Kampala City Traders Association (Kacita) have recently been up in arms with URA over withholding tax.
On September 13, 2023, at least 1,000 small-scale wholesale traders in Kampala asked URA to revise the six percent withholding tax imposed on them.
Most of the traders represented by Kacita included shop owners operating alongside Kikuubo trading areas of St. Balikuddembe market, Ham Enterprises and other downtown areas. Kacita is a business support association that was established and registered for the purpose of facilitating trade and mobilizing the business community to enable them to obtain a collective bargaining power to make their business aspirations meet.
Thadeus Musoke Nagenda, the chairperson of Kacita, went on to state that URA was reluctant to react to their claims even when it ‘acknowledges that there is a problem with the withholding tax.’
This is not the first time that the Kacita traders have been at loggerheads with the tax collection body. Earlier this year in May, an engagement was held between the two factions under a URA-Kacita Business Community Tax Dialogue at the Nakawa-based UMA show grounds in order to find solutions for the warring factions.
The recent bout is testament that no feasible solution was ever reached or if it was, a new conflict has come to light. The taxpayers, who have vowed to close their shops as a means of expressing their dissatisfaction with what they referred to as unfavourable tax policy claim that the percentage at which withholding tax is paid is not only exorbitant but also serves the purpose of distorting depriving taxpayers of their cashflow.
To resolve this impasse, it is pertinent that the traders understand how withholding tax applies. Withholding tax mechanism is applied as a form of income tax that is withheld at source by the person (withholding agent) upon making payment to another person (payee). The tax is deducted at source and remitted to URA in advance by the withholding agent.
What this means is that where a transaction is amenable to withholding tax, the person making a payment is obliged to deduct a certain percentage of the payable amount before making that payment.
For the traders that Kacita seeks to represent, the withholding tax usually applies in two ways. First is where the traders import goods like clothes or household materials in bales (endiboota) into the country. Given that this is an international purchase and payment is being made to a non-resident that URA would find hard to track and ensure prompt payment of taxes on the sale made to a resident, the obligation to withhold the taxes payable is shifted to the resident person before payment is made.
Technically, if a bale of clothes is $1,000, the resident purchaser will withhold and remit to URA 15 per cent of this amount and pay the balance to the non-resident seller.
This ensures a certain level of compliance and an effective means of ensuring that the non-resident pays the requisite taxes owed. In a sense, this tax is being paid by the non-resident, but the resident person, appointed withholding agent for this particular transaction, merely helps URA in collecting that tax which will be treated as a final tax.
However, where withholding tax is not a final tax, it becomes creditable to the person from whom the tax was withheld. This is because the person will pay the entire total tax due at the end of the year but will be allowed a credit of the tax that was initially withheld from them while conducting the transaction.
This tax is charged in order to notify URA that a taxable transaction has been conducted. In simple terms, a trader sells items to a withholding tax agent who deducts six per cent on the payment and remits it to URA. The trader pays an entire tax at the end of the financial year but is also entitled to a credit for the 6% that was withheld at the time the transaction was entered.
The challenge that most of these traders face with URA comes in at the time of claiming the creditable tax. A tax credit means an amount that a taxpayer deducts from the income tax they owe to URA and is granted to avoid double taxation.
According to the traders, URA does not remit the creditable taxes to them but uses these amounts to clear off future tax liabilities. This greatly affects their cash flow which distorts the nature of business and undermines progress.
Secondly, refunds that exceed five million always trigger audits which most traders try to avoid. This leaves them in a position where URA holds their money for uncertain periods.
What URA ought to do is to set up a streamlined process to enable these traders to access their credit claims and refunds expeditiously without suffering damages to their businesses. This will resolve one of the eminent Kacita-URA woes but will also ensure tax compliance among traders.
The writer is an advocate of the High court and a tax expert