The Kampala High Court yesterday ruled against Uganda Revenue Authority (URA)’s move to levy a Corporate Tax on interest payable to customers of the National Social Security Fund (NSSF).
In this case which has been in court for 7 years, NSSF challenged the tax on grounds that interest paid to members’ accounts is an allowed deduction that cannot be taxed.
The tax dispute centered around whether the contributions made to the Fund “create a debt obligation as per the Income Tax Act, making interest paid to members a deductible expense.
It was in addition about whether interest is a payment of an expense of income of capital nature and whether the annual interest paid by the NSSF to its members was not incurred in the production of income included in the gross income.”
URA on the hand claimed the interest is not an allowed deduction “since it fails to satisfy the conditions for deductibility under Section 25 of the Income Tax Act”
The move by the tax body moreover, was contrary to its earlier clarification that members interest is indeed not taxable.
URA back in 2001 had written to NSSF confirming that interest paid to members’ accounts by NSSF is accepted as an allowed deduction.
However, in November 2013, the tax body backtracked on this pronouncement, and proceeded to conduct an audit for the period 2005 to 2012 issued and assessment of Shs 30,521,703,065 as principal tax and penal tax interest of UGX 12,196,875,941 to NSSF.
NSSF quickly rushed to High Court’s Commercial Division to challenge this and the High Court referred the case to the Tax Appeals Tribunal.
The Tribunal however, ruled in favour of URA allowing it to tax the members’ interest, which compelled NSSF to challenge the ruling before the Commercial Court.
In his ruling yesterday, High Court’s Justice Bonface Wamala overturned the Tribunal’s ruling citing a number of factors, among them its failure to evaluate the evidence on record which made it make an erroneous decision.
The judge as such ruled that the “interest paid by the Appellant to its members is a deductible expense for income tax purposes” and that NSSF is not liable to pay the principal tax assessed of UGX 30,521,703,065 or the penal tax or interest of UGX 12,196,879,941”
The judge also ordered URA to pay costs of the proceedings in this Court and in the Tax Appeals Tribunal.
Speaking to press today, NSSF’s Deputy Managing Director Patrick Ayota described the ruling as a “big deal.”
“The ruling preserves the savings of members and motivates them to save,” he said, adding, “Long term, savings are good for the country.
Ayota said if their appeal had not succeeded, the ruling would have deeply affected the interest that the Fund pays to members annually.
“The interest would have dropped by nearly 30%. For instance, this year if we were able to pay 10.7% of interest, it means we would have only paid about 8.3%
The deputy MD went on to thank the court for standing with the savers and for the Fund’s lawyers who put up a spirited fight in court.