Taxing cash withdrawals is double taxation, says Nalunga

Tuesday February 23 2021
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Ms Jane Seruwagi Nalunga, an expert on trade and tax. PHOTO/courtesy

According to government, this move will encourage cashless transactions, promote e-commerce and improve tax compliance in addition to raising revenue. Why are you not happy with a move whose intention is as clear as this one!

We believe that this proposal will subject people whose incomes are already taxed to double taxation. Already, banking services are heavily taxed, so additional Excise duty means the burden will be transferred to the clients, majority of whom are already burdened enough. This will make banking more costly.  Therefore, the tax proposal is already unfair and is not a measure for compliance.

We also think it will not address the taxation of big e-commerce platforms like Amazon, Alibaba, Jumia, Uber, Facebook, Google among others who still remain outside the tax bracket because of the weak regulatory framework.

But the government must start somewhere, considering that the large informal sector players are largely outside the taxation bracket.

We agree that Uganda’s economy is largely informal which partly contributes to low domestic revenue generation in the country. The Economic Policy Research Center (EPRC, 2017) noted that informality was growing faster than formality in Uganda with 98 percent (over 13.67 million) of the working population working in the informal sector.  It is also important to take note of the 2018 Finscope study for Uganda which indicates that 50 per cent of Ugandan savers (approximately 5 million adults) save informally. The proposed 0.5 percent charge on all bank withdraws serves to discourage the informal/shadow economy operations as economic agents will shy away from depositing their money in commercial banks. This may have undesired effects of reduction of bank transactions.          

Government needs revenue to actualise the national budget by way of delivering social services. That money must come from somewhere, particularly the citizen.

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Granted! But it shouldn’t be at the expense of increasing the tax burden through multiple taxation. This is not fair. In fact, it is counterproductive. Here is why: Excise duty tax is levied on bank to wallet transactions and the same is taxed further through mobile money transactions. Therefore, the same people are being taxed multiple times which does not increase the tax base as explained by Ministry of Finance.

Some banks increased charges on over the counter cash withdrawals in order to promote the use of e-banking. Therefore, whereas we acknowledge the fact that it is critical for Uganda to increase domestic revenue to finance public goods and services, this should not come through double taxation and increasing the burden of the already burdened tax payers.

We are cognisant of the fact that for the Financial Year (FY) 2021/22, domestic revenue is projected to decline from Shs21.8 trillion in FY 2020/21 to Shs21.6trillion.  The negative impact of Covid-19 on domestic resource mobilisation efforts of the country and on individuals have further exacerbated this situation. However, this move to tax withdrawals is likely to deepen rather than broaden the tax base leading to an increased tax burden. This will simply widen the inequality gap between the rich and poor.  The negative impact of Covid-19 on domestic resource mobilisation efforts of the country and on individuals have further exacerbated this situation. However, this move to tax withdrawals is likely to deepen rather than broaden the tax base leading to an increased tax burden. This will simply widen the inequality gap between the rich and poor.

Government’s intention is to largely encourage cashless transactions. Isn’t this a trend you should support, given its advantages?

Actually, this move could discourage e-commerce. It is critical to note that taxation of all cash withdrawals (counter, agency banking, ATM and Mobile money) is not an enabler of a transformative e-commerce agenda.

First, let’s understand what e-commerce is. It refers to the production, distribution, marketing, sale or delivery of goods and services by electronic means, and comprises of online shopping, electronic payments, online auctions, internet banking, and online ticketing, among others. Therefore, e-banking and e-payments are just a subset of the broader e-commerce agenda and thus do not necessarily promote e-commerce per se.

This is because Uganda as a primary commodity dependent country which is currently experiencing the challenge of premature deindustrialisation, tapping into the benefits that accrue to e-commerce will require interwoven policies and strategies aimed at developing value chains that link critical productive sectors like agriculture and mining to the digital trade.  

The promotion of e-commerce further requires requisite digital infrastructure and conducive regulatory frameworks which are currently missing in Uganda.  For example, in 2020, Internet penetration in Uganda stood at 24 per cent, with only 10.6 million Internet users . Further, Uganda, like most African countries still lags behind in the 3As of Internet that is availability, accessibility and affordability as she still ranks highest in EAC regarding the cost of Internet (1GB =$2.67 compared to $2.41; $2.18 and $2.18 for Kenya, Tanzania and Rwanda respectively . Currently, the National ICT Backbone Infrastructure (NBI) covers 39 districts (out of 121 districts in total) with over 2,400 km of fibre-optic cable, it has a relatively low penetration in rural areas. Under such a reality, the digital divide still presents enormous hurdles for Uganda’s full and beneficial participation in e-commerce. The UNCTAD eTrade Readiness Assessment recommends inter alia a dedicated national e-commerce Strategy and a strong data protection and privacy policy be put in place.


What is the way forward in terms of alternative sources of revenue?

The proposal will not achieve the intended objectives but will rather discourage people from banking, with far reaching negative implications on the promotion of financial inclusion and the need by the banking sector to mobilise funds for onward lending. Government should therefore venture into avenues that promote financial inclusion in the country and generate revenue while ensuring fairness, equity and inclusiveness.

We urge the government drop this proposal and engage in a broad rethinking of the domestic resource mobilisation architecture that will support the resuscitation of the crumbling economy on the account of Covid-19 pandemic.

Government should renegotiate and fast-track ongoing negotiations of existing Double Taxation Agreements (DTA), particularly the one between the Netherlands-Uganda and Mauritius-Uganda DTAs. If it is done well, Uganda can regain her taxing rights on dividends, royalties and interests.

Double taxation

Don’t burden taxpayers

Some banks increased charges on over the counter cash withdrawals in order to promote the use of e-banking. Therefore, whereas we acknowledge the fact that it is critical for Uganda to increase domestic revenue to finance public goods and services, this should not come through double taxation and increasing the burden of the already burdened tax payers.

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