SACCOs celebrating too early if URA asks for arrears

May 28, 2018 in Finance, Financial Services, Policy by Editor

May 28, 2018—-Savings and Credit Cooperatives Organisations (SACCOs) in Uganda are celebrating an escape from paying a proposed new tax, but might find themselves now having to clear arrears on an old tax many have been dodging if the finance ministry decides to pressure Uganda Revenue Authority (URA).

The Uganda Cooperative Alliance (UCA), the umbrella for cooperative societies, has already expressed gratitude to legislators for last week rejecting a proposal by the finance ministry to impose a 30% tax on SACCOS.

Ivan Asiimwe, the UCA chief executive officer said, “We are grateful for the parliament’s decision. This will allow SACCOs small holder farmers to be included in the formal banking system. These have been excluded by commercial banks that are more interested in making profits. This is different for SACCOs as they are interested in serving the interests of their members.”

MPs rejected the proposal in the Income Tax Amendment Bill to scrap off a tax exemption on the SACCOs that was presented by the Minister of Finance in April this year.

However according to Francis Kamulegeya, the Senior Partner at PwC Uganda, according to current tax laws, SACCOs are required to pay tax on their chargeable income. This is the interest income they earn on the loans they make to their members.

In addition to paying income tax at the rate of 30 pc on their profits, SACCOs are also expected to collect withholding tax on the dividends they pay to their members. The withholding tax rate on dividends is 15 pc.

Kamulegeya said, “It appears that SACCOs were not aware that they are required to pay tax. As a result, they had accumulated tax arrears with the URA. The government recognises the importance SACCOs play in financial inclusion and economic development and would not want them to be burdened by tax arrears they were not aware of. This must be the reason government has decided to waive all tax arrears owed by SACCOs as at the end of last year”

Repulsed on the proposed 30% tax, sources say the finance ministry and under pressure to improve the tax revenue-to-GDP ratio, may tell URA to follow up on SACCOs that have these arrears. The government projects a revenue shortfall this financial year ending June 30, of nearly UGX700 billion ($185 million) and is scratching at all corners to limit future tax shortfalls.

The amendment Bill proposes to repeal section 21(I) that exempted SACCOs from paying taxes for 10 years and introduce a 30 pc because they were assumed to be making profits. UCA had come out strongly and opposed the proposal saying the tax would kill off the SACCOs, many of them still in their infancy.

The cooperators also argued the tax would defeat the government’s agenda of spreading financial inclusion and prosperity for all since SACCOS were acting as alternative financing sources.

The parliamentarians gave the same reasons for rejecting the proposal and asked the government to give more time to SACCOs to mature before heaping taxes on them.

MP Pentagon Kamusiime said,  “Saccos are acting ad shocker absorbers and are filling the financing gap left by the commercial banks. We should give then some time to mature to a certain threshold before taxing them.”

Kamulegeya partly agrees. He said, “Some people will argue that taxing SACCOs is not right, considering the role they play in alleviating poverty in Uganda. I agree. SACCOs play a very important role in Uganda with regards to providing access to finance. They are now part of our mainstream financial institutions. They are also key in mobilising savings. However, the challenge of broadening the tax base in Uganda requires every person, company, business, institution and organisation involved in an economic activity and earning income or making profits to make their fair contribution to the government treasury. This includes SACCOs.”