An undomestic VAT
Analysis of the partial judgment of the High Court in the case of Margaret Akiiki Rwaheru and 13,945 others
Like most developing countries, Uganda struggles to collect tax from the informal sector, which is one of the biggest sectors of the economy. The legislators and the Uganda Revenue Authority (URA) have made several attempts to bring the informal traders within the tax net in a manner that is administratively efficient. One such effort is the URA’s imposition and collection of “domestic VAT” at the point of importation of goods.
Though the imposition and collection of domestic VAT has long been considered controversial, it was not legally challenged until the class action case of Margaret Akiiki Rwaheru and 13,945 others vs. URA (Civil Suit No. 117 of 2013). In that case, Ms Akiiki and others (the plaintiffs) sought a declaration that there is no legal basis for the URA to charge domestic VAT on imported goods. The plaintiffs also asked the Court to order the URA repay those taxes illegally collected, together with interest.
On 10 January 2014, the Commercial Division of the High Court of Uganda delivered its partial judgment covering the points of law raised in the case. The High Court was scheduled to deliver its judgment separately on the merits of the facts of the case as proven by the plaintiffs, particularly for the purposes of awarding costs. However, the proceedings in the High Court were stayed by the fact that there is a pending appeal on the decision on the point of law (Court of Appeal Civil Appeal No. 98 of 2015). As such, the final judgment in respect of the High Court case has not been delivered to date.
Article 152 (1) of Uganda’s Constitution of 1995 prohibits the imposition of tax unless authorized by an Act of Parliament. There is no specific Act of Parliament authorizing the imposition of domestic VAT on non VAT registered importers. As a result, the general public and tax community were surprised when the URA included a note in its VAT guidelines (the ‘URA Guidelines’) that stated that “Domestic VAT for Non VAT registered importers” had come into effect on 1 March 2002. In the guidelines, the URA defined domestic VAT as VAT charged on goods whose value is UGX 4,000,000 or more. According to the guidelines, importers who meet the following are required to pay domestic VAT:
The importer is not VAT registered.
The Cost, Insurance, Freight (CIF) value (as determined by Customs) of the goods is UGX 4,000,000 or more.
The goods are subject to the standard VAT rate of 18%.
The goods are not personal effects or motor vehicles.
The URA guidelines further provide that domestic VAT is payable at the customs entry point together with “other customs taxes” and that the value for domestic tax purposes is computed by applying a 15% mark-up on the value on which VAT at Customs is computed, which is the sum total of CIF plus import duty and excise duty (the so-called Customs VAT value). The mark-up is the expected value added between the stage of importation and sale.
Based on the URA’s guidelines, the total combined VAT suffered by the importers is 33%, which is neither provided for by the Value Added Tax Act (Cap 349) nor the East African Community Customs Management Act, 2004.
In the Margaret Akiiki Rwaheru case, the URA explained its justification for imposition of domestic VAT on imports of goods. According to the URA, given the fact that many of taxpayers that fall into the informal sector intend to circumvent compulsory VAT registration, since they do not keep proper records, have no fixed places of abode, have multiple registrations, or are simply not registered for VAT at all, the URA faces administrative challenges in ascertaining output VAT. As a result, the URA feels it is important to collect input VAT at importation and output VAT (domestic VAT at 15%) at the point of importation. Furthermore, the URA claims that it has authority to do so under Section 32 (1) (c) of Cap 349, which empowers the URA Commissioner General to make an assessment of the amount of tax payable by a person where the Commissioner General has reasonable grounds to believe that a person will become liable to pay tax but is unlikely to pay the amount due.
The URA further explained that the domestic VAT did not amount to a different tax with a different rate because the calculation was based on an estimated mark-up (15%), derived through a research/market survey, that was meant to represent the expected value added on imports between the stage of importation and sale in the domestic market, taking into account costs incurred as well as the profit margin. The URA also noted that aggrieved taxpayers had a legal right to file a VAT return and could seek a refund for the overpaid tax under Section 42 (3) of Cap 349. According to the URA, the plaintiffs’ action was in essence an omnibus objection to VAT assessments at importation which was not provided for under Cap 349.
As the plaintiffs’ Counsel in the case pointed out, by imposing domestic VAT on imports, the URA made several assumptions that contravened the provisions of Cap 349. First, the URA assumed that all imports of goods worth over UGX 4,000,000 are for sale in the domestic market at a profit and that from such a sale, output tax would always exceed input tax and, as a result, an importer is always in a VAT payable position rather than a VAT refundable position. The plaintiffs argued that by assuming that all importers of goods worth over UGX 4,000,000 are eligible for VAT registration, the URA was effectively rendering the annual VAT registration threshold of UGX 50m (prior to the July 1, 2015 amendment to Cap 349 which raised the VAT registration threshold to UGX 150m) set out in Cap 349, meaningless.
