Shs5 trillion lost in tax exemptions, incentives

More than Shs5 trillion in taxable revenue is foregone due to exemptions and related incentives, according to the government tax expenditure report.

The report, the first to be published despite being a mandatory annualised document, indicates that during the 2019/20 financial year, a total of Shs5.03 trillion was foregone due to tax expenditures incurred on exemptions, reliefs and incentives. 

Exemptions and reliefs related to international trade taxes, which stood at more than Shs2.1 trillion, according to the report, contributed the largest share of foregone tax followed by value added tax, which contributed more than Shs1.8 trillion. 

Foregone revenue resulting from exemptions on income tax stood at Shs1 trillion, with the largest share coming from employment income tax exemption due to armed forces (Shs172.74b), followed by employment income - other than basic salary - for Members of Parliament (Shs82.24b). 

It is first time Uganda is conforming to the regional and international statutory requirement that requires governments to publish a comprehensive tax expenditure report. 

Tax expenditure is estimated revenue loss that results from extending tax concessions or preferences to a particular class of taxpayers or activity. 

Over the last 40 years, tax incentives, although a deviation from the tax system, have since doubled from 40 to 80 per cent, despite their relevance coming under intense scrutiny. 

Civil Society Organisations under Tax Justice Alliance Uganda and development partners such as the World Bank and International Monetary Fund have in the past challenged government to publish tax expenditure reports to promote transparency.

Ms Regina Navuga, a tax analyst with Seatini, said that whereas it was a good step to publish the report, there was need for government to promote tax transparency as a matter of urgency.

“A society like our must ensure that its tax system is working for the benefit of everybody, particularly those who pay taxes,” she said, noting that the design of Uganda’s tax incentive regime impacts overall effectiveness, which in the end might force government to put in place regressive tax measures “to make ends meet”. 

The exemptions, Ms Navuga noted, partly prevent government from mobilising enough revenue, which is key in promoting growth and development. 

Tax exemptions and incentives seek to offer players in strategic sectors of the economy such as manufacturing, among others, ample space to grow their capacity and sustainable  operations.

However, there has been evidence of abuse in Uganda, suggesting that their costs is much higher than anticipated benefits.   

Ms Navuga, who is also a programme coordinator, financing for development at Tax Justice, noted that it was “important for Uganda to conduct a cost-benefit analysis to assess whether the country needs to continue awarding tax incentives, allowances and reliefs. 

Experts also argued that the government tax expenditure report should inform decision making processes in regard to tax incentives with the need to understand if indeed they have been important in attracting foreign direct investment and priority sector investment.

Some experts have also argued that instead of focusing on tax incentive, which are in most cases abused, government should focus on provision of skilled and cheap labour, access to raw materials and predictable political environment to attract investments. 

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