Uganda’s decision to suspend withholding value added tax (VAT) in September due to opposition from business community highlights the fallout from the controversial tax experiments undertaken this financial year.
Now, there is fear this decision may trigger a slowdown in revenue collections of the 2018/19 financial year.
According to the government gazette published in September, Finance Minister Matia Kasaija declared a suspension of the withholding VAT effective September 28, after just three months of enforcement.
Under withholding tax rules, taxpayers were required to withhold VAT charged against gazetted transactions and pay it immediately after receiving invoices for goods and services supplied before the official filing date, that is, 15th of every month.
In addition, taxpayers were obliged to remit withholding VAT against goods and services delivered by a non-VAT registered supplier and are valued at more than Ush37.5 million ($9,829), regardless of the availability of cash in their businesses.
Withholding VAT, which is meant to tackle tax fraud and non-payment of VAT, was met with hostility by the business community due to the heavy cash flow pressures tied to it and the delays in issuing of withholding tax certificates.
Government data shows around 30 per cent of filed VAT bills are never cleared, translating into a revenue loss of four per cent of the country’s tax to GDP.
The suspension of withholding VAT has drawn attention to the government’s failed tax experiments during this financial year.
The one per cent mobile money tax, for example, drew criticism from politicians, telecommunications companies and citizens over escalated transaction costs.
Under the mobile money tax regime, each transaction is subject to one per cent excise duty tax on sending, receiving and withdrawal of funds while deposits and other services such as utility and tax payments are exempt.
Consequently, the total value of mobile money transactions registered by local telecommunications companies fell by more than Ush50 billion ($13 million) at the end of July according to Bank of Uganda data, as many users opted to transact in hard cash while some customers opted to utilise banking agents that recently rolled out services in various towns and charge lower transaction fees than mobile money agents.
Mounting opposition to the mobile money tax eventually forced the government and parliament to amend the excise duty law last month, with a discounted 0.5 per cent tax rate restricted to cash withdrawals.
The introduction of Over the Top (OTT) tax of Ush200 ($0.05) per day on mobile Internet users has similarly frustrated telecommunication companies and put pressure on marketing teams.
Whereas severe cashflow pressures exerted on some companies by the withholding VAT regime apparently forced their owners to borrow money to clear taxes, withholding VAT agents, which often transact with service based clients, reportedly came under more compliance pressure than some of their peers.
“We need to focus more on expanding production levels within the economy in order to widen the tax base sustainably instead of killing local production pillars,” argued Denis Kakembo, energy and tax practice leader at Cristal Advocates, a Kampala-based law firm.
This view is shared by Derrick Nkajja, chief executive of the Institute of Certified Public Accountants of Uganda, who argued that with the tax suspended, the government now has time to understand the tax and improve its implementation.
"There is a need to diversify the tax base through deepening income taxes and collecting VAT due from many SMEs that have registered for VAT but rarely file returns nor remit to URA,” said Derrick Nkajja.
But the removal of withholding VAT could slow down collections in spite of the recovery witnessed during the first quarter of 2018/19.
Latest URA data shows the taxman posted a revenue surplus of Ush35 billion ($9.45 million) in July and a net surplus of Ush96 billion ($25 million) in August, despite traditionally slow business activity experienced during the first three months of the financial year.
Total collections from withholding VAT stood at Ush10 billion ($2.6 million) at the end of August.
Local excise duty — a tax segment that includes mobile money tax, generated Ush107 billion ($28.1 million) but suffered a deficit of Ush7,339,457,585 ($1.92 million), according to URA data.
“The suspension of withholding VAT was long overdue. Though This measure was meant to minimise cases of people filing VAT returns but failing to pay up, it actually forced some businesses to borrow money just to clear taxes and that does not make sense.
Why should anyone be paying taxes against an invoice that is yet to be settled? The removal of withholding VAT could prompt the government to increase excise duties on mobile money transactions, banking transactions and other viable excise duty channels.
But tax expansion opportunities in the income tax segment seem have to dried up in recent times,” noted Oscar Ofumbi, a business owner in the transport and education sectors.
Efforts to obtain comment from Uganda Revenue Authority and Finance Ministry officials on proved futile.