Mixed reactions to Uganda new tax proposals

Tax changes proposed for the 2019/20 financial year had a mixed reception among Uganda’s business community.

The proposals, recently announced by the government include a reduction in withholding tax charged on interest earned from Treasury bonds with a duration of more than 10 years.

The reduction is expected to boost offshore dollar inflows and ease pressure on the exchange rate, increase investor participation in future infrastructure bond auctions and also reduce interest on government securities.

Withholding tax on gazetted bonds has been halved, from 20 per cent to 10 per cent, and also applies to the 10-year and 15-year Treasury bonds currently issued by the Central Bank.

A lower income tax rate on Treasury bills and bonds usually attracts more offshore investors to the government debt market, raises competition among market players and cuts the cost of debt repayments incurred by the government every year.

Interest rates earned on the 10-year and 15-year Treasury bonds was 15.75 per cent and 17 per cent respectively earlier this month, according to Stanbic Bank Uganda’s financial market reports.

“The reduction in withholding tax charged on interest earned from Treasury bonds with a duration of more than 10 years is probably driven by the government’s desire to attract more local and foreign capital to future infrastructure bond issuances; the tax rate could go down further as it seeks more money from that financing window,” said Denis Kakembo, managing partner and head of tax practice at Cristal Advocates.

The government’s proposal to restore withholding VAT, a controversial tax that was suspended in late 2018 following an outcry by local businesses, is said to be due to the government’s failure to identify new revenue streams coupled with excessive pressure targeted at compliant taxpayers.

Under this measure, the withholding VAT rate has been cut from 18 per cent to six per cent, while taxpayers are required to pay VAT dues upfront for eligible transactions involving non-compliant taxpayers with a value of more than Ush37.5 million ($9,966).

This tax measure yielded Ush10,040,055,921 ($2.6 million) at the end of August 2018, according to Uganda Revenue Authority data.

“The government is not spending any more and this has made matters worse for local businesses. Some players in the business value chain are not equipped to handle withholding VAT, and the difficult economic times will simply add to the problem.

“The government ought to deploy at least three data scientists to analyse ways of utilising artificial intelligence, algorithms and data analytics with a view of minimising the compliance burden placed on a few, upright taxpayers instead of ignoring non-compliant individuals,” said Oscar Ofumbi, a business owner in the transport and education sectors.

Delays in issuing VAT and excise duty guidelines for Islamic banking products, almost three years after an amendment of the Financial Institutions Act (FIA) of 2004 that paved the way for innovations in Uganda’s financial sector, has raised questions about the future of the products.

The Finance Ministry will gazette VAT and excise duty rules for Islamic banking products during 2019/20, but lack of clarity on the government’s position and the prolonged review of Shariah banking regulations by the Bank of Uganda and the Uganda Bankers Association could delay the introduction of the banking services in the country.

“The government is concentrating on Islamic banking laws and this has delayed the rollout of VAT and excise duty regulations for this segment. But Islamic banking is not so different from conventional banking systems and does not require complex legislation to implement,” said Mr Kakembo.

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