Platform for Labour Action (PLA) a national civil society organization founded in 2000 to advocate for the promotion and protection of the rights of vulnerable and marginalized workers in Uganda has been monitoring, participating and informing the on-going reforms in the pension sector of Uganda for the last 17 years including the on-going amendment of the National Social Security (Amendment) Bill, 2019. With the participation of other civil society organizations under the Social Justice cluster of LASPNET, PLA examined the pros and cons of the proposed NSSF Bill.
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. The basic principles on social security anchored in the International Labour Organization (ILO) Convention 102 include the need to guarantee 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.
In Uganda, the principles on social security are embedded in a number of legislations including the 1995 Constitution of the Republic of Uganda under Objective VII of the National Objectives and Directive Principles of State Policy provide that the state shall make reasonable provisions for the welfare and maintenance of the aged, National Social Security Fund Act, 222 -, the Pensions Act Cap 286 and-the National Social Protection Policy 2015, and a myriad of occupational schemes.
Amendment of the current NSSF Act started in the 1990s and it was in 2017 that the Ministry of Labour bore an idea that culminated into a cabinet memorandum to propose principles to amending the Act. The amendment is therefore timely to ensure that it is aligned to the current labour situation in Uganda where the informal sector is absolving majority of the labour force. This paper therefore seeks to analyze the pros and cons of the proposed NSSF Amendment Bill 2019 and makes recommendations aimed at strengthening the proposals.
PROS OF THE PROPOSED BILL
The proposed Bill expands the coverage of social security. Currently, under section 7 of the NSSF Act only employers with five employees and more are legible to register and make monthly contributions to the Fund. The same section gives the minister discretion to determine the category of employees and employers that are eligible to contribute to and for their retirement. The proposed amendment to this section requiring every employer irrespective of the number of employees to register with the fund as contributing employer and make contribution for his/her employees. According to the PLA 2018 survey on Cost Benefits from Compliance with Labour and Employment Standards at the Work-place, majority 48.5% of the employers in the survey were employing less than five staff and because of the current provisions workers in these enterprises were not remitting NSSF. Therefore, the proposed amendment expands the scope of coverage to the excluded workers by the current law.
Likewise, the Bill allows a self-employed person to register and make voluntary contributions to the fund. With this amendment, such employers and workers will be covered. This will ensure that almost every worker is provided with social protections as well as achieve Uganda’s vision 2040 that underscores the importance.
Unlike the current Act that limits the definition of an employer to government, manager or subcontractor, 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. However, to further strengthen the scope, there is need to include an individual or natural person in the definition of an employer to cover people employing others in their individual capacity.
The Bill introduces mid-term access to benefits. While this is only intended for members making voluntary contributions to the Fund, the concept of mid-term access can benefit all the workers if it is applied indiscriminately with reasonable restrictions.Early 2019, cabinet approved policy amendment to the NSSF Act and among the approved proposals was for workers to access NSSF savings at 45 years of age because at that age savers have the capacity and energy to commit savings to lucrative venture which they may then monitor and grow successfully before the evening years set in. Whereas it would not be practical at 45 years for one wipe out all his savings as this would threaten the fund’s growth strategy given the fact that Ugandans aged 45-55 account for 4.7% of the population, mid-term access should be opened to all members to the Fund above 45 years of age to access only their 5% contribution and retain the balance (10%) which should be accessible at 55 years.
Clarity on the composition of the Board; 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. The proposal in the Bill expressly states the composition of the board of directors to include four workers representatives, two employers’ representatives as well as Permanent secretaries from the Ministry of Finance and the Ministry of Gender Labour and Social Development. 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.
CONS OF THE NSSF AMENDMENT BILL
The Bill increases tax burden on contributing members.
Generally, pension schemes can be taxed at three levels (i) when you contribute to the scheme as an employee, (ii) when the scheme invests the contribution to grow the fund and (iii) when you withdraw contribution as well as the accumulated saving income it has earned over the period.
It should be noted that in Uganda established retirement schemes exist in Public service, military and armed forces, National Social Security Fund and companies’ in house arrangements. Of these, Public Service and Military and armed forces schemes are noncontributory and no tax is levied to the members at all. It is only NSSF and companies’ in house arrangements that are taxed.
Currently, the NSSF workers savings are taxed at level (i) and (ii). At Level (i), the 5% employee’s contribution to NSSF is deducted after PAYE meaning that at deposit a tax has already been levied. At Level (ii), when the contributions made to the NSSF scheme is invested, a business tax of 30% is levied on the profits from the investment before the members get a share of the profits from the investment. The provisions of section 38 of the current NSSF Act exempt income tax on the members’ contribution at the point of withdrawal from the fund. It therefore means that workers’ benefits are not subjected to a tax at level (iii) having paid a tax at level (i) and (ii).