And finally, the plaintiffs argued that to require unregistered persons to pay VAT without establishing whether they are taxable persons under the Act is contrary to the provisions of Cap 349.
In concluding that imposition of domestic VAT is not illegal per se, the judge pointed out that it is was irregular for the URA to assess taxes on taxable supplies before the supply takes place. The judge added that the URA’s conclusion that all importers are unlikely to pay VAT on future taxable supplies of goods should be determined on a case-by-case basis, rather than on a blanket basis for administrative convenience. The judge concluded that it was unnecessary for the URA to resort to relying on estimated VAT assessments on speculative future supplies and, instead, the URA should use the various penal provisions specified by Cap 349, such as penalties for failure to apply for registration, failure to lodge returns, and failure to maintain proper records.
The judge also noted that it cannot be assumed that the taxable person shall not lodge taxable returns which are accurate for the URA to invoke the provisions of Section 32 (1) (c) of Cap 349 or even to come to a conclusion that there are reasonable grounds to believe that the person will become liable to pay tax but is unlikely to pay the amount due.
Furthermore, he explained that a strict interpretation of Section 32 (1) (c) of Cap 349 confines the belief of the URA to reasonable grounds that a particular person will become liable to pay tax but is unlikely to pay the amount due. This by necessary implication refers to the circumstances of a particular person in each case. Consequently, Section 32 (1) (c) of Cap 349 can only be invoked on one taxpayer at a time and cannot cover a general category of taxpayers.
The judge concluded that the plaintiffs had only established generally that it would be irregular to charge VAT on taxable supplies which have not occurred and without giving the reasons why an importer who has paid VAT on the import ought also to pay VAT on a taxable supply before making the supply, on the basis of an estimate made under section 32 (1) (c) of Cap 349. He was of the view that while the charging of VAT on a person who would never supply the goods as a taxable supply would be illegal as submitted by the plaintiffs, VAT charged on an importer whose goods are subsequently supplied in the domestic market is an irregularity and not an illegality as tax on taxable supplies is prescribed by Cap 349. In other words it is a curable defect.
Whilst the point about the definition of what was domestic about the VAT collected by the URA at 15% was somewhat lost in the nomenclature of other legislation, it was a touch dispiriting to see that the exposition on the purpose of Section 32 (1) (c) of Cap 349 dealing with assessments was somewhat missed. The URA seems to stretch the use of Section 32 (1) (c) by applying it in instances where, as is widely accepted is a basic premise of VAT internationally, no supply has actually taken place. There also appears to be distortive possibilities in the imposition of domestic VAT if a particular importer does indeed intend to make onward supplies of those goods, but for a consideration below the registration threshold. In such an instance, the URA would have raised tax illegally since it can safely be assumed that Parliament intended to exclude traders making supplies below the threshold from the clutches of VAT. Since the VAT registration threshold was revised upwards to UGX 150m on 1 July 2015, more tax payers are likely to be captured by the low domestic VAT threshold of UGX 4m thus circumventing the overall purpose of the amendment.
Through the imposition of domestic VAT, the URA also seems to amend the penalty regime of Cap 349 by interchanging circumstances authorizing it to impose penalties with circumstances where it is authorized to raise an assessment. Through the domestic VAT mechanism, the URA utilizes Section 32 (1) (c) of Cap 349 which covers assessments and not penalties to covertly impose an omnibus penalty for anticipated infringements of Cap 349, for failure to apply for registration, failure to lodge returns, and failure to maintain proper records that are covered elsewhere in Cap 349.
Also of interest is the fact that the URA guidelines note that domestic VAT came into effect on 1 March 2002 notwithstanding that Section 32(1) (c) of Cap 349 which is the suggested enabling provision of the law has not been amended since the inception of Cap 349 on 1 July 1996.
If sustained in the appellate courts of law, the plaintiffs’ arguments in this case have wide-ranging ramifications for the URA and taxpayers alike. Subject to factual evidence and, of course, verification by a URA audit, some taxpayers may seek refunds of overpaid VAT in accordance with the provisions of Cap 349.
Given the URA’s practice of instigating wide-ranging audits into taxpayer’s affairs to verify refunds claimed, the URA may be overwhelmed by the large number of pre-refund verification audits and possible legal challenges that may result. Importers who have erroneously paid domestic VAT face the dilemma of deciding whether to pursue the VAT refund or to forfeit it in order to avoid the intrusive URA audits.