Tax

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Construction Industry and Taxation:

According to the Back ground to the budget 2013-2014, Private and public construction activities accounted for half of the value of economic activity in the Industrial Sector, and for 13 percent of GDP at current prices. The Industrial Sector consists of Manufacturing, Mining, Electricity generation and the construction industry. This important sub-sector is estimated to have grown by only 1.7 percent in FY2011/12. This represents a sharp decline from the 7.8 percent growth in FY2010/11. There was a fall in public construction due to the tight fiscal conditions, while private activity in the sector slowed due to the unfavorable economic environment. The situation has not improved that much for the last 3 years. The macro-economic fundamentals e.g. inflation, foreign exchange pressures continue to exert negative impact on the construction industry.

Owing to the government’s deliberate policy to drive infrastructure development, the sub-sector also commands close to 10% of the national budget in allocations to roads and infrastructure projects to at tune of Ugx 1,000 billion. This offers prime opportunities for construction contractors and firms to do business as the country makes baby steps towards it journey as middle income economy in the next decade or so. However, some challenges come to the fore in regard to construction contracts and tenders, financing and project management that are at the heart of the formal construction business in Uganda.

A key input in the industry is construction materials e.g. sand, aggregates, timber, cement, steel etc. Most of these are increasingly supplied by informal and unregistered SMEs e.g. hardware shops, warehouses etc. Contactors and project developers have to make a choice on whether to procure their construction materials from informal and unregistered business firms e.g. hardware shops that tend to offer lower prices OR from registered and formally incorporated firms that are registered for tax purposes e.g. VAT. It is increasingly a challenge for construction firms to enjoy the benefits that accrue from tax avoidance and tax planning. An example suffices.  If a contractor buys 100 square meters of tiles, at Ugx 30,000 per square meters from any unregistered or informal hardware shop in downtown Kampala that will cost them Ugx 3,000,000! If one was to buy the same from a formal and tax registered store e.g.  CTM Kampala, the charge may be Ugx 35,000 (VAT inclusive) per square meter thus a total invoice price of Ugx 3,500,000 (VAT inclusive). Whereas one can use the CTM tax invoice to claim input tax while filing the VAT return, the price is higher compared to buying from an informal/unregistered hardware shop. This poses many challenges in regard to tax planning, tax avoidance (which is actually legal), working capital management, contract financing etc. In an effort to minimize construction costs, one may prefer to buy from the informal and unregistered hardware shops or timber dealers! This is both unfavorable for the government and the formal contractors. The government misses tax revenue on the bulk of the sales in the informal sector, while the contractor misses the benefits accruing from procuring materials from formally registered firms e.g. purchase discounts, credit facilities, better tax planning etc.

There is need for review of the regulatory framework so that formal construction companies and dealers gain dividends from going formal. The low tax to GDP ratio for Uganda (currently at 11% and the lowest in sub-Saharan Africa) continues to hurt our efforts to achieve middle-income status by 2030. There is need to clamp down on the informality in the sector that is hurting both construction firms and the government coffers. The majority of construction-material dealers do make annual sales in excess of thresholds set by the Uganda Revenue Authority for tax registration. We need to make deliberate efforts towards construction material dealers embracing formality and tax registration to in an attempt to go formal and uphold corporate governance principles. This would even improve the ability and opportunities of construction firms to engage in robust tax planning and tax avoidance which are key to business success and growth in terms of profitability, cash flows and working capital management. The TREP (Tax Register Expansion Project) initiated by the Ministry of Finance Planning and Economic Development is a step in the right direction. The key partners URA, KCCA and URSB will go a long way in helping in construction material dealers going formal which benefits the construction industry as a whole.

Nicholas Agaba Rugaba

Civil Engineer

ruganico@yahoo.com

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