Is Uganda Going To Tax Losses?

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Charles de Secondat, Baron de Montesquieu, in his book, the Spirit of the Laws (Batoche Books 2001, Book XIII), states that, “… public revenues should not be measured by the people’s abilities to give, but by what they ought to give ….”

According to him, “nothing requires more wisdom and prudence than the regulation of that portion of which the subject is deprived, and that which he is suffered to retain.”

In principle, the policy and legislative frameworks for revenue collection should also ensure that “… their abilities to give” should be reasonably assessed so as to guarantee constancy.  


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It is against this background that Section 38 (5a) of Uganda’s Income Tax Act Cap 340 (ITA) as amended in 2023 is to be examined.

Section 38(5a) of the ITA was enacted in 2023, but discussions to enact such a provision started in 2019.


Clause 6 of the Income Tax Amendment Bill, 2019 sought to amend Section 38 of the Income Tax Act by introducing Section 38(5a). It was drafted as follows:

“A taxpayer who has carried forward assessed losses for a consecutive period seven years of income shall pay a tax at a rate specified in Part XIII of the Third Schedule.”

Part XIII provided as follows:

Tax Rate For Taxpayers With Carried Forward Losses For Seven Consecutive Years

“0.5% of gross turnover for a year of income for which the taxpayer continues to carry forward the assessed losses after the seventh year.”

A look at the Parliamentary Hansard indicates that Hon. Henry Musasizi the then Chairperson of the Committee on Finance, Planning and Economic Development noted that the objective of the above provision was to limit revenue loss that occurs when a business that made profits took advantage of assessed losses to avoid paying revenue for years.

In addition, he noted that this amendment was intended to enhance progressivity and productivity of the income tax regime and limit abuse of the indefinite carry-forward of losses.

The provision was strongly opposed by the Members of Parliament and it was deleted. It was opposed on grounds that:

  1. Section 38(5a) was going to be used as a charging section in contradiction of Sections 4, 15 and 17 of the ITA;
  2. Penalising businesses for making genuine losses would be unfair and would discourage investment and employment;
  3. Profit margins are so small, imposing a tax on gross turn over before allowing expenses would grossly affect businesses.
  4. URA’s capacity to conduct audits and investigations had been enhanced.

The above proposal was wholly rejected by Parliament and Clause 6 was deleted from the Income Tax (Amendment) Bill, 2019.

In 2023, a similar provision was proposed in Clause 12 of the Income Tax (Amendment) Bill, 2023 which sought to introduce Section 38(5a). It provided as follows:

“Notwithstanding the provisions of this section, a taxpayer who after a period of five years of income carries forward assessed losses shall only be allowed a deduction of fifty percent of the loss carried forward at the beginning of the following year of income in determining the taxpayer’s chargeable income in the subsequent years of income.”

On reading the Bill, Hon. Nandala Mafabi objected to the clause on the same grounds as he did in 2019.

He also noted that the Capital allowances which had been a major cause for continued taxable losses (accelerated allowances) had been repealed (initial allowance under Section 27A).

He emphasized that there is a difference between a trading loss and a tax loss and that Section 38 is about assessed losses. According to Section 38(1) of the Income Tax Act, an assessed loss arises when a taxpayer’s gross income is exceeded by the total deductions allowed to the taxpayer.

It should be noted that per the Parliamentary Hansard of 2nd May 2023 and after a long debate, Clause 12 was deleted from the bill and it was sent to the President for assent.

He, however, sent the Bill back to Parliament for reconsideration.

After a long debate once again, it was agreed by the Members of Parliament that the period of 5 years be extended to 7 years as an assumed break-even point for new businesses.

It was also emphasised that this would apply to financial years starting on 1st July 2023.

Section 38 (5a) was redrafted to read as follows:

“Notwithstanding the provisions of this section, a taxpayer who, after a period of seven years of income, carries forward assessed losses, shall only be allowed a deduction of fifty percent of the loss carried forward in the following year of income and the subsequent years of income.”

