- Justification. Government has proposed several tax measures to “enhance revenue collection”. Government says it needs to find solutions to its expenditure which is growing faster than revenue collections.
Faced with a high cost of living and soaring unemployment, Ugandan tax payers will have to dig deeper in their pockets to fund government’s expenditure, effective July.
In several moves tending towards panic, several tax measures have been proposed to “enhance revenue collection” and they are expected to find little opposition in the ruling NRM dominated Parliament.
To justify its moves, government says it needs to find solutions to its expenditure which is growing faster than revenue collections, to expand infrastructure, support electricity production and the oil sector still in its infancy, but also find money to build the long awaited standard gauge railway.
The other considerations in introducing new taxes and raising others, according to Mr David Bahati, the State minister for Planning, are expansion of the economy and covering the gap of reduced collections from international trade taxes due to increase in global trade liberalisation.
It also emerged this week that the government was unable to front its share in the Shs14.6 trillion ($4b) capital expenditure for the proposed oil refinery in Hoima District, and instead relied on the Albertine Graben Refinery Consortium (AGRC) to shoulder its burden for now, as it looks for resources.
The government is also faced with a “debt crisis” with a report by the Parliament’s committee on national economy for the financial year 2016/2017 putting the stock of external debt for both public and private sector at 41.4 per cent from 40.2 per cent in the preceding financial year.
Sources say this has only increased and the 94 years that a parliamentary committee said it would take to repay the existing stock of debt at the current level of amortisation, according to the House report will only be revised upwards.
This is besides the cost of servicing the said debt as the government continues to source for external debt on less concessional terms.
There is, therefore, a fear that Uganda’s credit rating may deteriorate, affecting the country’s ability to access international financial markets, which has alarmed government and forced it to take a chance on more taxation, even with a threat of political backlash.
From the National Budget Framework Paper (NBFP) for Financial Year 2018/19, the government intends to source its financial resources from both private and external borrowing.
In terms of external funding, the government intends to borrow money on both concessional and non-concessional terms.
While the 50 per cent threshold, which international organisations have set for the public debt to be considered unsustainable, is yet to be surpassed, there is an urgent feeling that it is close and panic appears to have set in.
In the financial year 2018/19, interest rate payment to local and external loans obligation is projected to be Shs2.7 trillion or 12.3 per cent of the entire budget.
That, basically, seems to sum up the Executive’s desperate attempt to convince the House and the public to support its ambitious new tax regime.
But that is not the entire story. Experts have opined that the cash-strapped government is looking for quick fixes to raise money to run the economy.
Tightening tax collection
The tax increases government has proposed include on wines, spirits, beers, airtime, Saccos, money transfers and on social media use on platforms such as WhatsApp, Facebook, Twitter, Skype and Viber.
President Museveni in a letter to the tax body, said it is to stop what he called lugambo (gossip) but experts say the projected Shs400b to Shs1.4 trillion is so tempting to the broke government to look the other side.
In efforts to “widen tax base”, the government says it will, among other things, align the tax treatment of returnable containers used by manufacturers with the accounting treatment, introduce excise duty on opaque beer (kibuku), impose excise duty on cooking oil (Shs200 per litre).
Other measures to widen the tax base include excluding goods for private use from the scope of application of the VAT deemed payment provisions and imposing excise duty at 15 per cent on all juices including powders for reconstruction, and levy 1 per cent on mobile money.
On April 12, URA announced it was intensifying its crackdown on tax evasion by deploying more scanners at various entry points in the country, among other things as part of the government plan to raise more revenue. The taxman is also taking 10 other administrative measures mainly to clamp down on tax evasion.
Outside widening the tax base, the government proposes to introduce a 10 per cent final withholding tax on commissions by telecommunications companies to mobile money and airtime agents as a final tax. The government has also proposed the enforcement of 1 per cent withholding tax on persons engaged in agriculture to enhance compliance in the sector “where most income earners are not paying any tax compared to other persons paying tax on relatively lower incomes such as teachers”.
An export levy on wheat bran, maize bran, rice bran, cotton seed cake and sunflower cake will also be imposed, among other measures.
