EFRIS: when technology trumps the law

by Business Times
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We have seen the rise of technology across the different sectors. We saw it in the Companies Registry, with OBRS (Online Business Registration System). We saw it in the courts too as ECCMIS, (Electronic Court Case Management Information System). It is also in the Lands Office as National Lands Information System

It is like a conspiracy against us digital dinosaurs ‘born before computing’ (BBC), by those whose births were announced off the maternity bed, from smart devices in the sweaty palms of their mother’s hands.

While heralded by law, these technologies intended to streamline administration and improve compliance, soon become tyrannical. ‘The system’ soon becomes ‘the system’. As long predicted, the machines do take over and rule our lives.

I recall the lawyers anguish when in the Lands Office, the long-glorified mortgage deed of a dozen pages or so was cut short to six pages, not by legal decree but because the ‘system’ said so. Stories abound with each of these technologies imposing new requirements outside the law.

Who is EFRIS?

EFRIS (Electronic Fiscal Receipting and Invoicing Solution) is another technology implemented by the Uganda Revenue Authority (URA), with the same laudable aims of all the other technologies, to streamline administration, and improve compliance.

Uganda’s EFRIS rollout began with a targeted approach, gradually expanding to encompass more businesses. In June 2020, the URA mandated EFRIS usage for all VAT-registered taxpayers. In April 2022, the URA mandated specific categories of VAT-registered taxpayers to utilize the “system-to- system” method for issuing e-documents. This involves integrating their ERP systems with EFRIS for automatic data exchange. These categories include businesses with existing billing, invoicing, or ERP systems, businesses exceeding an annual gross turnover of Shs 2 billion, and businesses with a gross turnover below Shs 2 billion but exceeding 100 daily sales transactions.

The Tax Procedures Code Act (TPCA) empowers URA to mandate specific taxpayers to issue electronic invoices (e-invoices) or receipts (e-receipts) or utilize Electronic Fiscal Devices (EFDs) linked to the centralized EFRIS system. Non-compliance with this mandate attracts hefty fines or imprisonment.

EFRIS goes beyond simply replacing traditional paper invoices. It records business transactions in real-time, transmitting details to the URA for instant verification and generation of e-documents. This offers significant advantages for both tax authorities and businesses.

For tax authorities, EFRIS enhances compliance by providing real-time access to transaction information, allowing for effective management of compliance risks. Additionally, EFRIS automates data processing, facilitating faster tax return processing and refunds, while also reducing the administrative burden associated with paper documents.

Businesses can benefit from EFRIS in several ways. E-invoices can accelerate the processing of invoices, potentially leading to quicker payments. Long-term, EFRIS can save money by eliminating

paper printing, storage, and manual processing. Automation minimizes errors associated with manual data entry, and businesses can store e-documents electronically, saving physical space. Accurate and transparent records maintained through EFRIS may also lead to fewer audits.

The global landscape reflects a growing trend towards electronic invoicing. Pioneering countries like Italy adopted EFDs in the 1980s, followed by regional expansions across Europe and Latin America. In Africa, Kenya became an early adopter, implementing EFDs in 2005. As of December 2022, 19 African countries have mandated electronic invoicing for specific transactions, with others encouraging voluntary adoption.

Challenges of EFRIS

The downtown traders in Kampala and some other cities have closed their shops in protest against EFRIS and the debate is quite polarised. While URA portrays EFRIS as a well-intentioned system solely focused on tax collection and casts the traders’ opposition as simply tax avoidance, requiring a tough handed approach.

But paying close attention to the traders’ cries reveals this is the same technological tyranny again. The system is simply doing its thing much to the delight of the URA, who have added some transgressions of their own.

Here are some choice picks:

Penalties beyond the law:

The TPCA prescribes a penalty equivalent to the tax due or Shs 6 million for not issuing e- invoices/receipts or tampering with EFDs. Court cases like Embassy Supermarket v URA and Jazz Supermarkets Ltd v URA have established that these penalties apply per tax period (i.e monthly for VAT) and not per invoice or per day.

However, URA routinely imposes daily penalties for default.

Irrationality of the EFRIS penalty amounts

The penalty for failing to issue invoices or receipts under EFRIS is Shs 6,000,000 or the amount of the tax, whichever is higher.

