Service delivery is constrained where needed most - report

Local government revenues are used to fund projects such as road construction, among others. FILE PHOTO

What you need to know:

  • Mandate. Local governments (LGs) are mandated to formulate, approve and execute their budgets and plans and to collect revenue and spend it.
  • Services. LGs are mandated under the Constitution and the Local Government Act, to provide management services and other programme activities including planning, budgeting and supervision of service delivery, oversight functions of councils, operation and maintenance (O&M) including maintenance of building infrastructure, and other basic logistical works among others.
  • Funding. Local government funding includes Grants (Unconditional, Conditional and Equalisation) as per Article 193 of the constitution; Local Revenues as per Article 191; donations and contributions. Besides, LGs are allowed to borrow from financial institutions as per Article 195.

Kampala. Local Service delivery in almost all districts leaves a lot to be desired, a report commissioned by a civil society organisation has disclosed.
Lack of adequate funding and the inability of local governments to generate revenues from the available sources to supplement grant transfers from the central government emerged among the leading reasons explaining the sad state of affairs.
According to the report commissioned and conducted earlier in the year by the Civil Society Budget Advocacy Group (CSBAG) to assess the viability of Local Service Tax and other local revenue, local revenue (collected by the local government) collection is not performing as expected.
“The main local revenue sources used to be Graduated Personal Tax but was abolished by the government in 2005, leaving a big gap of about Shs61b,” reads the report in part.

However, the report also discloses that attempts to close the gap left by graduated tax have been made but have failed to raise sufficient revenues.
“In Financial Year 2007/8, government passed Local Service Tax and Hotel Tax estimated to generate Shs67b but these new sources have only generated Shs12b which is just 18 per cent of the expected potential,” the report says.
“The other sources have not performed well either. Subsequently services have continued to go down thus undermining the benefits of decentralisation that the country has been enjoying,” it adds.
The report reveals that only Shs10b (or 6.6 per cent) of the Local Service Tax is being collected, with Local Government Hotel Tax contributing only Shs1.2 billion (or 0.6 per cent).
In total, the two taxes contribute Shs11.2 billion out of the expected Shs67 billion, which represents a combined collection of 18 per cent.

This implies that the new sources have not been well exploited and local governments seem not to understand their potential and impact despite the study showing that even low income people can pay an annual minimum Local Service Tax of Shs5,000 or even Shs10,000. This shows that citizens’ ability to pay Local Service Tax is not only high but long overdue.
On the other hand, the study revealed that all those who can afford to stay for a night in a hotel/ lodge are also willing to pay the hotel fee, implying that this is a viable source of revenue to the Local Government.
Based on the above findings, the two sources of revenue - the Local Service Tax and Local Government Hotel Tax, are viable sources of revenue that is ready for collection.
Furthermore, business licences, user fees, property related revenues are steadily increasing, with the property related revenues presenting the highest annual increment, indicating a lot of potential for revenue growth in the future.

Case for Local Service Tax
Article 176 (2) (d) of the Constitution stipulates that there shall be established laws for each local government unit to have a sound financial base with reliable sources of revenue.
However, in 2005 Graduated Tax was abolished despite being the main revenue source for the local governments. The argument advanced was that the tax was too expensive to collect.
Mr Ezra Suruma, the then Finance minister, while presenting the 2007/08 budget, proposed that two taxes - Local Service Tax and Local Government Hotel Tax, supplement local government revenues that had been diminished by the abolition of graduated tax.
Local Service Tax is levied on people in gainful employment, self-employed professionals, artisans and business people, including commercial farmers.

People employed in the armed forces such Uganda People’s Defence Forces, Police, Prisons and Local Defence Units, and the unemployed among others, are exempted from Local Service Tax that is deducted by employers from employee salaries and remitted to government.
The second revenue source was the Local Government Hotel tax which is levied on all hotel and lodge room occupants.
Between 2008 and 2016, the creation of an additional 32 districts meant that revenue collection in both the new and old districts was impacted. This was highlighted in a review of Local Government Financing which was conducted by Local Government Finance Commission in 2012. The study revealed that there was a funding gap of about Shs2 trillion, thanks to among others, poor local revenue mobilisation and collection.
Local Service Tax constrained
In the absence of a clear law that provides for receipts after transaction, compromise in enforcement as well as the amorphous definition of some categories of taxpayers (for example the self-employed artisans) it is becoming increasingly difficult to assess some taxable people. This is worsened by the fact that the enforcement provisions are not only weak but also provide no clear punishments to the defaulters.
Lack of proper tax records as well as challenges to identify eligible taxpayers, in addition to staffing and penetration issues have remain key constrained in the collection of the Local Service Tax.

Other local revenue sources are also constrained with challenges such as: Administrative weaknesses at Local Governments; low staffing and insufficient technical capacity; poor revenue management and corruption.
Departmental revenues like Veterinary fees and forest revenues are not shared with the local governments, let alone insufficient capitalisation, poor supervision and monitoring by both lower local governments and higher local governments.
There is also reliance on grants. Grants contribute more than 95 per cent of LG budgets. And because of that some political leaders relaxed collection efforts.

Parliament’s view
Some representative of the people in Parliament say Local Government hasn’t done itself any favour considering that it has not yet made a convincing case for proper financial strengthening.
In a meeting in Kampala recently between Members of Parliament on finance and economy committee, it emerged that the legislators are unhappy with the local government method of work and commitment to transparency. This was well demonstrated by MP for Kumi constituency, Mr Charles IIukor who asked: “What has the Local Government done with the little they have before we think of adding them more money?”
In rebuttal, the Mr Johnson Gumisiriza from the Local Government Finance Commission, said Local Government responsibilities far outweigh the budget allocated to the docket. He said rather than trading blame, the Local government deserves more attention and financial backing than it currently receives.

Recommendations

Government should review Local Service Tax with a view to make it collectable. For example exemptions should be removed, strong enforcement should be provided, tax bands should be in the range of Shs20,000 and Shs100,000.
Minimum payment of Local Service Tax (LST) should be at Shs10,000, management committees should be revitalised, establishment of the local revenue. Database should be roll out to all the LGs so as to capture LST eligible taxpayers. In addition, government should finalise the guidelines and approve them to enable LGs tax farm incomes.