“The pressure is coming partly from the donor community and from government itself. The government needs more money and I think they are getting a push back from all the budgets that have to be financed. People are like, we are getting to the level of domestic borrowing to finance budgets, what is URA doing to hit the targets?” Ms Hadijah Nannyomo of Ernest & Young Uganda, a tax consulting firm, says.
There have also been a long-running debate that that a small fraction of Uganda’s population shoulders the tax burden of the entire country.
In its current predicament, the government seems to have finally heard the cries from donors, experts and some citizens about the same.
The question was partly addressed by President Museveni in his “Lack of seriousness in tax collection” letter to the tax body and the Finance ministry on March 12.
In the letter, President Museveni said the “the lack of seriousness” in tax collection was rendering Uganda unable to fulfill obligations to the people and end borrowing and dependency on aid (grants and projects) from outside.
“I am beginning to confirm that there is total lack of seriousness, at the very least, or collusion, at worst, among your tax identifiers and collectors,” he wrote.
But as the rest of the government moves to confront the challenge of how government can raise resources that even President Museveni has acknowledged, Ms Nannyomo says it will only make sense if the taxes are reasonable and the rationale behind the same is achieved.
“It is one thing to put it up and it is another to implement it,” she says.
Take, for example, the proposed “social media use tax” and another of withholding VAT. The government is saying there is no excise duty on internet data, but data is procured through airtime which is already taxed. On airtime, there is VAT and excise duty which is already embedded.
Unanswered questions remain on how the government is going to implement this tax and minister Bahati found a hard time explaining the same to journalists on April 12.
Is debt a drive?
Other factors driving the panic could be the need to build confidence in the economy, by among other things raising money to lessen the escalating debt burden in the country.
Expected revenue from the proposed taxes is estimated to be in trillions and some of the money could offset one of the country’s biggest priorities currently—paying interest on external and local loan obligations.
In the National Budget Framework Paper (NBFP) for financial year 2018/19, interest rate payment to local and external loans obligations is projected to be Shs2.7 trillion, about 9.3 per cent of the entire budget.
In the 2016/17 budget, debt servicing costs absorbed 23 per cent of government revenues.
As a result, a parliamentary report has warned, “fiscal risks are starting to materialise (revenue shortfalls, critical expenditure shortfalls, and supplementary budgets)”.
Just last year, despite protest from a section of legislators and other experts, the Executive decided not to collect any revenues from Savings and Credit Cooperative Organisations (Saccos) for the next 10 years but made a U-turn and now wants a tax imposed on the same.
Finance minister Matia Kasaija last year said Saccos had been exempted from paying tax on their incomes so that every Ugandan belongs to a financial institution of some sort and consequently encourage every eligible citizen to save.
Then there is the controversial directive by URA to commercial banks to lay open bank accounts of their customers in what has been widely described as for purposes of taxation.
The banks have since gone to court to challenge the request and the Executive has announced that URA will be forced to back down on the same.
It is assumed that after decades of being accused of failing to tax many of Uganda’s top earners, the taxman appears to be of the view that if one does not pay tax at the point of earning, they will be netted at the point of spending or thereabouts.
In 2011, a year which was characterised by economic turbulence, URA introduced new rules on transferring or registering property (cars and houses). Under the new rules, anyone transferring ownership of a car or house worth more than Shs50 million was required to show the tax returns on the income used to buy such an asset, or else they would be made to pay the income tax at the time of spending.
The move, like the request for people’s bank details, met with wide resistance and was consequently not implemented.
Will gamble pay off?
Ms Nannyomo of Ernest & Young Uganda casts doubt on the long term benefits of the government gamble.
“There are many [taxes], but the extent that they are really applicable and worth it is another question. If we take the best scenario that all this is implemented, it will of course raise taxes but the raising of taxes is very short term and at best medium term. There are penalties and all these other things, but when penalties come people will be penalised and it will stop. They are a bit short-lived, it is a vicious cycle. The short term benefits will be there in form of revenue but them becoming long term will be a problem,” she says.