Cephas Birungyi, a Partner at Birungyi Barata & Associates and a member of Uganda Law Society
The Uganda Law Society has asked Parliament to halt the enactment of laws to operationalize Islamic Banking in Uganda for one year.
This is on grounds that this will allow all stakeholders familiarize themselves with concepts around sharia law so as to avoid confusion in the financial sector.
The call was made by Cephas Birungyi, a Partner at Birungyi Barata & Associates, who is also a member of Uganda Law Society, while appearing before Parliament’s Finance Committee that is considering four tax bills including; Income Tax Amendment Bill No.2 (2023, Stamp Duty Amendment Bill 2023, Excise Duty Amendment Bill No.2 (2023) and Value Added Tax Amendment Bill No.2 (2023) that are intended to streamline the operationalization of Islamic Banking in Uganda.
According to Uganda Law Society, it was a tactical risk for Government to bring amendments of tax bills to operationalize Islamic banking after the other tax bills, and asked Parliament to halt enactment of the laws on Islamic Banking for one year, to allow stakeholders to understand the concepts instead of ambushing the public and asked Parliament to inquire from URA about their preparedness to tax Islamic Banking.
“I have an understanding that the staff of URA haven’t been trained in Sharia Law, and sharia law taxation, the players like us who practice tax haven’t had time with this. Remember the portals of URA for Electronic tax are set in certain terms, so it means you are going to change that software to conform to those provisions. I want to think it was premature because URA couldn’t have had software developed before this law came in place, so come 1st July, how are we going to implement it? How are you going to identify those going by Sharia Law and those who aren’t? I think it should take some time, one year isn’t too much, we have had all the years without it the sharia law also took some time to develop, and people get proper training,” he said.
The Uganda Law Society also asked Parliament to enact separate laws to govern Islamic Banking, instead of mixing them with the laws governing the conventional financial.
Birungyi cited the proposal by Ministry of Finance to insert a new clause in section 75A of the principal Act, to give the Commissioner General of Uganda Revenue Authority (URA) to re-characterise of arrangements under Islamic financial business not provided for under this Act to the equivalent arrangement under conventional financial services for purposes of reflecting the equivalent economic substance other than the form.
He wondered whether this provision would require the Commissioner general, to submit to another authority like an imam, as opposed to the tax laws that URA is mandated to operate, warning that if such a provision is approved, Parliament would be sending URA into the business of interpreting sharia law, as opposed to tax laws as per their mandate.
“You are going to have a situation where you aren’t only interpreting tax, but you are also interpreting religion because you must understand this concept of sharia law because the whole idea is that in sharia law, you aren’t imposing interest. Financial institutions are basically earning interest, so for you to re-characterise a tax law, you must apply very solid sharia principles and you have challenges of implementing sharia law with our domestic law, and you are going to have it extended to financial institutions. So you are making things complicated, just for people to comply, but you are also going into a different regime not specific for URA, to interpret sharia law,” he added.
He argued that the confusion doesn’t only lie with the Value Added Tax Amendment Bill 2023, but also the proposals in the Income Tax Amendment Bill No.2 (2023) saying the proposals from Government are likely to pose complications in the financial sector, which would require a different tax laws to government Islamic banking, instead of incorporating it in conventional banking.
“You need a different tax regime for sharia law, not appearing to amend the conventional taxes, then you have it as a standalone. If you look at the regimes for taxing peculiar income say mining law, insurance law, they are in income tax, but they have standalone laws and you avoid the confusion you would get when you do patch work like in this case when you pick a section and say we amend this,” he explained.
Amos Kakunda, Chairperson Finance Committee however defended the enactment of laws to govern Islamic Banking, arguing that it is intended to spur the economy by giving the business community to other financing options.
“Remember this is juxtaposed with the fact that the economy needs refinancing with reasonable financing costs and most of the players in the business sector are looking at Islamic financing as another source that will help them revitalize and it is against this background that we think it would be prudent,” said Kankunda.
Birungyi in response said that although it is understandable for Parliament to balance the need between putting in place policies for Islamic Banking and the need for the business community to access other financing options, but there will be need for an investigation into the efficacy of having such provisions.
“I think what we need is a middle ground and the middle ground is just some time to understand the concept between the different players. I think there is need for an interface between the practitioners of the tax , the tax body and the business side which needs to understand this,” he explained.
Gerald Nangoli (Elgon County) decried the limited time of one week that the Finance Committee was given to process the bills remarking, “Basing on what I have heard from the technical person, in most cases when these bills come, we are always given inadequate time and you know if we don’t have enough time to consult, it becomes very hard for us to explain to the public.
If passed into law, Uganda will join other African countries that have adopted Islamic banking but are non-Islamic states including; South Africa, Senegal, Botswana, Zambia, Eritrea, Mozambique, Kenya, Tanzania, and Rwanda.
