Uganda's Tax Interest Regime Under Scrutiny: Recent Judicial Developments And Implications For Taxpayers And Investors

The constitutional court in Mbanza Martin Kalemera v Attorney (“Kalamera”)General (“Kalemera”), has upheld the constitutionality of Uganda's tax refund interest regime under the Income Tax Act, (Cap. 338). The decision builds on the foundation laid by the Supreme Court in Commissioner General Uganda Revenue Authority v Airtel (“Airtel”) confirming that interest penalty continues to accrue during tax objection proceedings under the Value Added Tax Act, (Cap. 349). Pentecostal Assemblies (“Uganda Revenue Authority v Pentecostal Assemblies of God. More recently, the High Court has addressed the question of refund interest from a different angle, holding that statutory interest under Section 36 of the VAT Act is mandatory and runs from the date of wrongful collection, not from the date of a court order or formal application.

Together, these decisions expose a structural imbalance in Uganda's tax administration framework, one in which interest works systematically against the taxpayer, dispute resolution carries escalating financial risk and the courts offer no effective remedy beyond directing aggrieved parties to a Parliament that has yet to act. Notably, whilst Pentecostal Assemblies offers a more taxpayer-friendly approach to refund interest under the VAT Act, the decision does not cite or engage with the Kalemera framework under the Income Tax Act, leaving unresolved the question of whether the two regimes can be reconciled. This alert critically analyses the Kalemera decision, compares it with Airtel, Pentecostal Assemblies and and considers the broader implications for taxpayers, acquirers and investors operating in Uganda.

Background to the Kalemera decision

In Kalemera, the petitioners challenged several sub-provisions of Section 123 of the Income Tax Act, contending that they contravene Articles 21 (equality) and 26 (protection from deprivation of property) of the Constitution of Uganda. Under the impugned provisions, interest on a tax refund accrues only from the date the Commissioner General of URA receives the taxpayer's refund application, not from the date the tax was originally overpaid. Moreover, if the Commissioner General requests additional information, the application is deemed submitted only upon receipt of that information, effectively suspending the accrual of interest. The Commissioner General is also afforded six months from receipt of the application to process and pay the refund.

The petitioners contrasted this regime with Section 148 of the Income Tax Act, under which interest on unpaid tax owed by taxpayers to URA accrues from the date the tax becomes due until payment is made. They argued that this asymmetry constitutes preferential treatment of URA, amounting to discrimination and deprivation of property.

The court's reasoning

The Constitutional Court unanimously dismissed the petition, reasoning along several lines.

On the interest commencement date, the Court held that the tax refund system is triggered only when the taxpayer acts by filing an application. Under Uganda's self-assessment regime, taxpayers can apply for a refund promptly after paying refundable tax, thereby minimising any gap between payment and interest accrual. The Court characterised this as offering taxpayers a "choice" regarding when to submit their application, rather than imposing an unequal condition.

As to the comparison between Section 123 and Section 148, the Court found the petitioners’ argument to be “illogical”. It reasoned that Section 148 is a penal provision applicable to instances of unpaid taxes, and that the respondent "cannot be penalised for receiving the amount in excess of tax liability it intended to refund". The Court drew a categorical distinction: Section 148 penalises non-compliance, whereas Section 123(4) compensates for opportunity cost. In the Court’s view, these fundamentally different statutory purposes render the comparison illogical.

Turning to the suspension of interest when additional information is requested, the Court relied on the "use of money" principle from the US case of Manning v Seeley Tube & Box Co. It is reasoned that when the tax authority lacks sufficient information to verify a claim, it should not bear the cost of the taxpayer's delay.

On the question of interest during the objection or appeal period, the Court held that awarding interest from the date of assessment would amount to double payment, as the judicial award already accounts for that period.

Critique of the Kalemera decision

• The liquidated claim analogy is misplaced

The Court equated a tax refund claim to a liquidated claim in civil litigation, relying on several decisions to justify the rule that interest runs from the date of filing the refund application. This analogy is strained. Tax overpayment is not a disputed claim; it is an arithmetical fact within URA's own records. URA is "deemed to be in possession of all the tax records of individual taxpayers and therefore ought to know those entitled to tax refunds" a concession the Court itself made. If URA already holds the information necessary to identify the overpayment, the rationale for requiring a formal application before interest begins to run is significantly weakened. The analogy thus rests on the flawed premise that URA lacks knowledge of overpayments a premise that does not reflect the realities of tax administration. If anything, the solution lies in URA strengthening its internal processes for accuracy in tax records, rather than shifting the burden onto the taxpayer.

