Members of Parliament on Finance, Planning and Economic Development Committee have rejected a number of new tax proposals on the property sector on grounds they will increase the administrative cost for companies in the business of commercial property.
Finance Ministry recently tabled The Value Added Tax (Amendment) Bill, 2020 whose object is to amend the Value Added Tax Act Cap.349, to restrict
a taxable person from claiming input tax credit in respect of specific construction of a commercial building; to exempt the Islamic Development Bank from tax; to require an owner of a commercial building to account for tax for each building separately to provide for exemptions from tax for specified supplies and for other related matters.
Clause 2(b) of the bill proposes that an owner of more than one commercial building shall account for tax for each commercial building separately and shall not claim tax credits on inputs used in the construction of an incomplete building against the tax collected
from a completed commercial.
However, according to the Finance Committee Report to Parliament, MPs wondered how the input tax incurred on purchases for projects under construction for more than six months will be claimed.
“The VAT Act is equitable where the supplier accounts for output tax while the purchaser claimed the input incurred. However, in this case the suppliers of goods and services for projects under construction will be expected to account for the output while on the other hand developers cannot claim the input tax credit on their purchasers,” the report obtained by Business Focus reads in part.
It adds: “This is bound to increase the administrative cost for companies in the business of commercial property since they will have to either obtain separate tax invoices for shared supplies for each property or apportion a single invoice among the properties owned.”
Lawmakers add that the tax proposal will impact the real estate sector by increasing the cost of each project, thus threatening the viability of many developers currently undertaking debt funded projects.
The Finance Committee has recommended to Parliament that the proposal be trashed because “VAT is a consumption tax thus developer and other taxable persons are not supposed to be burdened by it. This proposal creates a burden on the developer and allows the tax authorities to benefit from income that they are not entitled to for the duration of the project.”
The Committee has also recommended that Uganda Revenue Authority (URA) strengthens its tax Investigations Department so that audits can be carried out where there is suspicion on VAT claims.
MPs also rejected several tax proposals in The Income Tax (Amendment)
Bill, 2020.
Under the current Act, 20% of the rental income is allowed as expenditures and losses incurred by an individual in the production of the rent. However, Under Clause 3 (b) read together with Clause 7(a) (i), the bill proposes that for rental income purposes, only 50% of the rental income should be allowed as expenditures and losses incurred by persons in the production of such income.
“This means that whether it’s an individual or company, the expenses or losses allowable for purposes of determining chargeable income will be capped at 50% of the rental income. This denies corporate persons deductions of legitimate capital and operational expenses incurred on deriving rental income thus contravening principles of taxation and unfairly disadvantage the taxpayer,” the Committee report reads in part.
It adds: “Taxpayers in the real estate sector should have the right to receive deductions for all the supportable expenses incurred in deriving the rental income.”
Further, Clause 3(d) of the bill proposes that a person who owns more than one building should account for income and expenses, and pay rental tax for each building separately.
Currently, rental incomes and expenses from various buildings owned by the same person are aggregated while accounting for rental tax by that person.
MPs also rejected this Clause, saying: “The proposal will increase the costs of administration from the companies who own several buildings. It further ignores the synergies that require a taxpayer, for example, a real estate developer, to run all their projects as part of one business with all the expenses incurred applying collectively across income from all buildings.”
MPs say income tax is chargeable on the “gross income” of each tax payer which allows for accounting for income tax on the aggregated income of a single tax payer.
“Therefore, accounting for rental tax separately for each building may work against this principle that, for tax purposes, allows a tax payer to offset the losses incurred from one income stream from the profits in another income stream of the same tax payer,” the report reads.
Clause 16 of the Bill proposes to increase the rate of tax for an individual from 20% to 30%.
However, MPs recommended that the entire Clause 3 be deleted on grounds that limiting the amount of deductible expenses and losses denies corporate persons deductions of legitimate capital and operational expenses incurred on deriving rental income thus contravening principles of taxation and unfairly disadvantage the taxpayer.
MPs also said Clause 5 should be deleted and therefore the status quo is mantained. i.e. there is no change in the rate of rental income for a trust or retirement fund as proposed under clause 7 (a) (i).
