For the last four years, Innocent Byarugaba runs two restaurants as registered businesses and pays trading licences to Kampala Capital City Authority (KCCA). He says he cannot formally pay taxes now due to the pandemic that caused a drop in sales, forcing him to lay off eight workers out of 12. His daily income is still slow, prices of raw materials are still inflated and the returns are low.
Byarugaba is a restaurant owner in Makindye division, Kampala.
“Every day, I invest Shs20,000, which brings in Shs180,000. With that, I pay off daily wages for the workers, and keep Shs20,000. The money to pay rent comes from another side income. So you will find that you can’t pay taxes.”
“A jerrycan of cooking oil has gone up in costs from Shs80,000 to Shs120,000 and baking flour is at Shs72,000 from Shs52,000.Tomatoes cost Shs500 each for pastries,” Byarugaba adds.
Byarugaba’s views represent several business people in the informal sector that do not meet their tax obligations due to limited information and cash flow problems. Due to the pandemic, many businesses collapsed while others are struggling to pick up.
Mr John Walugembe, the executive director of the Federation of Small and Medium Enterprises Uganda (FSME) urges Uganda Revenue Authority to work with other stakeholders to put in place mechanisms that will assist businesses to recover.
“Educating people about the need to pay taxes is one thing but do they have the money? Government needs to do a proper assessment on the impact of Covid-19 on different sectors of the economy to inform their strategic development,” Mr Walugembe says.
“We should all be discussing how to stimulate business. How effective was the last stimulus package? What can we do more? What sectors were most affected?” he argues.
Borrowing a leaf from the West, the current USA President Joe Biden has approved the latest stimulus of $1.9 trillion because his government recognises that the pandemic affected businesses negatively.
Walugembe believes there are no direct benefits linked with formalising businesses in this country. They are just inferred so URA should put in place benefits with other government agencies to attract SMEs to formalise business.
“This could be positioned in terms of a scoring system in public procurement processes, as part of the endeavours to encourage businesses to formalise. There has to be a link between requests to formalise and the benefits that come through like financing or business offers.” Currently, there is nothing substantive about formalisation.
Mr Ian Rumanyika, the acting commissioner of public and corporate afairs a URA, clarifies that one does not find a struggling formal business paying taxes because it has records on a specific time frame declaring its failure to make enough profit to pay tax. In short, Rumanyika says any struggling business will not pay tax but will earn incentives.
During the Covid-19 crisis, URA halted auctioning items of businesses that did not pay tax. Rumanyika acknowledges, “We found it inhuman to start auctioning especially those that have not paid tax. There is a possibility that one has not paid tax because they have been struggling.”
Then the government advised URA to opt for open negotiation with clients in a fix. Currently, the institution makes sure a taxpayer accepts liability and agrees to pay tax in installments under a Memorandum of Understanding.
Under the new programme, court cases are shoved away from the legal stature to a one-on-one discussion between the plaintiff and defendant under the alternative dispute resolution by URA.
In the last six months, this programme has seen Shs500 billion collected, which is far better than arguing out a case.
Another successful measure is through voluntary disclosure. This alone has raked in Shs18.3 billion in the last seven months. Voluntary disclosure is a process where the taxpayer discloses information related to tax liabilities, misstatements or omissions of his or her tax declarations to Uganda Revenue Authority (URA) without being prompted by any action or threat.
Voluntarily disclosing your status guarantees a waiver of your’ penalties and interests. This is a combined effort for all government bodies to reduce informal operations which account for about 63 per cent. The Tax Register Expansion Programme (TREP) has introduced over 600,000 tax payers.
Under TREP, the government implemented one stop shop to facilitate the formalisation of businesses. The programme is a cooperation between different agencies to ease the registration process. Uganda Registration Services Bureau is in charge of registering businesses, URA issues out a Tax Identification Number while KCCA grants trading licences. The Ministry of Local Government also gives out licensing for any local government.
Formalising a business means attaining a registration status; acquiring a taxation number and all necessary certifications required.
Rumanyika arugues that there are many opportunities in being formal. Government is the biggest spender in contracts of services and supplies. Therefore, without a taxpayer certificate or a trading licence, you cannot get a tender.
“We have seen small enterprises remain small because they have not formalised their businesses while formal businesses are overwhelmed with opportunities. The only trick in building from a small to medium or large taxpayer is by being compliant and formal.”
The African single market (Africa Free Trade Area) according to World Bank presents a bigger market with a combined gross domestic product (GDP) valued at $3.4 trillion and 1.3 billion people. To partake such opportunities, one must be formalised.
What has happened elsewhere?
The USA President Joe Biden approved the latest stimulus of $1.9 trillion because his government recognises that the pandemic affected businesses negatively.
“Educating people about the need to pay taxes is one thing but do they have the money? Government needs to do a proper assessment on the impact of Covid-19 on different sectors of the economy to inform their strategic development,” Mr John Walugembe, the executive director of the Federation of Small and Medium Enterprises Uganda says.