MICROCAPITAL BRIEF: Uganda Revenue Authority Demands Repayment of Outstanding Stamp Duty on Microfinance Institution Loans

Microfinance institutions (MFIs) in Uganda are being pursued by the Uganda Revenue Authority (URA) to pay outstanding stamp duty fees on their microfinance loans. MFIs claim that these outstanding fees exist due to a failure in communication by the URA on how to monitor taxes related to credit-providing institutions. MFIs believe that these duties are “almost impossible” to recover, since they come from very small loans that were not taxed by the URA in the past, at neither the time of provision nor repayment. Currently, locally operating MFIs are debating with the URA over whether the stamp duty should be levied at a rate of 0.5 percent of the principal amount of the loan or at a flat rate equivalent to USD 2.50 for every loan extended.

In order to compensate for these outstanding taxes, MFIs are considering increasing the rates they charge clients. Executive Director of the Association of Microfinance Institutions of Uganda, David Baguma, believes that if this occurs, the burden of payment of these dues will fall on poor borrowers, thus increasing default risk and undermining the country’s rural economic development and financial growth potential.

About Uganda Revenue Authority:

The Uganda Revenue Authority was created in 1991 as the central agency to administer and enforce laws pertaining to tax revenue collection. More specifically, its functions include financing current and capital development activities, helping reduce poverty in Uganda, and increasing the ratio of tax revenue to gross domestic product so that the government can become self-sufficient in funding its own projects.

About Association of Microfinance Institutions of Uganda (AMFIU):

The Association of Microfinance Institutions of Uganda (AMFIU), is an umbrella organization for Ugandan microfinance institutions (MFIs), which was established in 1996 in order to strengthen Ugandan MFIs’ lobbying efforts with respect to government policy formation and to aid local MFIs in networking with other local and international organizations.

Bibliography:

[1] The East African. “Uganda microcredit sector in panic over stamp duty demands.” http://www.theeastafrican.co.ke/business/-/2560/835114/-/item/1/-/d47ye4z/-/index.html

[2] Uganda Revenue Authority. http://www.ugrevenue.com/profile/

[3] Association of Microfinance Institutions of Uganda. https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Association+of+Microfinance+Institutions+of+Uganda+(AMFIU)

Original Source Article: The East African

“Uganda microcredit sector in panic over stamp duty demands”

Small loans that have for long been the preserve of microfinance institutions have returned to haunt the very institutions they propped up following pressure by the Uganda Revenue Authority for outstanding stamp duty to be paid.

Market players claim the outstanding dues are based on loans that were approved, disbursed and cleared by their borrowers in the recent past, which makes it almost impossible to pursue them for recovery.

Consequently, the affected players are considering hikes in their charges in a bid to recover unbudgeted tax costs, maintain liquidity ratios and protect profitability. All this is attributed to strong pressure exerted by URA over clearance of outstanding stamp duty fees.

“Microfinance institutions handle a lot of business among small clients and passing on stamp duty will inevitably increase charges levied on borrowers,” said Association of Microfinance Institutions of Uganda executive director David Baguma.

Industry sources attribute the failure to collect the stamp duty to lack of communication by Uganda Revenue

Authority on full tax liabilities related to credit facilities offered by microfinance providers and commercial banks.

The tax agency was, however, not available for comment by press time.

Small loans are known to attract high administrative costs, hidden risks and low profit margins that tempt financial institutions to waive selected charges in an attempt to boost growth in low income market segments. The loans are as little as Ush50,000 ($25) and are repayable within less than a year. Stamp duty chargeable on the loans is Ush5,000 ($2.5) per loan.

However, a new legal battle between URA and the Uganda Bankers Association is likely to enforce tax compliance on loans in the credit market.

While the tax body contends that stamp duty must be levied at a rate of 0.5 per cent of the principal amount of the loan, the bankers insist on current provisions that stipulate Ush5,000 ($2.5) for every loan disbursed.

According to Mr Baguma, the tax body’s continued pressure on clearance of outstanding stamp duty negates government efforts to minimise lending rates and improve access to credit for local businesses through the Prosperity for All programme.

The Prosperity for All programme is meant to boost agricultural productivity through improved access to microfinance loans that are charged as low as 13 per cent per annum.

Should microfinance institutions pass on extra costs of business to existing clients in order to safeguard profit margins, many fear growth in the low income segment, which is very sensitive to high charges and carries bigger default risk, will be undermined.

Valuation of collateral — a critical element in the processing of loans — is also considered complex and costly because of the small, low value assets involved. These include second hand television sets, household furniture and hair dryers to mention just a few.

The unforeseen tax liabilities have created unease within small and large microfinance players alike. For instance, Equity Bank Uganda, which transformed into a commercial bank this year, is currently overwhelmed with a tax bill of Ush1 billion ($500,000) arising out of stamp duty and has only cleared Ush200 million ($100,000).

According to the bank’s managing director Charles Nalyaali, the tax bill is mainly derived from small loans that were never subjected to stamp duty and were already closed by the time of assessment.

Case for tax relief

He explained that failure to gain tax relief would compel the bank to hike its charges in order to recover unexpected tax costs.

Some small players are reportedly contemplating closure of their operations for fear of being declared bankrupt due to failure to clear outstanding tax bills.

“Any charge originating from government has to be passed on to the client. We have increased our interest rates accordingly by 0.5 per cent so as to ensure collection of the new tax charge,” said Finance Trust’s Robert Kakande.

According to Mr Kakande, this will affect growth in the small loans segment because of higher transaction fees.

He argued that stamp duty needs to be done away with in order to spur growth in the microfinance sector.

Finance Trust, a micro deposit taking institution with 25 branches countrywide, charges interest rates between 25 per cent and 30 percent and operates about 25 branches countrywide.

But some are hesistant to hike charges in the hope of securing tax relief in the near future.

“We cannot recover costs from old clients and it is not viable to pass them on to new clients. Such a charge will increase small borrowers costs.

We are still negotiating with URA and the Ministry of Finance over the matter in order to secure relief from stamp duty on small loans,” said Finca Uganda’s chief executive Fabian Kasi.

Finca Uganda is a micro-deposit taking institution with about 22 branches in the country.

Microfinance charges are known to be much higher than those of commercial banks because of larger default risks, huge financing costs and administrative costs. Some microfinance firms charge as much as 2 per cent interest per week, equivalent to 48 per cent for 6 months compared with an average of 22 per cent levied by commercial banks.

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