VAT Treatment of Supplies to Aid-Funded Hydroelectric Project Contractors: Tax Appeals Tribunal Affirms Deemed VAT Despite Paragraph 1(z) Exemption
- Kiiza John Paul
- 2 days ago
- 9 min read
Applicant China North Machine Company Limited
Respondent Uganda Revenue Authority (URA)
Coram Mr. Siraj Ali (Chairman), Ms. Christine Katwe (Member), Ms. Grace Safi (Member)
Note: Ms. Grace Safi delivered a dissenting judgment. The majority decision (2:1) was given by Mr. Siraj Ali and Ms. Christine Katwe.
Subject Matter VAT Assessment | Input Tax Credit | Deemed VAT | Aid-Funded Projects | Section 24(6) VAT Act
Facts
The Applicant, China North Machine Company Limited, a private limited liability company incorporated in Uganda engaged in the importation, wholesale and retail of agricultural machinery and other equipment.
Between 2017 and 2022, the Applicant imported goods into Uganda, paying VAT at the standard rate of 18% at the point of importation. It subsequently supplied a portion of these goods to Sino-Hydro Corporation Ltd and China International Water and Electric Corporation (China Water), both contractors engaged in the construction of the Karuma and Isimba hydro-electric power projects.
The Karuma and Isimba projects were aid-funded within the meaning of Section 24(8) of the VAT Act, having been financed by a foreign government or development agency through a loan, grant or donation.
The Applicant invoiced the contractors without charging VAT, relying on Ministry of Finance guidance and declaring the supplies as zero-rated in its VAT returns. In February 2022, the Applicant filed a cash refund return, triggering a VAT audit for the period January 2017 to February 2022.
Following the audit, the Respondent reclassified the supplies to the contractors as exempt supplies under Paragraph 1(z) of Schedule 3 of the VAT Act, apportioned the Applicant’s allowable input VAT, and on 10 October 2022 issued an Administrative Additional VAT Assessment of UGX 1,265,705,370 and an Income Tax Assessment of UGX 2,256,832,971. The Applicant’s objection was disallowed, giving rise to this application.
ISSUES FOR DETERMINATION
1. Whether the Applicant is liable to pay the VAT assessed.
2. What remedies are available to the parties.
The determinative legal question was whether the Applicant’s supplies to the contractors ought to have been treated as taxable supplies attracting deemed VAT under Section 24(6) of the VAT Act, or as VAT-exempt supplies under Section 19(1) read with Paragraph 1(z) of Schedule 3 of the VAT Act.
LEGAL REPRESENTATION
Applicant
Mr. Bright Natumanya
Ms. Damalie Tibugwisa
Respondent
Ms. Charlotte Katutu
Ms. Eseza Victoria Sendege
Mr. Simon Peter Orishaba
SUBMISSIONS OF THE PARTIES
Submissions of the Applicant
The Applicant submitted as follows that Section 24(6) of the VAT Act was introduced by the VAT (Amendment) Act 2016 to create a deemed payment mechanism for supplies to contractors of aid-funded projects. The Applicant satisfied all preconditions: the supplies were made to contractors of aid-funded projects and the goods were used solely and exclusively for those projects.
Furthermore, that the goods were imported as standard-rated supplies and VAT was duly paid at importation. Their character as taxable supplies should have been maintained throughout the supply chain.
The Applicant also submitted that Section 24(6), as the later, more specific provision enacted in 2016, overrides the general renewable energy exemption in Schedule 3 (dating from 2008). The canons of statutory construction require that later, specific legislation prevails over earlier, general provisions.
That VAT neutrality demands that VAT not create an irrecoverable cost in a taxable supply chain. Denying input tax credit while retaining importation VAT treats that VAT as a final tax on the Applicant rather than on the ultimate consumer.
The Applicant also submitted that the Respondent’s retention of VAT collected at importation while simultaneously denying input tax credit constitutes unjust enrichment and an impermissible double benefit to the fiscus.
Lastly, the Applicant submitted that the enactment of Section 24(6) and URA’s own Practice Note and Ministry of Finance circulars created a legitimate expectation that supplies to aid-funded project contractors would be treated as taxable with deemed VAT. The Respondent’s conduct violated that expectation and the right to just and fair administrative treatment under Article 42 of the Constitution.
The Applicant prayed for a declaration that Section 24(6) of the VAT Act applies to the Applicant’s supplies to Sino-Hydro and China Water. A declaration that the Applicant’s supplies were effectively zero-rated (or exempt by law). And an order vacating URA’s assessments that disallowed the Applicant’s input VAT.
Submissions by the Respondent
The Respondent submitted as follows that Paragraph 1(z) of Schedule 3 read with Section 19(1) of the VAT Act expressly classifies as exempt all supplies of goods and services to contractors and sub-contractors of hydro-electric power, solar, geothermal, bio-gas and wind energy projects. The Applicant’s supplies fell squarely within this provision.
