The battle to widen the tax base: Where has it reached?

Uganda Revenue Authority (URA) has in 2018/19 financial year essentially “squeezed” from all corners, suffocating some and frustrating many.
It has been a tough year for the tax payers but a good one for URA, which last week announced it would close the financial year with a Shs300b surplus.
The surplus, it should be noted, was achieved from a tiny fraction of Uganda given that more than a half of the economy contributes little or nothing to the revenue kitty.
According to the background to the Budget Year 2019/20 prepared by Ministry of Finance, 2018/19 revenue collections will be way above the target in the excess of Shs352b.
This, according Moses Kaggwa, to the director economic affairs at the Ministry of Finance, pushes the tax contribution to GDP to 15.2 per cent after years of stagnating between 12 and 13 per cent.
By close of the 2019/20 financial year, Kaggwa says, the tax contribution to GDP will have reached 16 per cent, a target that has been in corridors of government for at least four years.
Every year, tax collection targets increase. In the 2018/19 and 2019/20 financial years, targets have or will increase by nearly Shs2 trillion.

Current economic fundamentals
What is strange, however, is the rate at which the tax base is expanding does not reflect the current economic fundamentals.
With more than 50 per cent of GDP (Ubos 2014) attributed to the informal sector, and 80 per cent of the labour force working in the informal economy, the challenge to widen the tax base is almost beyond URA.
The complexities of the informal sector make it difficult for URA to bring them in the tax fold.
Majority do not keep proper books of accounts, they are mobile and not registered. Therefore, this plays out in the open and the formal economy is left to “bleed” with new taxes most of which are either direct or indirect.
Taxes such as mobile money and over the top, were part of the measures to widen the tax base. But majority of those who pay it were already paying a certain tax somewhere somehow.
Therefore, this leaves URA with two option to either squeeze those who are already paying or find expensive ways to include the informal economy.
Ever since she took over, Doris Akol, the URA commissioner general, has emphasised the need for everyone to contribute to the national kitty, arguing that if “we all pay a little, nobody will pay much”.
However, this has been like a walk in the park as businessmen, including those already in the fold, find new ways to dodge paying tax.

Administrative measures
So far, there are about 1.6 million tax payers on URA’s register, majority of whom are in the formal economy.
During the period between July and March in the 2018/19 financial year, 129,454 new taxpayers were added to the tax register, representing a growth of 9.80 per cent.
Of these, 121,588 were individual taxpayers while 7,866 were non-individual. Overall 36,790 taxpayers were value clients and, contributing Shs18.27b, according to data from the Finance Ministry.

Strengthened
Information available from URA, indicates that the expansion in the tax base was strengthened through implementation of the Tax Registration Expansion Programme (TREP) and block management initiative that registered 67,068 new taxpayers against a target of 78,100, performing at 85.87 per cent.
These posted a combined contribution of Shs17.86b against the target of Shs28.38b performing at 62.93 per cent during the period July to March 2019

OTT and the virtual private networks (VPN)

Collection frustration. As a way of expanding the tax base, URA introduced over the top (OTT) tax. Indeed, URA believes it has brought a number of Ugandans in the tax fold.
For instance, issues of the VPNs usage continue to frustrate URA revenue collection targets.
According to the Background of the Budget for the 2019/20 financial year, Local Excise Duty underperformed on the account of a Shs197.9b shortfall registered under OTT. This was mainly attributed to avoidance through use of VPNs.
However, the levy on Mobile Money withdrawals, performed well registering a surplus of Shs45.16b. Growth in production and sales of all excisable goods apart from beer was also registered in the period.

Revenue performance over the years

Domestic taxes: The structure of Uganda’s tax system has been changing over the last decade.
The share of domestic taxes (both direct and indirect domestic taxes) has increased from 50 per cent in the 2009/10 financial year to 54 per cent in 2017/18 financial year.
This is projected to reach 56 per cent by end of June 2019, while the share of Non Tax Revenues (NTR) to total revenues has averaged at 3 per cent in the same period.
International trade taxes: Over the same period, the share of international trade taxes to total revenue has reduced from 48 per cent in the 2009/10 financial year to 43 per cent in the 2017/18 financial year and is projected to drop further to 42 per cent by the end of June 2019.
The decline is not only due to globalisation and rationalisation of import duties but also because of positive growth of domestic revenue sources.
Impact of trade treaties: Uganda subscribes to globalisation and trade facilitation initiatives which include the EAC Customs Union, Comesa, the Tripartite and African Continental Free Trade.
This means that all goods originating from member states are imported to Uganda either at 0 per cent Import Duty or at reduced rates.

Going forward

Compared to Kenya, Tanzania and Rwanda, Uganda’s tax contribution to gross domestic product, is the lowest.
Speaking in an earlier interview, Mr Muhammed Ssempijja Ernst & Young Tax partner and country leader, said revenue collections suffered from “structural problems”.
“The economic environment is not attracting and retaining enough investment. This means that the tax base is not expanding because there are fewer players.” The tax contribution to GDP ratio has stagnated over the years but is expected to rise at the end of this financial year because URA has “squeezed” a tiny fraction of tax payers.
Therefore, as long as the tax contribution to GDP grows, albeit slowly, analysts such as Mr Ssempijja argue collecting revenue to fund the Budget will always be a difficult task.
Going forward, Mr Godfrey Akena, the East African School of Taxation executive director says: “The tax base must be widened by bringing informal tax payers into the tax bracket. It is not enough to squeeze a few while exempting the majority, many of whom are earning a lot of money.”