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Income tax amendments will derail economic progress

A URA official conducts a session on Voluntary Income Tax Assistant (VITA) programme at Kyambogo University recently

A URA official conducts a session on Voluntary Income Tax Assistant (VITA) programme at Kyambogo University recently

Parliament, through its sectoral committee on Finance, Planning and Economic Development, has called upon the general public, all stakeholders and other interested parties to submit views on the Tax and Revenue Bills that were presented at its 18th sitting on March 28, 2024.

These bills, which were tabled by the minister of Finance and Economic Development, included the Income Tax (Amendment) Bill, Excise Duty (Amendment) Bill, Tax Procedure Code (Amendment) Bill, Stamp Duty (Amendment) Bill and Value Added (Amendment) Bill, all of 2024.

The most intriguing amendment that has left several Ugandans agape has been the proposed introduction of tax on the disposal of non-business assets which seeks to introduce a 5% tax on capital gain from disposal of non-business assets as a final tax payable within fifteen days from date of disposal with an interest at 2% per month in cases of late payments.

As peculiar as it sounds, the Bill seeks to impose tax on gains made from disposal of shares in a private company, rental property and on land in cities or municipalities (with the exception of a person’s principal place of residence).

Parliament seems to be interested in an easy and quick way of collecting taxes. This is because all land and share capital transfers cannot be concluded without payment of stamp duty. It is at this stage that Uganda’s revenue body, URA, is to be triggered to assess any person intending to transfer an asset for any taxes that could arise as a result of gains made in the disposal.

However, this could present various challenges to both the revenue body and the taxpayer. Firstly, to ascertain whether a person has obtained a gain, there’s need to know the previous sale or purchase value as compared to the current sale value. URA does not have any database that can be used to ascertain these values.

In the absence of this information, it is possible that URA will be left to make estimates or use their best judgment to determine assessment amounts especially where the transaction leading to initial purchase was done many years back.

Besides, there is a likelihood that disgruntled taxpayers will evade the tax. For example, the Bill provides that land sold in cities or municipalities that forms part of a person’s principal place of residence, does not form part of the non-business assets to which tax can be assessed.

Many shrewd taxpayers with intention to sale their land will claim that the sold land formed part of their principal place of residence in order to avoid payment of taxes.

That aside, the imposition of tax on sale of land in municipalities and cities will discourage economic growth. Most of the land in cities is used by developers for critical investments. Uganda’s land system is already fragile and littered with all sorts of fragmentation. Adding taxes to this will discourage investors from purchasing land hence discouraging economic growth.

There is likely to be an increase in property values for both land and shares being sold as sellers will incorporate the tax component on the land or share sale value to ensure that the burden falls on the purchaser and not the seller.

Much as the amendment only provides for cities and municipalities, this proposal is likely to have a ripple effect on other jurisdictions hence increasing property prices across the country.

An increase in cost of land will increase the cost of production for several other things like construction. Once construction costs have skyrocketed, other products that fall along it like rent will increase and this will inevitably discourage economic growth.

It is key to note that the proposed Bill seeks to exempt gains made from disposal of non-business assets through involuntary disposals where the sale is made subject to an auction, court order, mortgages, divorce settlements or spousal separation agreements or transmission of the asset from a deceased to a trustee or beneficiary.

This is likely to increase evasion of taxes whereby partners transfer land between themselves in forms of spousal separation agreements. This mainly applies to huge chunks of land that would otherwise have cost them huge taxes.

This also applies to transfer of shares where spouses will merely enter artificial transactions depicting transfer of shares amongst themselves so as to benefit from the exception that comes with spousal separation agreements.

Evidently, the requirement of a person disposing of the non-business asset to notify the Commissioner General in writing of disposal within fifteen days is also likely to be avoided by taxpayers.

Uganda alone has over 10 cities and over 25 municipalities which record numerous land transfers across the country on a daily basis. It is difficult to fathom that individuals participating in transfers will report them to the Commissioner General within the required fifteen-day period.

This will increase the cost of compliance by inevitably placing a huge burden on URA to work backwards and track transfers made at respective Lands offices, a burden that seems not only cumbersome but also likely to over stretch the mandate of URA.

The writer is an advocate of the High court

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