Tax incentives constraining service delivery - new report

Kampala- In an attempt to attract Foreign Direct Investment (FDI), Uganda, just like other East Africa countries, has provided a range of tax incentives to businesses, constraining the already small basket from which revenue is collected.

According to a new report titled: Widening Uganda’s Tax base: What’s at Stake and What Should Government do, tax incentives and exemptions can lead to significant revenue leakages, explaining the narrow tax base which has for years remained stagnant.

“…tax incentives have a cost in terms of revenue foregone,” reads the report produced by the Civil Society Budget Advocacy Group (CSBAG).
Evidence from the Tax Justice Network Africa revealed that Kenya, Uganda, Tanzania and Rwanda were losing up to $2.8 billion (Shs10 trillion) a year in tax incentives and exemptions.

Uganda alone loses in excess of Shs1.5trillion every year, an amount almost half the budget of the ministry of Transport and Works, which takes the biggest chunk of the National Budget expenditure.

The picture becomes even worse when resources lost through illicit financial flows are factored in.
Currently, these losses are estimated to be in excess of Shs2 trillion.
The CSBAG study, which was produced in September 2017 notes that the country offers a wide range of tax incentives, including import and stamp duty exemptions, for exporting companies and unlimited corporate income tax holidays for certain categories of businesses such as agro-processing companies among others.

This is in addition to a 10-year corporate income tax holidays for businesses exporting finished consumer and capital goods.

In total, the report says more than 35 goods and services including petrol, diesel, gas, computers and software are VAT exempt in Uganda.

The CSBAG study also made reference to a 2010 African Development Bank study, which said that tax incentives and exemptions had undermined Uganda’s revenue potential, partly explaining the sizeable tax gap.

According to the AfDB report, Uganda’s tax base could easily expand from 13 per cent to currently 16 per cent in terms of tax contribution to GDP, if the incentives and exemptions were removed. This means that the country’s ability to fund her own budget will increase rather significantly.

Other constraints
The Uganda Revenue Authority (URA) taxpayer reward system, according to the CSBAG report, is not attractive enough.

This is further complicated by the political interference that hinders the tax body from pursuing the “big fish” tax defaulters.

This is worsened by the punishment system in place which is not punitive enough.
In addition, close to 50 per cent of Uganda’s economy is informal, with agriculture, the biggest economic sector largely being exempted from taxation.

It also emerged in the CSBAG study that URA lacks most of the necessary external controls to ensure that a taxpayer stays within the system.

Given that URA does not have the resources to control all taxpayers effectively, it is easy for a potential taxpayer to fall off the radar in these circumstances—either by not registering in the first place or by stopping declarations— and do so without facing any major consequences.

To counteract this, the CSBAG report proposed that registration must be made more rigorous, and feedback systems must be introduced to ensure taxpayers regularly update their information.
Also, quick and simple controls can be put in place to raise the alarm if taxpayers fail to comply.
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