Indirect taxes are a double-edged sword

Uganda’s vision 2040 is an ambitious one. The vision aims at transforming Uganda from a predominantly peasant and low income country to a competitive upper middle income country by 2032 and attaining its target of per capita income of $9,500 in 2040 from the 2010 baseline per capita status of $506.
The Vision implementation remains a responsibility of every citizen in government, private sector, civil society, political organisations and any other institutions. Moreover, it is expected that the vision will be implemented through carefully designed five-year national development plans and annual Budgets.

The focus of this article will be on the latter. Every year new tax amendments are tabled before parliament for deliberation and later approval and this is such a time.
As government of Uganda seeks to increase the tax collections, one of the attractive areas to look is the indirect tax base. This is simply because indirect taxes are self-policing, provide a wide revenue base and satisfy the neutrality principle. An indirect tax is a tax collected by an intermediary (such as a super market) from the person who bears the ultimate economic burden of the tax (such as the consumer).

The intermediary later files a tax return and forwards the tax proceeds to a revenue authority with the return. In Uganda, the common indirect taxes are Value Added Tax (VAT) and excise duty.
The disposable income that such final consumers retain after tax diminishes significantly. This implies that the final consumers, individuals and businesses alike, ultimately save less. This drives the cost of borrowing high, which slows down production, and generally economic activity.

It is also worth noting that all indirect taxes are levied on consumption not production. Now all households in Uganda consume. An in-depth examination of the VAT Act, Excise Duty Act together with the East African Management Act, reveals that there are very few goods and services on which a fresh tax can be levied.
The only option, perhaps, is to increase the rate or amount that is currently being levied. If any increases are made on the basic goods and services, it implies that achievement of the vision 2040 may be compromised.

The memories of the resistance to mobile money and social media tax are still fresh in our minds. When taxpayers do not like a given tax, they either evade, reduce or avoid consumption altogether.
Evasion is illegal and has abysmal consequences. In the interest of enhancing revenue collection, government should work towards avoiding the repeat of what happened earlier in this financial year.
The consequences were undesirable: Government revenue collections was adversely affected and unplanned expenditure were incurred to quell the protests, Parliament had to reconvene to consider the amendment to the Excise Duty Act, related businesses lost revenues, which translate into lower tax payable and costly efforts were undertaken to allay the fears of many stakeholders.

Empirical evidence using household data indicates that access to basic financial services such as savings, payments and credit can make a substantial positive difference in improving poor people’s lives. For firms, especially small and medium enterprises (SMEs), access to finance is often the main obstacle to growth.

Accordingly, tax regimes that promote financial inclusion will go a long way to helping Uganda realise Vision 2040. Currently, Uganda has the second highest rate of financial inclusion in the East African Community.
The actual cost and benefit of the indirect tax on mobile money and social media will only be known at the end of the financial year. What is clear though is that when a tax-boosting measure goes awry, it can endanger the existing tax base and derail the expected end.

Mr Kampumure is a consultant at Uganda Management Institute (UMI).
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