The proposed NSSF Amendment Bill, 2019 proposes an Exempt, Exempt Tax; a tax exemption at contribution by the member, at investment by the fund and proposes a tax on the accumulated members’ contribution as well as the interest earned on the savings at withdraw. Section 38 (4) provides that member benefits shall be taxed at the point of payment to the member except in cases of death or invalidity. Levying a tax on a lump sum saving of a member put all workers in Uganda under the tax threshold irrespective of monthly wages and will attract 30% taxation. This means that even those workers whose income/salaries at the time of contribution would not ordinarily fall within the tax threshold of 30% or are exempted would be under this proposal taxed as a result of their savings having accumulated and surpassed the threshold.
In addition taxing the retirement benefits at the point of payment shall be in contravention of the current provisions of Section 21 (1) (0) of the Income Tax Act which is states that ‘The following amount are exempt from tax – a lump sum payment made by a resident retirement fund to a member of the fund or a dependant of a member of the fund’. This would then, require the Minister of Finance, Planning and Economic Development to repeal this particular section from the current Income Tax Act.
The Bill also proposes tax exemptions on the investment income of the fund. Currently under section 8(4) & (8) of the Income Tax Act, the chargeable income of the Fund is taxed at 30%. This means that when Fund invests the members’ contribution into viable business ventures or operates commercial buildings from which rent is derived or profits are made, these investments are taxed at the rate of 30% on the profits just like other business are taxed. As it is a well-known principle that dividends are shared among members after paying tax, the Fund then shares the profits/interest with the members. This proposal to exempt the fund investment is to the effect that the profits from the fund investment using members’ contribution shall not attract a business tax however a tax will be levied on the member’s share of the profits or interest earned at the point of withdrawal. This provision will increase a tax burden on the member’s savings and interest earned.
Only taxing the lump savings of a member of a contributing retirement scheme further undermines the principle of diversity for a good tax system for any growing economy like Uganda, adversely affect the incentive to work, save and also encourage evasion.
Whereas the proposal under section 38(6) of the Bill is to the effect that a member over the age of 60 years shall not pay a tax on the benefit, the provision strategically introduces compulsory retirement and indirectly coerces workers contributing to fund to retire at 60 in fear of facing the heavy tax on benefits if withdrawn at 55 years.
Section 38 (2) of the amendment is to the effect that all employer contributions to the fund are tax exempt. However, section 19 (2) (g) of the Income Tax Act is to the effect that any contribution or similar payment by the employer made to a retirement fund for the benefit of the employee or any of his or her dependents does not include employment income of an employee. This means that the Income Tax Act already exempts the employers contribution hence the proposed exemption in the Bill is redundant. This is also because the employers’ contribution is already exempted at deposit, taxed at investment by the fund and exempted at withdrawal from the fund.
The Bill further discourages saving culture. Whereas the object of the Bill is to provide and encourage voluntary contribution to the fund, and a voluntary contributing member can access their savings mid-term, the proposed tax levy at the point of withdrawal of savings in itself is a deterrent factor especially to the target group like the self-employed and those that would wish to save over and above the standard contribution.
The Bill risks members’ contributions
The Bill proposes to empower the board to use in house expertise and fund managers in the investment of scheme funds including lending to Government of Uganda. According to the 2018 Auditor General Report, Uganda's public debt has increased by 22 per cent, rising from Shs 33.99 trillion as at June 30, 2017, to Shs 41.51 trillion as at June 30, 2018.
The report further indicated that although Uganda's debt to GDP ratio of 41 per cent is still below the International Monetary Fund (IMF) risky threshold of 50 per cent and compares well with other East African countries, it is unfavorable when debt payment is compared to national revenue collected which is the highest in the region at 54 percent. This therefore means that if the government is to service the loans as projected in the next financial year 2019/2020, it would require more than 65 per cent of the total revenue collections which is over and above the sustainability levels of 40 per cent.
Lending to the government of Uganda may affect the cash flow and growth strategy of the Fund given government record of delayed repayment of debts.
- The fund should meet its own tax obligation on the investment it undertakes using members’ contributions. The current position of the law should be maintained so as to reduce the tax burden on members’ contributions and interest earned and promotes equity and fairness in taxation.
- We propose an Exempt Tax Exempt (ETE). With this tax structure the members’ contribution at the point of deposit shall be exempt, taxed at the point of investment and exempted at the point of withdrawal from the fund. This will give the fund more cash inflow to invest and the government as whole will benefit from the business tax levied on the investments by the fund. This allows both the contributing member and the Fund to partake of the tax burden.
- Include natural person (individual) in the definition of employer to ensure that workers employed by an individual are covered.
- The Bill should provide a definition for “self-employed person”
- The concept of mid-term access should be applied indiscriminately to benefit all the contribution members with reasonable restrictions. Mid-term access should be opened to all members of the Fund above 45 years of age to access only their 5% contribution. This in long term will contribute to the voluntary contributions from the investments of the members.
 World Bank Development Indicator 2016
 Section 18 Income Tax Act, cap 340
 Part 111 of the Third Schedule of the Income Tax Act
 Section 13 (a) of the Amendment Bill