Government’s tax proposal faces rejection at birth

Customers observe social distancing in a banking hall. Government is proposing a 0.5 per cent tax on cash withdrawals in the next financial year to raise revenue for the economy. The move has been rejected by the already burdened taxpayers. PHOTO/KELVIN Atuhaire

What you need to know:

The proposed 0.5 per cent tax on cash withdrawals discourages people from making deposits and forces those who get paid in the bank to withdraw all their cash and keep it Christine Kasemiire & Dorothy Nakaweesi write.

#Rejecttheunjusttax; a harsh tag where like-minded Ugandans raised concerns about the tax proposal that government through Ministry of Finance had hatched, garnered more than 4,000 tweets last week.

 There was a plethora of views condemning government’s proposal on grounds that the same tax payers are being over-exploited. 

 The views were in response to a government proposal which came to light through a February 9 letter signed by Mr Patrick Ocailap, the deputy secretary to the treasury in Ministry of Finance highlighting government’s intention to introduce tax on cash withdrawals made across different banking channels such as over the counter, agency banking and Automated Teller Machines (ATM). 

The proposal was premised on the need to level the playing field by taxing banks the same way mobile money transactions are taxed. 

 “Currently, mobile money withdrawals are subject to 0.5 per cent excise duty but on the counter, agency banking and ATM withdrawals in commercial banks are not subjected to the same tax,” Mr Ocailap said in the letter. 

 Government is now proposing a 0.5 per cent levy on cash withdrawals at the different bank channels. 

 The proposal, government says, will encourage cashless transactions, promote e-commerce and improve tax compliance in addition to raising revenue.  

Introducing a tax on withdrawals means people will be discouraged from making deposits while those who get paid in the bank might turn to withdrawing all their cash and keeping it with them.

Liquidity pressure

According to the National Budget Framework Paper 2021/2022 recently approved by Parliament, Uganda’s budget is projected at Shs45.65 trillion, of which Shs20.9 trillion will go to debt servicing, against total domestic revenue that is projected at only Shs21.69 trillion.

This essentially means that 96.7 per cent of Uganda’s total domestic revenue — whose tax revenue is projected to be Shs20.13 trillion will be spent on debt servicing.

Current tax policy  

Currently, the 27.7million mobile money subscribers pay excise duty of 0.5 per cent on withdrawal transactions. This is in addition to a 15 per cent excise duty paid by customers through mobile money charges. In other wards, 15 per cent of all the mobile money charges paid by customers goes to Uganda Revenue Authority(URA) as Excise Duty.

While banks and their channels also remit 15 per cent of their bank charges on transactions to URA, they do not pay the extra 0.5 per cent. 

Some people from the communications world are of the school of thought that the tax levied only on mobile money is unfair and should be applied across the banking industry as well. 

 The sentiment from mobile money operators stems from the realisation that some of their customer base was retracting from mobile money and turning to bank channels due to lowered costs. 

“A levy on mobile money contributed a deficit of Shs30.4b which can be explained by the fact that high value clients withdraw their funds from agency banking,” then Commissioner General Uganda Revenue Authority (URA), Ms Doris Akol, said during the release of the Authority’s half year performance in the financial year 2019/2020.

 Bankers respond

Bankers through their umbrella body, Uganda Bankers Association said imposing the tax will be counterproductive and will make financial and payment services more expensive. 

They instead proposed new ideas. 

“We submit that the tax of 0.5 per cent applied to withdrawals made at mobile money points operated by telecom led mobile money agents is a counterproductive excessive tax burden...and should be withdrawn and instead replaced with the same 15 per cent excise tax on charges levied for mobile money withdrawals or even lowered across the board,” the letter from UBA read in part. 

Dr Adam Mugume, the executive director research, Bank of Uganda (BoU) in an emailed response to Daily Monitor explained that taxing cash withdrawals could have a negative impact on bank deposits.

“I believe taxing cash withdrawals would be detrimental to the economy as it could impact on growth of deposits in the banking system. In other words, it would encourage individuals saving in pots or under mattresses to avoid taxation,” he opined.  

