In a letter dated June 26, 2023, President Museveni returned certain clauses in the Income Tax (Amendment) Bill, 2023 back to parliament for their reconsideration, highlighting concerns mainly on carried forward losses and Digital Service Tax (DST).
In this analysis by DERRICK NAHUMUZA, the president is averting hemorrhage of taxes and incomes out of the country to help Uganda attain its intended fiscal targets.
The letter, addressed to the speaker of parliament, called for reinstatement of clause 12 of the Income Tax (Amendment) Bill that related to carried forward losses.
The current position of the law is that a taxpayer is allowed to deduct losses and expenditures incurred by them in a year of income where those losses or expenditures were incurred in the process of producing that income.
However, to avoid taxpayers from claiming deductions accruing from unverified and fictitious losses, the Income Tax Act provided for scenarios where, if the total amount of deductions exceeded the income, those deductions in excess would be carried forward indefinitely to the next financial year.
An amendment to this proposition of the law was introduced to limit these deductions to five years with a justification of introducing a tax measure that would limit the practice of indefinite deferral of payments taxes that businesses have been using to claim fictitious deductions.
Parliament had, in its wisdom, rejected this proposed amendment. There has been debate among taxpayers and the revenue body over concerns that a lot of revenue is lost when companies ‘cook up’ their books to reflect losses in their financial standings.
Uganda Revenue Authority has held the position that it is inconceivable to maintain losses over the years and still keep in business. Taxpayers on the other hand have insisted that losses are a natural outcome of business and can at times be more than the income.
Realistically, it would need supernatural intervention for an entity to declare losses for over three years and stay in business in a poorly performing economy like Uganda’s.
Even when the president was right to return the bill to parliament for reconsideration, ultimately, the better solution is to provide for mandatory comprehensive audits for entities claiming carried forward losses for a period of more than three years as is the case whenever taxpayers are claiming refunds exceeding Shs 5m.
The audits would help in ascertaining the veracity of the losses and accuracy of the books of accounts held by the loss-claiming businesses.
The president also showed concerns over parliament’s rejection of clause 16 of the bill that related to the introduction of a Digital Service Tax (DST) on income derived by non-resident persons from provision of digital services in Uganda.
The rationale for rejecting the clause was that Uganda does not have the technical know-how or the skillset to implement the collection of the taxes and that Ugandans would feel more the pinch from the taxes than the companies it was intended to catch.
The president further advised that the proposed DST is reinstated as it seeks to tax non-residents and not Ugandan tax residents. Even if parliament was right on the difficulties that resonate with implementing the tax given that Uganda has poor technological infrastructure, I share the same sentiments with the president. The enactment of the DST has been long overdue.
DST is basically imposition of an income tax rate of 5% on non-resident persons deriving income from the provision of digital services in Uganda to customers in Uganda. This income is derived if the digital service is delivered over the internet, electronic networks or online platforms.
Digital services in Uganda are mainly provided by tech-giants and large Multi-National Entities like Amazon, Facebook/Meta, Netflix, Google, Apple and Microsoft.
Several countries across the globe like the United Kingdom and our sisters in Kenya have had the tax for over two years. It would not be imprudent for Uganda to borrow ideas and benchmark from these countries to ensure that collection of these taxes is effectively implemented.
Kenya, for example, was able to register over 6.3 trillion in its first year of implementing DST. Uganda’s currently budgetary expectations from domestic revenue are at 29.6% and an introduction of the DST would be a great boost in achieving this target.
Failure to impose taxes on these entities creates a hemorrhage of taxes and incomes out of the country and Uganda would not be able to attain its intended fiscal targets. Since the tax targets non-resident persons, parliament should reconsider the amendment.
In cases of any doubts about implementation, there would be need to include a sunset clause in the Income Tax Act specifying that DST would only be applicable for a specific number of years as the country looks for more effective ways of implementing it.
The United Kingdom, for example, introduced the tax as an interim measure applicable till 2025 or such a time when there is an internationally agreeable solution to challenges the digital economy poses to the international tax system. Parliament, therefore, ought to consider the solutions highlighted above before presenting the bill to the president for reconsideration.
The writer is an advocate of the High court and a tax specialist
2023-07-05 – Increasing tax on diapers is retrogressive