Some Banks and other financial institutions in Uganda today, register for and pay VAT regardless of exemption of financial services from Value Added Tax (VAT). The supply of financial services is an exempt supply for the purposes of section 19 of the VAT Act cap 349. Exempt supplies in lay terms are supplies that are exempt from VAT. Financial services means granting, negotiating and dealing with loans, credit, credit guarantees, and any security for money, including management of loans, credit, or credit guarantees by the grantor.
The services also include transactions concerning deposit and current accounts, payments, transfers, debts, foreign currency sales and purchases, cheques and negotiable instruments, other than debt collection and factoring, transactions relating to shares, stocks, bonds and other securities, other than custody services, the management of investment funds; but does not include provision of credit facilities under a hire-purchase or finance lease agreement.
The rationale behind the tax policy that led to financial services being exempt supplies was to promote and grow the financial services sector in Uganda. The sector has indeed grown with an individual having a choice over which bank, micro finance institution or forex bureau to use all over the country. There is also a variety of services offered by the banks from salary and car loans, Automatic Teller Machines (ATM) services to the more sophisticated like electronic money transfers.
Some banks and other finance institutions took the tax exemption literally and did not register for VAT. However, others followed the prudent but costly approach and registered for VAT regardless of the exemption. In registration for VAT, a number of advantages are given like the credit worthiness of the business and the use of VAT returns. These advantages were mentioned in my last article titled: When to register for VAT as below.
There are benefits to Voluntary Registration and these include: One dealing in zero rated or mostly zero rated supplies would be able to claim input tax credit and even cash refunds, it opens up one to more business opportunities e.g. big firms tend to prefer dealing with fellow registered firms as the payment of VAT can sometimes be used as a benchmark to determine the reputation of a business. Registration is also advantageous because a registered person can issue tax invoices to customers who in turn can utilize them to claim VAT incurred, there is a defined risk reduction on the penalty for not registering for VAT in time i.e. by the time one’s turnover exceeds the required threshold, the person is already registered.
The disadvantages of Voluntary Registration which would also affect the suppliers of financial services include: The registered person must file monthly tax returns even where no sales have been made; and failure of which the person incurs penalties, the business incurs the cost of printing tax invoices, some small businesses incur extra costs of a consultant to compute the tax and one must stay on register for a period of two years.
The question is, with the exemption of the supply of financial services from VAT, is it necessary for the players in the financial services sector to register for VAT as some have done in the past? Would their input VAT exceed output VAT to warrant VAT refunds? Even with the relatively new e-tax on-line filing of VAT returns and automated accounting systems, doesn’t the payment of VAT affect the profit margin or is it passed onto the final consumer, the customer? All is well with the institutions that decide to voluntarily register as it is their choice. But wouldn’t all financial institutions benefit from a waiver of VAT as was originally intended when classifying financial services as exempt supplies?
Unlike some other businesses that need to use VAT returns filed with the Uganda Revenue Authority as a form of credit worthiness, the Bank of Uganda as a regulatory authority, has done a good job supervising the banking sector in Uganda. And unlike some businesses, banks and other financial institutions when licensed, would ordinarily not need a VAT return to prove their credit worthiness. Before the blame is put on the Uganda Revenue Authority for being an exuberant tax collector, one must know that not all financial institutions register for VAT and those that do, register only under voluntary registration. However, after registration, the Uganda Revenue Authority is bound to collect VAT from the financial institutions that have registered and one cannot cry foul over something they did voluntarily.
The decision for the registered financial institutions to deregister should not be taken lightly as it involves an application to the Commissioner General of the Uganda Revenue Authority to deregister and a two year waiting period before the institution is deregistered. During the two years waiting period, the institution must file the mandatory monthly VAT returns. Before applying to deregister, the financial institution must consider the bulk of its supplies as the provision of credit facilities under a hire purchase or finance lease agreement is not exempt from VAT.
I decided to publish the above article again after I received an e-mail request to clarify how much VAT a borrower is supposed to pay on loans of 2 million Uganda Shillings and below, soon after the reading of the 2011-2012 budget by the new Honourable Minister of Finance Maria Kiwanuka.
- How to utilise credit notes for VAT in Uganda (renderuntoceaser.wordpress.com)
- Value Added Taxes Around the World (turbotax.intuit.com)
- Taxation of employee benefits and Pay As You Earn (renderuntoceaser.wordpress.com)
- Financial services are exempt from VAT (renderuntoceaser.wordpress.com)