While the Minister of Finance, Ms Maria Kiwanuka, has announced increase in taxation as a way of expanding Uganda’s tax base, business analysts and economists say more comprehensive approaches should have been undertaken.
Issues of increasing Uganda’s tax ratio to the Gross Domestic Product, that has been staggering at 13 per cent of the GDP, still remains a big challenge to the government, and the worry is that external financing sourced from the development partners are dwindling.
Senior tax officials told the Saturday Monitor that while the measures of increasing Uganda’s base announced by Ms Kiwanuka are good, it will take government some time to increase tax base using the new measures of generating taxes locally. “It will take Uganda 10 to 15 years to realise increased tax using the new approaches that the Finance minister announced on June 13,” said Peter Kyambadde, a senior tax official at KPMG.
Total resource inflows in financial year 2013/14 are projected to amount to Shs13.1 trillion. Domestic sources are expected to contribute Shs10.509 trillion, representing 81.1 per cent of the total budget resource for the year.
Uganda Revenue Authority (URA) is expected to collect taxes amounting to Shs8.4 trillion and non-tax revenues of Shs275 billion. The Budget will also be financed by issuing government securities worth Shs1.040 trillion on domestic markets. Total external financing of the Budget will amount to Shs2.6 trillion, equivalent to 20 per cent of the total budget. Budget support comprises Shs213 billion while project aid amounts to Shs2.44 trillion, an increase of Shs234 billion over the financial year now ending.
The resources available to finance expenditure next year, therefore amount to Shs9.4 trillion excluding project aid and statutory external and domestic debt repayments which amount to Shs2.6 trillion.
The total resources available for expenditure next financial year represent an additional Shs1.4 trillion above the level in the year now ending.
Ms Kiwanuka said the objectives of the various measures for the financial year 2013/14 are to raise revenues, enhance transparency in collection and enforcement, improve compliance and encourage investment.
The minister announced the expansion of withholding tax (tax paid in advance) administrators as a way of increasing Uganda’s tax base.
She proposed widening the scope of tax administrators to capture non-compliant tax persons engaged in economic activities and not registered for income tax purposes. This measure is expected to generate Shs5 billion.
She also proposed to provide a legal framework through which URA will collaborate with Uganda Registration Services Bureau, local governments and KCCA to identify taxpayers and collect taxes on small businesses which are hard to reach by URA. This is aimed at easing tax administration and enforcing compliance by bringing more taxpayers into the tax net.
While Mr Kyambadde agrees that all these measures are good, there are shortfalls. “In my view, the bigger informal sector should have been brought on board of the tax base expansion through amnesty approach because there are people who would want to come to the tax base but they are seeing it as a liability,” Mr Kyambadde said.
The Senior International Monetary Fund (IMF) Resident Representative, Ms Ana Lucia Coronel, said Uganda’s tax base to the GDP must be broadened because Uganda’s tax ratio to the GDP is very low by the international standards and a comprehensive approach of increasing the tax base must be undertaken to ensure that people pay taxes.
“While the tax administration in Uganda has improved due to efficiency at URA, government should phase out the existing tax exemption in place because they are too many,” she said. Ms Coronel said while government priorities in 2013/14 budget are good enough, credibility of the budget lies on the implementation of projects and programmes in time. Uganda’s economy since the early 90s has been growing at an average rate of five to six per cent, but little economic transformation has taken place.
From the World Bank perspective, Ms Rachael Sebuddu, explained that transformation can come from changing what the country is producing (moving up the value ladder of production), how it is producing it (using better methods and higher productivity approaches, and where it is selling its produce.
The 2013/14 Budget gives priority to primary growth sectors such as agriculture and infrastructure.
However, the Managing Director of Alpha Capital Partners, Mr Stephen Kaboyo, told the Saturday Monitor that budget implementation is still a challenge.
“It is all good and well to provide adequate resources in areas that will stimulate growth, such as energy and roads but the issue of absorption needs to be addressed. Government needs to build capacity in areas of project management, and improve on the procurement of these projects,” he said.
Mr Kaboyo said expanding the tax base calls for additional measures to bring the informal sector in the tax net. Large tax payers pay 68 per cent of the tax while small tax payers, who make up about 94.6 per cent, only pay 14 per cent.
Need to diversification
While government is busy laying strategies of expanding Uganda’s tax base, economic experts advise that there is no need for introduction of new taxes, arguing that the existing policies aimed at expanding the tax base is enough.
“What is missing and which needs to be done is massive public education by the government to help the general public understand why they should pay tax and what the government is doing with their money,” the Country Senior Partner, Price Water House Coopers, Mr Francis Kamulegya, said.
Mr Kamulegeya explained that what is needed urgently in Uganda is to get everybody who is involved in the economic activities to pay tax without exception.
While the IMF says a study on tax to find out the size of the economy and how much tax can be raised from citizens will help Uganda realise increased tax base, Mr Kaboyo said given the huge public investment projects, government will need to diversify its funding sources. He argues that the current debt ratios are sustainable. “Uganda’s external debt currently stands at 16.5 per cent of GDP ($5.85 billion), while domestic debt constitutes 11.5 per cent of GDP (Shs6.3 trillion),” he said.
While government propose to borrow Shs1.04 trillion from the domestic market by issuing treasury bills and bonds, Mr Kaboyo cautioned that heavy reliance on domestic borrowing potentially crowds out the private sector through increased interest rates and high debt service costs.
However, on the other hand, this calls for a comprehensive debt management strategy. Experts say the government should also be able to identify shovel ready projects, build capacity in managing, procuring and implementing large public investment projects.
Delays in implementation undermines growth and slows down private sector investments. In the last financial year, Uganda’s economy grew by 5.1 per cent and government is now projecting that the economy will grow by six per cent in financial year 2013/14.
Ms Kiwanka said the macroeconomic outlook objectives of the government in the financial year 2013/14 and over the medium term are: To ensure low inflation close to the policy target of five per cent per annum, achieve and maintain rates of economic growth of at least seven per cent per annum.
The Executive Director of Private Sector Foundation Uganda, Mr Gideon Badagawa, said the approaches of increasing Uganda’s tax base as has been laid out by the Finance minister is discretionary in nature which is not good for Uganda. He added that there are high levels of tax base inelasticity in Uganda.