• The "Choice" argument overstates taxpayer agency

The Court assumed that taxpayers are aware of overpayments at the time of payment and can file immediately. In practice, overpayments frequently arise from withholding tax deducted at source by third parties, provisional tax instalments based on estimates, or errors in assessment that only become apparent later. In such cases, the taxpayer may not know they have overpaid until well after the event, whereas a civil litigant typically knows they have a claim before filing. The Court's framing therefore overstates the degree of practical control taxpayers exercise over timing.

• Internal inconsistency with the treatment of Section 148

The Court dismissed the comparison between Section 123 and Section 148 as “illogical”. Yet the liquidated-claim analogy, if taken seriously, arguably supports the petitioners' position rather than undermining it. Under civil law principles, once a liquidated debt is due, interest runs from the date of default not from the date the creditor demands payment, precisely as Section 148 already provides. If the overpaid tax is truly analogous to a liquidated sum, then the taxpayer's entitlement to interest should logically arise from the date URA received the excess funds the date of "default" in repayment not from the later date of application. The Court's selective application of the liquidated claim framework creates a tension that the judgment does not fully resolve.

• The "Use of Money" principle cuts both ways

The Court's reliance on the "use of money" principle from Manning v Seeley Tube & Box Co. to justify the filing-date trigger is, on closer inspection, self-defeating. If interest compensates for the loss of use of funds, that loss begins when the funds leave the taxpayer's hands, not when the taxpayer files an application. The involuntary character of tax payments, particularly those made by withholding or instalment strengthens the argument that interest should accrue from the date the state received excess funds.

The Supreme Court decision in URA v Airtel

The vulnerabilities in the Kalemera reasoning are thrown into sharper relief when the decision is placed alongside the Supreme Court's treatment of interest in Airtel. That case concerned whether penal tax under Section 65(3) of the VATA continues to accrue on unpaid VAT during the pendency of tax objection proceedings in the Tax Appeals Tribunal. Celtel Uganda Ltd had failed to file VAT returns for April 2000 to July 2003, prompting URA to issue a tax assessment totalling approx. USD 270,698. Celtel paid 30% of the disputed amount and lodged objection proceedings as required by Section 15(1) of the Tax Appeals Tribunal Act. When Airtel, having acquired Celtel's liabilities, sought to pay the remaining balance, URA informed it that penal tax in the form of compounding interest had continued to accrue during the objection proceedings, bringing the total liability to approx. USD 397,000

The Supreme Court unanimously allowed URA's appeal and reinstated the High Court's judgment. The court emphasised that taxing statutes must be interpreted according to their plain language, without intendment, implication or equity. The Court held that Section 65(3) imposes penal tax whenever a person fails to pay VAT by the due date, and that no provision of the TAT Act contains any express provision suspending the accrual of penal tax. The Court found that the requirement to pay 30% of the disputed tax is merely a procedural prerequisite giving the taxpayer the right of audience in the Tribunal; it does not operate as a statutory moratorium on penal tax.

The High Court decision in URA v Pentecostal Assemblies of God

The recent High Court) decision in Pentecostal Assemblies, addresses the treatment of refund interest from a markedly different perspective. The Pentecostal Assemblies of God (PAG), a charitable organisation, imported super cereal for humanitarian aid to South Sudanese refugees between 2017 and 2021. URA initially cleared the goods without tax but later conducted a post-entry review and issued a VAT assessment claiming the items were standard rated rather than exempt. PAG had already a VAT under compulsion in June 2019 to secure the release of earlier consignments of the same exempt goods. PAG objected to the assessment, but URA failed to respond within the mandatory 30-day statutory window under Section 229(4) of the East African Community Customs Management Act (EACCMA), causing the assessment to be deemed allowed by operation of law. Despite this, URA subsequently enforced collection in 2023 by impounding PAG’s entire fleet of motor vehicles for nearly five months and deactivating its Tax Identification Number.

The High Court upheld the Tax Appeals Tribunal’s finding that the assessment had been extinguished by operation of law and went further than the Tribunal by ordering a full refund of the unlawfully collected VAT. The Court held that the simple fact that tax was exacted unlawfully is sufficient to require repayment, and that retaining the funds constituted unjust enrichment. The Court further held that URA held the funds in a constructive trust for PAG once the illegality was established.

