Hawkers display their goods outside shops in Kampala after traders closed them in protest against the EFRIS tax collection system. PHOTO | MICHAEL KAKUMIRIZI.
The Treasury has proposed several tax amendments in a bid to make ends meet. Some of the amendments have already been passed by the August House. The public is deeply concerned about the government’s plan, with traders and manufacturers raising the most alarm. But the government needs an extra Shs5.64 trillion to fund its Shs58.3 trillion Budget for the fiscal year 2024/2025.
This would have been simpler if its tax collectors were bringing in enough money, but according to its records, top taxpayers are disappearing from its list of remittances, arrears are growing, and traders are contesting remittance of VAT.
What is the VAT (Amendment) Act, 2023?
The Uganda Revenue Authority (URA) has devised a plan and is moving quickly to implement it. It has expanded the scope of what it considers to be “electronics” in its systems, expanded the scope of VAT collection to include proceeds from bank auction proceeds, and proposed the collection of VAT on goods and services that employers issue to their employees.
All these proposals are in the VAT (Amendment) Act, 2023. The amendment broadened the definition of electronic services to encompass advertising, cloud storage and data warehousing, cab hailing services, streaming platforms and subscriptions, and database access to capitalise on the rapidly advancing technology that is increasing the value of its chain of usage.
Are there any VAT case studies in Uganda that are instructive?
Yes. There have been instances in the past, such as the 2006 VAT dispute between Celtel Uganda and the taxman, where both sides were unable to reach a consensus regarding the tax’s remittance and ultimately sought a settlement through the legal system.
In this case, clarification was sought regarding how an employer’s supply to an employee should be handled. Following a Value-Added Tax audit, which URA conducted on Celtel from April 2000 to July 2003, the VAT payable by Celtel was determined to be Shs358,652,458 for airtime that Celtel provided to its employees for use in their official capacities. The court had to decide whether an employer’s supply of airtime to an employee qualifies as a taxable supply or as a supply of goods and services.
What arguments were put forward during the standoff?
Celtel contended that since the VAT Act allows for sales tax, which necessitates the exchange of goods or services for consideration, the supply covered by the Act is essentially one of sale.
Consequently, the company contended that since no consideration was given, the airtime it provided was for the business and not a supply. It disagreed with URA’s assessment, asserting that employees are not associates for the purposes of Section 3(1) of the VAT Act and that the tax collector improperly used Section 18(7) of the Act to impose VAT on the telecom.
From the taxman’s perspective, an associate is defined as any individual who follows the person’s instructions, requests, suggestions, or wishes, regardless of whether those instructions, requests, suggestions, or wishes are communicated.
The argument was that because Celtel was an artificial person, it was unable to conduct the task of providing airtime on its own; this task was completed by its employees. The Ugandan tax authority proceeded to assert that the airtime was given for Celtel’s business purposes and that any employee who disobeyed Celtel’s directives would face harsh consequences. This is what prompted URA to present its claim that, in the context of Section 3(1), the workers were associates of Celtel.
The taxman stressed that Celtel’s airtime supply constituted a taxable supply because it was a diminished consideration to an associate.
Can you walk us through the court’s decision?
Sure. In assessing this, the court pointed out that even though the sale and purchase of airtime is a common term for the transaction, it is actually a service. This, the court further ruled, is because the customer does not actually receive the airtime.
Additionally, in accordance with Section 18(7) of the VAT Act, this was a supply made between associates for no consideration or at a consideration below the supply’s fair market value.
Celtel’s employees were considered associates under the provisions of Section 3 of the VAT Act since they acted as employees in compliance with their employer’s instructions.
Consequently, in this appeal to the High Court, Celtel was unsuccessful and had to pay costs as well as mandated by the judge’s decision, court documents show.
What lessons can be gleaned from that high-profile case?
Many. It is because of cases like this that Grant Thornton, a tax and business advisory firm, recommends that “employers in Uganda who offer VAT supplies should consult a tax advisor to ensure they are correctly applying VAT regulations. They may have to remit VAT to URA on those supplies.”