The author opines that Section 38(5a) of the ITA Act seeks to tax assessed losses for taxpayers who after 7 years of income, still carry forward an assessed loss by only limiting their assessed loss in the 8th year of income to only 50%.

This means that 50% of the remaining assessed loss would be forfeited by the taxpayer.

How is the Provision to be Applied?

  1. It is applicable to taxpayers who continuously declare assessed losses even after 7 years of income.
  2. The period is 7 consecutive years of income.
  3. The allowable assessed loss is 50% of the carried forward assessed amount in the 8th year.

This move undoubtedly discourages investments in and into the country by denying taxpayers who are genuinely making assessed losses to claim them.

An important question raised by Hon. Nandala Mafabi’s argument is, does this not contradict Section 4 of the ITA that imposes income tax in Uganda?

It provides that:

“Subject to, and in accordance with this Act, a tax to be known as income tax shall be charged for each year of income and is imposed on every person who has chargeable income for the year of income.”

There are key words which are; “subject to, and in accordance with this Act……” in the provision. This would mean that this provision is subject and should be read together with other provisions of the Income tax and not in isolation.

These other provisions of the Act include Section 38 (5a). This may, however, be seen to contradict the purpose of Section 4, 15 and 17 of the ITA as will be illustrated later.

It can be argued that whereas Section 4 generally imposes a tax on chargeable income for the year of income, Section 38(5a) of the Act creates an exception by limiting the amount of assessed loss that is claimable by a taxpayer in the 8th year of income who, upon carrying forward assessed losses for a period of 7 years of income.

Other questions are:

  1. If Parliament repealed initial allowance (accelerated capital allowance) which was mainly the cause of persistent carry forward losses, then why introduce Section 38 (5a)?
  • Is the assertion of Ministry of Finance that this was meant to combat tax avoidance or evasion substantiated?
  • Does URA not have adequate powers to conduct audits, investigations and recharacterise transactions under the existing provisions of the law so as to combat tax avoidance or evasion? If yes, why call for the introduction of Section 38(5a) against the background of combating tax avoidance?
  • In any case, is it fatal to strengthen the existing law (closing gaps for tax abuse) by limiting carried forward losses claimable by taxpayers who are alleged to have evaded tax for 7 years?
  • If no, is it not a necessity to introduce Section 38(5a) to support URA’s administration of tax?
  • Most importantly, does this not negatively affect investment (especially capital-intensive ones such as Manufacturing and those in the Oil & Gas sector)?
  • Lastly, how can taxpayers navigate around Section 38(5a)? Should taxpayers be concerned about this, if initial allowance has been repealed and yet it was the main accelerated capital allowance that could have led to such a situation of assessed losses?

An interesting contrast is made with Kenya.

Kenya enacted a similar provision by introducing Section 12D of the ITA Cap 470 through the Finance Act 2020 which imposed a minimum tax at a rate of 1% of the gross turnover.

To implement the amendment, Kenya Revenue Authority (KRA) published “Guidelines on Minimum Tax,” whose central feature was the definition of gross turnover.

The Kenya Association of Manufacturers, Retail Trade Association of Kenya, and Kenya Flower Council being aggrieved, filed a constitutional petition in the High Court of Kenya seeking declarations that Section 12D was illegal and contrary to the provisions of the Constitution and that under the provisions of Section 3 read together with section 15 of the Income Tax Act, the taxable income is the net income after deduction of expenditure wholly and exclusively incurred in the production of that income.

The Court declared section 12D of the Income Tax Act null and void as it violated Article 201(b) of the Constitution; and that failure to comply with the Statutory Instruments Act, rendered the Guidelines on Minimum Tax void.

Accordingly, it granted an order of prohibition restraining the implementation, administration or enforcement of the contested amendment and KRA appealed to the Court of Appeal.

