Tax compliance in Uganda’s steel industry has been a topic of discussion for some time. Back in March 2017, during a parliamentary debate, the 10th Parliament passed a motion to investigate tax evasion in the steel sector. The motion was introduced by Gaster Mugoya, a former lawmaker from Bukholi North, who pointed out that there was a widespread practice of misclassifying and under-declaring imported steel products to avoid paying taxes.
In November 2020, a government minister made a request to waive UGX 92.4 billion in import duties on steel products imported between January 2005 and June 2020, as reported by Sunday Monitor.
The import duty on steel products, which includes hot rolled coils and wires made from alloy steel, is set at 10 percent and is part of the Common External Tariff (CET) imposed by all East African Community (EAC) member countries.
In a letter dated November 4, 2020, addressed to the Secretary General of the EAC Secretariat, Maj Gen (rtd) Kahinda Otafiire, who was the East African Affairs minister at the time, cited Section 133 (2) of the East African Community Customs Union Management Act. In this letter, he argued that the tax arrears should be remitted due to the “difficulty of collecting them.”
He stated, “This is to submit to you Uganda’s request for a remission of duty amounting to UGX 92,406,780,938 for the period starting January 2005 to June 2020, on account of undue difficulty in collecting the tax arrears and the impact it will have on the competitiveness of the steel manufacturing sector.”
However, Minister Otafiire clarified that he didn’t have the authority to make this decision and that the matter should be addressed by the current Minister of Trade.
In his 2020 letter, Minister Otafiire argued that steel manufacturers in Uganda had been importing hot rolled steel coils and wires of alloyed steel but were erroneously classifying them as non-alloy steel coils/wires to avoid paying the 10 percent import duty. This misclassification resulted in a demand for payment amounting to UGX 92,406,780,938.
Hot-rolled coils are intermediate products used in various applications, including steel shelving, storage tanks, doors, shipbuilding, receptacles for compressed gas, tubes and piping, and construction.
However, some experts point out that Minister Otafiire’s approach to seeking a tax waiver may not align with the provisions of the EAC Customs Union Act. According to Section 133 (2)(b) of the Act, the Commissioner in charge of customs is responsible for notifying the Council when it is impossible or too costly to recover the whole or any part of the duty or tax due. The Council, with the approval of the East African Legislative Assembly, can then decide to remit or write off the duty.
The Uganda Revenue Authority (URA) uncovered the misclassification of imported hot-rolled steel coils in 2020. Scientific tests were conducted to validate the material content of the imported products, resulting in their reclassification from non-alloy steel to alloy steel, subject to a 10 percent import duty.
Trade experts note that misclassification is a form of trade mis-invoicing, which can lead to revenue losses. They emphasize the importance of accurate classification and tax payment to ensure fairness in taxation.
The Uganda Steel Manufacturers Association, in response to the demand for payment, requested a stay on the application of the EAC Common External Tariff and a 10 percent duty rate. They argued that imposing the 10 percent tariff would make them less competitive compared to steel manufacturers in other EAC countries.
Tax expert Andrew Kyambadde Mukasa highlights the need for a fair and consistent tax system, emphasizing that the law should be followed, regardless of moralistic arguments.
Despite the request for tax remission, some companies paid approximately UGX 3 billion in import duty for hot-rolled steel coils in July 2020, while many others did not pay any taxes for their imports.
Mr. Mukasa insists that the tax arrears should be collected as the application for remission is pending, emphasizing that the law does not automatically suspend tax collection when a letter is written.
Local press attempted to reach out to Mr. Abel Kagumire, URA’s Commissioner of Customs, for comment, but he declined to provide a statement.
The issue of tax evasion in the steel sector has been a long-standing concern, with investigations initiated in 2017 yet to commence as of 2023.