Tax holidays hurting URA performance, says Kagina
Posted Friday, July 25 2014 at 01:00
Alternatives Security, markets, infrastructural development, energy suggested for investment attraction
Tax holidays and exemptions have had a negative impact on revenue collections, Uganda Revenue Authority Commissioner General Allen Kagina has said.
Speaking at a news conference in Kampala yesterday where she enumerated the agency’s performance for the last decade, Ms Kagina said although the need for exemption was meant to enhance trade and investment, revenue collection became the victim in the process, explaining why the policy is now being reversed.
She said: “The government has over time introduced different tax policies which impact on revenue collection. Although it had benefited some, we think without it our collection and contribution to Gross Domestic Product (GDP) ratio would have been much better.”
According to her, the country has been providing tax incentives which were meant to mainly attract investments and support productive sectors to take off with the major exemptions residing in the VAT and income tax regimes to support construction, agriculture, health and education sectors.
“Recent studies have concluded that tax exemptions are no longer the major incentives for investments. It is security, markets, infrastructural development, energy and skilled labour that are very important for investment attraction, and not tax holidays and exemptions,” said Ms Kagina.
She continued: “And that is why starting FY2014/15, most of the exemptions have been terminated and this is expected to improve our tax to GDP ratio in comparison with other countries in the region.”
Other factors that have affected the contribution of revenue to GDP are the differences in computations: While computing tax to GDP ratio, countries like Kenya, Tanzania and South Africa include government taxes in total revenue while Uganda does not. This has affected growth of tax to GDP ratio in comparison to other countries in the region, she said.
Exceptional tax handles is the other reason that Ms Kagina cited as having an effect on revenue collections. She said some countries have exceptional tax handles which generate additional percentage points to tax to GDP ratios. Some of the exceptional tax handles include pay roll taxes, taxes on bank charges and commissions, property taxes, air departure taxes, skills development levies and others.
Uganda has started closing the gaps by introducing some tax handles which can fit well in its tax environment. Meanwhile, differences in the size of the informal sector also explain why the country is grappling with revenue collections.
Countries with large informal sectors like Rwanda (46 per cent), Tanzania (48 per cent) and Uganda (43 per cent) have lower tax to GDP ratios, while countries with smaller informal sectors like South Africa (11 per cent) have high Tax to GDP ratios.
Tax policies and why there was need for exemptions
The tax policies introduced for the last decade were geared towards;raising revenue to support government programmes, promoting investment, ensuring equitable distribution of income, protecting sectors offering public goods such as education, health and agriculture, among others.
In a bid to promote investments, the Ugandan Government for the last decade has granted exemptions to key sectors to support their growth. The impact of these exemptions can be observed through the improved infrastructural developments across the country, employment creation, increased investments across sectors and increased Foreign Direct Investment. In some instances, revenue has been generated while in others revenue has been foregone.