Prime
Concern as govt’s regressive tax policies hurt service delivery
Motorists drive past a banana plant planted in one of the potholes on Katwe road in Kampala on April 30, 2023. PHOTO/FRANK BAGUMA
What you need to know:
- As the country grapples with reduced external funds, the government has embarked on an aggressive strategy to expand the local revenue collection threshold. But as Gillian Nantume writes, the strategy could kill livelihoods and increase tax evasion.
For the past two weeks, Ugandans have relied on microblogging site Twitter to launch a creative campaign relying on the powerful narrative of pictures and stories under the hashtags #KampalaPotholeExhibition and #UgandaHealthExhibition to showcase poor service delivery.
This comes at the time the cash-strapped economy attempts to recover from exogenous shocks, including the Covid-19 pandemic and the geo-political conflict in eastern Europe.
As antipathy continues to grow over poor service delivery, the Executive Director of Kampala Capital City Authority (KCCA), Dr Dorothy Kisaka, said the authority is constrained by a shoe-string budget to repair roads and construct new roads.
Earlier this month, Dr Jane Ruth Aceng, the Health minister, told Parliament’s Committee on Health that a Shs80.6 billion budget cut to her ministry meant that the upgrade of health centres across the country hangs in the balance as the health sector remains in a decrepit state.
Uganda’s annual population growth rate stands at 3.2 percent, which means that the economy needs to grow nearly at double digit figures to be able to provide adequate services to the grassroots.
It also needs to generate enough revenue to be able to sustain its bloated structure, pay its debts and interest as it is estimated that by the commencement of this financial year, debt to GDP ratio will eclipse the 50 percent threshold.
Mr Andrew Kyambadde, a tax expert and lawyer with Godena Associates, says with dwindling loans from Bretton Woods institutions that provide long-term concessional lending rates, the government needs to collect more tax.
“Every year, people make money through different innovations. Government wants to tap into those areas to raise money. Uganda has a very large informal sector. Some of these are people who do business and make money but cannot easily be tracked by Uganda Revenue Authority (URA). So, you find that only 14-16 percent of our GDP comes from our tax collection,” he says.
Statistics from URA show that Uganda’s tax register has about 3.3 million taxpayers and 70 percent are in the formal sector. In the current financial year, URA’s target for revenue collection was Shs25 trillion, however, by mid-April, only Shs17.5 trillion had been collected. This means many taxpayers in the informal sector are slipping through the net.
READ: Instead of excessive borrowing, let’s curb wasteful incentives and build tax base
Exemptions make tax administration difficult, says IMF
Why low compliance?
Augustine Lwanga Busiiwa has since 2007 been selling electrical items in his shop at Energy Plaza in downtown Kampala. He says given chance, a number of importers, including himself, would exploit any loopholes in the system to evade taxes.
“It is not good to avoid paying tax, but the taxes are too high. For instance, URA officials will not visit a business but will sit in their offices and make an assumption that a particular business should pay Shs400 million in taxes. On a site visit, when they find out that the business is actually worth Shs100 million, they will close it anyway. So, your only choice is to dodge paying tax but strive to remain open by bribing URA officials,” he says.
In a Sauti za Wananchi survey carried out by Twaweza East Africa in September 2022 to collect citizens’ views and experience of business and the tax environment in Uganda, more citizens said tax evasion in Uganda is prevalent. Three out of 10 citizens, which is about 30 percent, felt that the level of tax evasion was high, and a further 14 percent said it is at a medium level.
Mr Robert Wamala Rumanyika, URA’s acting manager for public and corporate affairs, says the assessment of how much tax a business is supposed to pay is primarily the role of the business owner, but if he or she fails to do so, then URA will undertake its own computation.
“URA assessments are based on similar players in the sector. If URA is able to ascertain how much your neighbour is earning, the assumption is that you are earning the same. Secondly, assessments are based on rents, expenses incurred, or the number of clients who enter your shop.
ALSO READ: Can government really tax the super rich?
Sometimes, the assessments may be excessive, because we are using assumptions to arrive at a chargeable income,” he says.
According to the Sauti za Wananchi survey, a low and declining number of citizens estimated at 13 percent, down from 33 percent in 2019, think that current tax rates are fair.
