Rational tax exemptions will increase revenue, IMF says

To minimise under reporting and misclassification by firms manufacturing excisable goods, government introduced the digital tax stamps. PHOTO / FILE

What you need to know:

Reductions in tax exemptions will increase the revenue base and contribute to ensuring that the debt-to-GDP ratio continues declining.

The International Monetary Fund staff appraisal on Uganda’s policy has supported government’s plan of adopting a tax exemption rationalisation plan that will save 0.1 percent revenue to Gross Domestic Product (GDP) for FY 22/23 and another 0.2 percent thereafter.

The IMF said reductions in tax exemptions will increase the revenue base and contribute to ensuring that the debt-to-GDP ratio continues declining over the medium term.

Uganda has been losing 2.1 percent tax revenue to GDP due to tax exemption, which the government has been giving investors in different sectors.

The tax exemption rationalisation plan entails criteria of choosing tax exemption, timeframe and the purpose of the tax incentive to the investors for a specific sector of the economy the investor will be investing in.
It is also anticipated that the tax exemption rationalisation plan will help government to realise cost analysis of tax exemption.

The stock of public debt increased from $ 19.54 billion in June 2021 to $ 20.99 billion in June 2022. As a share of GDP, public debt increased from 46.9 percent to 48.4 percent over the same period.

The Finance Ministry says this represents an increase of 7.4 percent compared to 27.45 percent the previous financial year. This is as a result of government’s deliberate policy of fiscal consolidation aimed at ensuring that debt remains within the set threshold of 50% of GDP in the medium term.

The International Monetary Fund staff appraisal which is accompanying Uganda second and third reviews under its Extended Credit Facility arrangement issued on January 17, 2023 from Washington DC, the IMF executive board explains that returning to the programmed fiscal consolidation path and reserve cover remains essential to keep debt sustainable and maintain external buffers.

“Enhanced domestic revenue mobilisation, including via the elimination of inefficient tax exemptions, rationalization of non-priority spending, and shifting the composition of spending towards priority social areas will help achieve the fiscal objectives and address large development needs,” said the IMF.

The IMF staff says a tight monetary policy will ensure that inflation returns to target in the medium term.

Repealing tax exemptions
 The IMF staff appraisal adds: “MoFPED should identify areas for repealing tax exemptions, outline the intended yields, and establish a clear timeline for implementation. Uganda’s debt remains sustainable, with a moderate risk of debt distress. The Monetary policy should continue to tighten to achieve the core inflation target.”