If government wants everybody to pay taxes, it must first understand who deserves to pay how much
Despite collecting more revenues over the years, the country’s tax base has remained stagnant, an indication that there is a huge segment of the population that is not paying its fair share of taxes, resulting in the perpetual budget deficit.
A report titled: ‘Widening Uganda’s Tax Base: What is at stake and what should government do’ produced by the Civil Society Budget Advocacy Group (CSBAG), indicates that the country’s tax efforts are still below potential, thanks to the small base from which Uganda Revenue Authority (URA) is collecting revenue.
This means that although URA is able to incrementally collect more taxes annually, it does so from the same compliant tax payers instead of reaching out to those earning taxable income but paying no tax at all.
With a low tax to Gross Domestic Product (GDP) ratio that stands at about 13 per cent, it means the country’s National Budget is insufficient and, therefore, unable to finance its operations to the fullest. However, there have been attempts made to improve tax revenue through steps such as establishment of the URA in 1991; the introduction of Value Added Tax (VAT) in 1996, and modernising the tax administration systems, all aimed at broadening tax base and increase domestic revenue mobilisation. These reforms have not been in vain. URA has since seen its revenue collections rise over 10 times from Shs1 trillion in 2000/1 to about Shs11.2 trillion in 2015/16.
However, despite this growth in revenue collections, CSBAG executive director Julius Mukunda, wonders why Uganda’s tax efforts are still below potential when the tax/revenue to GDP ratio is considered.
Statistics from the World Bank also shows stagnation of Uganda’s tax to GDP ratio at about 12 per cent over the last 10 years. In comparison with regional neighbours, Uganda’s tax revenue to GDP is still below the 16 per cent sub-Saharan average and lags behind her East African Community (EAC) neighbours too.
On the other hand, owing to Uganda’s many development needs, government expenditure has over the years continuously exceeded revenue collection, compelling the government to resort to other sources to finance the deficit. As a result, Uganda’s stock of public debt has almost tripled in the last 10 years from about Shs10 trillion in 2006 to about Shs30 trillion in 2016, according to the report.
Although this is still within sustainable levels (at about 37 per cent of GDP), the pace of growth as well as the country’s increased appetite for infrastructure investment calls for an increase in domestic revenue mobilisation to control public debt.
Challenges in collection
A number of reasons account for Uganda’s relatively poor performance when it comes to revenue collection. Statistics shows that Uganda has a higher dependency on international trade duties compared to other EAC countries, particularly Tanzania, Kenya and Rwanda.
In 2013, according to CSBAG’s report, Uganda collected 11 per cent of its tax revenue from customs and other import duties compared to 8 per cent for Tanzania and Kenya. The same report also shows that Uganda has been generous in granting tax incentives, which undoubtedly has a cost in terms of revenue foregone. Available evidence reveal that Uganda loses more than Shs2 trillion a year from all tax incentives and exemptions.
Although URA has made significant reforms, tax evasion and avoidance continue to impact tax collection negatively as it habours the highest percentage of firms that do not report all sales for tax purposes, standing at 74 per cent compared to 71, 26 and 43 per cent for Tanzania, Rwanda and Burundi respectively.
Tax evasion is largely due to the lack of transparency from traders, informality in the economy as well as weaknesses in the tax administration system. Regional comparisons show that Uganda has a higher level of informality than the other EAC countries.
More steps taken
“We have continued to expand the tax base. During the period of July-September 2017, our tax register registered a growth of 13 per cent (125,635 taxpayers),” URA Commissioner General, Ms Doris Akol, said while releasing the Revenue Performance for the period July to September 2017 recently.
The growth is accredited to the performance of the Tax Registration Expansion Programme (TREP) and newly introduced block management system initiatives.
For example, TREP brought on board 5,501 value clients during the first quarter. Block management that involves door to door visits brought 25,397 income taxpayers and 313 rental taxpayers.
She continued: “We have witnessed an improvement in the filling ratios for all tax segments. On average, our filing ratios for Pay As Your Earn (PAYE) were at 94 per cent and 96 for VAT respectively.”
She also said that the tax body has been very vigilant in cleaning the tax register; monitoring and enforcing non-filers, implementing compliance visits and advisories and return examination of perpetual off-setters to establish correct positions and enforce on the outstanding tax.
Then there is the wealthy and high net worth individuals. According to a working paper, produced in January 2016, titled: ‘Boosting Revenue Collection through Taxing High Net Worth Individuals (HNWIs): The Case of Uganda,’ authored by among others, Ms Jalia Kangave, a tax researcher, there is a need to tax more rich people in Uganda because they are not contributing enough despite earning huge incomes.
Budget policy specialist, Ms Sophie Nampewo, in an interview last week told Daily Monitor that before attempts to penetrate the informal sector are undertaken, there is need to understand who makes up the sector. She said: “You need to understand who earns how much so that you know how to tax a boda boda and a hawker. URA must do this study with the help from other partners in government.”
The report proposes that URA needs to adopt a revenue system that enables it to seal all loopholes, capture all avenues of revenue streams and provide it with the capacity for continuous improvement.