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No tax relief for retrenched workers

URA’s legal win means benefits will be subjected to PAYE

Kampala, Uganda | JULIUS BUSINGE | It is now official that workers who will be paid benefits as a result of retrenchment will be subjected to Pay as You Earn tax – which is 30% of the total earnings.

This follows the Supreme Court’s ruling on Sept.10 that upheld Uganda Revenue Authority’s right to tax terminal benefits.

Siraje Hassan Kajura, had in 2009, filed a suit that turned out to be a game changer in tax administration as the Ugandan public had for a long time held divided views on whether or not retrenchment packages or terminal benefits are taxable.

The subject caused a long legal battle between the taxman and Kajura plus 160 other former employees of the defunct Dairy Corporation Ltd after their retrenchment in August 2006.

The Privatization Unit of Ministry of Finance Planning and Economic Development had subjected the retrenchment packages of these former employees to Pay As You Earn, and remitted to URA tax of Shs1.1bn.

Kajura challenged the taxation of their benefits in the High Court, lodging civil suit no. 117 of 2009, arguing that the packages paid to them were not employment income but rather a ‘thank you’, following the privatization of the Diary Corporation.

In his judgment, Justice V.F Musoke Kibuuka ruled in favour of Kajura declaring that, URA unlawfully charged PAYE on the terminal benefits, thereby ordering a refund of the taxed amount, with interests, general damages and costs.

But the tax body was not convinced with the High Court decision. It appealed to the Court of Appeal, under civil appeal no. 26 of 2013, arguing that, retrenchment packages and terminal benefits generally, are taxable under the Income Tax Act.

The Court of Appeal, in a Judgment of 7th July 2013, agreed with the High Court, that terminal benefits were not meant to be taxed.

Again, not satisfied, URA appealed in the Supreme Court in 2015, contending that the items in the package paid to Kajura and his colleagues were indeed taxable and qualified as compensation under the Income Tax Act.

The Supreme Court agreed with URA, in its decision handed down on Dec.20 2017 that terminal benefits or retrenchment packages are indeed taxable and URA was right in taxing them.

Feeling aggrieved by the Supreme Court ruling, Kajura filed an application for review in 2018, under civil application no. 26 of 2018, asking the very court to revisit and ‘correct’ its judgment, alleging the Supreme Court was in error in deciding as it did in 2017.

In the end, the Supreme Court on Sept. 10, 2020, dismissed Kajura’s case, with costs, terming it a disguised appeal to the very Court that had ruled on the same matter already, in 2017.

By press time, The Independent was yet to receive a response from the URA legal department on the way forward regarding compilation of the costs incurred by the tax body on this case.

“The value of this decision is unquantifiable, in monetary terms. This decision means the Government of Uganda would have been exposed to the risk of revenue loss, had the case gone against URA. The Government would have to refund all terminal benefits that have ever been taxed by URA from retirees/ retrenchees,” said URA’s Assistant Commissioner for Litigation, George Okello.

This new development comes at the time the Makerere University based Economic Policy Research Centre is predicting that more than a million Ugandans could lose their jobs if the coronavirus pandemic persists.

In separate interviews with The Independent on Sept.16, Ronald Omega, a tax expert and Isaac Nkote, a senior economics lecturer at Makerere University Business School (MUBS) agreed with the final ruling saying such income, going by the generic interpretation of the income tax law must be taxed unless it is specifically exempted under the law.

But Omega said that if one has worked for at least 10 years, 25% of their terminal income/benefits is exempt and that in the case of URA and Kajura’s, this percentage was adjusted for in URA’s workings.

Nkote said the only way the Diary Corporation former employees would have skipped paying this income tax was to seek and be offered a special waiver from/by the president – who would issue an executive order – to the URA Commissioner General.

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