It argues in a corporate notice that “any employer who supplies taxable supplies to their employee would be liable to pay VAT on those supplies despite the supply being at no consideration or at a reduced consideration.”
This means if a company gives something to its employees without charging them, like maybe free lunches or company cars, the company might still have to pay a bit of VAT on those things, even though no money is changing hands directly.
What is the Parliament’s take on the VAT regime in Uganda?
During the parliamentary sessions, several legislators, chiefly Amos Kankunda, the chairperson of the Finance Committee, stated that because employers claim input VAT but still provide gifts or services to their staff, there were instances where the output VAT wasn’t remitted to the tax authorities. The lawmakers contended that if things continued this way, staff members would become more inclined to solicit gifts or donations from their bosses, which would mount tax leakages.
Consequently, during the discussions, some proposals surfaced, including setting a threshold for the value of the gift to be accounted for, doing away with it completely, and delaying the claim of their input VAT. All of these were, however, rejected. Lawmaker Dickson Kateshumbwa, a former commissioner of Customs and Domestic Taxes at URA, informed the House that this would complicate tax administration because it permits tax apportionments, which are costly despite being lawful.
“Some people might receive the gifts and resell them in the market where other products have remitted VAT, something that is unfair. Apportionment distorts tax administration. Worldwide, the cost of [tax] administration should not exceed three percent of the tax collected. So this process could shoot up the cost of administration, but it can be studied for the future, but for now, we just shouldn’t consider it,” he said.
New discussions concerning the economic viability of implementing this amendment surfaced after these administrative debates ended. This was due to the Finance Committee’s findings, which indicated that the Treasury’s certificate of financial implication did not provide enough information regarding the estimated revenues compared to the cost of tax administration. An addendum was later submitted by the Finance ministry, but many lawmakers—mostly from the Opposition—remained unconvinced.
What costs or rather the lack of are we talking about here?
A minority report claimed that this violates the Public Finance Management Act, citing the Finance minister’s certificate of financial implication, which stated that revenue anticipated from the VAT amendment Act would be realised through improved compliance, something that wasn’t quantified. The shortcomings connected to this Bill were not measured, which necessitated detailing the cost of administration and the anticipated revenues over a minimum of two years after it went into effect.
The impact of this Bill on the economy was also required to be included in the certificate of financial implication so that it doesn’t result in incidents where companies would collapse as a result of its implementation. But the Treasury on its end said “since this is an amendment to existing tax provisions, there is no expenditure plan, specifically from the overall allocation of Shs619.99b for the 2024/2025 fiscal year and Shs534b for the 2025/2026 fiscal year to the Uganda Revenue Authority.”
Mr Ibrahim Ssemujju Nganda, the shadow Finance minister, was even moved to say that “the minister of Finance [Matia Kasaija] does not know how much it will cost to collect the new taxes, and if he knows, he does not want to tell Parliament.”
It has already been noted in the Domestic Revenue Mobilisation Strategy Annual Monetary Plan for the 2022/2023 fiscal year that most tax law amendments lack the support of tax-related analytical briefs.
What is VAT?
VAT is the acronym for Value-Added Tax. VAT in itself is an indirect tax on consumption charged on value-added to taxable supplies at different stages in the chain of distribution. It is payable by the final customer of a product that is subject to VAT and is assessed at an 18 percent rate on the majority of goods and services supplied to Ugandan businesses operating in the country.
VAT is commonly expressed as a percentage of the total cost of a good or service. For example, if a product costs Shs100,000 and there is an 18 percent VAT, the consumer pays Shs118,000 to the merchant. The merchant keeps Shs100,000 and remits Shs18,000 to the government.
This is due from anyone whose taxable turnover exceeds or is projected to exceed Shs37.5m for three straight calendar months. Or if their yearly revenue surpasses Shs150m.
In the event that they are found guilty of knowingly or carelessly failing to file a return or register when they are eligible, they may be subject to fines ranging from Shs2m to Shs3m, as well as up to six years in prison.
Exports outside of Uganda and a few specific goods and services—such as financial, health, and educational services—are exempt from this tax.
