WILL THE NSSF BILL 2019 ALLOW DOUBLE TAXATION OF MEMBERS’ BENEFITS?

WILL THE NSSF BILL 2019 ALLOW DOUBLE TAXATION OF MEMBERS’ BENEFITS?

Platform for Labour Action (PLA) notes with great concern the emerging controversial statements about the recently published headline in the New Vision that read “Government to tax NSSF members’ benefits.”

Platform for Labour Action (PLA) notes with great concern the emerging controversial statements about the recently published headline in the New Vision that read “Government to tax NSSF members’ benefits.”

While the headline stimulated heated debate about the tax implications the NSSF Amendment Bill, 2019 will have on members’ savings, the Bill displays efforts by the Fund to convert the existing scheme to more inclusive social security coverage. Particularly, the Bill seeks to open membership to the Fund to all workers in the formal and informal sector as well as allow self-employed workers make voluntary contributions to the Fund. PLA has examined the Bill as whole to discern its implications on workers in the formal and informal sector as well as understand the tax implications on members’ benefits as follows; The principles on social security are embedded in a number of legislations including the 1995 Constitution of the Republic of Uganda, National Social Security Act, 222 which regulates formal sector workers with five or more employees, the Pensions Act Cap 286 regulating civil servants in the local government, police, prisons, judiciary, doctors and teacher and a myriad of occupational schemes. Objective VII of the National Objectives and Directive Principles of State Policy of the Constitutions require the state to make reasonable provisions for the welfare and maintenance of the aged. Objective XI of the Constitution states that the state shall give the highest priority to the enactment of legislation establishing measures that protect and enhance the right of the people to equal opportunities in development. In addition, the Universal Declaration of Human Rights (1948) provides for everyone’s right to social security in the event of unemployment, sickness, disability, widowhood, old-age or other lack of livelihood in circumstances beyond ones control. Further, the basic principles on social security anchored in the International Labour Organisation (ILO) Convention 102 include the need to guarantee of defined benefits, participation of employers and workers in administration of schemes, general responsibility of the state for due provision of the benefits and collective financing of the benefits by way of insurance contribution or taxation. However, while there is a wealth of regulations that require states to establish a social security scheme that caters for all workers, the current NSSF Act is limited to workers in companies that employ five or more employees as eligible to contribute for retirement. Like Kenya where National Social Security Fund is the largest social security scheme covering almost all of the formal labour force, the NSSF Amendment Bill seeks to enhance the spectrum of benefits available to workers and to improve management of the National Social Security Fund. According to the National Social Security Fund Act (2013) of Kenya, both employed and the self-employed workers and their dependents qualify as contributing members to the Fund. Similarly, the Bill defines contribution to include voluntary contribution and special contribution. Section 13A (5) and (6) of the Bill provide that a person who is self-employed may apply for membership to the fund and shall make voluntary contributions to the fund and any other person may apply for membership and make voluntary contribution to the fund. This means that workers in the informal sector can voluntary register to the Fund and make contribution. However, the procedure for voluntary contributions is yet to be determined. Secondly, section 7 (2) of the Bill states that every employer irrespective of the number of employees shall register with the fund as a contributing employer and shall make regular contributions for his or her employees in accordance with the Act and respective regulations. However, the Bill needs to be more specific on the categories of workers for which the employer is required to contribute to avoid discrimination against certain categories of workers such as the casual workers and other workers who by virtue of the precarious nature of their employment are unable to volunteer to save with the Fund. The Bill does not make any provision for vulnerable groups such as refugees, asylum seekers, internally displaced persons among others. Further, the Bill expands the definition of employer to include the Government, a company registered or incorporated under the companies Act, 2012, a partnership registered under the partnership Act, 2010, a trustee incorporated under the Trustees Incorporation Act, a business registered under any other law, governing body of an unincorporated association and a manager or subcontractor who provides employees for the principle contractor. This will ensure that almost every worker is provided with social protections as well as achieve Uganda’s vision 2040 that recognizes the need to provide assistance to people who are vulnerable either by age, social class, location, disability, gender, disaster or who do not earn any income. Under the current Act, the appointment of the Managing Director and Deputy Managing Director by the Minister without the role of the board undermines the ability of the board to supervise them. Section 39 of Bill stipulates that the Managing Director will be appointed by the Minister on recommendation of the Board and that the Managing Director of the Fund shall serve a period of five years and may be reappointed, subject to satisfactory performance. This implies that unlike the current Board, the Board envisioned in the Bill will play a supervisory role over the managing director and the deputy managing director. The Act in its current form does not make express provision for the representation of workers, employers and other stakeholders on the board of directors. Like the Kenyan Act, the Bill proposes a stakeholder board composed of workers representatives, employers representatives as well as government representatives from the Ministry of Finance and the Ministry of Gender Labour and Social Development. According to Section 3 (1) of the Bill, the Fund shall be governed by a stakeholder board of directors consisting of chairperson, managing director, permanent secretary of the ministry responsible for labour, the permanent secretary of the ministry responsible for finance, four representatives of employees and two representatives of employers. This means that interests of the workers and employers will be reflected in the decisions made by the Fund. This composition will also ensure that the board accommodates the views and aspirations of the key social partners in policy formulation and running of the organization. However, the provision does not indicate the gender considerations that will be taken into consideration in the board composition to ensure that issues that are unique to women are reflected in the decisions of the Fund. Regarding taxation of workers benefits, the Bill seeks to encourage saving by exempting workers’ contributions to NSSF from taxation but instead tax the members’ retirement benefits. Section 38 (1), (2) and (3) of the amendment is to the effect that all member contributions not exceeding 30% of income of the member shall be tax exempt as well as all employer contributions and the investment income of the fund. Section 38 (4) further provides that member benefits shall be taxed at the point of payment to the member yet exempting benefits arising out of contributions made to the fund prior the coming into force of the Act. In other words, contributions to NSSF will be tax exempt which isn't the case today. For example, if you earn one million shillings per month, URA will only tax their 30% on the balance after deducting NSSF which is better than the current practice. The new tax regime will not affect current balances but only apply to new savings. This is because the current contributions were already taxed at the point you earned salary. It's therefore not double taxation. In fact, by the time your benefit is taxed at the point of withdrawing your money, it has earned significant interest due to the compounding effect that tax paid is no longer off your principle contribution but rather from the returns earned over the years. The bill also gives us an option to save more than 5% on voluntary basis and also provides the informal sector a chance to voluntarily save. To empower the Fund to recover from a third party any sum owed to a defaulting contributing employer to cover any contribution, penalty or interest. Section 14 (3) of the amendment states that any amount of any contribution and any other sum together with interest or penalty on the contribution or any other sum due under this Act may be recovered from a third party who owes money to a defaulting contributing employer. While this provision gives room to employers to meet their obligations under the law, it is not stated as to what happens when there are no third parties to recover from. To ensure compliance with the provisions of the Act, the Bill imposes a punishment of 500 currency points or imprisonment not exceeding one year or both for any person who obstructs an inspector in the exercise of his powers under the Act or fails to furnish any information required by the inspector since the current ten thousand shillings is not punitive enough. In other words a fine of ten million shillings (10,000,000) will force employers to comply with the requirements of the Act unlike the current two hundred thousand shillings (200,000) that can easily be paid.

Written by Counsel Naimah Bukenya (Platform for Labour Action)

News and Updates