The deepening non-compliance in the informal sector, presently accounting for the largest segment of the country’s economy, is largely as a result of lack of proper segmentation and tailored tax education.
According to a study conducted by Makerere University College of Business and Management Sciences, the disconnect in tax education has played a big role in entrenching informality, which partly explains the failure to widen the tax base.
Despite registering significant increases in domestic revenue collections over the years, data from the Uganda Revenue Authority (URA) indicates that the country’s ability to collect taxes across the economic sectors hovers between 12.5 per cent 13.5 per cent, which is below sub Saharan average of tax revenue to GDP average of 16 per cent.
The rate is also below most East African Community member states.
The huge informal sector, making up nearly 52 per cent of the economy, according to the study, which set out to interrogate tax education gaps in the informal sector and how it can be leveraged in broadening the tax base, represents a potential untapped revenue source for government.
According to findings of the study, only about four out of 10 businesses in the informal sector reported having received some tax related information, which according Prof Eria Hisali, the Lead Research Investigator, is a clear indication that majority of businesses do not receive suitably targeted information.
Prof Hisali, who is also the Principal of Makerere University College of Business and Management Sciences, noted that things that should be basics and common knowledge such as Tax Identification Number (TIN), filing tax returns, types of taxes paid and the need to formalise businesses, are actually not understood by people operating informal businesses, which continues to deprive government of an opportunity to widen the tax base.
The study also found that only 40 per cent of respondents were registered with URA while those who were not registered said they did not know where to register from (86 per cent), did not know how to register (83 per cent) while others did to see the value (rationale) in registering (70 per cent).
Some respondents who reported being registered with URA said they were non-compliant or not paying taxes at all, citing low morale and unfairness in the tax system.
However, according to the study, there is need for government and URA to create a critical mass of agents and volunteers to drive tax awareness among Ugandans through introducing tax modules in the education system.
Impact of politicians
According to Kampala City Traders Association chairman Everest Kayondo, the glorification of informality, which is fueled by politicians, is failing businesses to transition to stages where they can be taxed.
Association of informal traders, he says, should be discouraged because they entrench informality which translates into not paying taxes.