Critically, on the question of interest, the Court applied Section 36(1) of the VAT Act, which mandates URA to pay interest at 2% per month compounded on any refund resulting from a tribunal or court decision. The Court held that this provision is “couched in mandatory terms, leaving no room for administrative discretion once the illegality of the collection is affirmed”. Interest was held to run from the date of wrongful payment (June 2019) until full restoration, rather than from the date of the court order or a formal refund application. The Court reasoned that interest serves “not merely as compensation but as a vital tool for administrative accountability”, ensuring that the public treasury does not benefit from “the interest free loan created by illegal tax collection”. In endorsing PAG’s argument, the Court observed that URA itself charges taxpayers 2% interest on late payments, and therefore “the same standard of 2% per month compounded must apply when the Authority is the defaulting party”. Any other interpretation, the Court reasoned, “would create an inequitable one-way street in tax administration”.

Distinction between Pentecostal Assemblies and Kalemera

Although both Pentecostal Assemblies and Kalemera concern the question of when and how interest accrues on amounts owed by URA to taxpayers, the two decisions are distinct in several important respects. Notably, the High Court in Pentecostal Assemblies does not cite the Kalemera decision, nor does it engage with the Constitutional Court’s reasoning on refund interest under the Income Tax Act. This absence is significant, as it leaves unaddressed the tension between the two frameworks and their respective approaches to taxpayer compensation.

First, the statutory basis differs. Kalemera concerned Section 123 of the Income Tax Act, under which refund interest accrues only from the date of the taxpayer’s refund application. Pentecostal Assemblies concerned Section 36(1) of the VAT Act, which the Court held mandates compounded interest from the date of wrongful collection. The contrast is stark: Section 123 requires an affirmative act by the taxpayer (filing an application) before interest begins to run, whereas Section 36(1), as interpreted in Pentecostal Assemblies, triggers interest automatically from the date the state received the funds unlawfully.

Second, the courts adopted fundamentally different characterisations of URA’s obligation to pay interest. In Kalemera, the Constitutional Court treated refund interest as compensatory in nature, analogising the taxpayer’s refund claim to a liquidated claim in civil litigation and holding that the taxpayer exercises a “choice” as to when to trigger interest by filing an application. In Pentecostal Assemblies, by contrast, the High Court treated interest as a mandatory, non-discretionary statutory obligation and a tool for administrative accountability. The Court held that the Commissioner General has “no residual discretion to withhold, reduce, or waive” interest once a refund is ordered, and that treating it as discretionary would allow URA to benefit from a “double standard”: strict enforcement against taxpayers but no equivalent accountability when URA unlawfully withholds funds.

Third, the decisions differ on the question of reciprocity. A central critique of Kalemera in this alert is the internal inconsistency between Section 123 (which delays interest to the taxpayer) and Section 148 (which charges interest to the taxpayer from the date of default). The Constitutional Court dismissed this comparison as “illogical”. The High Court in Pentecostal Assemblies, however, expressly endorsed the principle of reciprocal fiscal discipline, holding that the same 2% monthly compounded rate that URA charges taxpayers must apply when URA is the defaulting party. This reasoning directly addresses the asymmetry that Kalemera declined to remedy, albeit under a different statute.

Fourth, the factual contexts are distinct. Kalemera was a constitutional challenge to the legislative framework itself, in which the petitioners argued that Sections 123(4), (5), and (6) of the Income Tax Act were unconstitutional. The Court applied the presumption of constitutionality and held that the legislative design was a permissible policy choice. Pentecostal Assemblies, by contrast, was a specific enforcement dispute involving the unlawful collection of VAT from a charitable organisation importing exempt goods. The Court was not asked to assess the constitutionality of the statutory regime but rather to enforce existing statutory rights, including the mandatory interest provision. The different procedural postures may partly explain the divergence in outcomes, but they do not resolve the substantive tension between the two approaches to refund interest.

The failure of the Pentecostal Assemblies decision to cite or distinguish Kalemera is a missed opportunity for judicial clarity. The two decisions operate under different statutes but address the same fundamental policy question: when should URA bear the time-value cost of holding a taxpayer’s money? Kalemera answers that question in URA’s favour; Pentecostal Assemblies answers it in the taxpayer’s favour. Until a higher court addresses the interplay between these frameworks, taxpayers and practitioners are left with an uncertain landscape in which the applicable interest regime depends not on a coherent underlying principle but on the specific taxing statute in question.

Comparative analysis: Kalemera and Airtel

The doctrinal weaknesses in Kalemera and the strict literalism in Airtel produce a combined framework whose practical effects warrant close attention.

• The imbalance in financial risk

The most striking consequence is that financial risk operates in one direction only. In Airtel, penal tax accrues relentlessly from the due date and is not suspended even when the taxpayer exercises a statutory right to object. In Kalemera, compensatory interest on refunds does not accrue until the taxpayer takes the affirmative step of filing an application. The combined effect is that URA benefits from the time value of money in both directions: it charges interest immediately when the taxpayer owes money, yet delays paying interest when it owes money to the taxpayer.

