In drafting the measures, the government had in mind the adverse effects of COVID- 19 on the economy, including the failure by the Uganda Revenue Authority to meet the collection targets for 2020/21.
The newly introduced tax measures have generated mixed
feelings and fortunes for taxpayers and the general public as a whole. Several
tax measures and amendments to the tax laws have been completed and are due to
take effect starting July 1, 2021. According to the Ministry of Finance, these amendments are
in line with the budget theme of ‘Sustainable Industrialization for Inclusive
Growth, Employment and Wealth Creation.
"The changes in tax
legislation this financial year are geared towards Government’s commitment to
industrialization/import substitution, boosting local production, creation of
employment, supporting local and foreign investment, easing the burden of tax
compliance and encouraging compliance."
In drafting the measures, the government had in mind the adverse
effects of COVID- 19 on the economy, including the failure by Uganda Revenue
Authority to meet the collection targets for 2020/21. And this year, by April
2021, the tax body had realised just Shillings 15.5 trillion or 72%, just three
months to the end of the year. Notable among the measures is the Income
Tax (Amendment) Act 2021, which was assented to by President Museveni in May.
On agro-processing, the Government has repealed paragraph (z) of
Section 21 (1) that provided for income tax exemption for agro-processors. This
paragraph was giving a blanket exemption to all persons earning income from
agro processing, but now it considers the size of the investment made, as well
as responding to local content policy requirements.
So, it has been narrowed down to specific sections with in the sector and will
only be applied under certain conditions as to investment threshold and
utilization of locally sourced raw materials, employment of citizens and their
earnings are met. It also prevents duplication since a similar exemption
is provided under section 21(1)(a) of the same law.
The government has added more items to the main strategic sectors qualifying for
the ten-year income tax exemption. These include an operator in an
industrial park or free zone or anyone who manufactures chemicals for
agricultural use, industrial use, textiles, glassware, leather products,
industrial machinery, electrical equipment, sanitary pads and diapers.
One of the most controversial changes is on the Rental Income Tax, where
the government has capped up to 75% of allowable deductions for expenses and
losses incurred in generating rental income. This applies to both
individuals and non-individuals. This is aimed to ensure equitable
taxation of rental income irrespective of the legal nature of the person
"This will remove distortions which arise from capping the allowable deductions
for a year of income of individual rental taxpayers, but allows unlimited
deductions for non-individual rental taxpayers" says the response by URA
tax education team. It adds that this reform removes the incentive for individual property owners
to own properties through companies in order to claim fictitious deductions.
According to law firm Grant Thornton says this proposal is very likely to draw
opposition from property owners, developers and real estate businesses because
it presents administrative difficulties since taxpayers shall have to develop
policies for apportioning common expenses to each property.
The URA will also increase as it will be tasked with designing complex forms
for taxpayers to account for income, expenses, profit/losses, and income taxes
for each property separately. Calculation of Rental Income for Tax could be hard for some property owners,
meaning they will either have to rely on the revenue officers or agents.
For one to be taxed, they must have a net income of more than Ushs 2,820,000
(that is after allowing them to deduct expenses to the tune of 20%). If a landlord gets a total (gross) Ushs 3m a year from his unit, he will be
allowed to deduct 20% for expenses, and this left Ushs 2,400,000 only, which
is below the threshold of 2,820,000.
Therefore, the tax is nil. Assuming the landlord gets Ushs 4m gross, a
deduction of 20% expenses leaves Ushs 3,200,000 net, which is above the
threshold and therefore taxable. To get a net chargeable rent, the landlord is allowed to deduct the threshold
(Ushs2,820,000) from the net income. The net chargeable rent is, therefore, Ushs 380,000 (above the threshold), on
which a 20% tax is charged. This leaves the landlord whose gross rental income is Ushs 4m, to pay Ushs
76,000 per year.
This scenario is based on someone renting out their unit at about Ushs 340,000
monthly, on which they will pay Ushs 6,333. “While this looks fair, it will require a lot of documentation and most of the
smaller landlords will find issues with the authorities,” a caretaker of
residential houses in Kamwokya Kampala said, adding that they fear for
unscrupulous URA officers who might take advantage of their ignorance.
The team leader, tax education at URA, Michael Masembe admits that some URA
staff sometimes do not give all or honest information to clients intentionally,
to make them make mistakes and get penalized.