Is EFRIS a necessary evil?

Over the past few weeks, Kampala city traders have become more irate over a variety of issues that they believe to be unjust. One of the issues that the traders have raised is their concern for URA’s demand for them to use the Electronic Fiscal Reporting and Invoicing System, dubbed EFRIS. The traders argue that small businesses should be excluded from EFRIS and that it should only apply to large suppliers and manufacturers.

Several reasons including lack of clarity on how the system works as well as the compliance enforcement procedures being instituted by the Uganda Revenue Authority have triggered the traders’ unrest. In order to reach an amicable position, it is important to understand why EFRIS was introduced by Government and whether it is being implemented as  intended. objectives.

EFRIS is a real time invoicing system that was implemented by the URA in 2020. This system enables the URA to instantaneously receive taxpayers’ sales details at the point of conducting the transaction or shortly thereafter. The system therefore allows the tax man to track all the invoices and receipts by taxpayers through their unique Tax Identification Numbers (TINs) therefore curbing revenue leakage and widening tax base.

URA designed several EFRIS platforms to facilitate the issuance of electronic invoices such as the use of the web portal, linking of taxpayers accounting systems to URA’s system, as well as use of Electronic Fiscal Devices. EFRIS is also utilised as a record-keeping tool by taxpayers engaged in the supply of goods. It accomplishes this by providing a stock management functionality, which logs incoming stock purchased locally or imported, outgoing stock sold to customers in addition to invoice issuance and receipt records.

Who is required to use EFRIS?

When EFRIS was first introduced, URA communicated that the use of EFRIS was only mandatory for VAT-registered taxpayers in 2020 through a Gazette Notice No. 595 published on 23 June 2020.. Many businesses such as manufacturers, professional service providers and supermarkets that were already VAT registered were subsequently enrolled onto the EFRIS system and commenced mandatory issuance of electronic invoices on 1 January 2021.

The traders’ plea – Is it legitimate?

Since the use of the EFRIS platform is mandatory for VAT registered taxpayers, a business may only worry about EFRIS if it is already VAT registered or if it is required to register for VAT due to meeting the  registration threshold . The annual VAT registration threshold is UGX 150 million. This means that businesses making sales of UGX 12.5 million per month (approximately UGX 410k per day) have the obligation to register for VAT and start issuing electronic invoices on all sales to their customers using the EFRIS platform.

Traders, landlords and small businesses who meet this threshold are required to register for VAT and also start issuing electronic invoices using the EFRIS system.

As an example, assume a wholesale trader buys a bag of sugar from Kakira at UGX 95,000. The UGX 95,000 is inclusive of VAT of UGX 14,491. This means that the trader has paid UGX 80,508 for the sugar and VAT thereon of UGX 14,491. Based on the EFRIS invoice from Kakira, the trader will be able to claim a credit of UGX 14,491 in their VAT return. This will reduce the VAT payable by the trader to URA in that month. At the point of selling the bag of sugar, the trader is required to add any additional costs incurred and his margin to the UGX 80,508 in order to determine the new base for computing VAT. At this stage, let’s assume that the trader incurred loading costs of UGX 2,000 and adds a margin of UGX ,2000. The new base that he should use to compute VAT is UGX 84,508 at the point of selling sugar to his customers (retailers) . This means that he will sell the bag of sugar to the retailer at UGX 99,720 ( i.e., at UGX 84,501 and VAT thereon of UGX 15,212). If the retailer is not VAT registered, then he will bear the VAT cost since he is not able to claim a credit for it. However, if the retailer is VAT registered, his base for computing VAT will now be UGX 84,501, and he will claim a credit for the VAT of UGX 15,212 paid to the wholesaler.

The URA has the mandate to forcefully register businesses that meet the VAT registration criteria if they do not register voluntarily. Forced VAT registration is followed by mandatory EFRIS registration. The taxman may then penalize the business for late VAT registration and failure to issue electronic invoices.

Navigating the opportunities presented by EFRIS

As with any new system, the need to sensitise the traders on the use of the EFRIS platform cannot be overlooked. The use of the system comes with the requirement for businesses to train personnel on the use of EFRIS as well as investment in data and system installation, depending on the mode of EFRIS operation that may be adopted by the taxpayer. In addition, since many traders source raw materials / stock from non-VAT registered persons, they will not be able to get the benefit of claiming input VAT.

In addition, there continues to be a conflict on who is required to register for EFRIS since taxpayers are denied a deduction for expenses in their income tax returns where purchases of goods/services are not supported with electronic invoices (e-receipts). This means that even though it is not mandatory for  non-VAT registered persons to issue electronic invoices, they need to provide e-receipts to their customers so that the customers can enjoy a deduction in their respective income tax returns. This calls for alignment by the Government.

However, the system also presents some opportunities such as improvement in record keeping and stock management as well as ease in VAT return filing based on the pre-filled tax returns. This also eliminates the risk of physical loss of tax invoices as copies are digitally stored in the system.

As traders start to become aware about EFRIS and its functionality, URA should consider more lenient onboarding procedures such as waiving penalties on businesses that had already reached the VAT registration threshold but not registered for VAT. The taxman should also consider a more rigorous sensitisation program on how the multi stage VAT system works and how to utilise tax credits along the supply chain in order to encourage more traders to comply and get on board.

This article was authored by By Juliet Najjinda