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Home Economy/Technology

Insurers, unit trusts big winners in Uganda tax proposals

Uganda

The Matters Press by The Matters Press
May 25, 2023
Reading Time: 3 mins read
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CIIN president tasks Insurance directors on manpower development

Insurance companies and unit trust funds have emerged as big winners in Uganda’s tax proposals for the next financial year even as firms providing digital services and VAT payers face higher expenses.

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Uganda has made specific exemptions for Zep-Re, a commercial enterprise owned by Comesa.

Under the new tax policy proposals submitted to parliament, Zep-Re will enjoy withholding tax exemptions on reinsurance premiums collected from Ugandan insurers, withholding tax relief on investment incomes earned in Uganda and a VAT exemption.

Withholding tax rates in Uganda fall between six and 20 percent and are charged on various goods and services, including financial products.

The proposals are also scrapping a new income tax that had been introduced on unit trust funds. Interest earned from unit trust funds is currently exempt from income tax, but a new proposal provided for a 10-15 percent withholding tax on interest earned from funds held by members.

This triggered fears of rapid withdrawal of funds by scared savers.

Total assets held by local unit trust funds stood at Ush1.27 trillion ($341 million) by close of December 2022 with six-unit trust fund operators, according to data compiled by the Capital Markets Authority of Uganda.

Some experts say Uganda will need more incentives to develop its insurance industry.

“This may imply injecting additional capital within insurance companies or passing on new investment costs to clients. For that reason, anything that facilitates faster insurance industry growth is acceptable except the new digital service tax,” said Tetteh Ayitevie, Prudential Assurance Uganda CEO.

“Uganda has an insurance penetration rate of less than one percent of GDP and requires massive investment to expand the market,” he said.

Other tax proposals include a five percent withholding tax rate on foreign providers of digital services in Uganda that include online advertising, online gaming, cloud computing and data warehousing.

An existing 18 percent VAT rate coupled with the fresh withholding tax measure would yield a total tax burden of 23 percent for industry players compared to a 1.5 percent and two percent tax rate levied in Kenya and Tanzania respectively.

Current VAT regulations require the Uganda Revenue Authority to seek taxpayer consent before utilisation of a tax credit valued at more than Ush5 million ($1,343).

Proposed changes will empower the tax agency to absorb one’s VAT credit without consultation, a move that reduces taxpayer choice in relation to exploitation of financial benefits offered by the tax regime.

While the overall tax revenue collection target is set to increase from Ush25 trillion ($6.8 billion) in 2022/23 to Ush29 trillion ($7.8 billion) in 2023/24, there is concern over prospects of higher taxation under increasingly tough economic conditions.

“Those that contribute less to the tax basket are subjected to new tax measures in order to maximise revenue growth. But we feel frustrated seeing many salaried people paying income tax while some businesses do not pay any income tax in this country,” explained Gerald Namoma, a senior economist at Uganda’s Finance Ministry.

“There is no clear economic growth model for this country today. We have invested heavily in agriculture, roads and energy projects but the returns are very small. How do we fix this anomaly?” asked Dr Fred Muhumuza, a local economist.

Uganda collected Ush3.6 billion ($966,962) this year in VAT from overseas digital service providers.

“But the new tax proposal requires the user of digital services to withhold the five percent income tax. This means someone who pays for a Netflix movie subscription in Uganda will be required to pay withholding to URA for such a transaction and this does not make sense,” he observed.

The EastAfrican

Tags: Insurance
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