Small businesses that often struggle to clear their tax bills stand to benefit if proposed amendments to Uganda’s value added tax carry the day.

The proposed changes awaiting parliamentary approval include raising the minimum turnover threshold — from Ush200 million ($66,308) per year to Ush500 million ($166,000) — for small businesses that are eligible for cash accounting benefits, a special compliance arrangement that allows small firms to pay VAT dues on cash sales recorded in a month while outstanding charges calculated against credit transactions are settled after receiving payment from customers.

The threshold adjustment is expected to raise the number of small businesses benefiting from the tax arrangement while minimising financial pressures caused by routine compliance obligations.

Many small businesses that generate average monthly turnover of Ush42 million ($13,925) suffer from low cash flows, a situation attributed to limited capital and high level of credit sales registered in their operations, experts say.

Though most of these businesses are exposed to bill settlement periods of more than 45 days, the tax payment cycle for VAT returns is 30 days, meaning they cannot clear taxes on time.

The existing law requires all VAT registered taxpayers to file returns by the 15th of every month and clear their bills before the last day of the month. They are thus forced into costly short-term borrowing borrowing to clear tax liabilities. This sometimes ends in the collapse of businesses.

Therefore, an increase in the number of small businesses enjoying longer VAT clearing periods is likely to improve overall cash flows through diminished finance costs while boosting tax compliance rates.

“Firms that supply government can go for months without getting paid. We believe this change in the law will save many of them from collapsing due to accumulation of tax arrears,” said Cyprian Chillanyang, Assistant Commissioner for Business Policy at the Uganda Revenue Authority (URA).

Improved compliance rates among small enterprises are likely to create a fairer distribution of Uganda’s tax burden in the future — a major shift from the current heavy reliance on a few large taxpayers.

Out of an estimated 740,000 taxpayers on the tax register, just under 3,000 account for around 90 per cent of the country’s revenue collections, URA data shows.

In addition, the general VAT threshold is to be raised from Ush50 million ($16,577) to Ush150 million ($49,731) in a strategic decision intended to weed out inactive, small firms from the VAT register, URA sources said.

Growth of inactive taxpayers on the register has undermined tax efficiency, with revenue officers often following up on small businesses that bear zero VAT returns due to extended lack of business.

“Increasing the cash accounting threshold to Ush500 million ($165,770) will enable small businesses to improve their financial base and ability to pay VAT over the long term,” noted Muhammad Sempijja, managing partner at Ernst and Young Uganda.

The introduction of tough VAT reporting rules for large taxpayers about four years ago compounded the problem of inactive taxpayers, analysts claim.

While large taxpayers are required to submit lists of VAT registered suppliers to the taxman in order to secure tax refunds, some suppliers have persistently filed irregular returns for lack of steady business volumes.

Observers feel most of these firms prefer to retain VAT status to seek big procurement deals without demonstrating adequate tax compliance. The local VAT register grew to 16,000 taxpayers at the end of last year but the number of inactive firms could not be established.

However, local investors feel aggrieved over the slow integration of tax structures across the region and the absence of sector based VAT thresholds.

“It is important to realign the VAT system with sector lines whereby critical areas like industrial production could be offered a higher threshold so as to encourage the entry of more players in this segment,” said Edward Kigongo, chief executive of Ken Group, a stationery materials supplier.