The Tax Appeals Tribunal (TAT) has disallowed a UGX 504,098,312 tax bill by Uganda Revenue Authority (URA) on asset-financing firm Tugende Limited, saying the tax authority wrongly assessed the tax.
The 2 against 1 majority ruling follows an application by Tugende Limited arguing that the tax assessment was based on discounts to its customers who repaid their leases early, yet these should be allowable expenses. URA disagreed and issued an additional income tax assessment of UGX504,098,312 which the applicant objected to.
Tugende was represented by Oscar Kamusiime and Linda Mugisha from Birungyi, Barata & Associates, while URA was represented by its in-house lawyers, George Ssenyomo and Tony Kalungi.
The tribunal was presided over by Dr. Asa Mugenyi, Mr. Siraj Ali and Ms. Christine Katwe.
Tugende’s Financial Planning Analyst & Reporting Manager, Mr. Emmanuel Mvano, told the tribunal that the company has two primary sources of revenue: income from selling motorcycles and income from financing motorcycle purchases. He further said that while Tugende leases motorcycles to customers who pay in instalments over a period of time, customers who completed their lease payments before the agreed period were offered discounts and these discounts were treated as business expenses/impairments which are allowable deductions in its tax computations.
He argued that for instance, while customers purchase motorcycles on lease at UGX6,424,000 inclusive of Value Added Tax (VAT), if the client makes an early payment with a discount, Tugende earned UGX6,221,750 and the gross lease receivable was UGX5,444,067.80 and that a result of the early payment Tugende would suffer a loss of UGX103,580.6 which it treats as impairment in its income statement.
However, URA refused this argument and issued an additional income tax assessment of UGX504,098,312 for the period ranging from January 2014 to 31st January 2018 on the grounds that the impairment losses claimed by the applicant were accounting losses that are not recognised as allowable deductions under S. 22(1)(a) of the income tax Act because impairment expenses are not connected to a sale or purchase in the accounting period.
Having listened to the evidence and read the submission of the parties, the tribunal’s Dr. Asa Mugenyi and Mr. Siraj Ali ruled that when a party has “included a discount in its gross income it should be allowed to make an adjustment to arrive at chargeable income”.
“Taking the above into consideration, the Tribunal holds that where a person has included discounts used in the production of income in its gross income, they should be allowed to make adjustments in its deductions so as to arrive at the correct chargeable income. The applicant (Tugende) was justified to include the discounts as deductible losses or adjustments in arriving at its chargeable income. Therefore, the respondent (URA) was not justified to issue an additional income tax assessment of UGX504,098,312. This application is allowed with costs to the applicant,” the duo ruled.
In a dissenting ruling, however, Ms. Christine Katwe ruled that a “discount offered at a company’s will cannot be called an impairment” and therefore shouldn’t be an allowable expense.
“Having expounded that the discounts and incentives given freely were given by the applicant (Tugende) resulting into a reduction in the interest and fee earned income a recording of lower income does not make Government receive less tax. In the circumstances, this application would have been dismissed with costs to the respondent”.