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The Income Tax(Amendment) Act 2023 has repealed Section 27A of the Principal Act which provided for initial allowances as a fiscal policy geared at enabling investors in industrialisation and manufacturing to recover costs of acquiring plant and machinery much faster than if they had to recover those costs only through capital deductions allowed through traditional depreciation.
A depreciable asset is any plant or machinery, or any implement, utensil or similar article, which is wholly or partly used, or held ready for use, by a person in the production of income included in gross income and which is likely to lose value because of wear and tear, or obsolescence.
A capital deduction is allowed for expenditures on acquiring depreciable assets and this deduction is spread across the life of the asset through a depreciation.
Investment incentives
The government of Uganda grants fiscal incentives to qualifying investors to promote both domestic and foreign investment. These incentives focus on industrialisation with the objective of job creation, value addition to local raw materials, export promotion, and promotion of tourism, among others. These include incentives for investments located in industrial parks or free zones and the establishment of new factories. Investors who are able to take full advantage of all incentives for which they qualify under the different heads are able to minimise their chargeable income and consequently minimise tax liabilities in the short and long term.
Plant and Machinery and the repealed initial allowance capital deduction
When these assets are plant and machinery, an initial allowance has before this amendment been provided for eligible property which is wholly used in the production of income but excluding goods and passenger transport vehicles, household appliances, office and household furniture, fixtures and fittings.
These were excluded because ‘plant and machinery’ in tax law is a wide technical term and anything and everything may qualify for this allowance. A horse, a swimming pool, wall paintings have been found to fall within the old famous definition of ‘plant and machinery’ in tax law laid down in YARMOUTH v FRANCE(1887) which defined plant and machinery to include “whatever apparatus that is used by a businessman for carrying on his business, not his stock in trade but all goods and chattels, fixed or movable, live or dead which he keeps for the permanent employment in his business”.
And so as an incentive for businesses to invest upcountry, the government introduced deductions for accelerated depreciation through initial allowance through the now-repealed provision. This was meant to allow for recovery of costs of acquiring plant and machinery and construction of industrial buildings much faster before the payment of corporate income tax by allowing for a one-off deduction of initial allowance for certain capital investments outside a radius of fifty kilometres from the boundaries of Kampala.
And so a trader who placed a capital asset which is plant and machinery into service outside a radius of fifty kilometres from the boundaries of Kampala during a year of income was allowed to deduct fifty per cent of the cost base of that asset during that particular year and the remaining fifty per cent was what was to be added to a pool of assets of its class for purposes of deductions by traditional depreciation and this enabled the trader to recover costs of acquiring plant and machinery much faster than if they had to recover those costs only through deductions allowed through traditional depreciation.
I think this amendment has been brought to target the capital investments in the oil sector in Hoima and Bulisa. While I believe this is critical that the oil industry investors pay enough tax off their earnings, I still believe there could have been a way to isolate the industry through enacting provisions specifically targeting the sector as is the case throughout the rest of the Income Tax Act as opposed to having the rest of the economy become collateral damage. I hope parliament revisits this position in the next fiscal year, as this is perhaps the only surefire way to ensure industrialisation and job creation are taken and maintained beyond the main industrial hubs and large market of Kampala, especially for manufacturers targeting exports and the rural markets.