With an aim of tapping into the digital world while widening the tax revenue base, legislation passed the Digital Service Tax (DST) as a new form of tax on non-resident individuals offering digital services to customers in Uganda through the Income Tax (Amendment) Act 2023. This legislation, effective from July 1, 2023, under Section 86A of the Principal Income Tax Act, clearly stipulates a tax rate of 5% on gross income.
However, there have been concerns raised regarding the implementation and consequences of this tax and a number of legislators have expressed apprehensions about the potential impact it may have on Ugandan consumers, as it could lead to an increase in the cost of accessing these services. Furthermore, there is contention regarding the tax rate itself, as Uganda’s 5% DST is considerably higher than the rates imposed by neighboring countries. Kenya, for instance, charges 1.5%, while Tanzania charges 2% so, let us unravel the intricacies behind this Tax.
Context of the Tax and its implications
Notably, back in June 2023, the proposed amendments had seen the withdrawal of the tax due to concerns regarding Uganda’s Technical dexterity to effectively administer it. However, it resurfaced after the Head of State returned the bill, suggesting that the legislators revisit their position, emphasizing that the burden of this tax would not fall on Ugandan citizens and ultimately, the tax was passed by the legislators. The current question at hand revolves around whether the introduction of the 5% DST, combined with the existing 18% VAT rate imposed on digital service providers, will result in increased prices for digital services in Uganda. Should such a scenario unfold, it could potentially make the Ugandan market less appealing to foreign service providers.
In an effort to decipher the ambiguity surrounding DST, it is commendable that the Uganda Revenue Authority (URA) issued comprehensive guidelines presented in the most recent notice dated October 20, 2023, and encompass the following key points:
- Non-residents who provide digital services to Ugandan customers are obligated to register for Income Tax through the URA web portal. However, individuals or entities that are already registered for taxes, specifically Value Added Tax (VAT) on electronic services offered to individuals in Uganda, are not required to register again.
- Quarterly returns must be submitted within 15 days following the end of each quarter. These returns should declare the amount of revenue obtained from Ugandan sources.
Moreover, it is emphasized by the URA that resident taxpayers, as well as the general public, must withhold tax on payments made to non-resident suppliers of digital services who haven’t registered with the URA under the Electronic Service Taxation Regime with URA providing a list of registered non-resident service providers on their web portal.
However, despite the aforementioned guidelines, there are still unresolved inquiries regarding the implementation of the Tax. For instance, it is unclear whether businesses are eligible to claim a credit for the 15% deduction made by their customers through withholding tax as this clarification would help affected businesses understand the final tax liability they are responsible for. Additionally, no exemptions have been mentioned for the withholding tax of 15% and therefore, it can be inferred that the effective tax rate increases to 20% if both measures are implemented.
While these measures aim to capitalize on the emerging trends of digitalization, it remains uncertain whether they will generate the intended outcomes. Moreover, URA’s endeavors to eliminate revenue seepages carry significant importance in the realm of tax administration. This raises the question of whether the Tax Administration will be capable of effectively meeting the desired tax revenue targets (five billion shillings- from DST).
To conclude, the Digital Service Tax poses a captivating challenge for the government, with some professionals considering it a “hindrance to inclusive access and usage of digital technologies”. While this tax affords an opportunity to tap into the ever-evolving digital landscape, there remain uncertainties that would be harnessed with continued dialogue and a collaborative approach between the URA, businesses, and other stakeholders is crucial to achieving a balanced and successful implementation of DST.
By Abigaba Chrispus
