New Value Added Tax (VAT) regulations that came into force in Uganda in July have tax experts and local businesses complaining even as the government posts rare revenue surplus in the first month of 2018/19.
While the new rules were aimed at reining in errant taxpayers that reportedly collected VAT from buyers and never remitted it to the taxman, enforcement has compliant taxpayers torn between coping with a problematic taxation environment and keeping their businesses afloat.
The stiff measures were motivated by strong pressure exerted by the International Monetary Fund (IMF) on Uganda’s Treasury over poor tax revenue performance last year. The value of taxes lost through unremitted VAT could not be established by press time.
Under these rules, taxpayers are 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.
In addition, taxpayers are obliged to remit withholding VAT against goods and services supplied by a non-VAT registered supplier and are valued at more than Ush37.5 million ($9,909), regardless of availability of funds in their businesses.
Faced with these circumstances, many businesses are experiencing cashflow crisis as their owners struggle to raise money to clear taxes upfront.
This is unlike the small, traditional waiting period which allowed companies time to collect monies owed by clients before settling their tax obligations, sources say.
In addition, businesses appear unsettled about the fate of delayed VAT payment certificates yet to be delivered by the Uganda Revenue Authority (URA) since last month coupled with fears of increased costs of doing business.
“The withholding VAT requirement has terribly affected cashflows in several businesses. To make matters worse, URA has refused to allow some companies that paid excess withholding tax and corporation tax in previous years to utilise their surplus as tax credits for new tax expenses and is instead demanding hard cash from them. In cases where a taxpayer files a claim for a VAT refund, URA usually chooses to conduct fresh audits on them,” said Plaxeda Namirimu, tax director at PwC Uganda.
Officials at URA and the Ministry of Finance, Planning and Economic Development were reluctant to comment on this subject when contacted by The EastAfrican last week.
“This new VAT compliance regime is very confusing. It bears a double taxation element that forces a taxpayer to clear their own VAT obligations and pay VAT due from a supplier that is not VAT registered and has sold goods and services above the legal threshold. A business is obliged to pay the withholding VAT expenses in advance even when there is no sufficient cash to settle the bill. We have written to URA to clarify these issues but they keep telling us that it is a new government policy,” said Muhammed Sempijja, a tax partner for Uganda and Rwanda at Ernst & Young Uganda Office.
Despite the backlash, URA posted a collection surplus of Ush35,771,782,906 ($9.45 million) in July, a rare positive performance recorded in a period of traditionally slow business activity.
The revenue surplus was partly attributed to strong returns from Customs duties, but the contribution of domestic taxes remains unclear, according to latest government data.
“The VAT withholding tax regime is proving a disaster to many small and large businesses. For example, small firms that supply technical inspection services used to receive VAT refunds based on some recoverable costs but they are now forced to pay lots of money in withholding VAT for any contract executed by them.
“This huge tax burden will eventually lead to higher contract costs as those firms struggle to recover additional commercial costs incurred in their operations. This in turn, will increase our costs of doing business similar to other companies and such a trend might kill the economy.
For this reason, the government should abolish the withholding VAT tax before it is too late. Compliant taxpayers should not be unnecessarily punished for others’ failure to file proper tax returns across the business value chain,” noted Robert Byaruhanga, a senior manager at Kyagulanyi Coffee Ltd, a coffee exporting business.
Revenue collections from the VAT tax stream account for nearly 30 per cent of Uganda’s tax revenues followed by corporation tax with a 35 per cent share, according to government data.