How land tax will affect rent, land purchases

The tax amendment bills are estimated to generate Shs9 trillion (3.3% of the budget) in tax revenue and among these tax bills includes an amendment under section 3 of the Income Tax (Amendment), 2024 inserting section 5A to the Income Tax Act which imposes 5 percent tax on gains of voluntary disposal of non-business assets.  

Under section 3(2) of the Income Tax (Amendment) Bill 2024, the government is proposing a 5 percent tax on the gain realised from the sale of land in a city or municipality except for the principal place of residence; and rental property that is subject to rental tax.

Tax on land transactions
Kasirye purchased an acre of land in Mukono, which is not his principal place of residence, at a purchase cost of Shs50 million and voluntarily sells it at Shs150 million. The total profit or gain on disposal of the land is Shs100 million (Shs150 million – Shs50 million). He will have to pay a tax of Shs5 million (5 percent of Shs100 million profit) within 15 days from the date of sale. Additionally, he will have to inform the Uganda Revenue Authority in writing about details of the sale within 15 days.

Failure to pay the tax will render him non-compliant and will have to pay the principal tax plus a 2 percent interest per month until when the tax is paid.
Land under the law includes fixtures like buildings that are permanently attached to the land as discussed in the case of ATC Uganda Limited & Another V Kampala Capital City Authority (Civil Suit No. 323 of 2018). 
The implication is that sales or transfer of land which is voluntarily disposed of in the jurisdictions of cities and municipalities except for a principal place of residence and the sale and transfer of rental property subject to rental tax voluntarily disposed of would be liable to the 5 percent income tax on the gain (profit) on disposal.

This proposal will result in increased property prices: There will be a general increase in the price of properties not only in cities and municipalities but also in other jurisdictions. 
Land being a factor of production will adversely affect in cost of investment and discourage those who wish to dispose of some of their properties to invest in economic activities.

Increase in rent
There will be an increase in rental prices for both business and residential properties due to the higher cost of construction due to the tax on the purchase of land.
Unfair computation of gains on disposal: The proposal seeks to charge tax on a gain or profit on disposal ignoring indexation of the cost base.

Due to the effects of inflation in the economy which is an adjustment of the cost base of the property as a critical parameter in determining the gain or profit generated on disposal, this will lead to the computing gains based on an unadjusted cost base leading to computing higher and unrealistic gains.

Key terms have not been interpreted in the proposed law for instance a principal place of residence which could lead to unfair and inequity of taxing where the sale of land attached to residence might be taxed for one individual and exempt for another which defies the canons of taxation of equity and fairness.

The proposed amendment further seeks to treat rental property as a non-business asset yet rental property generates business income thus leading to the treatment of rental property differently for purposes of rental tax and capital gains at disposal which will create ambiguity.

Potential conflicts under the tax law: Under section 21(1)(k) of the Income Tax Act provides for an exemption of tax on income from non-business assets. However, under section 3 of the Income Tax Amendment, the bill seeks to propose tax non-business assets which will create a conflict in provisions of the law in case section 21(1)(k) is not amended.

Discriminative application: The proposed law seeks to apply to only jurisdictions of cities and municipalities and excludes other areas which is negative discrimination that violates the principles of fairness and equity.
Increase in the cost of compliance: The proposal will lead to increase in the cost and burden of compliance in ensuring that they compute the accurate taxes, pay the taxes in time, and file the required detailed information in regards to the sale to the URA within the required time.

The economy is already hit hard and struggling with high cost of living which directly and indirectly are affected by the cost of real property.  This will increase the cost of construction and rent which will affect Ugandans renting for business and residential purposes.

John Sebuuma  is a member of the Tax & Economic Policy Committee at the Institute of Certified Public Accountants of Uganda.