2013/14 budget preview :Ugandans to face tough financial year

The withdrawal of budget support by the development partners means that the government must come up with new drastic measures to boost domestic revenue mobilisation if it is to fully finance its budget.

These new measures will be presented to Parliament when the Minister of Finance presents the government’s 2013/14 budget proposals next month. One of the biggest challenges facing Uganda today as we strive to transform from a low income economy to an upper middle income economy, is how to mobilise more revenues locally in form of taxation without damaging the livelihoods of the poor. Uganda’s tax revenue to GDP has been stagnant at 13%, which is lower than the average of 20% for Sub-Saharan Africa, and way below the 30% average for advanced industrial economies.

Tax to GDP ratio
The low tax-to-GDP ratio in Uganda reflects low compliance and enforcement in some sectors of the economy, as well as the numerous tax exemptions that are provided for in our tax laws most of which, in my view, have passed their ‘sale by date’.

The combination of low compliance, poor enforcement and the numerous tax exemptions in the tax laws explain the country’s very narrow tax base. As a result of this narrow tax base, the entire country’s tax burden is borne by a very small proportion of the population being primarily the large formal sector firms as well as the government and private sector employees.

The vast majority of the population in Uganda especially the self employed business people do not pay tax on their income. This is wrong and must stop. The biggest challenge facing the government with regards to its efforts to mobilise more tax revenue from the economy is the structure the economy itself. They are many factors that are structural in nature within our economy that have given rise to the narrow tax base we have. Below are some of these structural factors of the country’s economy that explain our low tax revenue to GDP of only 13%.

Subsistence agriculture
The first one is the large share of subsistence agriculture in total output and employment compared to other sectors of the economy. Agriculture constitutes about 26% of economic activity in Uganda by value but employs close to 70% of the country’s total working population. For as long as this large population who derive their livelihoods from agriculture remain outside the tax net, widening the tax base will always remain a challenge.

Secondly we have a very large informal sector that comprises of many medium, small and micro enterprises. These enterprises employ the majority of the working population in the urban areas, up country big towns and in the city. Many of these enterprises as well as their employees are not in the tax net. This includes mainly people working in the retail and wholesale sector, transport, construction and housing sectors. These are one of the fasted growing sectors of the economy. As long as the people employed in these sectors as well as the economic activity taking place in these sectors remain outside the tax net, the objective of widening Uganda’s tax base will be very hard to achieve.

Narrow tax net
Thirdly, only a very small share of total consumer spending is made in large, modern establishments such as big retail stores, shopping malls and supermarkets. These establishments are often formal and within the tax net. As a result, they contribute to the government revenue by charging VAT from customers who buy goods and services from them. On the other hand, the smaller groceries, kiosks and corner shops where the majority of the population do their shopping are informal and do not pay tax. This partly explains the reason why in the past we have been seeing rapid economic growth as a result of increase in consumer spending, but without seeing a corresponding increase in tax revenues that one would otherwise expect to arise from this rapid economic growth.

Studies have shown that as the population gets richer, more people attain middle income status and also as more people move to the cities, consumption increases and this translates in more tax revenue. This is also happening in Uganda. People are getting richer and urbanisation is on the increase. However this is not translating in the increase in tax revenue that one would expect as has been the case in other countries. The reason why urbanisation in Uganda has not translated into an increase in tax revenue is partly because of the way the urbanisation is happening, and also because of our spending habits, culture and lifestyle.

In order for urbanisation and increase in quality of life to translate into additional tax revenue, it must be properly planned and controlled. This is not happening. In addition to this, although we all left our villages and rural homes to come and work as well as live in the city, our spending habits, culture and lifestyle clearly indicates that many of us are still villagers at heart. That is why you see people driving six hours from Kampala to their villages (country homes as they call them) to harvest matooke from their plantations and bring to Kampala for food. These urban dwellers can afford to buy the same matooke from their local supermarket which these days is never more than ten minutes drive, depending on where one lives.

Outside the box
Combined, all the above factors explain Uganda’s low tax take as a percentage of GDP, compared to other countries that have similar and in some cases lower per capita income than Uganda. In order to address these factors policy makers will have to think outside the box to ensure that the majority of the population that is currently not paying tax is brought into the tax net.

This is critical if we are to achieve equity, efficiency and growth in the tax system. However, it is important that this is done in a humane way without hurting the livelihood of the poor. With all the challenges the government is currently facing with regards to donor funding, now is a good time to make those hard tax policy and enforcement decisions to ensure that everybody who is supposed to pay tax in Uganda, complies with their obligation to pay tax.

The writer is Country senior partner, PwC, Uganda
francis.kamulegeya@ug.pwc.com

editorial@ug.nationmedia.com