Don’t kick a man that is already down; real estate sector appeals to Kasaija over 2020/21 proposed taxes Real estate is a fundamental sector of every nation’s economy. How affordable rental prices are, influences the cost of doing business for many other sectors such as tourism, trade and retail and services. In this letter, to Hon. Matia Kasaija, the Finance Minister, Dr. Sudhir Ruparelia, the Founder and Chairman of the Ruparelia Group, the country’s largest property developers and owners, invites the finance minister to revisit certain clauses in the proposed Value Added Tax (VAT) and Income Tax bills 2020, saying they will have adverse effects on the real estate sector in the country and therefore a knock-on effect on the economy as a whole.

Meera Investments Limited, the real estate arm of the Ruparelia Group, has written to Hon. Matia Kasaija, the Finance Minister taking exception to a number of proposed tax amendments saying that should they be made into law, they will adversely affect the growth of the real estate sector.

In a 2^nd April 2020 letter, the Meera Investments’ Managing Director and founder, Dr. Sudhir Ruparelia called out specific clauses in The VAT Amendment Bill 2020 and Income Tax Amendment Bill 2020 saying that these clauses would cripple the sector.

“We have had consultations with our tax lawyers, Kampala Associated Advocates, and we write to inform you that some of the bills will have an adverse effect on many of our businesses and we seek your indulgence to prevent an adversity,” wrote Dr. Sudhir.

He further wrote that: “with the current global situation regarding Corona Virus, we do believe that this is not the right time to introduce the proposed amendments. Together, with our lawyers, we propose some tax incentives we believe shall boost the reckoning and heal businesses and the local people from the devastating effects of the virus,” reads the letter.

Meera is the largest real estate company in Uganda, employing thousands of people. The company has also been severally awarded for being a top taxpayer for rental tax.

Here below are some of the suggested amendments in verbatim:

Value Added Tax Amendment Bill

The VAT Amendment Bill 2020 has proposed some changes to the current section 28. The proposed amendment is that an “owner of more than one commercial building shall account for the tax on each building separately and shall not claim input of incomplete buildings on the tax collected from complete buildings”. We have the following challenges with this provision:

1. Many of us in the real estate industry run our businesses through companies. Therefore, one company will have may be five to fifty buildings. Under the proposed amendment, it would mean that for each of the fifty buildings I must account for the tax separately. This creates the following complications:
2. It would mean that if I have ten acres on plot 41 Kampala Road and on them I have ten buildings, I have to account for each building separately. This means that I must now demarcate between buildings one to ten and each must have its own tax identification number(TIN). The reason that each must have its own TIN is that I must account for the tax separately. The effect of this is that at the end of the day, I shall have one company with ten to fifty TIN numbers. Worse still, this also means that I shall have one company with ten to fifty different invoices for the same project. This makes accounting difficult and will create confusion among real estate companies. The company would also have to obtain various tax clearance certificates for each of the buildings. This would be outrageous because one company would have over 50 tax clearance certificates.
3. There is also the problem of how to allocate expenses. For instance, if I hire Kampala Associated Advocates and they bill me 1 Million Shillings for work they have done for my real estate company which owns all buildings, who would we allocate this expense to? Would this go to building one, two or ten? This, in our view, has the potential of placing so many expenses on one building and leaving the rest out. This also exposes the Companies to rejection of expenses which will make it impossible to claim any credits justifiably.
4. The proposed amendment against claiming tax credits for an incomplete building is also disastrous for many of our companies. For instance, we all know that in construction, about 18% of the costs are expenses due to VAT. If I start the construction of a building and am not able to complete it, it would mean that for the time I can’t complete the building, my input is unfairly withheld (not forgetting when you refund it shall not come with interest). This in effect means that for a businessman, if a building is worth 1billion at the in-complete stage, the real estate company cannot claim any input until the project is completed. This in effect means about 180 million of the investors’ money is tied up and cannot be used until the project is completed. If the property is sold in the incomplete state, the company would incur a loss since the input is not carried by the property but the company. Practically, when we construct a property and don’t claim the VAT, it becomes a cost to the business. The net effect means that the cost of the property would have to increase by 18%. This cost would then be transferred to the tenants of the property. This, in turn, would increase the cost of renting by 18%. It also means that the cost of investment in Uganda would go up by 18% since this money is not claimable until the property is complete. Therefore, for individuals that want to invest in real estate, they will be discouraged because the cost has increased. For the youth that are employed in real estate, they will lose jobs because of the 18% increase in the cost of investment. Yet if the company was allowed to claim money on the incomplete building, it would probably be used to complete some sections of the property that would generate the investor money which would then be taxed by the URA a rental income. This, in our view, would be a win-win for both parties.

Income Tax Amendment Bill

The Amendment to section 5 (3)(a) of the bill proposes that “rental income is accounted for separately for each of the buildings”. This will have the same challenges as we mentioned in the VAT part discussed above. Accounting for the income separately means that in each case we have to have a TIN for each building. This also creates complications in allocating expenses such as legal fees from the various service providers. More so, it makes business cumbersome as we must have different invoices for each of the buildings. It also makes it cumbersome when filing returns. If all buildings are managed under one company, the Company can file one single return for each buildings rental income. However, if every building must file a return, the Company will be faced with a challenge of fling returns in different periods since the buildings will have been built in different periods.

The Amendment to section 22(2)(n), states that “the expenses incurred for the rental income shall be limited to 50% of the rental income.” We find this particularly unfair especially since other businesses can claim all their expenses incurred in the production of income. This will limit investment in the real estate business especially if we have a rental income of 1billion, and expenses of 700million. It means that we can only claim 500 million as expenses yet in actual sense, our expenses are over that. What then happens to the amounts that are over and above the 50% of our rental income?

Currently, properties in Uganda have an average of 47% occupancy levels. For us as a real estate business, if we put up a property and can only fill 47% of said property under the proposal made in the amendment, it would mean that we would only claim 50% of the rental income. This means we can only claim 50% from the property with a 47% occupancy level. Yet, when we are making renovations, we do so for the entire property. We do not do renovations for only 47% of the property. This means that the amendment is not taking cognizance of the fact that we incur expenses for an entire property and not part of it. Buildings have a useful life of up to 30 years, this would also mean that in the 30 years, we might never recover all our money. As a result, the cost of investment is too high. Therefore, we do propose that the amendment provides for 100% deduction on expenses.

The amendment to section 118(3) provides that “a resident person who purchases land that is not a business asset shall withhold 0.5% of the purchase price”. First of all, if this is not a business asset why would anyone have to pay any tax? Under section 21(k), there is a clear exemption from tax on the capital gain that is not included in business income. A one-off sale is not business income and therefore would be exempt under section 21(k). More so, if it is acknowledged that this is a not a business asset, then why tax it in the first place. And how would a resident person determine that this land is not a business asset? This kills the informal sector who speculate on buying a plot of land and sell it after five years. The tax imposed on such a person will only curtail people’s interest in acquiring property.