In Summary

According to the Fair Tax Monitor report, Uganda’s current tax system is regressive. This has been worsened by tax body’s complex tax structure which is not only difficult to understand but also worsens inequality, Ismail Musa Ladu writes.

Uganda Revenue Authority (URA) efforts over the years to educate as many tax payers as possible seems to have fallen short of the desired effect on the biggest segment of the population, according to the Fair Tax Monitor Study released recently.
As a result, the above study which also described the country’s current tax system as regressive, found out that the public perception of the tax body leaves a lot to be desired.

This has been complicated by tax body’s complex tax structure which according to the study is not only difficult to comprehend but also deepens inequality.

The Southern and Eastern Africa Trade Information and Negotiations Institute (SEATINI) -Uganda and Oxfam Uganda commissioned study further found out that the tax assessment process done by the tax authorities did not provide sufficient information to tax payers and assessors do not seek the involvement of the tax payer.
For that, most tax payers considered the current taxation system as unfair.

In addition, the study shows that most tax payers did not understand the functions and mandates of institutions responsible for taxation in the country, with particular confusion being between URA and Local Government collected taxes. For most citizens, this is equivalent to double taxation.

Importantly perhaps, the report found out that citizens’ compliance is highly interlinked to provision of quality public services which is still deteriorating, affecting compliance levels as.

Fair Tax Monitor
To Mr Godfrey Akena, a tax expert, not much has been done by the tax prefect to explain the structure and nature of taxes that tax payers are required to pay.

When contacted last week, he said: “I think this report is biased. First of all everybody knows that tax is technical. The report is making baseless claims. For that, I beg to disagree with it.”

He continued: “I believe that URA has over simplified taxation so that nobody is left behind. There are simplified formula on the portal on how to calculate all kind of taxes URA applies. They have also conducted tax clinics and used all form of platforms to reach the tax payers. So I think the study is controversial.”

However, the country director of SEATINI-Uganda, Ms Jane Nalunga thinks differently. Speaking during the unveiling of the report recently in Kampala, she said: “This report presents the other side of the story which we believe should be heard. We believe that everybody should be part of this debate. We hope the findings of this study will be useful in informing policies that will be fair to all of us tax payers.”

Mr Moses Dombo, the executive director of Oxfam Uganda, was more bullish. In his remarks during the launch, he said the report is not just an academic study, but a proper reflection of the reality on the ground.
He said the perception of citizens which is accurately captured by the report has a direct link with the feeling that they do not get much value from the taxes they are already paying.

For Mr Benson Ocen Ekwe from Soroti, the perception of the tax body will always take a beating as long as there is a variance between taxes paid and the value recouped from the obligation. He was also of the view that the technicality of taxation both in practice and theory excludes the majority of the population.

URA’s action
When interviewed at the sidelines of the ninth graduation of the East Africa Customs and Freight Forwarding Practicing Certificate (EACFFPC) last week on Friday, the Assistant Commissioner Field Services at URA, Mr Stephen Magera, told Prosper Magazine that the tax body is working hard to close the perception gaps raised in the study.

He said: “We accept there are some gaps. Every single day, we do our best to improve our perception. We actually feel that our doors are open for any tax payer to just walk in and we shall always be happy to help.”

He continued: “We are aware that there could be some integrity issues that could damage our image but we are working very hard to stamp out such vices and related issues.”

In the interview, it further emerged that URA is trying to get in touch with tax payers directly instead of dealing with them through their agents. This will be through several outdoor programmes, including tax clinics. But for this to work, Mr Magera urged tax payers to attend URA tax education programmes where there is an opportunity to ask direct questions relating to any tax or related issues.

BMOs speak out
A section of Business Membership Organisations (BMOs) have raised issues against URA, some of which have been highlighted in the report.
The leadership of Kampala City Traders (KACITA) resonates with the most of the study findings.
“We never get the same treatment as foreign investors who enjoy numerous benefits that we don’t access even if we go to their countries,” the vice chairperson, KACITA, Ms Hope Katwiine said.

She continued: “In addition to tax inequality, how do you think we feel?”

The sentiments of Ms Katwiine who is also the chairperson of KACITA Women Entrepreneurs League (KAWEL), is reinforced by another research being conducted by several stakeholders including Argidius whose aims is to help entrepreneurs build profitable businesses and contribute to the sustainable development of their communities.

The research indicates that inequality in accessing tax-related incentives are skewed despite the Investment Code Act Cap 192 providing for “National Treatment”, in which it requires that both domestic and foreign investors should be treated the same. This is expected to limit domestic investors from being given better treatment compared to their foreign counterparts.

SMEs troubles
The study found out that while this provision has been contested in view of the fact that domestic and foreign investors have varying needs, with the domestic investors being worse off, the case of Uganda is peculiar.
The ecosystem is not only unequal but largely unfair to domestic investors especially Small and Medium Enterprises (SMEs), both in policy and practice.

For example, the research reveals that with the incentives regime, a number of medium enterprises, despite reaching the $50,000 investment capital requirement to be registered by Uganda Investment Authority (UIA), are yet to be registered. As a result, some of these enterprises have not been able to access the incentives offered by government through this Authority.
Yet some of these enterprises pay their fair share of taxes and are in some cases exporting over and above the threshold required by URA for an enterprise to qualify for a tax incentive for 10 years.

In addition, SMEs that do not meet the $50,000 investment capital requirement but are registered by the Uganda Registration Services Bureau (URSB) as required by law, have also been faced with a similar scenario given the absence of attractive incentives (tax incentives) under the URSB.

Complexity of the tax system remains an issue for tax payers involved in businesses. SMEs have complained about the complex nature of the taxation system noting that the number of small taxes and licences required by them increases on the amount of time required for them to commit to administration compared to innovation and enterprise development.

Simplifying the tax system is therefore important in supporting small business growth and ensuring that they benefit from other tax-related services such as tax returns.

According to the report, taxpayer are willing to pay their fair share of taxes. In fact, some of the tax payers interviewed pay Income Tax for their directors in addition to paying Presumptive tax or corporate tax (whichever applies). Despite this, several studies have ranked them among the worst in compliance. The factors influencing their low compliance levels range from the lack of motivation to limited knowledge and understanding of the taxes they are expected to pay.

Tax payers have not been provided with the necessary support to understand their tax obligation to pay their taxes. There are also hardly any incentives for them. All that contributes to tax payers’ perception towards tax authorities.

Ms Veronica Namwanjje, the executive director, Uganda Small Scale Industries Association (USSIA), believes that the major problem for small scale industry players, especially those who do not belong to a member based organisation like the one she heads, is the differentiation between the taxes collected by Local Government and URA.

A regressive tax, in contrast to a progressive tax, is one where everyone pays the same amount of tax despite their income or ability to pay. Here, the tax rates decrease as the taxable amount increases, resulting in a greater tax burden for the poor compared to the rich. Indirect taxes are often regressive.

Uganda is not performing well in reducing inequality through tax policy. Uganda performs poorly in terms of the impact of tax on inequality. The country has regressive tax systems, with high dependence on indirect taxes (for example, excise duty, VAT, and customs), which contribute about two-thirds of total tax revenues. Indirect taxes are more regressive since they are based on the value of goods, services and assets, rather than the ability of people to pay. Indirect taxation also affects women more because they spend a higher proportion of their income on consumer goods for their families. Women tend to spend more of the income on goods that contribute to the social reproduction of labour, including healthcare, education, food, child care and the elderly.