Tax deepening or tax widening?

In this world, nothing can be said to be certain except for death and taxes”. While neither topic sparks excitement, the latter is arguably a more tolerable choice.

As Uganda continues to grapple with the need for sustainable revenue generation to support its growing economy, the debate over the most effective taxation strategy intensifies. The government faces a critical choice between tax deepening and tax widening to mobilise resources for development and public services. 

Tax deepening involves extracting more revenue from the current tax base. It encompasses measures such as increasing tax rates, enhancing compliance, and rigorously pursuing tax evaders and curbing tax avoidance schemes.

The concept is rooted in the belief that more revenue can be harvested from those already within the tax net. While this approach can lead to a more equitable tax environment and potentially reduce income inequality by targeting the wealthy, it also carries risks. 

Over the past month, traders have voiced their dissatisfaction with the tax authority’s enforcement of the Electronic Fiscal Receipting and Invoicing System (EFRIS) and the imposition of penalties for non-compliance.

We have also witnessed in the past, businesses closing shops in Uganda citing an unsustainable tax burden. This backlash signals a growing tension resulting from an over-reliance on a narrow tax base, which might be loosely described as “diving deeper into the existing narrow pool”.

Tax widening on the other hand seeks to broaden the tax base by incorporating more individuals and entities into the tax system, that is “casting the tax net wider”.

This strategy involves taxing new goods and services, integrating the informal sector, or introducing new tax types. A broader tax base can lead to more stable revenue streams and alleviate the tax burden on current taxpayers by distributing it more widely.

Tax widening also has the potential to encourage the formalisation of businesses. The informal sector forms a big part of the Ugandan economy, making up over half of it while employing over three quarters of the country’s labour force (International Labour Organisation , 2021).

This presents an untapped potential which could be realised through exploring a broader tax base. The challenges of tax widening are not insignificant. The political difficulty of implementing new taxes, the risk of overtaxing low-income earners, and the need for substantial administrative reforms are all hurdles that must be overcome.

A sustainable approach for Uganda would likely involve a judicious mix of tax deepening and widening. Strengthening tax administration and enhancing compliance are crucial steps to ensure that those within the tax net contribute appropriately.

Rationalising tax incentives is also important to prevent the erosion of the tax base while still achieving economic goals. Expanding the tax base should be done cautiously, with efforts to formalise the informal sector and introduce taxes that are straightforward and easy to manage.

Protecting low-income earners through appropriate tax thresholds and exemptions is essential to prevent placing an undue burden on them. Additionally, investing in taxpayer education is vital to cultivate a culture of tax compliance and civic responsibility.

The path to sustainable tax revenue growth in Uganda is not a binary choice between deepening and widening but a strategic combination of both. A refined approach that considers the country’s unique socio-economic landscape while aiming for efficiency and fairness in tax collection is crucial.

By fostering a tax system that is equitable, transparent, and conducive to growth, Uganda can secure the necessary resources to invest in its future and realise its development goals.

Mr Benjamin Ngobi, Tax Associate, EY Uganda.