By John Rujoki Musinguzi
Reference is made to an article titled “Anatomy of policy disaster” published by Mr. Andrew Mwenda in The Independent on 7th June 2021 and to subsequent media reports regarding taxation of the real estate sector. The gist of Mr. Mwenda’s article (and subsequent media coverage) is that Uganda’s tax policy towards the real estate sector is a “policy disaster” having grown “from bad to worse since 2012.”
This article seeks to dispel this view and clarify Uganda’s tax policies towards the real estate sector.
In his article, Mr. Mwenda gave the following as examples to illustrate what he called “policy disaster”:
- “A friend was selling a house on a 60-decimals plot of land (0.6 of an acre) in Bugolobi. The price was $500,000 (UGX 1.8 billion). He had been renting it and paying rental income tax to URA. Here are the taxes he would pay if he sold the house. First would be 18% VAT i.e. UGX 275m. He had bought the house in 1997 at UGX 300m. Therefore, he had to pay capital gains tax of UGX 450m. The buyer would have to deduct 6% as withholding tax i.e. UGX 108m. The total tax liability would come to UGX 833m.”
Mr. Mwenda’s friend resorted to a rather rudimentary form of “tax planning” by demolishing his house and selling the plot as empty land at the same price and thus only paid the withholding tax at UGX 108m.
This illustration is inaccurate in a number of aspects;
- There is no Value Added Tax (VAT) charged on the sale of residential properties. Paragraph 1(f) of the Second Schedule to the VAT Act exempts a supply by way of sale, leasing or letting of immovable property, other than a sale, lease or letting of commercial premises and service apartments. Furthermore, VAT is only chargeable by a person registered for VAT and making taxable supplies.
- Mr. Mwenda’s example assumes that the withholding tax of 6% on sale of a business asset under Section 118B(2) of the Income Tax Act is a final tax and separate from capital gains tax. Withholding tax is merely a means of collecting income tax in advance. Mr. Mwenda’s friend would therefore be able to reduce his capital gains tax liability by the withholding tax already remitted. The capital gains due would therefore be UGX 450m – UGX 108m which is UGX 342m. Moreover, Mr. Mwenda’s friend need not consider the cost base upon which to calculate capital gains at just UGX 300m. Any improvements made to the house over the years (purchased in 1997) should be added to the cost base. Assuming he made improvements valued at UGX 200m over the years, the capital gains liability becomes UGX 390m – UGX 108m which is Shs UGX 282m.
Thus Mr. Mwenda’s friend’s true tax liability upon sale of his 60 decimal plot of land would be about UGX 282m or 15.6% of the selling price.
Further, Mr. Mwenda’s friend ought to be advised that his “tax planning” may not be beneficial. Destroying the building does not change the tax liability and in addition comes with heavy demolition costs. Section 51(1)(c) of the Income Tax Act provides that a taxpayer is treated as having disposed of an asset when the asset has been destroyed. The taxpayer therefore remains liable for the full capital gains tax due on the sale of the property (land) under the given circumstance.
- “Imagine a Ugandan who has made UGX 400m and decides to purchase an apartment in Bugolobi to earn some income. Let us assume that this tax compliant Ugandan registers with URA for rental tax and that three years later, he had a tenant for only four months but the price of his apartment has appreciated to UGX 600m, giving him or her capital gain of UGX 200m. If he sold the apartment, he would have to pay VAT of UGX 92m, Shs 60m as capital gains and the buyer would have to withhold UGX 36m as withholding tax, a total of UGX 188m. Three years later he would have gained only UGX 12m from the investment. But this is before we deduct the cost of inflation. His net return is most likely close to zero.”
As explained, unless the apartment described above is a service apartment, there will be no VAT charged. Similarly, the withholding tax is an advance collection of the capital gains tax therefore the final tax liability would be UGX 24m after offsetting withholding tax of UGX 36m if there was no improvement on the apartment in the three years.
Tax policies affecting the real estate sector
Companies Rise or Fall on How Well They Renew Their LeadersAs demonstrated above, Uganda’s tax policy towards the real estate sector is far from a policy disaster. The spectre of high taxation raised by Mr. Mwenda and others in the media is clearly an illusion.
Please note that the sale of a commercial building (not a residential building as Mr. Mwenda suggested) is subject to VAT at the rate of 18%. However, VAT is a multi-stage consumption tax and where the purchaser of such a building is VAT registered, the person will claim input tax credit for the VAT incurred. In other words, the VAT would not be a burden to the purchaser.
Furthermore, the 2021 tax policy reform is very favourable to the real estate sector. As regards capital gains tax, the cost base will be calculated after considering the effect of inflation. If Mr. Mwenda’s two examples above were to take place after 1st July 2021, the tax liability would be drastically reduced by taking inflation into consideration. This development cannot be construed to be a policy disaster in any way.
As regards the rental tax, while it is true that the rental tax rate for individuals has increased from 20% to 30% and the annual threshold of UGX 2,820,000 removed, these changes are offset by an even greater increase in allowable deductions from 20% to 75%. In fact, the effective tax rate will reduce from about 15% to 7.5%.
These reforms are in consideration of the challenges posed by the COVID-19 pandemic and will be beneficial to all stakeholders of the real estate sector.
I call upon all Ugandans to consult URA whenever they need guidance on a tax policy matter. Finally, I appeal to all Ugandans to pay their taxes in time to support Uganda towards achieving economic independence. If all of us pay a little, none of us will have to pay too much.
“Developing Uganda Together”
John Rujoki Musinguzi is Commissioner General Uganda Revenue Authority