A teacher conducts a lesson at Butaswa Primary School in Bugaya Sub-county, Buyende District, on October 24, 2020. Photo/FILE
Mr Issa Sekitto, the spokesperson of Kampala City Traders Association – which has about 150,000 members – concurs, saying high taxes are leading to non-compliance.
“As a member of regional blocks, such as the East African Community (EAC) and the Common Market for Eastern and Southern Africa (Comesa), the determinant factors for tax rates and values in Uganda should no longer be based on Ugandan literature,” he says.
“Unfortunately, the EAC Customs Management Act, which we are supposed to follow, is habitually abused by URA. When the EAC decries that textile importers will pay a 35 percent import duty per container, Uganda insists on charging import duty per kilo of textiles. This multiplies the taxes. Where an importer would have paid import duty of Shs100 million on a 27-ton container, they now have to pay Shs500 million,” he says.
Repressive taxes
Mr Sekitto says while countries in the EAC agreed to zero import duty on smart phones – with the emphasis on recouping taxes during the connectivity of users – Uganda continues to impose a regressive 35 percent import duty on all smart phones entering the country.
“This blatant abuse of the EAC customs guidelines is leading to smuggling and illicit trade. People are dodging taxes in order to survive in business. One of the reasons the government gives for flaunting the EAC Custom Guidelines is the need to protect home industries from competition, but how many smartphones are being manufactured in the country? How many economically viable productions are being made in the textile industry?” he wonders.
From the 1960s, Uganda pursued an import substitution policy, introducing several measures to protect the local industries. During this time, Uganda enjoyed a trade surplus of £29.4 million (about Shs138.73 billion at today’s exchange rate). However, after the NRM government came into power, Uganda stopped the policy, and as a result, recorded a trade deficit.
Today, however, in a bid to reach the much vaunted middle-income status, the government is once again pursuing an import substitution policy. A June 2020 paper, titled ‘Import Substitution as an Economic Response to the Covid-19 pandemic in Uganda,’ published by ACODE, noted that one criticism of the import substitution strategy is the promotion of protectionist policies.
Infant industries are often protected using the tax system, which is criticised for creating economic distortions. Besides, import taxes are a major source of revenue in most developing countries, while subsidies are susceptible to abuse or rent seeking which can exacerbate corruption and lead to inefficient allocation and distribution of resources.
The import substitution strategy is credited with increasing local production, reducing unemployment and increasing the purchasing power of employed Ugandans. However, Mr Kyambadde advises caution in implementing the strategy.
“Any country would want to protect its industries against foreign competition, but you must create a balance. Otherwise, the foreigners will do the same to you in their country. But, what services is the government giving for the high taxes levied and collected on imports or on domestic taxes? For instance, people in Canada and the US pay higher taxes than we do, but their governments provide quality service delivery. So, while their taxes are higher, the citizens rarely feel the pinch,” he says.
According to experts, there is a correlation between high taxes on a small section of the population and the temptation to avoid and evade taxes.
According to the Sauti za Wanachi survey, citizens are increasingly recognising the importance of paying tax. A large majority of citizens (84 percent) now say tax is important for national success and the country’s economy, up from 79 percent in 2019. Seven out of ten citizens (67 percent) now say paying tax is important, irrespective of the quality of public services, up from five out of ten (52 percent) in 2019.
Mr Sekitto argues that people in the informal sector are conscious about the need to pay taxes.
“Unfortunately, taxation is not very popular although traders have been taught about their rights and obligations when it comes to taxes. They know what to pay and what to demand for. However, those deliberately dodging to pay taxes are doing so because the taxes are repressive,” he argues.
URA is also deepening its tax education campaign, not only in Kampala, but in other cities and town councils.
“Under our Voluntary Income Tax Assistant programme in downtown Kampala, once we register tax payers, we encourage them to send us their children so that we can train them to perform tax assessments on the family, instead of waiting for URA to do it. We have service support channels, toll-free helplines, and even mobile offices that we use to reach out to the taxpayer. We have translated our literature into 13 local languages. So, tax education is being done. Tax compliance is a behaviour that needs to be nurtured through tax education,” he says.