Furthermore, that Section 24(6) expressly requires a “taxable supply” as a precondition. Since the supplies were exempt under Schedule 3, Section 24(6) could not apply.
The Respondent also submitted that since the Applicant made both taxable and exempt supplies, Section 28 of the VAT Act required apportionment of input VAT, which was applied using the Standard Alternative Method at the Applicant’s own request.
That there is no statutory provision entitling a taxpayer to a refund of importation VAT merely because the subsequent domestic supply is exempt. The goods were imported generally, not specifically for the hydro-electric projects.
The Respondent submitted that no sub-contract agreement was produced. Merely supplying goods to a contractor does not constitute sub-contracting.
Lastly, it was submitted that administrative guidance from the Ministry of Finance or URA cannot override the clear provisions of the VAT Act, citing Rubya Investors Limited v. URA (HCCA No. 16 of 2022) and Crane Bank v. URA.
The Respondent prayed for declarations that the Applicant’s supplies to Sino-Hydro and China Water were exempt supplies. The Applicant had both standard-rated and exempt supplies requiring input VAT apportionment. The Applicant is not entitled to deemed VAT because the supplies were exempt.
TRIBUNALS DETERMINATION
On the Relevant Statutory Provisions
The Tribunal clarified that Section 4 of the VAT Act imposes VAT on every taxable supply made by a taxable person, every non-exempt import, and the supply of non-exempt imported services.
Section 18(1) defines a taxable supply as a supply of goods or services, other than an exempt supply, made in Uganda by a taxable person for consideration as part of his or her business activities.
Section 24(6) provides: “For the purposes of this section, the tax payable on a taxable supply made by a supplier to a contractor executing an Aid-funded project is deemed to have been paid by the contractor solely and exclusively for the Aid-funded project.”
Section 24(8) defines an “Aid-funded project” as a project financed by a foreign government or development agency through a loan, grant or donation.
Paragraph 1(z) of Schedule 3 provides that the supply of any goods and services to the contractors and sub-contractors of hydro-electric power, solar power, geo-thermal, bio-gas and wind energy projects constitutes an exempt supply.
Majority Decision of Mr. Siraj Ali & Ms. Christine Katwe
The majority (application allowed) reasoned as follows:
1. Conflict Between Section 24(6) and Paragraph 1(z)
A careful examination of Section 24(6) and Paragraph 1(z) reveals that these two provisions are in direct conflict specifically where the aid-funded project is a hydro-electric, solar, geothermal, bio-gas or wind energy project. Suppliers of goods and services to the contractors of such projects cannot avail themselves of Section 24(6) because Paragraph 1(z) characterises their supplies as exempt, and exempt supplies do not meet the taxable supply precondition of Section 24(6).
2. Irrational Distinctions and Legislative Intent
A literal reading of the two provisions creates irrational distinctions by confining Section 24(6) to aid-funded projects that are not energy projects, effectively barring the very class of suppliers Parliament sought to protect. The majority relied on the Report of the Committee on Finance, Planning and Economic Development on the VAT (Amendment) Bill, 2016, which states:
The proposed law will adopt a remission scheme for domestic suppliers to donor-funded projects so that no VAT is paid by contractors to the domestic suppliers of goods but the suppliers can claim VAT on the inputs they used in the production of the final goods sold to the contractors. This will make local companies competitive with foreign companies.
3. Application of the Absurd Result Principle
The majority applied the absurd result principle, citing the Supreme Court of Canada in Piekut v. Canada (National Revenue) 2025 SCC 13, which holds that courts should interpret legislation under the presumption that a legislature does not intend to produce absurd consequences. An interpretation produces absurd consequences if it: (i) frustrates the purpose of the legislation; (ii) creates irrational distinctions; (iii) leads to ridiculous or futile consequences; (iv) is extremely unreasonable or unfair; or (v) leads to incoherence, contradiction or disproportionate hardship.
The majority concluded that in order to give effect to the intention of Parliament, the provisions of Paragraph 1(z) should be disregarded when construing Section 24(6) in relation to supplies made to contractors of aid-funded hydro-electric, solar, geothermal, bio-gas or wind energy projects.
Dissenting Opinion of Ms. Grace Safi
Ms. Safi dissented and would have dismissed the application, reasoning as follows:
1. The Supplies Were Exempt Under Section 18(1)
For a supply to qualify as taxable under Section 18(1), four cumulative conditions must be met: (i) there must be a supply of goods or services; (ii) the supply must be made in Uganda; (iii) the supply must not be an exempt supply; and (iv) the supply must be made by a taxable person. On the facts, the supplies fell squarely within Paragraph 1(z) of Schedule 3 and were therefore exempt. The third condition was not satisfied.