There is a real risk of incurring a penalty multiple times the value of the goods sold. In Jazz Supermarkets, the value of the goods sold under non-EFRIS invoices was Shs 500,200 as against the assessed penalty of Shs 84,000,000. Even after the Tax Appeals Tribunal (TAT) intervention, the penalty was still Shs 6,000,000 several times more than the value of the goods sold.

Unfortunately, TAT did not address the argument on irrationality of the penalty. While the penalty is a statutory prescription, TAT has previously shown wonderful creativity in invoking constitutional rights and statutory interpretation to overcome statutory unfairness against as taxpayer. (See Red Chilli v URA, East African Investments v URA, Embassy Supermarket v URA).

Cash basis accounting restrictions

The Value Added Tax Act (VAT Act) allows qualified taxpayers to utilize cash basis accounting. This means the taxpayer only pays VAT when he receives actual payment for goods or services sold. This is different from accrual basis accounting where VAT is payable when the invoice is issued or goods supplied. Cash basis accounting is a useful option for businesses, with a taxable supply below Shs 500 million who often face cash flow challenges.

However, ‘the system’ currently restricts cash basis accounting only to suppliers of the government.

Unnecessary barriers to approval of credit notes

The VAT Act permits adjustments through credit and debit notes for cancelled or altered transactions, for instance a customer changes his mind about the supply of goods or services, the original fee or cost is discounted, or say an invoice has to be redirected to another entity.

‘The system’ however, now requires URA approval for issuing credit notes. Unfortunately, the URA mechanisms for the credit note approval is manual and often the taxpayer is caught between demands for immediate payment of tax and a penalty for a delayed tax return. This can severely constrain the cashflows of a small and medium size business.

Disregarding legal timeframes for penalty payments

The TPCA stipulates a 28-day window for penalty payments after issuance of the penalty.

However ‘the system’ again provides only three days for EFRIS penalty payments. This hinders taxpayers’ right to evaluate and potentially object to the charges.

Unlawful customer targeting

URA officers have been reported to stop customers exiting a business premise with their purchases and demand EFRIS receipts, threatening penalties if the customer does not have an EFRIS receipts.

For this one, ‘the system’ is innocent. it is URA that is being tyrannical. There is no law in Uganda that obligates a customer to demand for or retain a receipt for his transactions. Tanzania’s Electronic Fiscal Devices (Income Tax) Regulations 2012, explicitly authorize such customer targeting. URA’s actions disrupt business operations and violate customer privacy rights.

Towards a more effective EFRIS

Let’s start with the premise that Ugandans will appreciate or learn to appreciate that the while basis of their social contract with government starts with payment of taxes. Let’s also assume that Ugandans demand for accountability will grow and that leaders like the Honourable Speaker of Parliament will also learn that she is accountable for the use of taxpayers’ monies. To paraphrase the great Margaret Thatcher ‘there is no such thing as public (government) funds, there is only taxpayers’ money’.

To ensure a more effective and lawful EFRIS implementation, the following recommendations are proposed:

Compliance with law on penalties

URA must adhere to established legal interpretations regarding penalties. Penalties should be applied as per court rulings and TPCA provisions.

Enabling cash basis accounting for all qualified taxpayers

The system must conform to the law! EFRIS should be modified to allow cash basis accounting for all qualified taxpayers, not just government suppliers.

Automating credit note adjustments

The EFRIS system should automatically recognize and process adjustments made through credit notes, eliminating the need for unnecessary URA approval.

Respecting timeframes for penalty payments

URA should adhere to the 28-day window mandated by TPCA for penalty payments, allowing taxpayers sufficient time to consider and respond to the charges.

Promoting EFRIS through incentives

Instead of heavy-handed enforcement tactics, arising from a presumption that all taxpayers are at dodgers, URA should focus on promoting EFRIS through incentives.

The EFRIS rebate provision in the VAT Act can be made more accessible by lowering the spending threshold from Shs 5 million to a more achievable amount like Shs 200,000 per month. This rebate can be automatically credited to customers who provide their mobile numbers during transactions, eliminating the need for formal refund applications.

Realistic penalties linked to tax lost

The current penalty structure, with a Shs 6 million penalty for a minor infraction like a missing EFRIS invoice, is demonstrably unfair. A more balanced approach would be to link the penalties to the actual tax lost due to the non-compliant transaction.

Phillip Karugaba

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