A policy shift towards casting tax net wider has rattled employees who will opt for early retirement as an amendment to law proposes a tax on their benefits.

The agriculture sector, however, enjoys tax relief.

Under the proposed changes to the NSSF Act of 1985, benefits paid to members aged above 60 years will be exempt from income tax but members who choose to withdraw their savings before clocking 60 will be subjected to income tax.

Whereas the current legal regime offers tax exemptions on NSSF contributions and benefits but imposes income tax on the Fund’s investments, the proposed legal framework provides for tax relief on general contributions and NSSF investments but charges income tax on members’ benefits.

PENSION CONTRIBUTION

The income tax exemption offered to members who choose to withdraw their benefits after reaching 60 is apparently motivated by government’s desire to lock in local savings for longer periods so as to finance huge infrastructure projects without resorting to expensive commercial loans.

Though NSSF and Ministry of Labour, Gender and Social Development officials insist tax relief offered on members’ contributions and the Fund’s investments is enough to offset the burden of income tax levied on contributors’ benefits, tax experts argue a flat income tax rate could severely affect small NSSF savers who often struggle to achieve a comfortable retirement life.

Average NSSF savings per member are estimated at Ush15 million ($4,032) because of fairly low salaries paid by many Ugandan companies to junior staff, relatively short contribution periods of less than 15 years and poor returns on savings recorded between 1986 and 2006. In contrast, NSSF’s membership register has grown to more than two million contributors to date.

“The government is using tax benefits to attract more people towards saving with NSSF and be able to secure a comfortable retirement life. We have utilised new technologies to help voluntary savers pay their NSSF benefits easily through use of mobile money platforms at a reasonable fee,” said Richard Byarugaba, NSSF Uganda’s Managing Director.

While the proposed amendments offer NSSF members tax exempt contributions in the range of 5-30 per cent of one’s monthly salary, any individual contributions above 30 per cent are subject to Pay As You Earn (PAYE) but the amendments are silent on taxation of such contributions upon withdrawal of a member’s benefits — a scenario that raises risks of double taxation. 

EXEMPTION THRESHOLD

“In case a member contributed above the exemption threshold of 30 per cent, the excess is subject to PAYE at the point of payroll processing as per the Bill. However, the Bill does not specifically exempt this excess from taxation at the point the member accesses the benefits. The Bill needs to be amended to avoid double taxation of this amount at the benefits payment time,” reads a client brief issued by BDO Uganda Ltd, a tax advisory and audit firm.

Other contentious items in the NSSF amendment package include a provision that allows government to borrow directly from the Fund and a clause that excludes payroll contributors from access to mid-term savings benefits — a special window that allows members to withdraw part of their savings for personal benefit before clocking retirement age. The latter provision threatens to deny more than 1.5 million NSSF payroll contributors access to mid-term benefits in spite of having investment appetite targeted at personal real estate projects and small cottage enterprises. However, voluntary contributors will be entitled to mid-term benefits according to the proposed amendments.

“There should be a maximum income tax rate of 10 per cent so as to cushion people’s benefits against the harsh consequences of one off taxation costs.

A tax threshold that determines who qualifies for the income tax rate based on the value of savings accumulated, contribution period and return on savings ought to be considered. The idea of government borrowing directly from NSSF also raises hard questions. How much interest is government willing to pay to NSSF and does it see any need for a borrowing limit against contributors’ money?” Asked Plaxeda Namirimu, a tax director at PwC Uganda.

Recent changes in tax laws have yielded income tax exemptions for investors in the manufacturing and hotel sector in recent times. For example, a foreign investor located in an industrial park or a foreign factory owner located outside an industrial park with a minimum investment of $10 million that uses at least 50 per cent of raw materials sourced from the local market and a workforce with 60 per cent local participation is entitled to a 10-year income tax exemption.

FOREIGN INVESTORS

Eligible foreign investors include agricultural processors, manufacturers or assembling plants that supply medical tools and pharmaceuticals, building materials, paper and household appliances to mention but a few. Local investors are obliged to invest a minimum of $1 million in the above activities in order to qualify for this tax exemption.

In comparison, a hotel or tourism facility developer with minimum investment capital of $10 million is entitled to a Value Added Tax exemption on goods and services supplied to their operations.

“Tax exemptions are secondary considerations to many foreign investors interested in establishing new businesses in developing countries. The business case always comes first and its weight carries more points in choosing where to invest than available tax incentives. For this reason, tax incentives are reduced to a bonus yardstick. Nonetheless, some foreign investors are quietly benefitting from these tax incentives. But Uganda Revenue Authority’s routine delays in responding to inquiries made on eligible imports has proved a big headache to the investors in question,” observed Jet Tusabe, Tax Director at BDO Uganda Ltd.

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NSSF’S CONTRIBUTION

Uganda’s National Social Security Fund, last year, come under criticism for contributing little to the economy and poor product innovation. This is despite the fund growing its assets to Ush9.6 trillion ($2.5 billion) from Ush1.7 trillion ($451 million) in 2010.

“There is nearly Ush6 trillion ($1.6 billion) lying idle on NSSF’s balance sheet that could have been invested in infrastructure projects which would have lowered the cost of government borrowing,” said civil society activist Julius Mukunda

The fund provides three products: Old age benefits, survivors’ benefits and invalidity benefits. Total benefits paid by the fund rose by 16 per cent to Ush278 billion ($73.7 million) in 2017, according to NSSF’s financial statements.