According to Black’s Law Dictionary[1], value-added tax is a TAX assessed at each step in the production of a commodity, based on the value added at each step by the difference between the commodity’s production cost and its selling price. Value-added tax (VAT) VAT is governed by the VAT Act and administered by the Uganda Revenue Authority (URA). VAT is charged at the rate of 18% on the supply of most goods and services in the course of business in Uganda. Specified goods and services, as well as exports outside of Uganda, attract a zero rate of tax.VAT is an indirect tax which is ultimately paid by the consumer, and is not a tax on individual businesses.
Article 17(1)(g) of the Constitution[2] of Uganda outlines a citizen’s duty, emphasising the obligation for every citizen to fulfill the responsibility of paying taxes. In the same way Article 152(1) of the Constitution[3] of Uganda goes on to provide that “No tax shall be imposed except under the authority of an Act of Parliament, this clearly lays down the authority of value-added tax from the Value Added Tax cap 349, laws of Uganda. Value-added tax (VAT) is a broad consumption tax assessed on the value added to goods and services as they move through the supply chain.
According to section 4[4], A tax to be known as a value added tax, shall be charged in accordance with this Act on — (a) every taxable supply in Uganda made by a taxable person; (b) every import of goods other than an exempt import; and the supply of any imported services by any person.
According to section 5 of the Act[5], Taxable person means a person registered under section 7 is a taxable person from the time the registration takes effect. (2) A person who is not registered, but who is required to apply to be registered, is a taxable person from the beginning of the tax period immediately following the period in which the duty to apply for registration arose.
Digital products sold by nonresident businesses to customers in Uganda are subject to Value Added Tax (VAT). The standard VAT rate in Uganda is 18%. B2C transactions are taxable, while B2B transactions are handled through a reverse charge mechanism.
In Uganda, VAT is levied at a standard rate of 18%, and digital services fall under the taxable category if supplied to consumers in Uganda. Therefore DSTV, Online shops all fall under this category.
Uganda implemented VAT digital services rules on 1 July 2022. a Public Notice in regard to taxation of nonresidents providing electronic services to non-taxable persons in Uganda. URA’s Public Notice is based on section 16(2)(d) of the VAT Act which provides that any non-resident person who supplies electronic services to a non-taxable person in Uganda, makes a taxable supply in Uganda
It should be noted that The Digital Service Tax is a final tax and no further income tax will be charged on the nonresident. However, the Digital Service Tax will apply alongside the VAT rules, which require digital service providers to account for VAT at 18%
The Uganda Revenue Authority (URA) is indeed grappling with the rapid transformation of the economy due to technology and digitalization, particularly concerning the taxation of online traders and digital services. The existing tax legislation, largely formulated before the widespread adoption of these digital business models, presents challenges in effectively capturing revenue from this burgeoning sector. Value Added Tax (VAT) on digital services is a key area where the URA has had to adapt and implement new measures.
VAT and Digital Services in Uganda:
Uganda has taken steps to address the VAT implications of digital services. The legal framework is primarily governed by the Value Added Tax Act Cap. 349, which has been amended to include specific provisions for electronic services.
Key Aspects of VAT on Digital Services in Uganda:
Scope of Taxable Digital Services: Uganda’s VAT regime defines taxable digital services broadly. These include:
- Streaming and download services (films, music, e-books).
- Software and applications (subscriptions, cloud computing, SaaS platforms).
- Online advertising and e-commerce platforms.
- E-learning platforms.
- Websites, web-hosting, and remote maintenance of programs and equipment.
- Images, text, and information.
- Access to databases.
- Online gaming and gambling.
- Cloud storage and data warehousing.
- Services delivered through social media platforms or internet search engines.
- Online auction services.
- Cab-hailing services.
Place of Supply: A crucial determinant for VAT applicability is the location of the consumer. If a consumer resides in Uganda or uses the service within the country, VAT obligations arise for the service provider. To determine the consumer’s location, indicators such as the customer’s address, IP address, phone number, and financial institution used for payment may be considered.
Taxable Person: Generally, VAT is charged on taxable supplies made by a taxable person. A person is required to register for VAT if their taxable turnover for three consecutive months exceeds UGX 37.5 million or is likely to exceed UGX 150 million annually.
Non-Resident Providers: A significant aspect of the URA’s efforts involves taxing non-resident providers of digital services. Effective July 1, 2021, non-resident entities supplying electronic services to non-taxable persons in Uganda are required to charge VAT at the standard rate of 18%.
Registration Requirements for Non-Residents: Non-resident digital service providers must register for VAT in Uganda if their annual taxable turnover exceeds UGX 150 million. The URA has a streamlined e-registration system for foreign entities. Registration requires: Proof of identity (company registration details), Description of services provided, Anticipated turnover in Uganda.
Digital Service Tax (DST): In addition to VAT, Uganda has also introduced a Digital Service Tax (DST) at a rate of 5% on income derived by non-residents from providing digital services to customers in Uganda, effective July 1, 2023. This is a separate tax from VAT and targets the income of digital service providers.
Implementation of EFRIS (Electronic Fiscal Reporting System): While primarily focused on VAT for traditional businesses, EFRIS aims to enhance tax administration and could potentially be leveraged for digital transactions in the future. There is need to sensitize the masses about the operation of this kind of technology.
In conclusion, the URA has made significant strides in adapting the VAT system to the realities of the digital economy. By defining taxable digital services, establishing rules for non-resident providers, and implementing online registration and filing, Uganda is working to capture revenue from this growing sector. However, challenges remain in ensuring full compliance, accurately tracking cross-border digital transactions, and keeping pace with the rapid evolution of digital business models. Continuous efforts in legislative updates, technological advancements in tax administration, and international cooperation will be crucial for the URA to effectively tax the digital economy and ensure a fair and equitable tax system. The collection of VAT on digital services in Uganda is primarily governed by the VAT Act and its amendments, alongside administrative guidelines issued by the URA. These legal provisions establish the taxability of electronic services consumed in Uganda and outline the obligations of both resident and non-resident providers. While specific case law directly addressing this area may be scarce at present, the existing legal framework and the URA’s active enforcement efforts provide the basis for VAT collection in this evolving sector of the economy. The introduction of the Digital Service Tax further underscores the government’s commitment to taxing the digital economy. As the digital landscape continues to evolve, it is expected that both the legal framework and potential case law will further develop in this area.
[1] Eighth edition, Bryan A Garner, Page 1599
[2] The constitution of Uganda 1995
[3] Ibid 2
[4] The Value Added Tax cap 349
[5] The Value Added Tax cap 349
