Exemptions make tax administration difficult, says IMF  

Projects such as the Lubowa International Specialised Hospital Uganda have benefited from huge government incentives some of which have been questioned by the public.   Photo | courtesy 

What you need to know:

According to Ms Izabela Karpowicz, the IMF resident country representative, there is no empirical evidence to suggest that tax incentives have a sizable impact on investment in the long term 

Tax exemptions increase the complexity of tax administration and mainly benefits those who are better off rather than the poor and vulnerable, according to the International Monetary Fund (IMF). 

Speaking at the launch of a report themed: Improving tax expenditures’ reporting in Uganda for improved social economic benefits in Kampala on Tuesday, Ms Izabela Karpowicz, the IMF resident country representative, said tax exemptions have less impact on the poor and vulnerable, which therefore, makes them more regressive than progressive. 

“Empirical studies and international experience suggest that tax incentives do not appear to have sizable effects on investment in the long term,” she said, noting that in cases where governments decide to offer tax incentives there should be clear estimates of costs and benefits. 

The report, authored by Seatini and supported by USAID, indicates that over the last three financial years, Uganda has foregone more than Shs5 trillion in taxable revenue, which translates into 3.6 per cent of gross domestic product, resulting from tax incentives and exemptions advanced to both local and mainly foreign investors. 

However, Mr Moses Kaggwa,  the Ministry of Finance director economic monitoring, said their assessment of the foregone revenue was much less than what the report had provided, with Dr Silver Namunane, Ministry of Finance tax policy revenue domestic mobilisation specialist, putting it at about Shs2 trillion. 

Tax expenditures are special provisions within the tax laws that benefit specific activities or groups of tax payers. They can be reliefs, exemptions, zero-ratings, credits or deferrals.

The report also indicates that Uganda has no provisions on how many tax expenditure items should be allowed in a given financial year and adds that there is no maximum amount of revenue that should be foregone or even the maximum number of beneficiaries per sector that should benefit.

While presenting the report, Ms Grace Namugambe, one of the lead researcher, noted that whereas it is critical to grant incentives, it is important for government to periodically assess and report on the impact of exemptions. 

However, in 2020, government published the Domestic Revenue Mobilisation Strategy, which listed as ‘high priority’ the need to establish an effective tax expenditure governance framework. 

Consequently, in the same year, for the first time a detailed tax expenditure report was compiled for Uganda and provided a foundation for the completion of annual reports in subsequent years.

Mr Dickson Collins Kateshumbwa, a tax expert and a member of the Parliamentary Budget Committee, while discussing the report, noted that irrespective of the variance in estimation of revenue forgone, tax exemptions are sometimes given in an irrational manner to respond to politics, noting that incentives and exemptions should be institutionalised.

The report recommends that government should establish a fiscal committee involving key stakeholders with knowledge on tax expenditures to provide regular updates on tax expenditure repositories as well as conducting feasibility of proposed tax expenditures and the cost and benefit analyses. 

It also recommends regular monitoring and review of tax expenditures, establish a proper definition of a bench mark tax expenditure to allow for a common understanding as well as ensuring consistency, prevent miss interpretation and encourage ease of comparison over years.