However, the Sauti za Wanachi survey found that the vast majority of citizens (88 percent) are most familiar with value added tax (VAT), more than any other form of tax in Uganda. Other taxes have much lower levels of unprompted recognition, including presumptive tax (20 percent), PAYE (19 percent), customs duties (16 percent), rental tax (16 percent), land and building (property) tax (15 percent), and local service tax (14 percent).
Wallowing under a heavy tax burden
Busiiwa says in 2007, when he began his business, he was paying Shs11 million in import duty for a 40ft – 27tonne container of electrical appliances. But the import duty has exponentially soared to the extent that just before Covid-19 struck, he was charged Shs103 million in taxes for the same amount of imports.
“In 2021, I led a delegation of business colleagues to meet General [Salim] Saleh [the chief coordinator of Operation Wealth Creation]. We informed him that the increase in import duty was driving us out of business. He was very angry, telling the URA officials who attended the meeting that they are making the citizens hate their government,” he says.
“However, the URA officials reasoned that they are not the ones who come up with revenue collection targets; it is the Ministry of Finance. Their duty was to find ways of hitting the revenue collection target. The meeting ended in a stalemate,” he adds.
A congested patient ward at Fort Portal Regional Referral Hospital in 2019. With the budget cuts, it will be difficult for the government to provide adequate health services. PHOTO | FILE
In the 2023/2024 financial year, URA plans to collect Shs29.3 trillion in revenue. Seven new tax bills have been tabled in Parliament by the Ministry of Finance, Planning and Economic Development.
These include; the Income Tax Amendment Bill, 2023; Excise Duty Amendment Bill, 2023; Value Added Tax Amendment Bill, 2023; Tax Procedures Code Amendment Bill, 2023; Traffic and Road Safety Act Amendment Bill, 2023; and the Lotteries and Gaming Amendment Bill, 2023.
Government also plans to levy a five percent digital service tax on all non-resident entities offering goods and services in Uganda, such as Amazon, Netflix, Twitter, and Facebook. The tax burden is also increasing in the domestic tax arena.
“On top of VAT, there is the Withholding Tax, which is six percent of what one earns. If you are a small or medium scale supplier, URA will remove six percent of your money even before you are paid. This is affecting the capital bases of small companies. At the end of the day, businesses are collapsing because big-name tax payers can ask for incentives from the Ministry of Finance or higher political circles, yet the small and medium businesses do not know where to turn,” Mr Sekitto says.
One of the major principles of taxation is that taxes should be fair but not regressive. These bad tax policies have led to a high business attrition rate as many firms continue to shutter in a market with high-interest rates and limited venture capital for start-up companies and small businesses.
If the government is to improve service delivery to its citizens, it is important to create an environment that enables citizens to form and run businesses to be able to pay taxes, and the tax body ought to rollout a progressive tax regime or else these high taxes will be akin to killing the goose that lays the golden egg.
Where does this leave service delivery?
With citizens (64 percent) saying the reason they and others pay taxes is to help with the delivery of public services, and 27 percent respondents claimed that the main reason they pay tax is because it is compulsory.
Earlier this month, Daily Monitor reported that the Inspectorate of Government had commenced wide-ranging investigation into allegations of corruption, abuse of office, and tax evasion at URA, where it is feared the country may have lost billions of shillings.
A 2018 Fair Tax Monitor Report released by Oxfam, SEATINI and other members of the Tax Justice Alliance Uganda, indicated that Uganda’s tax system is widening the inequality gap.
Unfair tax exemptions to large multinational corporations means few taxpayers shoulder the tax burden while significant amounts of potential revenue remain uncollected due to these tax breaks, leading to a loss of revenue that could have been used to improve service delivery.
The report further indicates that the loss of revenue coupled with a high expenditure rate means that generations of Ugandans are bound to keep repaying public debt, at the expense of social sector development and service delivery improvements.
“Corruption, in revenue collection and in different sectors, is a factor that we cannot fail to underscore. Those who are well-placed are able to get a share of the revenue collected and this leads to income inequalities. For instance, a business owner or employer, will question why they should pay taxes only for those taxes to end up being donated to people who are needed for political expediency, such as Full Figure (Jennifer Nakangubi), Bebe Cool (Moses Ssali) or Balam (Barugahara),” Mr Kyambadde says.
