• Tue. Oct 3rd, 2023

UGANDA, Mbarara | Real Muloodi News | Is Rental Tax by Uganda Revenue Authority (URA) and Property Tax (Property Rates) by Local Government on the same property double taxation?

This was a question recently posed by Dr Medard Bitekyerezo on Twitter.

Dr Medard Bitekyerezo is a former legislator in the Parliament of Uganda, representing Mbarara Municipality. He is currently the Board Chairman of The National Drug Authority. He is a highly educated doctor, holding a Bachelor of Medicine and Bachelor of Surgery from Mbarara University of Science and Technology and an Advanced Certificate of Education in Physics, Chemistry, Biology, and Sub-Mathematics from St Henry’s College, Kitovu.

This highlights a major problem; If such a highly educated individual, who was a legislator in the Parliament of Uganda no less, doesn’t understand the difference between Rental Tax and Property Rates, then one can only imagine the confusion of everyday citizens.

The Answer:

No, Rental Tax by URA and Property Tax by Local Govt on the same property is not double taxation. They are two different taxes.

Property Rates (often referred to as Property Tax) is a levy on the value of your commercial property, regardless of whether you earn rental income from that property. Property Rates are collected by Local Government.

It is different from Rental Income Tax; Rental Income Tax is a tax on the income you earn from rented land or property, which is paid to URA.

Furthermore, property rates are classified as an allowable expense that businesses may deduct from their rental income when submitting their tax returns to URA.

Both of these taxes are not unique to Uganda. Property owners in most developed countries pay property rates/property tax and a tax on income earned from a property if it is let.

Let’s explore the differences between the two taxes in more detail.

Property Rates

Property rates apply to any property or building used for business, like houses rented to tenants, shops, factories, and so on, even if it is an owner-occupied business.

However, property rates do not apply to the residential home you own and live in. Likewise, the levy does not apply to vacant land.

Local governments can levy property rates between 0 – 12% of your commercial property’s rateable value.

For example, in Mbarara, property rates are levied annually at 5% of your property’s rateable value. In Kampala, it is 6%.

Your property’s rateable value is determined by your property’s estimated rental value (whether it is rented or not) minus a deduction for expenses.

Property valuations for property rates are carried out by licensed and accredited government property surveyors every five years. For instance, Local Government conducted a major property valuation exercise last year in Uganda’s ten newly created cities.

Most importantly, property rates are a priority area for local authorities to raise the revenues necessary to provide much-needed services such as roadworks, street lighting, water and sanitation, health, and education.

Funds that Local Government receives from Central Government are insufficient when dealing with the needs of growing urban areas.

Therefore, the ability of local governments to provide services to citizens largely depends on their ability to raise their own revenue, and property rates are a significant contributor to this revenue.

As a matter of fact, the Local Government (Rating) Act 2005 dictates that a minimum of 75% of all revenues collected from property rates be reserved for local services, and no more than 25% can be used for administration purposes.

A prime example of how property rates correspond to the provision of local services can be seen in Mbarara City, which is fitting seeing Dr Medard Bitekyerezo was a Mbarara Municipality Member of Parliament.

Last year, Mbarara City leadership engaged property taxpayers through a “Services & Fair Tax for Property Owners” campaign to involve citizens in discussions about how the City should allocate property rates revenues to local services.

Samuel Rwakinanga Tayebwa, the Head of Revenue for Mbarara City, explains, “We went to the community and asked people about property rates, we asked them about what they would wish the property rates would do for them, and about the challenges they have in accessing government services.”

Consultations took place with 746 stakeholders from 187 villages, including LC1 Chairmen, youth representatives, and both male and female elders, spanning March through June 2022.

Among all groups participating, the top three priority areas were consistently:

  1. Improving Mbarara City’s road network.
  2. Health services.
  3. Water and sanitation, with education following closely in fourth place.

Consequently, in August 2022, Mbarara City town clerk, Assy Abirebe, confirmed that from the 2021/22 revenues collected by the City, they ordered a grader to aid in the maintenance of Mbarara’s roads, to the value of USh1 billion.

“The procurement process has been concluded, and it is going to cost us one billing shillings from the local revenue. And I believe we are one of the few local governments in Uganda that can save local revenue money to procure a motor grader and a vehicle,” Abirebe said.

According to the city clerk, in addition to the purchase of the grader and another vehicle, the remaining local money was utilised to build a classroom block at Biharwe Moslem’s P/S in North Division, to fence and make minor improvements to Kenkombe land, and supply three twin desks in chosen primary schools.

Rental Income Tax

URA collects rental income tax. Rental Income tax is a tax on the money you earn from the lease or rent of all immovable property (land and buildings).

Anyone who earns rental income is eligible to pay rental income tax, including landlords/landladies, rental property businesses, apartment owners, and even those who rent then sub-let a property to someone else.

The revenue from this tax contributes to funding the national budget, which is critical for reducing Uganda’s dependence on debt. According to the Ministry of Finance, Uganda’s Public Debt is set to increase to an alarming 53.1 per cent of GDP this financial year.

Government reduced the rental income tax rate for individuals for this financial year from 30% to 12% of rental income earned after deducting the threshold of USh 2,820,000. URA has also done away with having to deduct expenditures for Individuals.

The Rental Income Tax Rate for non-individuals is 30% of rental income earned.

Non-Individuals can claim up to 50% of allowable deductions for expenses incurred in generating rental income (such as property rates!) Additional expenses above 50% can be carried over to the next year of income.

After considering the allowable deductions, the effective tax rate for businesses can be as low as 15%.

URA recently stepped up its efforts to focus on landlords not declaring the rental income they earn through technology and data science.

Eight Ministries, Departments, and Agencies contributed data to URA’s Rental Tax Compliance System (rTCS), which the taxman deployed in April 2022. In July of the same year, URA formed a dedicated team whose sole focus was investigating cases of non-compliant landlords using rTCS.

As a result of URA’s efforts, the Authority is predicted to announce historic record-breaking earnings from rental income tax revenues for Q2 2022/23 later this month.

Key Take Aways

With Local Government’s recent efforts to update the property valuation registers in Uganda’s cities and URA’s focus on landlords, know your tax obligations and plan for them accordingly if you own or invest in property.

Taxes are necessary if we desire national prosperity and strong government service delivery. Tax avoidance results in a poor nation lacking social and physical infrastructure. Therefore, it’s time that property owners not contributing to Uganda’s prosperity start paying their fair share and stop putting pressure on the few carrying the burden.

It also behooves property owners who want to see a good return on their property investments to pay their taxes. Property values tend to be higher in areas with sound physical planning, infrastructure maintenance, and service delivery and lower in areas lacking these features.

Uganda’s most successful landlords and property developers, like real estate muloodi Sudhir Ruparelia, understand the benefits of paying property and rental income tax. Legitimacy is one of the considerations by investors when awarding big contracts, and tax compliance prove legitimacy.

Loan underwriters will consider the tax perspective of real estate financial models during loan underwriting when financing existing or expansion projects. Banks and other reputable capital investors will be reluctant to finance investments that don’t plan for, declare or under-declare their obligations.

Paying your property taxes also provides security for your property against land-grabbing, providing further evidence that you are the legitimate property owner.

A tax-compliant landlord is a real muloodi; they are reputable business professionals who are responsible citizens and who attract quality tenants and financial institutions to finance their growth.

Written by The Editor 


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