What you need to know:
Since Uganda’s PAYE rates are the highest across East Africa, there is limited room to increase this rate.
The Ministers of Finance in Burundi, Kenya, Rwanda, Tanzania, and Uganda read their respective budgets for the financial year 2023/ 2024 on 14 June 2023. The Democratic Republic of Congo and South Sudan Ministers of Finance are yet to read their budgets.
Generally, Gross Domestic Product (“GDP”) for the financial year 2022/ 2023 (“FY 2022/2023”) in Kenya, Rwanda, Tanzania, and Uganda has been projected to grow with Rwanda leading the pack at 6.2 per cent.
However, Tanzania has kept its inflation rate at an average of 4 percent as of May 2023, while Burundi, Kenya, Rwanda, and Uganda have seen spikes in their inflation rates.
Despite elevated inflation and an increase in interest rates by the United States Federal Reserve, the Uganda Shilling remained resilient against the USD. The bigger question for most East African states is the sustainability of their debt and how the debt commitments will be funded in FY 2023/2024.
To fund debt payments, several tax measures were suggested across the East African states. We have seen Kenya, Tanzania, and Rwanda suggest tax changes, and some of them are anchored in increasing the applicable tax rates.
However, Uganda’s tax changes do not necessarily increase tax rates but rather aim to establish an efficient tax administration system and reduce revenue leakage. Could this be a case of Uganda going against the grain by not over-taxing its citizens while its neighbours seek to increase tax rates to collect revenue? A glimpse of the recently proposed tax changes (both direct and indirect) across some of the East African countries could provide answers, and show if there is any room left for increasing tax rates in Uganda.
Individual income tax rates
Kenya introduced two additional tax bands for their Pay As You Earn (“PAYE”) that is 32.5 percent and 35 percent being the highest marginal tax rate.
The argument put forward by the Kenyan National Treasury was that this proposal would make the PAYE bands more progressive. This means those who earn more should be able to pay more tax, which is a fair argument. In Uganda, lawmakers already increased our marginal PAYE rate to 40 percent effective July 1, 2012. Considering Uganda’s PAYE rates are the highest across East Africa, there is limited room to increase this rate.
However, Kenya’s case, in addition to the new tax bands, the government has also suggested that employees will be paying a National Health Insurance Fund levy of 2.7 percent and 1.5 percent of their gross salary to support the country’s affordable housing programme.
Uganda does not have any similar levies proposed this year but considering the current discussions on the National Health Insurance Scheme, it may be a matter of time. Such a proposal would require a review of the current PAYE rates considering they are already high.
Taxation of branches
Kenya proposed a tax rate of 15 percent on repatriated branch profits which means that a Kenyan branch will pay tax at an effective tax rate of 40.5 percent (30 percent corporation tax plus 10.5 percent (100-30) *15 percent)). Currently, a branch in Kenya is taxed at a rate of 37.5 percent.
The effective tax rate of a Ugandan branch is already 40.5 percent and this has probably been the case since the Income Tax Act came into force in 1997.
Local excise duties
Tanzania has broadened its excise duty regime to now include cement and the rate applicable is TZS 20 per kilogram. The government argues that this change is meant to increase revenue and reduce the effect of greenhouse gas emissions in the country.
For over five years, Uganda has been imposing excise duty on cement and currently the rate of excise duty on cement is Shs500 per 50kgs which is Shs10 per kilogramme. Considering the 1TZS to UGX is about 1.5, the proposed excise duty rate in Tanzania is higher than Uganda but needs to be looked at in the context of the varying economic environments.
Regarding cigarettes, Uganda currently charges excise duty of 200 percent on Cigars, cheroots and cigarillos containing tobacco and other tobacco substitutes whereas Tanzania is only proposing to introduce a 30 percent excise duty on the same for FY 2023/2024.
Accordingly, whereas we see some increases in tax rates in Kenya and Tanzania, Uganda is already charging tax on the same items and probably has limited room to increase these tax rates. However, even where we have seen neighbouring countries reduce tax rates in some respects to make their tax regime more competitive and allow businesses to further thrive, the comparable Ugandan tax rates remain high.
Comparatively across the East African region, the Uganda tax regime appears high. Therefore, the government’s decision to expand the tax base using means other than increased tax rates seems to be a step in the right direction. This is especially when there’s only so much left to tax, and the citizenry already feels like they have been taxed to the hilt.
For example, Tanzania is proposing to remove the mobile money transaction levy on sending and receiving monies electronically but increase the levy on withdrawals by 50 percent of the current rates. Likewise, Kenya is proposing to reduce the excise duty rate on money transfer services from 12 percent to 10 percent to encourage financial inclusivity and promote economic activity for Micro, Small, and Medium Enterprises.
On the other hand, Uganda has maintained the same excise duty rates at 15 percent of fees charged which seemingly contravenes the National Development Plan III 2020/ 2021 – 2024/2025 ICT focus area on digital inclusion.
The writer is a senior manager in tax at PwC.