Tax compliance critical aspect for startup growth

Tax compliance critical aspect for startup growth

For two years, Sam Kajubi (not real name) has run a web design company that builds e-commerce platforms. But in the period of operation, not once has the business paid its taxes. The business has never been registered with Uganda Registration Services Bureau (URSB) and neither does its founder know where the process of paying one’s taxes starts or ends.  

“I do not have a clue about how much it costs. But also, I feel that my business has to first get enough clientele before I can add revenue costs to my expenses,” he says.

Kajubi’s reasons are shared by another startup founder of a retail business in one of the busiest corners of Kampala. “I really see no benefits in becoming tax compliant. There will be more costs for my business. I will avoid getting caught by Uganda Revenue Authority for as long as I can manage. Taxes should be paid by big businesses, not small ones like ours,” he says, preferring to speak anonymously. While these small informal businesses have been hellbent on not paying their dues to tax collection body Uganda Revenue Authority (URA), there are some that have chosen to give to Caesar what belongs to Caesar.

Ernest Okot, an innovator in the transport sector, registered his business, Safari Share from the onset.   

“As an online innovation, in order to get access to platforms like Mobile Money, we needed to be registered as a business so that naturally compelled us in the direction,” he says. 

With cashflow still unstable, the company has not spent a lot of money in taxes. Efforts have been made to keep operational costs as low as possible. While tax evasion seems like a wise way for startups to stay afloat, there are opportunities they stand to miss. 

“For any business that intends to grow beyond a certain ceiling, partnerships and investors prefer to deal with legal businesses that comply with tax legislation,” Okot says. 

On the other hand, as businesses fulfil their end of the requirement, he suggests that the government provides special tax incentives to businesses such as those offering climate-sensitive solutions so as to encourage eco-friendly innovation. 

Taxes are an important source of revenue for government. It is part of the income it uses to deliver services to Ugandans. Small and Medium enterprises which constitute 90 per cent of the private sector are very central to tax collections. However, just like in other developing countries, many remain non-compliant even in the midst of tax reforms meant to encourage them to pay. 

The Assistant Commissioner Public and Corporate Affairs in URA, Ian Rumanyika says fear to comply with taxes is rooted in the belief that it is costly to formalize a business. Startups also argue that formalising attracts URA to the business and makes operations difficult.  

Contrary to what startups think, there are many benefits to running a business formally. Startups must register their businesses with URSB and go ahead to register for taxes with URA by obtaining a Tax Identification Number (TIN) before finally securing a trading license.

Businesses that have gone through this process gain credibility, are headed for growth and continuity while being a magnet for investors. He also adds that besides these advantages, cross border business expands and with this comes expansion and growth.

While many entrepreneurs complain that there is unfair taxation for startups and few to no incentives, Rumanyika notes that there are tax incentives and exemptions embedded in the country’s tax laws.  The non-discriminatory incentives accessible to both domestic and foreign investment are intended to spur investment in the country; attracting both foreign direct investments and local investments.

He proceeds to provide a few tax incentives and exemptions that young startups should be aware of from international trade incentives including exemption on import duty on certain items, reduced import duty rates, import duty remission and high import duty rates on items that can be locally produced. This is aimed at boosting local production, promoting industrialization, import substitution and protecting the local market. 

Another tax incentive to guide startups is a 10-year exemption of income derived by an operator in an Industrial Park or Free Zone who invests in processing agricultural products; manufacturing or assembling medical appliances, logistics, warehousing and information technology among other many things. 

To further solve the challenges of navigating taxation and protecting startups from unfair taxation, URA has taken to the digitisation of its taxation system on a platform called Electronic Fiscal Receipting and Invoicing Solution (EFRIS). The new smart business solution is used to record business transactions and share the information with URA in real-time, to generate e-receipts and e-invoices.

Under the EFRIS, startups can receive refund claims using e-receipts or e-invoices that are fast-tracked given that the information shall be available in the system. Rumanyika says EFRIS will also enable URA to avail taxpayers with pre-filled tax returns in future to minimize delays and costs involved in filing tax returns. This is because URA provides a report of the taxpayer’s transactional data on sales and purchases through the tax period which the taxpayer either confirms or modifies to include additional information.

These pre-filled tax returns help taxpayers to avoid penalties for late or non-filing and would enable them to have fair assessments of their tax positions and reduce unfair competition in business.

The Legal Tech Lab Lead at The Innovation Village, Hellen Mukasa also weighs in on the subject of taxation for startups. Among her many responsibilities at the Lab is to support startups with business registration and tax compliance. 

Mukasa says when startups embrace legal knowledge it becomes a springboard to gain a competitive edge. She, like other tax experts, believes entrepreneurs shy away from registering businesses because of the expected costs once on the taxation radar. While they set out to save money, they end up losing out on great opportunities for markets that prefer working with formal businesses. 

To demystify the process of formalising businesses, the Legal Tech Lab partners with institutions like URSB and Uganda Revenue Authority (URA) to provide information about intellectual property protection and tax compliance respectively. 

Startups within The Innovation Village are catered for in all regions by various legal partners. Daraja Law serves the startups in the central region and Jinja, Kaganzi and Advocates serve the western region, while Odong & Co Advocates serve the northern region.

At the end of the day, Mukasa says the move towards tax compliance begins with a mindset change, and she hopes that The Legal Tech Lab will help to change legal services from the perspective of a curative service to a preventive service through compliance of startups with the law.