Interest is defined by the Oxford Dictionary as money paid regularly at a particular rate for the use of money lent or for delaying the repayment of a debt.

Interest is a significant factor in any economy, bet it in the public or private sector. It takes a key role for the simple reason that any sizeable economy, with the most basic elements of sophistication, is catalysed by credit. The provision of most goods and services relies on the assurance of payment at a future date. The providers of those services often have to borrow to produce. The cost of borrowing is interest, a major source of livelihood for financiers.

The interest charged on taxpayers, much like that stemming from borrowers, is founded on the principle that a taxpayer with a tax liability is analogous to a person who has borrowed from a financial institution. The delay in paying the principal tax attracts interest.

In the context of the taxpayer, the lender is the Government, to which payment is to be made through a regulator such as the Uganda Revenue Authority (URA). By examining the evolution of interest in the taxation of Uganda over the last 10 years, it is evident that there has been quite a number of amendments in the law. The Tax Procedures Code Act (TPCA) came into effect in the year 2014 ostensibly to harmonize the tax administration of the different taxes such as income taxes, Value added Tax, Excise Duty and Stamp duty.

In furtherance of this, the TPCA provided for an order of payment of tax as follows;

Section 38

(1) when a taxpayer is liable for penal tax and interest in relation to a tax liability and the taxpayer makes a payment that is less than the total amount of tax, penal tax and interest due, the amount paid is applied in the following order;

(a) in payment of the principal tax liability

(b) in payment of penal tax; and

(c) and the balance is applied against the interest due.

(2) if a taxpayer has more than one tax liability at the time a payment is made, subsection (1) applies to the earliest liability first.

In the year 2017 an amendment was made to section 38(1) (a) above by deleting the word ‘liability’

As part of the Covid relief measures, interest arrears were waived in the year 2020 section 40C.

In the year 2021, section 38(2) of the TPCA was deleted (2) 

     'if a taxpayer has more than one tax liability at the time a payment is made, subsection (1)  applies to the earliest liability first.'

In the year 2023, interest arrears as of 30 June 2023 were waived on the condition that the principal tax was paid as of 31 December 2023.

In order to understand the complication behind the legal reforms are the following facts about interest

  • The interest due for late payment of Value Added Tax (VAT) is 2% per month compounded.
  • The interest for late payment of Income Tax such as corporate tax, Pay, as You Earn (PAYE), is 2% per month (simple interest).
  • In other words, if one owes UGX 10,000,000 as VAT for one year, the interest at the end of 12 months shall be UGX 2,682,418 and the total liability at the end of 12 months shall be UGX12,682,418.
  • If on the other hand a person owed UGX. 10,000,000, corporation tax for 12 months, the interest due at the end of 12 months will be UGX. 2,400,000 and the total liability after the 12 months shall be UGX 12,400,000. 

There is no clear justification why there should be different interest charges for VAT from other taxes especially when you consider that until section 38(2) was deleted in 2021, a payment of VAT could be used to offset Corporation Tax. That scenario then becomes a nightmare for a software developer who has to separate the interest accruing from the above-said mix of laws in a situation where the tax positions keep shifting as new assessments are raised and amended for periods many years back but the amended and repealed laws remain applicable in the respective years.  

To add to the complication, at an administrative level, the software used by URA to compute taxes has been anything but predictable, confused by all the waivers and amendments in the law. Since August 2023, the tax ledger has been in turmoil, particularly during the transition from one software to another.

No wonder our tax ledgers have been nothing more than a jigsaw puzzle with no logic. Anyone who has attempted to update the 2023 tax position to benefit from the tax waiver has an interesting story to tell. 

What is quite surprising in all of this is that neither the regulator nor the Ministry of Finance has come forward to explain to the taxpayer and the public that the ledger is producing arbitrary results. It is unimaginable that a bank could have a defective ledger that provides incorrect balances and get away with it even for two days. 

Over to you, The Minister responsible.

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This article first appeared in CEO East Africa on January 21, 2024.

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