Kampala: Bank of Uganda (BoU) has, over the last few days, offered government securities in the nature of treasury bills (T-bills) and treasury bonds (T-bonds) to the public for purchase.
The main purpose of this is to raise loans and obtain money to finance the 2023/2024 budget. Issuance of government securities is derived from the Public Finance Management Act where the minister of Finance is granted authority to raise money to finance a deficit budget, manage the monetary policy of the country, or obtain foreign currency, among other reasons.
Most economists believe that issuance of government securities is one of the most efficient ways of raising money for a country. Other methods include quantitative easing (printing money), collection of taxes, and sale of government assets.
In fact, BoU recently released a T-bills and T-bonds auction calendar for the financial year 2023/24 indicating the dates on which the bills and bonds will be available for auction, the dates of expected maturity and the interest rates attached to those securities.
This was followed by a notice issued on July 4, 2023, inviting both resident and non-resident applicants to invest in these securities.
In as much as economists like Andrew Mwenda have argued that public debt financing is not only the biggest drain on the budget but also cripples the economy since a huge percentage of the national budget is always set aside for repayment (with interest) of this debt obtained through issuing government securities, this kind of investment is considered to be one of the safest modes of investment for private investors as there is always an assurance that government will eventually pay its debts no matter how long it takes.
Since this investment is key to both the government and private sector investors, it is pertinent for one to know their tax implications before committing to invest in them.
In the first place, treasury bills and bonds, once issued and successfully bided for, create a contractual relationship between the investor and Central bank. This relationship also creates a debt obligation as the Central bank is expected to repay the investor with interest which accrues for every period that BoU keeps the money.
The interest rate is subject to the prevailing fiscal policy considerations at the time. A person who invests is expected to obtain a return on investment in the form of interest income. It is this income that is subject to tax by Uganda Revenue Authority. The general rule is that interest income forms part of a person’s business income and is taxable at a corporate tax rate of 30 per cent.
However, for government securities, interest earned is subject to tax at a rate of 20 per cent as a final tax for the securities that have less than 10 years of maturity and 10 per cent tax rate for the securities whose maturity is more than ten years.
If a taxpayer buys treasury bills of Shs 200m, and is paid interest at a rate of 14 per cent, 10 per cent of that interest will be subjected to tax as this is what constitutes the taxpayer’s income. In this case, the obligation to withhold is on BoU. This withholding tax is a final tax and no further liability is imposed upon the taxpayer in respect to this tax.
The income obtained cannot be aggregated with any other income of the taxpayer while ascertaining their chargeable income. Whereas the Income Tax Act expressly provides for taxation of interest payments on government securities, the same Act exempts interest made from the purchase of infrastructure bonds.
An infrastructure bond is an example of government securities and basically means all listed bonds used to raise funds for public infrastructure and other social securities. These bonds must have a maturity period of at least 10 years for the tax exemption to apply.
A prudent investor would therefore be more interested in investing in infrastructure bonds as interest accruing from them is payable by Central bank without any form of taxation. Investment in these securities is advantageous but also comes with certain disadvantages.
An investor is, for example, not allowed any deductions for expenditures or losses incurred in deriving income in form of interest payments made upon maturity. This means that where a taxpayer incurs any legal fees, bank charges or similar expenses during the investment stage, the taxpayer will not be allowed to deduct these expenses.
Additionally, the taxpayer is not allowed any refund of tax that has been paid with respect to the income derived from investing in government securities. As the concern about investing in government securities is growing among Ugandans due to an increased awareness of the benefits of these investment opportunities, there is a need for the Central bank to streamline the payment process and educate people on how these investments operate.
The Central bank should also work closely with Uganda’s revenue body to ensure remittance of this withholding tax is effectively done upon payment of interest to the investors.
The writer is an advocate of the High Court and a tax expert
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