UGANDA, Kampala | Real Muloodi News | Real estate is one of the fastest-growing sectors, yet it remains relatively less taxed. However, recent concerns have prompted Kampala traders to petition the government, urging landlords to raise rental fees, claiming that commercial building owners are reaping abnormal profits without adhering to tax regulations.
Paddy Ocheng, the Manager of the Rental Unit at the Domestic Taxes Department at the Uganda Revenue Authority (URA), sheds light on the intricate details of the rental income tax sector in Uganda.
Defining Rental Income Tax in Uganda
Rental income tax applies to income generated by leasing or renting out immovable properties, which can encompass land or buildings, in exchange for payment. This tax is levied on any entity or individual earning rental income.
It includes individuals who own property that generates rental income and extends to companies, retirement funds, estates, or partnerships, provided the income is derived from the leasing or renting of such properties.
Addressing Revenue Leaks in the Rental Sector
Rental income tax has encountered challenges over the years, primarily related to compliance issues. The Uganda Revenue Authority (URA) has initiated various efforts to mitigate these challenges.
One crucial initiative involves widespread sensitisation campaigns to educate taxpayers in the rental income tax sector. Many taxpayers were previously unaware of their tax obligations in this area.
URA has employed tailor-made sensitisation campaigns, utilising tax literature translated into local languages to ensure comprehension among different stakeholders in the rental tax sector.
The agency has also organised media campaigns, such as television and radio broadcasts, to reach a broader audience.
Moreover, URA conducts weekly webinars and employs mobile outreach services using the Tujenge bus, recognising that some taxpayers cannot attend seminars or workshops. This comprehensive approach has helped bridge the awareness gap.
To address these issues, URA collaborates with various government agencies, such as the Kampala Capital City Authority, Ministry of Lands, UMEME, National Water & Sewerage Corporation, and the National Identification & Registration Authority.
The information gathered from these agencies is integrated into a system called the Rental Tax Compliance System. This system cross-references data from different agencies, aiding in the identification of unregistered taxpayers and landlords who underreport their rental income.
The URA has also implemented systematic and targeted compliance reviews and audits, with a particular focus on taxpayers engaging in aggressive tax evasion schemes.
These data-driven audits ensure compliance with tax regulations. Additionally, field inspection visits have been intensified, and collaboration with local council chairpersons helps leverage their data to reach out to landlords for compliance.
These efforts have yielded significant results. Over the past five years, there has been an average annual growth rate of 27% in collections.
Although there was a slowdown during the COVID-19 pandemic, collections in the 2022-2023 financial year are showing strong signs of recovery.
The period from July 2022 to March 2023 witnessed collections of UGX 131.4 billion, compared to UGX 97 billion collected during the same period in the previous financial year.
Furthermore, the URA has achieved substantial growth in its register. At the beginning of the last financial year, approximately 80,000 landlords were registered for rental income tax.
By the end of April 2023, this number had increased to 152,000 landlords across the country, representing an 89% growth rate. While challenges persist, these interventions have produced remarkable results.
Determining Eligibility for Rental Income Tax
URA levies rental income tax on chargeable income. This income is calculated based on the prescribed tax rate. For individuals, the calculation begins with the gross rental income, and a tax-free threshold is subtracted from that amount.
If an individual’s gross annual rental income falls below UGX 2,820,000, they are not required to pay rental income tax.
However, if their income exceeds this threshold, they must pay tax at a rate of 12% on the difference between their gross rental income and the UGX 2,820,000 tax-free threshold.
For non-individual entities like companies and retirement benefit schemes, the formula is different.
Their gross rental income is considered, and they are allowed to deduct up to 50% of that amount for expenses incurred in generating this income.
Addressing Landlord-Tenant Payment Conflicts
The effects of premises remaining vacant are accounted for in determining gross rental income. If, for instance, a landlord has five rental units and charges UGX 500,000 per month for each unit, generating UGX 2.5 million from all five units monthly, this amount will form the gross rental income.
However, instances where some units remain unoccupied throughout the year are considered, adjusting the gross rental income accordingly.
Promoting Compliance
The payment of rental income tax operates on a self-declaration regime. Landlords are responsible for making honest declarations at the end of the year, indicating the rental income they have earned during that year.
These declarations are subject to verification through field inspections and data obtained from third-party partners to establish occupancy and rental rates.
While URA ensures landlords are aware of their obligations, it is ultimately their responsibility to make accurate declarations.
This interview has provided an overview of the rental income tax sector in Uganda, offering insights into its operation, compliance requirements, and efforts to address revenue leakages.
In a series of upcoming articles, we will delve into more details about this sector and how it is taxed.
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