How to widen tax base to gain additional revenue in next budget

Kampala- Last week, government unexpectedly increased the budget for the next Financial Year 2015/16 from Shs18.5 trillion that was earlier proposed to a record Shs24 trillion.

Government, through a corrigenda (revision) presented in the House last week, revised the financial year 2015/16 Budget up from last year’s Shs15 trillion.

The Shs5.5 trillion addition, which the Secretary to the Treasury, Mr Keith Muhakanizi, described as a rollover, makes the new Budget the most ambitious ever.

Rollover is a technical term which implies an extension or transfer of a debt or reinvestment of money realised on the maturing of stocks or bonds as a way of funding the new budget.

In a phone interview last week, Mr Muhakanizi said the additional money is already there as bonds and, therefore, it should not cause alarm, considering that it was cleared by the International Monetary Fund and that the Auditor General is aware of it.
The other responsibility falls on the Uganda Revenue Authority (URA) who will be expected to collect beyond Shs11 trillion.

In an earlier interview, the URA Commissioner General, Ms Doris Akol, said they would try to meet their revenue collection targets through enforcing tax measures, some of which were declared in the Budget reading of FY 2014/15.

Collaborating with local authorities such as the Kampala City Council Authority and Uganda Registration Service Bureau is one such measure that is already paying off.

The Tax Register Expansion Programme (TREP) initiative has already yielded Shs800 million and is expected to be enforced further.

So far, 21,047 individual taxpayers have been registered for taxes, including 20,368 in Kampala based stations and 679 outside Kampala.

TREP initiative is one avenue for taxing “hard-to- tax” sectors mostly the large informal sector players who are out of the taxable bracket yet earn taxable incomes.

Also, beginning the new financial year in July, government will not do business with individuals or SMEs (small and medium enterprises) that do not have TIN—tax registration numbers.

The same requirement also applies to corporations that often deal with the SMEs. This is an attempt to include governments and large corporations’ suppliers into the formal tax bracket.
If successfully implemented, informal SMEs, yet earning taxable income, will now be captured into the tax bracket through the persons they are supplying.
The Private Sector Foundation Uganda (PSFU) policy analyst, Mr Moses Ogwal, argues that the best way to collect more revenue is by encouraging local consumption instead of imports.

Mr Ogwal says he wants to see more efficiency in tax management and reinvestment of the collected revenues in productive areas that boost investment and reduce the cost of doing business.

Such areas could be investment in power and a properly coordinated transport system.
He cautioned the tax collectors against depending on exchange rate and inflation which have a tendency of boosting revenue collections figures.

In the last 10 months (between July 2014 and April), the Shilling depreciated continuously against the dollar but it was blessing in some way to URA.

Positives
URA’s average exchange rate for the period was Shs2,743 which was above the projected Shs2,687 leading to a revenue gain of Shs52 billion.

Although an increase in exchange rate is expected to increase international trade revenue performance in the short run, URA is also wary of the fact that it affects revenue in the long-run due to increased stocks in warehouses and increased prices of merchandise.

Inflation also registered an upward trend mainly due to the exchange rate depreciation on the prices of imported goods, but generally remained stable for the period within single digit as a result of a decline in crude oil prices and the good harvest that reduced the food prices.

The current low levels of headline inflation have boosted domestic consumption which has a positive impact on indirect domestic taxes, especially VAT, with a positive growth in revenue collections of more than 10 per cent.

In an email interview, development economist and a policy researcher, Mr Fred Muhumuza, says the biggest problem that should first be sorted is the informality of the economy.

“The biggest part of the economy is informal. A lot of activities (trade, service provision, payments to labour, purchase of goods, including land) never get captured officially at the time of transaction,” Mr Muhumuza says.

“We need to have measures that confine people and firms to follow formal procedures in purchase and payment for goods and services. This can be instituted once everybody has the National ID which can be used for tracking individual and business firm processes,” he adds.

To widen the tax base, Mr Muhumuza proposes elimination of unnecessary waivers and exemptions most of which, he said, go to the well-connected and not necessarily those who need them most or have a better return to give back to the rest of the economy.

The former ministry of Finance employee also suggested improvement of value for money out of tax expenditures, because it increases compliance as more taxpayers (firms and people) see the benefits and link them up to the tax.

Unlike a section of the business community which has problems with the tax regime, Mr Muhumuza believes the tax regime would be fine in terms of rates and block bases targeted such as income, consumption, and trade and non-tax revenue.

However, the burden falls on a few as many survive having this rate apply to them. He says the focus should be more on increasing the base and not revising the tax regime.

According to civil society organisations, the country has an opportunity to expand the tax base through taxing currency conversions.
They say this would address the exchange rate volatility that is often associated with currency conversions.

It would also penalise short-term currency speculation, and will place a tax on-spot conversion of currency. This will stabilise the country’s currency.

Civil society recommendations

Civil society organisations recommend that government fully implements the Money Laundering Act so as to curb illicit trade, and establishing a mechanism of implementing the recommendations from the High level Mbeki Panel Report that was adopted by African Union in January 2015.

Property tax/ Ground Rent and rental income tax on commercial buildings should be well-enforced and regulated.

The CSOs also suggest that government carries out an assessment of various properties to determine the owners of commercial building and rental houses/apartments.

This is an area that the government can collect substantial amount of revenue considering the mushrooming buildings in urban areas.
Curbing illicit financial flows such as overpricing, transfer pricing, tax evasion, money laundering, corruption and false declarations will, according to CSOs improve tax compliance.
The position paper on the 2015/16 tax measures fronted by the CSOs, shows that Uganda lost an average of $509m (about Shs1.5 trillion) in illicit outflows per year between 2000 and 2008.

Currently, Africa is estimated to be losing more than $50b a year in Illicit Financial Flows.
This has a huge impact on revenue mobilisation and collections.

That is why CSOs recommend that the government strengthens the capacity of URA to curb illicit financial flows.

The tax numbers

14%: Estimated increase of GDP ratio up from the current 12.5 per cent if taxation of informal sectors coupled with shrinking of exemptions, tightening loopholes in revenue collections are implemented according to URA.

0.5%: Percentage tax that civil society organisations recommend that is imposed on all currency conversions as an international practice.

Shs1.5 trillion: Average amount of money Uganda lost in illicit outflows per year between 2000 and 2008, according to the position paper on the 2015/16 tax measures fronted by the CSOs.

Shs800 million: Amount of money that has been collected from the Tax Register Expansion Programme initiative so far.
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