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How the govt lost Shs1.4 trillion in tax incentives

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Auditor General John Muwanga presents the Annual Audit report to Speaker Anita Among at Parliament in January.  PHOTO | DAVID LUBOWA

Benefits of tax exemptions and incentives are so far not matching the objectives of the initiative, according to the Auditor General Report’s latest information.

The Value for Money Audit Report on the Management of Tax Incentives and Expenditure in Uganda done by the Auditor General for the Ministry of Finance, Planning, and Economic Development, reveals that although tax incentives and exemptions are expected to free up the capital, to enable companies to employ more staff, this key objective hasn’t so far been achieved.

According to the report, a total of 22 companies out of the 36 that had obtained the incentives, were performing below the 50 percent threshold, “and thus had not fully achieved the desired employment levels.”

The December 2023 report further discloses that government continues to take the cost of tax waivers, advising the Ministry of Finance to limit the number of tax exemptions to businesses that qualify under the Tax Laws.

The Auditor General, Mr John Muwanga, notes in the report that over the period under review, taxes waived by the government amounted to Shs1.4 trillion. These included Shs1.293 trillion waived under the Gazette by Parliament, direct waivers of Shs118.5 billion by the minister, and tax exemptions of Shs5.576 billion granted by the commissioner general as per Section 21 of the Income Tax Act.

“I, however, noted that there was no evidence that the other written-off taxes outside the Gazette, were communicated to Parliament for retrospective authorisation. The amount of taxes exempted are revenues that are foregone resulting into revenue loss on the side of government,” reveals Mr Muwanga In his report.

Over the last year, the Ministry of Finance committed to pay taxes totalling Shs553 billion on behalf of several taxpayers, according to the Auditor General. However, it was discovered that the commitments were not paid in time and have led to accumulation of domestic arrears.

The report also indicates lack of a framework for the management and monitoring of Tax Incentives and Expenditures. This is because at the time of the audit, the Ministry of Finance did not have an approved framework to guide management and monitoring of the different tax incentives and expenditures.

Further, an analysis of the memoranda of understanding (MoU) for the various beneficiaries of investment incentives and tax exemptions revealed that several companies have not achieved the outputs as stipulated in the signed MOUs and several incentives remained un-utilised, such as the Corporation Income Tax holidays for some companies.

Furthermore, the reports note that several challenges hindered the realisation of the tax exemption and incentive, including the high cost of electricity coupled with unstable supply, especially during peak hours that limit production hours and competition from imported industrial inputs that are locally available such as pre-painted sheets and galvanised coils.

Way forward

The Auditor General recommended following up with beneficiaries of the incentives to ensure that the benefits of the incentives such as job creation are realised. This should be in addition to regularly assessing benefits relating to tax incentives. Additionally, the benefits of the tax incentives should continuously and realistically be measured to ensure that the intended objectives are realised, and it should also guide future decision-making.

The ministry was also advised to establish criteria for approval of beneficiaries of tax incentives and expenditures to eliminate ambiguity regarding eligibility and the assessment of the expected benefits while assessing the performance of each beneficiary.

And taxpayers that seek exemptions due to inability to pay, should have proven beyond doubt that they are financially-incapacitated to limit the accumulation of domestic arrears.

In FY2024/2025, government plans to borrow an additional Shs8.9 trillion domestically from commercial banks. As a result, interest payments on loans now consume a substantial portion of the budget and domestic revenues, increasing interest payments to Shs9.5 trillion in FY2024/2025 from Shs8.2 trillion in FY2023/2024.

The Auditor General also proposed fast-tracking the compilation and approval of the framework for monitoring of tax incentives granted to companies, to enable an objective assessment of the levels of compliance of the beneficiary firms, with the terms in the signed MoUs.