Gov’t moves to tax bank loans, agent withdrawals

Uganda Revenue Authority’s policy to expand the tax base and adherence threatens to escalate costs associated with acquiring capital through bank loans and financial institutions’ recovery of the loans. 

The new set of tax proposals were recently tabled before Parliament by the Ministry of Finance and Economic Planning and Development for the 2024/25 financial year. 

The new taxes are captured in five amendment bills: Excise Duty Amendment Bill, 2024; Stamp Duty Amendment Bill, 2024; Value Added Tax, 2024; Income Tax Amendment Bill, 2024 and Tax Procedures Code Amendment Bill, 2024. 

Government proposes to amend Section 10(4) of the Value Added Tax cap 349, to provide for recipients of auction proceeds to pay 18% VAT. The proposal effectively transfers VAT to be paid by the buyer rather than the auctioneer, who is the supplier of the goods. 

Financial institutions will thus be responsible for accounting for the VAT when goods or property are sold through an auction. This also strikes banks off the list of VAT exemption and incorporates their accountability. 

Observers note the move will see banks transfer the charges to bank loans in order to meet the costs.

In a statement published by Kampala Associated Advocates April 16, the law firm warns that if passed in it’s current form, 18% of loans will become income to government and  banks will transfer the costs to borrowers. 

“It should be noted that the proposed amendment if passed, is bound to increase the burden on borrowers, who will take the heat for the newly-imposed VAT. The banks will transfer the burden of the 18% VAT to the borrowers, and many loan agreements will be drafted to provide for such a position”, part of the statement titled “Tax Alert” reads. 

“This will unnecessarily burden already distressed taxpayers, the effect of which will increase the non-performing loans, given that 18% of the said loans will become income to the government at the expense of the taxpayer. The proposed amendment is clearly telling the taxpayers, “pay your loans, or if you fail and the bank sells your property, you will incur an additional 18% VAT”.

The lawyers also argue that the proposed amendment will increase the burden banks’ tax compliance. 

“The proposed amendment is also bound to increase banks’ tax compliance burden, given that they will then be suitable to register for VAT, issue tax invoices, and file monthly VAT returns which they haven’t been doing on account of dealing in VAT exempt supplies. Currently due to the VAT exemption, Banks do not issue VAT invoices yet the proposed amendment requires them to account for VAT,” Kampala Associated Advocates noted. 

They argue lawmakers to uphold the position of the High Court which ruled banks as VAT exempt. 

In related development, government is also planning to place a 0.5% tax on all cash withdrawals through agent banking system. 

While presenting the proposals recently, finance ministry noted that the country can only develop itself sustainably through its own citizens. 

“We’re in a country whose resource envelope on revenue depends on revenue and borrowed funds. We borrow because the revenue is not enough. How long can you go on borrowing?” State Minister of Finance in charge of Planning Amos Lugoolobi defended government position on the new taxes. 

Finance ministry intends to table Shs58.6trillion budget for 2024/25 suggesting a Shs5.64 trillion increase from the 2023/34 budget.

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