Mobile money usage rises despite tax 

While mobile money transactions went into free fall at the inception of  the 1 per cent tax levy which was later revised to 0.5 per cent in 2018, the numbers over the years have since bounced back.

Bank of Uganda data indicates that the value of mobile money transactions decreased by 8.4 per cent from Shs73 trillion in 2017 to Shs66.9 trillion in 2018 when the tax was introduced and rose back to Shs79.7 trillion in 2019.

The story is different when it comes to the number of transactions which instead increased from 1.3b in 2017 to 2.5b in 2018 before peaking to 3.1b in 2019.

Values of deposits have been increasing since 2019 from Shs1.5 trillion with 32.6million transactions in January to Shs2.5trillion in December 2020 from 59.9 million transactions.

Withdraw transactions have increased from 21.9million valued at Shs1.4 trillion in January 2019 to 36.1million at Shs2.5trillion in value in December. 

Subscribers increased from 23.5million in 2019 to 30.5million in 2020.

This indicates that even while the tax made costs more expensive for the public, they have no other easier option as the world at the moment is addicted to convenience which government is capitalising on.

The search for revenue

This might only be the beginning for what lies ahead as the country is in deep need for revenue.

The harsh reality that Uganda especially with the emergence of Covid-19 more than ever needs to have increased and consistent revenue collected cannot be ignored. Due to global lockdowns and slowed economic activities, international taxes which were already plummeting as the country enters into common market protocols  dipped even further. 

Waiting for handouts from donors has also proven unsustainable.

URA in the first quarter FY 2020/21 (July to September) collected Shs4 trillion against a target of Shs2.9 trillion, resulting into a significant surplus of about Shs1 trillion.  

While one of the reasons for the positive performance by the tax body was reduction of target from Shs21.8 trillion to Shs19.6 trillion, URA also attributed the surplus to increased domestic taxes with import substitution.

The dipped international taxes have also led to a revised agenda by the tax authority to look inwards and collect more taxes locally through the domestic revenue mobilisation strategy. 

Due to this shift, the Authority is looking for new avenues of generating domestic revenue. 

However, because of the pocket-sized tax base of 1.6 million tax payers keeping the country afloat in domestic revenue, the old familiar story of over taxation sits deep in Ugandans hearts. 

The tax policies, however, are expected to have a regressive impact on financial inclusion by discouraging the unbanked from joining the formal financial sector. 

The proposal to tax the already heavily taxed was shunned by the public citing double taxation and over exploitation. 

In addition, poor service delivery, corruption and mounting debt further discourage compliance among tax payers. 

Reactions to proposed tax 

Dr Fred Muhumuza, an economist and lecturer at Makerere University, notes that one wrong should not be used as the norm to set future practice. 

“It was wrong to tax mobile money withdrawals and we cannot use that as reason to tax bank withdrawals. What exactly are we taxing? The bank that offers this service earns income that is taxable. The recipient of the service should not be taxed,” he says.

Robert Lule, a private digital consultant says “This catalyses use of digital technologies but we must push for an enabling environment with no interruption of government and security. The other aspect is to tighten data privacy and protection. Security should cease forthwith from tapping phones and confiscating people’s electronic gadgets. This compromises trust dynamics of digital systems. Digital identity mechanisms should be pursued, especially when it comes to harmonisation of personal records at all identity registries. E- Payment platforms and laws should be streamlined. What is the update on interoperability? Transfer margins and prices should be made affordable. In Nigeria, interbank e- transactions attract 50 Naira or Shs500 and for some banks, there are no charges. How can this be implemented in Uganda? Pricing issues are going to be very key if we need to drive cashless exchanges at merchant level. 

Ms Jane Nalunga, country director Seatini Uganda says, “Let government tax the digital economy.”

Tough times lie ahead

Government under pressure to identify new revenue streams

This might only be the beginning for what lies ahead as the country is in deep need for revenue.  

The harsh reality that Uganda especially with the emergence of Covid-19 more than ever needs to have increased and consistent revenue collected cannot be ignored. Due to global lockdowns and slowed economic activities, international taxes which were already plummeting as the country enters into common market protocols  dipped even further.                                     

Waiting for handouts from donors has also proven unsustainable.