Pricewaterhouse Coopers Limited and the Institute of Certified Public Accountants of Uganda (CPA) have warned Parliament against imposing a withholding tax on investment schemes, which also include the Savings and Credit Cooperative Society (SACCOs), saying the move will likely discourage the already struggling saving culture in the country.
While appearing before Parliament’s Finance Committee to present the views of PwC on the tax bills proposed by the Ministry of Finance to raise revenue for the 2023/2024 national Budget, Pamela Nantamba, Tax Partner at PwC, proposed that in order to continue promoting a savings culture, Government should stay the implementation for a period of 3-5years to allow the unit trusts to grow or if they must be taxed, a minimum uniform tax at a flat rate of 1.5% is imposed on all profits made on any contributions by participants of a CIS.
“We note that whereas this amendment may increase tax revenue, it is also likely to discourage domestic savings, a key goal under the NDP III. If these provisions are passed into law, the already low participation level of Uganda formal savers is likely reduce further,” she said.
Government is proposing to amend the Income Tax Amendment Bill 2023 to impose a rate of 5% Withholding Tax on money from investment schemes making more than Shs100M and 15% on investment schemes generating more than Shs101M.
Silajji Baguma Kanyesigye, Chairperson Tax Panel at CPA also described the tax as unfair, warning it will discourage people from saving and this will work against the very reason SACCOs were established in Uganda and proposed to have SACCOs be given 2-3years to grow.
One of the intentions of this section was to encourage savings which are still at a relatively low base in Uganda. The introduction of a withholding tax on income earned by investors in Collective Investment Scheme would be contrary and hence a disincentive for savings.
Nantamba also expressed doubt on the implementation of the 5% withholding tax on the gross income of digital companies drawing income from Uganda, saying the tax should instead be drafted as income tax where the digital companies will be required to register in Uganda, instead of imposing the obligation of customers to withhold the tax from the digital companies.
Nantamba argued that the 5% prescribed is high in comparison with the regional rates for example in Kenya 1.5% and 2% Tanzania and urged Government to clarify on whether the tax should be implemented as Income tax or withholding tax to improve compliance.
She explained, “We recommend that the tax be levied as an income tax and not a withholding tax. Therefore, the proposed amendment to section 87 should be rescinded. Further, section 86A should be expanded to provide that this income tax on the non-residents person is a final tax for which no deduction of expenditure or loss incurred by the non-resident is a final tax for which no deduction of expenditure or loss incurred by the non-resident person allowed.
In their recommendation to Parliament, PwC proposed, “This will yield more government revenue and also reduce the withholding tax burden on the customer. To achieve equity in the tax system and also remain competitive in the region, we recommend that the tax rate is reduced from 5% to 1.5%.”
This isn’t the first time that the Ministry of Finance is fronting a ploy to impose a tax on SACCOs having made such an attempt through the proposal to amend Income Tax (Amendment) Bill, 2018 in which Government was proposing to impose a corporation tax on SACCOs generate Shs10Bn annually, arguing that there are some SACCOs making more money than commercial banks yet these had been exempted from paying taxes.
However, Parliament rejected the proposal and instead asked Government to exempt SACCOs from paying tax for 10years so as to boost financial inclusion and allow their growth.
In the 2020/2021 tax expenditure report by the Ministry of Finance, a tax exemption on investment schemes cost Government Shs2.19Bn in revenue.