One of the main arguments by the respondents before the Court of Appeal of Kenya against the minimum tax were that it created uncertainty, which was exemplified in the Minimum Tax Guidelines published by the appellant; and that its imposition against gross turnover violated the principles of public finance as set out in Article 201(a)(i) of the Kenyan Constitution of 2010, and placed a heavier tax burden on the respondents.

It was further contended that the imposition of the impugned tax obligation ignored the economic capacity of the taxpayer, which is an elementary principle in taxation, namely that the percentage of the income of the taxpayer that may be affected by a tax obligation must not be in excess of the wealth available so as to subject the taxpayer to double taxation.

The KRA argued that;

  1. The process of enactment of the impugned legislation met the constitutional and procedural threshold;
  2. The purpose and effect of the impugned statute did not infringe on any constitutional rights as it aimed at levelling the operating playing field for business enterprises by ensuring that all businesses contribute to the generation of revenue through taxes;
  • The Constitution did not prohibit differentiation or classification, as long as it had a rational connection to a legitimate government purpose; that the guidelines served to ensure the effective implementation and enforcement of the Income Tax Act so as to meet the budgetary deficit, and
  • This did not contradict national values;
  • In any event, the guidelines were merely an interpretation of the law based on the holistic reading of the Income tax Act binding only on the 2nd respondent; that the mode of charging minimum tax was addressed in Section 3(1) and 3(2)(e); and
  • To that extent, there was no ambiguity created by the Act; and that there was no contradiction between Section 12D and other Sections of the ITA.

The High Court found in favour of the petitioners and KRA appealed to the Court of Appeal.

Among the so many grounds of appeal, KRA argued;

  1. That the learned trial judge erred in law and fact in failing to make a finding that the income to which minimum tax is levied under Section 12D was not subject to Section 15 and Section 16 of the Income Tax Act;
  2. That the learned trial judge erred in law and fact in finding that levying minimum tax on everyone assumed that they are tax evaders, which violates the right to dignity guaranteed by Article 28 of the Kenyan Constitution.

While upholding the High Court’s decision, the Court of Appeal of Kenya stated that:

“To our mind, the main contention here is with regard to the applicable Section under which tax should be charged. The Supreme Court of India in Associated Cement Co Ltd v Commercial Tax Officer AIR 1981 SC 1887 held that tax becomes payable by an assessee by virtue of the charging provision in a taxing statute.

From the dictionary definition as well as the various texts referred to in a bid to appreciate what amounts to taxable income under the Act, we hold the considered view that Sections 15 and 16 of the Income Tax Act sheds light as to what is considered as taxable income.

Certain deductions in form of expenses must be allowed and, therefore, for the appellants to now claim that minimum tax is to be levied on gross turnover without allowing for deductions as provided for under the Act would be contrary to the purpose and objects of the Act as clearly provided for under section 3 of the act, which is titled as the charging section of the Act.”

The Court of Appeal added that:

The Court in CIT v Madho Prasad Jatia (1976) 105 ITR 179 (SC) enunciated that, as a general rule when a taxing provision is ambiguous, it must be construed in favour of the assessee. Such an interpretation is also in consonance with ordinary notions of equity and fairness, and would further fortify the trial court in adopting such a course of interpretation.”

The Court of Appeal concluded that:

In view of the foregoing, we agree with the respondent that levying of minimum tax on gross turnover as opposed to gains or profit would lead to a situation where a loss making tax payer, would bear a heavier burden than other taxpayers contrary to Article 201 of the Constitution. Little wonder then that the learned Judge pointed out that the appellant was well equipped with the necessary mechanisms to carry out auditing in order to determine entities that are avoiding payment of tax.  We share the same sentiments with the respondent on this aspect that punishing entities who are already battling with a stifled economy because of a few miscreants is the epitome of unfairness.

