The brains behind new taxes

The determination of the number of taxes that individuals should pay often lacks comprehensive research and consultation across diverse economic sectors, according to economists.

Prosper Magazine has also established that most of the government tax proposals and measures, some of which end up being ‘rubber stamped’ by Parliament, tend to be hurriedly dealt with irrespective of the taxpayers’ concerns and queries raised by various sector professionals and experts. 

It further emerged in the course of numerous interviews for this article, that the technocrats at the Finance Ministry and government in general may ignore either in parts or whole the important principles of taxation, namely: efficiency, certainty, convenience, simplicity, ease of compliance, effectiveness and ability to pay. 

This, although shocking, has become the norm for policymakers whose decisions render implementers such as the Uganda Revenue Authority (URA) either in the line of fire or set them up for a wild goose chase.  

It is still fresh in the mind when the government introduced a 1 percent tax on mobile money deposits, withdrawals, transfers and payments, immediately mobile money transactions became expensive because the government proposed to also tax transaction value.

A public opinion survey, according to the United Nations Capital Development Fund (UNCDF), of nearly 3,000 people conducted two weeks after the introduction of the tax revealed that, of the 93 percent of respondents who had used mobile money in the previous six months, 44 percent transacted less in July and 47 percent stopped using mobile money completely after the tax was introduced. 
Even before this proposal became obligatory, it was clear that it was unpopular measure but the government forced it through. 

Following the back clash, the Cabinet communicated a decision on July 16, 2018, limiting the mobile money tax to withdrawals and to halve the tax to 0.5 percent of the transacted value, implying that in case of withdrawal, you will receive up to 99.5 percent of your money.

Then came a waiver issued by the Ministry of Energy and Mineral Development slashing taxes on gold to Shs43 billion from Shs616 billion, exposing lackluster, uncoordinated manner and resulting from lack of proper research and consultations. 

In 2021, the Finance Ministry issued a directive to halt the implementation of the five percent levy (US$200) on each kilogramme of gold exported. In March 2023, the Minister for Energy and Minerals Development, Ms Ruth Nankabirwa, directed URA to halt the recovery of gold export taxes.

This was after URA for the Financial Year 2021/2022, according to the Auditor General, failed to collect Shs340 billion in taxes from gold exports, which was estimated to be recovered after the five percent levy was implemented.
In 2017, the government introduced amendments to the Income Tax Act to exempt SACCOs from taxes for 10 years until 2027. 

These are just a telltale sign of the confusion over tax measures and proposals emanating almost year in, and year out from the cabinet and government corridors. 

In conclusion, International Monetary Fund (IMF) tax analysts believe that in an economy like Uganda’s, tax policy is often the art of the possible rather than the pursuit of the optimal. 

“It is therefore not surprising that economic theory and especially optimal taxation literature have had relatively little impact on the design of tax systems in these countries,” reads an IMF analysis of tax systems of developing country like Uganda.
  
Tough job
Setting up an efficient and fair tax system is, however, far from simple, particularly for developing countries, like Uganda, that want to get integrated in the international economy. This is according to IMF analysis in a paper titled: Tax Policy for Developing Countries. The authors, Vito Tanzi and Howell Zee note that the ideal tax system in countries like Uganda should raise essential revenue without excessive government borrowing, and should do so without discouraging economic activity. 

But for developing countries, Uganda inclusive, attempts to establish efficient tax system will always be in the face of what the IMF analysis describes as formidable challenges.  

“Most workers in these countries are typically employed in agriculture or in small, informal enterprises. As they are seldom paid a regular, fixed wage, their earnings fluctuate, and many are paid in cash, and off the books.

“The base for an income tax is, therefore, hard to calculate. Nor do workers in these countries spend their earnings in large stores that keep accurate records of sales and inventories. As a result, modern means of raising revenue, such as income taxes and consumer taxes, play a diminished role in these economies, and the possibility that the government will achieve high tax levels is virtually excluded,” reads the analysis. 

