Government plans to tax savings, investment schemes

The Income Tax Amendment Bill 2023 which was recently tabled by the finance minister, Matia Kasaija, before Parliament indicates that Government seeks to introduce 5% and 15% tax rates on the profit earned by members from their contributions to the scheme— effective July 1 2023 if the bill is passed into law.

According the Bill, a 5% tax rate will be applied to scheme members with total contributions not exceeding sh100m while those with contributions above sh100m will be subjected to a 15% tax rate.

According to the proposal, the income tax will be applied by way of withholding tax by unit trusts on the profit amounts credited to the members’ accounts.

Until recently, members of unit trusts have been receiving their incomes tax-free after Uganda Revenue Authority (URA) faced an initial resistance when it attempted to start taxing the members’ incomes. This was because there was no clear policy on what to tax and how much to tax.

This proposed amendment is now intended to iron out the ambiguities in the law and make the taxation of the interest income and its administration clearer.

The proposal has, however, drawn criticism from several stakeholders who say the move will discourage investment in unit trusts.

One of them is PriceWaterHouse Coopers who said this proposal sends shock waves in unit trust investment.

They said it will discourage investment in unit trusts in the country which is still very low.

The Capital Markets Authority (CMA), a country’s statutory body responsible for regulating and promoting the development of capital markets in Uganda, also said the tax is a contradiction and that it’s a barrier to savings.

“The introduction of a withholding tax on income earned by investors in Unit Trusts to the contrary is a disincentive for savings,” CMA wrote in a statement.

“It is our understanding that Section 21(1) (t) of the ITA exempts the income of a Collective Investment Scheme from tax to the extent of distribution of the income. The purpose of this exemption is to encourage savings which are still at a relatively low base in Uganda.”

CMA added: “It has further come to the CMA’s attention that there are differences in interpretation of the Income Tax Act within the CIS industry which has led to variances in treatment of Withholding Tax on payment of investors’ interest by the CIS operators.”

An accumulation of evidence suggests that Uganda may be caught up in a public debt safety trap in which a favourable debt position based largely on Debt Sustainability Analysis results falsely signals that the country has more fiscal headroom to borrow, especially when debt is still below the set national or international limit.

Tax experts said Government is trying to come up with ways to plug a hole in the annual budget deficit after donors cut aid over accusations of corruption and human rights violations.

Already, URA has said it plans to collect sh29.3 trillion in the 2023/24 financial year. However, it remains to be seen whether they will hit the target given the current low economic growth characterised by high inflation and low private sector investment in the country.