Taking into consideration both the purpose and effect of the impugned legislation, we are inclined to adopt the sentiments expressed in the Canadian case of The Queen v Big M Drug Mart Ltd, 1986 LRC (Const) 332, that both the purpose and effect can invalidate legislation. Given the nature of the tax, and the circumstances under which it is to be levied, makes the purpose irrational, miscalculated, and does not reflect the spirit of Article 201(b)(i) of the Constitution.”

As to whether the imposition of minimum tax infringed the right to dignity under the Kenyan Constitution (Article 24 of the Ugandan Constitution), the Court of Appeal observed that:

If indeed there is a wide world of difference between tax evaders/avoiders, and those who are unable to pay taxes due to genuine losses in their businesses, what would be the rationale for lumping them all together? From the explanation given by the appellant, the first implies devious criminal conduct, while the other is a victim of an odd cluster of inhibitions, not out of wilful design.

We can only reiterate our earlier reference to Justice Chaskalson “Dignity as a Constitutional Value: A South African Perspective,” that respect for dignity means not being devalued as a human being or treated in a degrading or humiliating manner. Surely, there can be no lesser humiliation than the imputation of criminal conduct for one who is grappling with a difficult economic environment. Accordingly, we hold that there was no error in the learned judge’s finding that the imposition of a minimum tax will undoubtedly lump innocent business that are in a loss-making position with evaders, which violates the innocent taxpayers’ right to dignity.”

With the above observations by the Court of Appeal of Kenya and with similar reasons, I am in consentaneous agreement that both the purpose and effect invalidate Section 38(5a) of Uganda’s ITA as amended in 2023.

Further, given the nature of the tax, and the circumstances under which it is to be levied, it makes the purpose irrational, miscalculated, and does not reflect the spirit of Sections 4, 15 and 17 of the Ugandan Income Tax Act Cap 340 and Article 24 of the 1995 Constitution of the Republic of Uganda.

The negative impact on investment in capital intensive sectors such as manufacturing and Oil and gas cannot be overlooked as well. This therefore calls for the repeal of Section 38(5a) of the Income Tax Act Cap 340 as amended in 2023.

A more liberal approach of dealing with carry forward losses can be learnt from neighboring Tanzania.

For businesses other than agriculture, health, and education services, the deductibility of the losses carried forward is restricted after a period of four years of continuous losses such that only 70% of the taxable profits of the company in the fifth year can be sheltered by losses brought forward (with any excess losses carried forward to future years).

This means that the taxpayer does not lose their right to carry forward assessed loss provided it is genuine as opposed to Uganda’s current tax regime.

It is therefore proposed that Uganda benchmarks on Tanzania’s tax regime, a country with similar economic circumstances.

It is also suggested that the government enhances the capacity of Uganda Revenue Authority to combat tax evasion or avoidance using carry forward losses by carrying out targeted audits instead of adopting a legislation that clumps all taxpayers altogether which will undoubtedly have a negative impact on investment in the country especially foreign directive investment.


The information provided within this Article is for general informational purposes only. While the Author endeavoured to keep the information up to date and correct, there are no representations or warranties, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the information and interpretation of the law. It is not intended to be a definitive legal opinion for a particular scenario.


Enock Turatsinze is an Advocate of the High Court of Uganda and Tax lawyer at RKA & Company Certified Public Accountants and a clearing & forwarding Consultant at Ridelink Inc. He Holds a Post Graduate Diploma in Tax and Revenue Administration from the East African School of Taxation, a Post Graduate Diploma in Legal Practice from the Law Development Centre and a Bachelor of Laws degree from the Uganda Christian University. For comments or queries, contact the author at

Enock Turatsinze on Tax
Enock Turatsinze

Turatsinze Enock is an Advocate of the High Court of Uganda and a Tax lawyer at RKA & Company Certified Public Accountants. He holds a Post Graduate Diploma in Tax and Revenue Administration from the East African School of Taxation, A Post Graduate Diploma in Legal Practice from the Law Development Centre, and a Bachelor of Laws Degree from the Uganda Christian University.

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