IMF wants govt to remove tax exemptions on Saccos 

The International Monetary Fund (IMF) has said government should consider removing exemptions on incomes of Savings and Credit Cooperative Societies (Saccos) as a near-term revenue reform priority to boost corporate income tax collections.

In details contained in the Uganda fifth review under the Extended Credit Facility Arrangement and Request for Modification of Performance Criteria, the IMF said government needed to conduct a comprehensive cost-benefit analysis to determine the impact of some tax incentives, suggesting that exemptions on Saccos should be repealed and restricted to “microfinance cooperatives serving low-income investors”.

“Top corporate income tax reform priorities include …. repealing tax exemptions for savings and credit cooperative societies,” the review reads in part, noting that government should also discontinue tax holidays that are cost-ineffective and instead offer windfall gains to companies that have invested even in the absence of incentives, and offer cost-based incentives, such as accelerated depreciation to strategic industries.  

Government did not address the matter in response to some of the issues raised in the review and efforts to get a comment from the Ministry of Finance proved futile.

Ministry of Finance Permanent Secretary Ramathan Ggoobi, who at the weekend had said he would cross-check and revert, had not responded by press time.

In 2018, while speaking during a post-budget dialogue organised by URA, Finance Minister Matia Kasaija, said Saccos were the nearest to what many people in villages had as financial institutions, thus exempting them from taxes would encourage more Ugandans to keep their money in formal settings, which would benefit the economy in the long run.

His comments had come after government had failed to reintroduce taxes on incomes of Saccos by repealing sections of the Income Tax (Amendment) Bill 2017, which exempted Saccos from paying taxes on their incomes for 10 years from July 2017 to June 2027. 

The Ministry of Finance had proposed to rescind the exemptions and reintroduce corporate income tax of 30 percent and withholding tax where applicable.

However, the proposal was rejected by Parliament, which observed that before considering a reintroduction government had not conducted a study to measure the impact of the exemptions on Saccos. 

In the review, IMF indicated that as of June 2023, revenue forgone from tax expenditures administered by URA was estimated at 1 percent of gross domestic product, while an even larger part of exemptions was administered outside URA’s domain. 

Reports have previously put foregone taxes due to exemptions at Shs7 trillion. 

The IMF further suggested that government must conduct a comprehensive cost-benefit analysis to determine the impact of tax incentives, noting that in particular corporate income tax and value-added tax regimes were characterised by relatively high rates and narrow bases, while the excise regime, even though raising revenues that are above average compared to peers in the region, was not well focused on correcting the negative externalities associated with major excise tax bases on fossil fuels, vehicles, alcohol, and tobacco. 

Repeal exemptions on parliamentary and military incomes

The IMF further suggests that government should also consider reforming exemptions under personal income tax on parliamentary and military incomes as one of the near-term revenue reform priorities. 

“[personal income tax] reform priorities include (i) repealing exemptions of parliamentary and military incomes (with a corresponding gross-up), which undermines taxpayer morale and (ii) taxing non-business capital gains, which would be highly progressive,” the review reads in part, noting that the overall net impact of the reforms, however, could be small if taxpayers were to be compensated through higher salaries. 

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