2. Section 24(6) Is a Computational Provision Only
Section 24 is entitled “Calculation of Tax Payable on a Taxable Transaction.” Section 24(6) is strictly a payment mechanism that presupposes an existing taxable supply; it does not create tax liability, alter the character of a supply, or override exemptions provided elsewhere in the Act. It cannot operate to re-characterise an exempt supply as a taxable supply or create tax payable where none exists.
3. No Conflict Between the Two Provisions
The dissent rejected the majority’s finding of conflict. Schedule 3 determines whether a supply is taxable or exempt; Section 24(6) addresses how VAT is treated where a taxable supply is already established. The two provisions operate in entirely different spheres and there is no inconsistency between them.
4. Apportionment and Policy Guidance
Since the Applicant made both taxable and exempt supplies, apportionment under Section 28 was correct. The fact that VAT was paid at importation does not convert an exempt output supply into a taxable one, nor does it create an automatic entitlement to a refund. Following Crane Bank v. URA, administrative circulars and parliamentary committee reports cannot override clear statutory language.
FINAL ORDERS OF THE TRIBUNAL
The application was allowed (2:1) with the following orders:
I. The provisions of Section 24(6) of the VAT Act apply to the Applicant’s supplies to Sino-Hydro Corporation Ltd and China International Water and Electric Corporation Ltd for the construction of the Karuma and Isimba hydro-electric power projects.
II. The supplies made by the Applicant to those contractors were taxable supplies.
III. The Administrative Additional VAT Assessment of UGX 1,265,705,370 is hereby vacated.
IV. The Applicant is entitled to full input tax credits on its imports.
V. The Applicant is awarded the costs of this application.
Read the full decision below
COMPILED BY.
KIZZA JOHN PAUL
EMAIL; johnpaulkizza499@gmail.com
LEGAL SCHOLAR AT UGANDA CHRISTIAN UNIVERSITY MUKONO CAMPUS.
EDITORS KEY TAKEAWAYS
The following practical implications flow from this decision:
1. Section 24(6) May Apply to Aid-Funded Energy Projects Notwithstanding Paragraph 1(z)
Even where a supply falls within the exempt category under Paragraph 1(z), the deemed VAT mechanism under Section 24(6) may apply where the project is also aid-funded. To avoid an absurd result that frustrates the 2016 legislative reform, Paragraph 1(z) will be disregarded in such cases.
2. The Absurd Result Principle Is a Recognised Tool of Statutory Interpretation in Uganda
Tribunals and courts may depart from a plain literal reading of a statutory provision where its application would produce irrational distinctions, pointless hardship or frustrate the evident purpose of a primary provision.
3. Parliamentary Committee Reports Are Cognisable Aids to Interpretation
Significant weight may be given to the Report of the Parliamentary Committee on Finance, Planning and Economic Development on the VAT (Amendment) Bill, 2016 when interpreting ambiguous or conflicting provisions.
4. Suppliers to Aid-Funded Energy Projects Should Review Their Input Tax Positions
Suppliers who made supplies to contractors of aid-funded hydro-electric, solar, geothermal, bio-gas or wind energy projects and were denied input tax credit on the basis that their supplies were exempt should assess whether the majority ruling entitles them to reclaim that input tax credit for open periods.
5. The Decision Is Split
The core question, whether Section 24(6) can override an express statutory exemption, remains live until settled by a higher court. Therefore presently, at the TAT, this the settled position. .
6. A Formal Sub-Contract Agreement Is Not Required for Section 24(6) Purposes
Section 24(6) covers any supplier to a contractor executing an aid-funded project. The absence of a written sub-contract is not fatal to a deemed VAT claim, provided the supplies were used solely and exclusively in the aid-funded project.
7. Administrative Guidance Cannot Create Enforceable Tax Rights Against URA
Consistent with Crane Bank v. URA and Rubya Investors Limited v. URA, administrative circulars, practice notes and Ministry of Finance guidance cannot override clear statutory provisions. Taxpayers relying on such guidance should ensure their positions are independently grounded in the statute.
AUTHORITIES
Piekut v. Canada (National Revenue) 2025 SCC 13, Definition and criteria for the absurd result principle in statutory interpretation.
United States v. Kirby, 74 US 482 (1868), Laws should receive a sensible construction to avoid injustice or absurdity.
UETCL v. URA, TAT App. No. 46 of 2018, Input tax recovery for suppliers in the deemed VAT context.
Electric Power Services Ltd v. URA, TAT No. 04 of 2022, VAT treatment of suppliers to aid-funded project contractors.
Crane Bank v. URA, HCTOO-CC-CA 18/2010, Administrative guidelines cannot override the statute.
Rubya Investors Ltd v. URA, HCCA No. 16 of 2022, Administrative guidance does not operate to supersede the law.
URA v. Uganda Taxi Operators Assoc., CA No. 13/2025, Taxing statutes strictly construed; ambiguity resolved in favour of taxpayer.
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