The business community is in jitters over new VAT rules that were quietly passed by Parliament a month ago.

According to the new regulations, all businesses operating in Uganda that import services from providers based outside the country will incur the VAT charged on the services provided.  The rules took effect on July 1, following the passing of the VAT Amendment Act, 2011, which President Yoweri Museveni assented to on September 29.

According to the amendments, VAT on a supply of imported services, other than an exempt service, is to be paid by the recipient of the service at the time of making payment for that service. This means that all payments made by companies based in Uganda for services provided by foreign entities will include 18% VAT, which the business community worries, would certainly make the already sky-high cost of doing business even worse.

Prior to the new amendment to the VAT Act, businesses based in Uganda but which contract off shore service providers, were not required to make any payment to the URA, as the VAT charge was shown as both an output and input payment.

However, the business community view the new regulations as “repressive” because as a standard, VAT is supposed to be a ‘consumption’ tax and not a tax on transactions of a business nature.

As it is, payments to non-resident services providers for services such as license fees, royalties, management fees, consultancy services, among others, are immediate targets of the new VAT rules.

URA says they are not responsible for policy-making as their mandate is to collect taxes as stipulated in the tax laws.

However, analysts say the VAT amendments were inevitable if the full benefits of the newly-introduced Transfer Pricing regulations were to be realised. The Transfer Pricing regulations, which also came into effect on July 1, require related entities to charge each other for services and goods at ‘Arm’s Length’ – the same as they would charge and pay if they were not related.

Finance Minister Maria Kiwanuka proposed the changes in her maiden budget in June.

The VAT law stipulates that a person who enters a service agreement with a non-resident entity for the provision of services that generate income in Uganda must notify URA within 30 days and the person receiving the service is liable to pay the tax as well as fines, penalties and interest.

Also among the changes is a requirement that radio or television broadcasting services; electronic services (such as websites, web-hosting and maintenance) as well as sale of copyright, patent or trademark provided by foreigners to persons based in Uganda are subject to VAT.

The private sector is anxious over the new rules, at a time when it is choking under an exorbitantly high cost of doing business, which has made Ugandan products and services less competitive in both local and international markets. Whether or not the government will reconsider the regulations remains to be seen.