Withholding Value Added Tax in Uganda

20th Aug 2019 15:20:16 Tibugwisa Damalie

Overview

In July 2018, Uganda, imposed an obligation on certain taxpayers to wihthold value added tax (VAT). Barely three months after its introduction, the implementation of the law was halted and in July 2019, the law was amended to cure some defects in the previous law. This article explains why the previous law failed and analyses the 2019 amendment and its possible effect

Introduction

The government is always thinking of ways to curb tax fraud and non-complaince. Value Added Tax in particular had proved to be a challenge for URA to collect for several reasons including what URA has for long categorized as fictitious transactions, fictitious invoices or even fictitious taxpayers. What better way to overcome this menace than to impose an obligation on certain entities to withhold VAT at the source and remit it directly to URA instead of paying it to the supplier who would then remit it to URA.

History of withholding VAT in Uganda

Withholding of VAT was first introduced by the Value Added Tax (Amendment) Act, 2018 which amended section 5 of the Principle Act to authorize the Minister to issue a notice of designated VAT withholding agents. Read together with the Added Tax (Withholding) Regulations, a designated agent was supposed to withhold 100% of the VAT (18% of the tax value) and remit such amount directly to URA by the 15^th day of the month following payment to the supplier.

The above provision was ope-rationalized by Legal Notice no. 12 of 2018, where-under the minister of finance, Planning and Economic Development, published a list over 600 entities that were designated as withholding agents. These mainly included manufacturers, telecoms, hospitals, construction companies and a few statutory corporations. By this move, Uganda joined a list of countries including Zambia, Kenya that also provide for withholding VAT though with different twists.

According to Mr. Ian Rumanyika the manager Public and Corporate affairs URA, withholding VAT would ease the tax payement process. However these sentiments were not shared witht the business community and tax experts.

Challenges of withholding tax in 2018

The private sector foundation of Uganda and the Uganda Manufacturers Association categorically petitioned and engaged the minister of finance to have the law recalled . Some of the reasons why the law was bound to fail include:

The negative cash flow effect. 100% withholding of VAT was found to be unreasonably high and would lead to negative cash flow for businesses yet many businesses already struggle to meet their working capital requirements and have limited access to credit. This was a challenge because contrary to the past where suppliers had the obligation to pay the VAT and the customer was allowed to pay the supplier over a 90 day period, the law was now requiring the designated entity to pay VAT by the 15^th day of the month following payment to the supplier. This was immaterial whether the supplier had only been paid only part or full. This, there for meant that businesses would require more capital to pay VAT with in the short time prescribed.
Unfair Competition. Related to the above, this led to another line of argument that this would lead to unfair competition between witholding agents and non withholding agents founded in the fact that the later would not have the short times to pay VAT.
Turnaround time for processing funds. The other issue is that the law made the processing of refunds onerous and time consuming as there would be need to reconcile computations of the supplier and customer and thus it would require more human and technological resources for URA as it was the case with Kenya when it first introduced the 100% VAT withholding which it later realized was unsustainable and accordingly amended its law.

As a result of these issues, on the 28th day of September 2018 barely three months of the commencement of the said Act, the minister in the gazette revoked Legal Notice No. 12 of 2018 and in effect, rendered the law redundant until July, this year when the law was amended.

The Value Added Tax(Amendment) Act 2019

The ( 2019 Amendment ) in many ways remedies some of the issues raised by creating further amendments to section 5 of the Principle Act but also leaves some issues unresolved as per discussion below:

It upholds the concept of withholding VAT. The 2019 amendment did not scrap the concept of withholding VAT. This reaffirms government's silence on withholding tax.
Reduces the amount required to be withheld. The 2019 amendment reduced the amount needed to be with held by the with holding agents from 100% to only 6% of the VAT payable thereby minimizing the effect of negative cash flows.
Exemplary taxpayers exempted from becoming withholding agents. The 2019 amendment exempts such persons as the commissioner General is satisfied have regularly complied with the obligations imposed under the law. Whereas this a commendable amendment, it also poses some challenges.
1. That the exemption is given to entities deemed to be compliant by the commissioner General means that all designated withholding agents are deemed non complaint which taints their record and is arguably unfair.
2. The provision gives the commissioner General discretion to determine which entity is compliant. Whereas this is generally acceptable , compliance is a question of the law. Thus is possible for the commissioner to believe an entity is not compliant when in fact its compliant under the law. This explains why some tax payers are successful in the courts of law or the tribunal against the commissioner. Accordingly, satisfaction based on the Commissioner's opinion leaves room for ambiguity.
The law does not set out criteria for determining withholding agents. Besides the discretion given to the commissioner to exempt compliant taxpayers, the 2019 Act as well does not spell out the criteria that minister uses to determine which entities are eligible to become withholding agents.

Conclusion: The 2019 amendment in many ways remedies the challenges posed by the 2018 law. However, it also remains to be tested whether it will stand the test of time. The minister is yet to issue another legal notice designating withholding agents. The criteria of selection and turn around time of processing refunds remains unclear and unresolved. only time will tell, if this time around, government nailed it.

Disclaimer:

This article provides general information only. it is not intended to provide advice with respect to any specific set of facts, nor is it intended to advise on all developments of the law .