• Wed. Dec 6th, 2023

UGANDA, Kampala | Real Muloodi News | **Editor’s note – an update was made to this article on July 8th to correct the rate of rental income tax**

Parliament has passed a USh48.1 trillion Budget for the Financial Year 2022/2023. Meanwhile, the country continues to grapple with the post-COVID-19 pandemic and Annual Headline Inflation hitting 6.3% in May, up from 4.9% in April 2022.

The lion’s share of the Budget will be financed through the Uganda Revenue Authority (URA)’s collections, with a target set at USh25.7 trillion. Other contributors to the Budget include grants (USh2.1 trillion) and domestic borrowing (USh7.1 trillion).

This is a huge weight upon the URA, according to some experts.

URA’s revenue performance for the last three quarters (July 2021 to March 2022) fell short of its target to collect USh16.5 trillion, by more than USh1 trillion. Instead, the taxman collected Shs15.4 trillion, representing 69 per cent of the annual target of Shs22.3 trillion.

To assist URA in achieving the massive target that has been placed upon the Authority for the coming financial year, Government has turned its focus to landlords and simplifying the collections of rental income tax.

On May 18, 2022, Parliament passed changes the Income Tax Act to amend the tax rate applicable to individuals and companies for purposes of rental income.

Legislators recognised that that record-keeping is a big challenge for many individuals in business, and as such, there was a need to tax incomes and not expenses when it comes to rental income. Therefore, legislators recommended that all individuals are taxed on gross rental income as follows;

Gross Rental Income
Rate of Tax
Not exceeding USh2,820,000 per year (235,000per month)Nill
Exceeding USh2,820,00012%

There are no allowable deductions for Individuals, including interest on mortgages.

For non-individuals, i.e., companies, trusts, retirement benefit funds; a tax of 30% will be apply, and where the expenditure and losses incurred in the production of rental income exceeds fifty per cent of the rental income, the allowable deduction shall be fifty per cent of the rental income for that year of income.

The Bill was assented to by President Museveni on June 2nd, and will take effect from July 1st, 2022.

According to Jon Jet Tushabe, the director Tax at BDO East Africa, landlord taxpayers will have to make changes to their business strategies and models to comply with the new rental tax requirements.

“The cost of non-compliance has been made very consequential. For example, for making misleading statements, the fines have been increased from USh4million to a whopping USh110 million,” he said.

Sarah Muzungyo Chelengat, Commissioner of Domestic Taxes at URA, confirmed that rental tax will be a significant focus of the URA in the coming financial year. She says that the authority is addressing key tax administrative changes to support revenue collection and ease tax compliance.

Chelangat says that URA is doing sensitisation through tax education to ensure that even illiterate Landlords can pay taxes using mobile money.

“Tax is going through a very fast digital revolution,” says Chelangat.

For example, in April 2022, URA deployed the fully live Rental Tax Compliance System (rTCS). rTCS is a complex software application used to determine the highest priority individuals or corporations likely to be underpaying their rental income tax obligations.

According to the tax authority, the rTCS application has so far identified just over 70,000 unregistered landlords (those without TINs) and their associated properties, and a further 80,000 landlords who are either not submitting tax returns, or not declaring or under-declaring their rental income. This is compared to the roughly 4000 who the system has identified as compliant.

Chelengat says widening the tax base is essential, as tax revenue from the few compliant landlords was severely impacted by COVID-19, impacting URA’s ability to achieve its rental targets.

“Collections from rental income in the last nine months from July-March 2022 were largely affected by COVID and many of the commercial properties were closed down. This implies that landlords didn’t have rental income, and even those that could pay did not pay on time, relying on promises from the tenants to pay,” says Chelengat.

“Because of this, we had a number of taxpayers asking for payment in instalments, and then those in employment had lost jobs yet had to pay rental income to their landlords—it’s a ripple effect on the entire supply chain,” she explains.

However, since the deployment of rTCS, URA’s focus has been on easing the burden on the few who are paying, by widening the tax base of unregistered landlords.

Chelengat explains that rTCS identifies a significant portion of the population that was never identified before.

“Largely, what we can say is that landlords have not been in the tax net, but we are doing registrations to have them on board and many of them are actually registering,” she says.

Dr. Fred Muhumuza, a Makerere University Lecturer and Development Policy expert, concurs that in order for URA to achieve the collection targets placed upon them, the revenue authority needs to look at improving efficiency, increasing the taxpayer base, and limiting room for people failing to pay.

Dr Muhumuza urges the public to utilise opportunities to comply with their tax obligations through the voluntary disclosure programs, extension of deadlines to file returns, instalment payments and extension to pay.

What’s At Stake?

Uganda’s rising public debt had increased by a whopping 15 per cent from 2020 to December 2021, to the last recorded USh73.5 trillion. Debt is expected to continue rising, with projections it will get to over 52 per cent of GDP.

The debt-to-GDP ratio is the metric comparing a country’s public debt to its gross domestic product (GDP). By comparing what a country owes with what it produces, the debt-to-GDP ratio reliably indicates a country’s ability to pay back its debts.

Speaking at the inaugural BDO-Signum Tax Breakfast meeting at Golden Tulip in Kampala recently, Dr Muhumuza said that, Government’s annual budget estimates for 2022/2023 are not consistent with the Charter for Fiscal Responsibility (CFR) regarding nominal debt to GDP ratios, which should not exceed 50 per cent.

Commenting on Uganda’s financial predicament, Hon. Patrick Opolot Isiagi, Budget Committee Chairperson said, “Public debt is on the rise and projected to reach 52.9 per cent of GDP in 2022/23 and the country’s debt sustainability metrics are characterised with slow export growth and increasing debt.”

A study by the World Bank found that countries with high debt-to-GDP ratios for prolonged periods experience significant slowdowns in economic growth. High debt-to-GDP ratios are also a key indicator of increased default risk for a country.