tax avoidance and cross-border tax evasion. 

This will assist URA to receive correct information to deter illicit financial transactions where the country is estimated to lose revenue amounting to Shs300-500b annually.

Excise duty changes
The Excise Duty Act has been amended to remove the excise duty of US Dollar 9 cents per minute on incoming international calls originating from Tanzania.

This will include Uganda’s southern neighbour in the One Area Network that comprises other East African Community (EAC) member states. 

“Phone users in the EAC will now be able to make and receive calls at local rates regardless of their location within the One Network Area,” Mr Kasaija revealed on Thursday. 

Further, the size of investment capital required for an investor to benefit from excise duty exemption on construction materials has been reduced to $5m from $50m (Shs18b) for Uganda nationals.

Foreign investors will be required to have investment capital of at least $50m (Shs184b) in order to benefit from this exemption.

To deter under-valuation, excise duty on mineral water, bottled water and other water purposely for drinking has been imposed at 10 percent or Shs75 per litre. 

The Excise Duty Act has also been amended to clarify the taxation of spirits for human consumption on the one hand, and the exemption from excise duty of spirits used as raw materials for the production of disinfectants and sanitisers on the other hand.

Meanwhile, the Tax Procedures Code Act has been amended to waive any interest and penalty on tax arrears outstanding as at June 30, 2023, in order to address requests from taxpayers who have cited hardships caused by the Covid-19 lockdown. 

This provision, according to Mr Kasaija, is limited to taxpayers who will make a payment by December 31, 2023. 

Where the taxpayer incurs part of the principal tax outstanding by the deadline, the payment of interest and penalty shall be waived.

After that date, the taxman will decisively enforce recovery of all taxes and penalties.