• Contrasting approaches to statutory interpretation

The Supreme Court in Airtel adopted a strict literal approach, insisting that "there is no room for an intendment" and "nothing is to be read in, nothing is to be implied". The Constitutional Court in Kalemera, by contrast, engaged in a more purposive analysis, drawing on policy rationales, foreign case law (Manning v Seeley Tube & Box Co.) and civil-law analogies to justify the refund interest framework. This methodological divergence is noteworthy: the stricter interpretive lens was deployed in the case that disadvantaged the taxpayer, while the more flexible approach was employed in the case that likewise disadvantaged the taxpayer. Taxpayers may legitimately question whether the interpretive methodology is being selected to support a predetermined outcome rather than applied consistently.

• The Taxpayer's dilemma

This inconsistency in method creates a double bind for taxpayers seeking relief. In Airtel, the Supreme Court acknowledged that policy arguments could be made for suspending penal tax during objection proceedings but stressed that any change must come from Parliament. In Kalemera, the Constitutional Court invoked the presumption of constitutionality and placed the burden on the petitioner to demonstrate inconsistency with the Constitution. Taken together, the message to taxpayers is clear: seek relief from Parliament, not the courts. Yet Parliament has shown no inclination to act.

• Implications for dispute resolution

The combined deterrent effect is substantial. The Airtel decision discourages disputing tax assessments, as compounding penal interest at 2% per month can cause the liability to grow substantially during proceedings. The Kalemera decision, meanwhile, ensures that even successful refund claimants are not fully compensated for the period during which URA held their funds. This combination creates a chilling effect on taxpayers' willingness to exercise their legal rights, which is particularly concerning given the constitutional guarantee of a right to a fair hearing.

• Implications for investment climate

Beyond the immediate impact on existing taxpayers, these decisions are likely to weigh on Uganda's attractiveness to foreign and domestic investors. A tax environment in which penal interest compounds relentlessly during objection proceedings, and refund interest accrues only from the date of a formal application, introduces material fiscal uncertainty that investors must factor into their risk assessments. The Airtel decision is particularly instructive: a company that acquired a target's liabilities found itself exposed to approximately USD 397,000 in compounding penal tax that had accrued during proceedings it did not initiate. For prospective acquirers, this underscores the hidden costs of M&A transactions in Uganda and the difficulty of quantifying contingent tax liabilities with certainty. More broadly, a judicial framework that systematically favours the revenue authority and offers no effective judicial remedy, directing taxpayers instead to a Parliament that has not acted risks signalling to the international business community that Uganda's tax dispute resolution framework lacks the predictability and fairness that investors expect.

Recommendations for clients

Considering these decisions, the following practical guidance is offered.

• Taxpayers should file refund applications simultaneously with, or immediately after, filing returns. Completeness of documentation is critical: any request for additional information resets the deemed submission date under Section 123(6) of the Income Tax Act, effectively pausing the accrual of interest.
• Before disputing a tax assessment, taxpayers should carefully weigh the financial cost of compounding penal interest against the likelihood of success. Interest accrues throughout the litigation process and is not recoverable even if the objection is ultimately upheld. Companies acquiring businesses in Uganda should factor potential accrued penal tax into their due diligence, particularly where the target entity has pending or historic tax disputes.
• For taxpayers and industry groups concerned about the systemic imbalance identified above, the most effective avenue for reform is legislative advocacy directed at Ministry of Finance and Parliament. Both courts have made clear that any change to the current framework must come through statutory amendment rather than judicial interpretation.

Conclusion

The Kalemera decision rests on a liquidated-claim analogy that is open to challenge and inconsistent with Section 148. Read alongside Airtel, it confirms that URA benefits from the time value of money in both directions, while taxpayers bear disproportionate risk when exercising their statutory rights. The Pentecostal Assemblies decision introduces a different approach under the VAT Act, treating refund interest as mandatory and non-discretionary from the date of wrongful collection. However, the High Court’s failure to cite or engage with Kalemera means that the tension between the two frameworks remains unresolved, and the applicable interest regime turns on the taxing statute rather than a unified principle. Future challenges should target the mischaracterisation of overpayments as unasserted claims, the inconsistency with Section 148, the logical corollary of the "use of money" principle that interest should run from the date of overpayment, and the persuasive force of the reciprocal fiscal discipline principle endorsed in Pentecostal Assemblies. Until Parliament acts, taxpayers should file promptly, document meticulously and carefully weigh the costs of protracted disputes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.