Mr Hamza M Ssali
As Uganda prepares for the fiscal year 2025/2026, policymakers must consider alternative tax bills that could significantly impact the business landscape, fostering an environment conducive to economic growth in the medium to long term. These proposals aim to enhance tax compliance, incentivize investment, and promote entrepreneurship.
Reinstating the initial allowance on eligible buildings, plant, and machinery is crucial for investment decisions by both prospective and existing investors. Currently, Uganda's tax regime lacks competitive advantages compared to other East African Community (EAC) member states. For example, in Kenya, buildings and machinery used for manufacturing or hospitality qualify for an initial allowance of 50 percent, followed by 25 percent in subsequent years. Tanzania offers a similar structure, providing a 50 percent initial allowance in the first year and the remaining 50 percent in the following year.
These favourable tax incentives in neighbouring countries encourage investors to consider alternatives outside Uganda, as they provide a quicker mechanism for recouping investments. Previously, Uganda's initial allowance allowed a 50 percent deduction on eligible property placed into service outside a 50-kilometre radius from Kampala.
Reintroducing this allowance could stimulate investments in infrastructure and industrial development, fostering economic growth and job creation.
Certain projects, particularly in energy, construction, and infrastructure, require substantial capital investments that local financial institutions cannot fully support. These projects often necessitate alternative funding sources, including foreign investment and public-private partnerships, to ensure successful implementation.
To address this, I propose removing interest capping restrictions on group loans for critical projects.
Given the close connection between these projects and the public sector, such financing arrangements pose little risk of base erosion or profit shifting. Currently, financial and insurance services are exempt from interest capping rules, allowing full deduction of interest expenses in tax returns. Extending this treatment to infrastructure projects could significantly enhance funding for essential developments, ensuring they receive the necessary financial backing for national growth.
To improve access to financing in the agricultural sector, reinstating a previously repealed income tax provision would be beneficial. This provision exempted interest earned by financial institutions on loans granted for farming, forestry, fish farming, and similar operations.
Refining this provision to include exemptions for interest income from loans disbursed to the agro-processing and agriculture sector, with specific conditions, could further support this initiative. Conditions could include the level of capital investment, number of employees, and value addition proposition. This measure would encourage financial institutions to offer loans at lower interest rates, making financing more accessible for large-scale agricultural enterprises.
Additionally, it would alleviate pressure on national resources currently allocated under the Parish Development Model (PDM), allowing funds to be redirected to critical sectors like health and education. This approach would also reduce administrative costs associated with monitoring PDM projects and mitigate financing risks in case of borrower defaults.
In conclusion, incorporating these alternative tax proposals into the FY 2025/2026 tax amendment bills could present significant opportunities for enhancing investment and economic growth in Uganda.
The reinstatement of initial allowances and reconsideration of interest capping rules could create a more favourable investment climate, driving economic development and prosperity.
