Uganda: Exempt Or Zero-Rated? Making The Difference Real

Last Updated: 7 October 2019
Article by Steven K. Mugisha

I am among the 20% of Ugandans that were born before 1986. My father worked for the Uganda Army and my mother worked for the Grindlays Bank, she sat in a building right next to the Central Bank of Uganda.

The first day I visited the bank was the first time I visited the post office. I saw how she went about business at work and what she did to pick the family mail. The post has many small boxes each labelled with a number and a keyhole. Each time she talked of a bank account, I imagined a box like the one at the post. In my mind, when you deposited money, someone would place it in your box. I found the post and the bank a lot similar because they resided in very huge buildings with high roofs and had large counters in wide halls. The fact that, they were both on Kampala's main street and on either side of the BoU also made it worse for me to distinguish yet they were so different.

Now, this year on different fora; ranging from a simple consultation over the phone, on watsup to more formal discussions; there has been one common query. "So what is the difference between exempt and zero-rated?" "What about this zero-rated stuff of yours?" "I have never understood this zero-rated thing."

After those questions from quite a wide spectrum, the temptation for us to have the "zero-rated discussion" on these pages has been so compelling because these two have similarities yet so different.

For most of the tax systems as far as Value Added Tax (VAT) is concerned, there is what is called taxable supplies on which VAT should be collected; and exempt supplies on which VAT is not applicable.

A state could have more than one distinct VAT rates to apply to these taxable supplies, but in such cases one rate is determined to be the standard rate or normal rate while the others are declared as special rates or reduced rates. We need to note at this moment that the reduced rate or special rate can be anything; 7%, 2% or 0.5%. It can as well be a 0% rate.

For example, there are countries in Europe that have a VAT standard rate of 20% (applied to most of the goods and services), a reduced rate of 5% (applicable to children's car seats and home energy for example) and a Zero rate (applied to most foodstuff and children's clothes).

In Uganda we pretty much have the same system; a standard rate of 18% applicable to most of the taxable supplies and a reduced rate or zero rate (0%) applicable to a few selected taxable supplies like drugs & medicines, sanitary towels & tampons and; certain agricultural items like pesticides, fertilizers, seeds and hoes.

Like other states, Uganda's VAT system declares certain supplies like the sale of unimproved land or the supply of financial services as exempt i.e VAT is not applicable to those supplies.

To make the difference real, let us explore how three (3) different suppliers would treat a tax invoice for their rent expense of UGX 1,000,000 plus 180,000 the VAT amount.

a) For entities dealing in Exempt Supplies; the entire UGX1,180,000 (amount including VAT) from our hypothetical example would be recorded as rental expenditure. It is not possible first of all that this entity dealing exclusively in exempt supplies can be registered for VAT. Entities like these are not able to claim VAT on expenses.

b) To the Standard Rated Supplier; only UGX 1,000,000 shall be recorded as rental expenditure in the books of accounts, and the UGX 180,000 recorded as a VAT claim to be utilised as relief against VAT liability on sales. It is possible for this kind of entity to be in a claimable position some months but not all the time and on the whole these suppliers (who are the majority by the way) should pay more VAT than they claim.

c) A Zero Rated Supplier will record the rental expenditure as UGX 1,000,000 in the books of accounts and the UGX180,000 VAT as an asset/claim just like the supplier of standard rated services. The difference here is that the VAT on the rental expense is claimed and actually refunded and paid into the entity's bank account. The reason for this is that the supplier of zero rated goods or services, has no VAT on sales from which to offset the claim because their taxable supplies are at a special rate of zero.

Conclusion

The real distinction here is that whereas suppliers of exempt commodities record as expenditure the entire amount including VAT (UGX1,180,000) in their books of accounts, dealers in Zero-Rated supplies have the luxury of only recording exclusive amounts (UGX 1,000,000) as expenditure.

In effect governments subsidise VAT-special-rate businesses. There is no doubt this is one of the ways of making certain sectors attractive to investors.

So the real deal in making zero rated supplies is government's consistent cash pay-out in form of refund of VAT genuinely suffered by the Zero-Rated business.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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