Income Tax in Uganda - Amendments for 2023-2024
25 Dec 2023
15 min read
The Income Tax Act, Cap. 340 is the main law that governs the taxation of income in Uganda.
The Act has been amended several times over the years to address various issues and challenges in the tax system. In this Article, we will highlight some of the key amendments that were introduced by the Income Tax (Amendment) Bill, 2023, which was tabled in Parliament on 30th March, 2023.
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Income Tax in Uganda - Amendments for 2023-2024
1. Removal of Initial Allowance
According to Section 27A of the Income Tax Act Cap 340, the initial allowance deduction is granted to a person who incurs capital expenditure on eligible property (plant and machinery) used for business purposes. Under the previous regime, a tax payer was allowed to deduct 50% of the cost base of an item of eligible property placed into service for the first time outside a radius of 50km from Kampala from their chargeable income.
Under the new tax regime, this capital deduction is repealed. In addition, the relief introduced last year in Section 29(1a) has been removed.
This means that taxpayers will no longer be able to claim this deduction for assets acquired on or after 1st July, 2023. The rationale for this amendment is to simplify the tax administration and reduce tax leakages.
2. Capital gains tax
One of the major reforms in the Act is the streamlining of the imposition of capital gains tax on the disposal of business assets. Previously, capital gains were treated as part of business income and taxed at the normal income tax rates. However, the Act has excluded capital gains from the definition of business income and repealed the deduction of capital losses from business income.
This means that capital gains will be taxed separately at a flat rate of 30%, regardless of whether the asset was on revenue or capital account. The Act has also repealed the definition of "business asset" and clarified that any gain on the satisfaction or cancellation of a business debt is subject to capital gains tax.
The implication of this amendment is that taxpayers who dispose of business assets will pay more tax on their capital gains, as they will not be able to offset their capital losses or benefit from lower tax rates.
On the other hand, taxpayers who dispose of non-business assets, such as personal or investment assets, will pay less tax on their capital gains, as they will not be subject to the progressive income tax rates.
3. Interest deduction limitation
Another significant reform in the Act is the expansion of the exceptions to the provision for limiting interest deduction to include micro-finance deposit taking institutions and tier 4 micro-finance institutions. The provision, which was introduced in 2018, restricts the deduction of interest expense to 30% of earnings before interest, tax, depreciation and amortization (EBITDA) for taxpayers who are members of a group or have thin capitalization.
The provision aims to prevent profit shifting and base erosion by multinational enterprises. However, the Act has exempted micro-finance institutions from this provision, as they are considered to have a social impact and a high cost of borrowing.
The implication of this amendment is that micro-finance institutions will be able to deduct their full interest expense from their taxable income, which will reduce their tax liability and increase their profitability. This may also encourage more lending and financial inclusion for low-income earners and small businesses.
4. ZEP-RE (PTA Reinsurance Company)
The Act has also provided for ZEP-RE (PTA Reinsurance Company) as a listed institution under the ITA. ZEP-RE is a regional reinsurance company established by an agreement of the Common Market for Eastern and Southern Africa (COMESA) member states in 1990.
The Act has granted ZEP-RE a preferential tax treatment, such as exemption from withholding tax on dividends, interest and royalties paid to non-residents; exemption from stamp duty on instruments executed by or on behalf of ZEP-RE; and exemption from income tax on income derived from reinsurance business outside Uganda.
The implication of this amendment is that ZEP-RE will enjoy a competitive advantage over other reinsurance companies operating in Uganda, as it will have lower tax costs and higher returns. This may also attract more reinsurance business from COMESA member states and beyond.
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5. Digital Services Tax
The digital services tax is a new tax that is imposed on income derived from providing digital services to persons in Uganda. Digital services include any services delivered over the internet or an electronic network, such as online advertising, e-commerce, streaming, gaming, cloud computing, etc offered by global companies such as Zoom.us, Google, Meta (Facebook) and Netflix Among others.
The Bill introduces a new section 86A in the Income Tax Act, which provides for the digital services tax. The tax rate is 5% of the gross income derived from providing digital services to persons in Uganda. The tax is payable by non-resident persons who provide digital services to persons in Uganda through a digital interface or a significant economic presence. The tax is also payable by resident persons who act as intermediaries or agents for non-resident persons providing digital services to persons in Uganda.
The digital services tax is aimed at taxing the digital economy and ensuring that non-resident persons who derive income from Uganda pay their fair share of tax.
6. Carry Forward Losses
The carry forward losses are losses that are incurred by a person in a year of income and are carried forward to be deducted from the income of subsequent years. The carry forward losses are subject to certain limitations and conditions depending on the type of income and business.
The Bill amends section 25 of the Income Tax Act, which provides for the carry forward losses.
Under the new provision, taxpayers carrying forward losses after a period of seven income years are only allowed a deduction of 50% of the losses carried forward at the beginning of the following year of income in determining the taxpayer's chargeable income in the subsequent years of income.
The amendment is intended to curb tax avoidance and evasion by persons who declare minimal or no tax liability for prolonged periods.
7. Exemption of the employment income of prosecutors in the Office of the Director of Public Prosecution.
Under the 2023 amendments, the employment income of state prosecutors in the office of the DPP will be exempted from tax. This is a bid to harmonize the exemption scheme of the core players in the criminal justice sector.
8. Removal of WHT on winnings from gaming
Under the previous regime, a person who made a payment for winnings of betting and gaming was mandated to withhold. The proposed amendment in section 118C seeks to remove the 15% withholding tax on winnings from gaming but retains the requirement to withhold 15% in respect to betting. This is due to the practical difficulties of ascertaining winnings from casinos.
9. Waiver of Interest and Penalty
In 2017, government introduced a waiver on interest. By virtue of a new section 136(8), interest that exceeded the aggregate of principal tax and penalty as at 30th June 2017 was waived. This provision has been removed. A similar waiver has been introduced in the TPCA changes.
10. Other amendments
The Act has also made several other amendments to the ITA, such as:
Repealing the application of Part VI (gains and losses on disposal of assets) for petroleum operations
Repealing sections 49, 50 and 54 of the ITA, which deal with taxation of petroleum operations
Inserting section 86A of the ITA, which provides for taxation of mining operations
Amending section 89GE of the ITA, which provides for taxation of Islamic financial transactions
Amending section 118B of the ITA, which provides for taxation of rental income
Inserting section 118I in the ITA, which provides for taxation of digital service providers
Amending section 136 of the ITA, which provides for offences and penalties
These amendments are intended to align the ITA with the current economic realities and policy objectives, such as promoting investment in key sectors, enhancing revenue mobilization, and ensuring equity and fairness in taxation.
Conclusion
The Income Tax (Amendment) Act, 2023 has introduced several changes to the ITA that will affect taxpayers in Uganda. It is important for taxpayers to understand the implications of these changes and comply with the new tax obligations.
Do you need help with tax matters? We can help! Please contact us at admin@harvestuganda.com or 0764001380.
About the Writer
CPA Innocent MUGISHA
CPA Innocent Mugisha is a Professor of Finance and Accounting with over 10 years experience in teaching Accounting and Finance related courses including Financial Accounting both at University and Professional level. His qualifications are: PhD (candidate), MBA(Finance), CPA(U), FCCA, CIPS, CTA and BCOM (Accounting). Innocent has also published various books on most topics in Accounting and Finance for Business and Professional Studies.