Given that nearly half of the country’s economy operates in informal economic structure, generating reliable statistics by URA and UBOS could prevent government policymakers at the Finance ministry from assessing the potential impact of their decisions, some of which are rushed, from building an efficient tax system. 

As a result, the two authors argue that governments often take the path of least resistance, developing tax systems that allow them to exploit whatever options are available rather than establishing rational, modern, and efficient tax systems. 

Who is behind tax proposals? 
Paying taxes is a good thing. It is an obligation that should be dutifully done. But who are those men and women behind these tax proposals/measures? Do you know the origin of these taxes before you are obligated, and sometimes compelled, to pay them?

 For starters, the people responsible for conceptualising and initiating most of the tax proposals and related measures are elite professionals in disciplines such as economics, tax and law. They’re often clad in ties or well-suited attire, strategising on maximising tax collection from taxpayers.

The deputy Secretary to Treasury, Mr Patrick Ocailap, told Prosper Magazine last week when contacted that matters of taxes are a macro issue. This is because they involve a lot of things, including; elasticity of demand, which is a relationship between demand and price, availability of substitutes, advertising pressure and even income.

According to Mr Ocailap, fairness, ability to pay, political economy et al all come into play when coming up with tax and related proposals.  

“We come up with tax measures and proposals as a team. We have the revenue intelligence team under tax policy department that comes up [with proposals], then we take them to Cabinet and finally it ends up in Parliament,” Mr Ocailap told Prosper magazine when contacted for this article. 

During parliamentary proceedings, various public representatives, associations, and apex bodies voice their opinions. Following this, the President’s assent is required for implementation.

But that is not all. According to Mr Paul Corti Lakuma, a senior research fellow at Economic Policy Research Centre (EPRC), even after all avenues have been exhausted, the courts of law can still have the last word if its interpretation is sought.  

Court emerges as the ultimate arbiter not only due to legal disputes but also insufficient research and consultations preceding proposals and tax measures.

  In another interview with the URA spokesperson, Mr Ibrahim Bbosa, it emerged that the tax body doesn’t shy away from collecting tax proposals and measures from segments of tax payers such as the business communities which is then compiled together with the ones the tax prefect has come up with before forwarding them to the Finance Ministry. 

“We assemble the proposals, discuss them and build consensus for their rationale then forward them to the Ministry of Finance. And this doesn’t mean that individuals and the various association cannot do the same,” he says.
Mr Bbossa, however, stressed that the tax body role is strictly advisory and shouldn’t be confused for introducing taxes. 

Can do better 
For the executive director, CSBAG, Mr Julius Mukunda, there is still more that can be done to create fair tax proposals and related measures. 

 “The consultation process is not enough yet. This is why despite opening up some space for consultations it is still very difficult to influence government to change its mind on a proposal that we think bears more disadvantage than advantages,” Mr Mukunda, a seasoned advocate for an efficient tax system told Prosper Magazine.  

To begin with, the process leading to conceptualisation and formulation of taxes and related measures is entirely driven by government and its technocrats.  
The Finance Ministry’s tax department, led by a commissioner and overseen by the director of economic affairs, collaborates closely with the budget director under the supervision of the permanent secretary and the secretary to the treasury. Ultimately, the minister, serving as the political head, receives directives directly from the President, who heads both the cabinet and the country.

Once the proposals go through those circles and endorsement, then the Parliament will have a say. By then, the likes of Civil Society Budget Advocacy Group, Southern and Eastern Africa Trade Information and Negotiations Institute and other key voices will simply be involved in the tail-end of the process, essentially flogging a dead horse. 

“We can do better but by the time the process is concluded, normally not so much has been done in terms of proper research across the board. A case In point is the [Over-the Tax] OTT proposals. It exposes how things tend to be done which is about the end game at the expense of the process,” says Mr Mukunda. 

For Mr John Kakungulu Walugembe, the Federation of Small and Medium-sized Enterprises - Uganda executive director, the budget process, concerning tax proposals and measures, entails both technical and political considerations, often proving challenging to contest even when they are not making sense.