What you need to know:
- Empirical evidence from the taxman shows that a catalogue of tax exemptions, credits, and deferrals whittled down the national budget for the Financial Year 2022/2023 by six percent.
At least Shs2.8 trillion in potential tax revenue has been lost to exemptions and deferrals extended to private businesses and organisations this financial year, thereby undermining government’s ability to fund the national budget, MPs lamented this week.
Ordinarily, tax waivers should be used to motivate investment. However, the view in Parliament is that this incentive is being abused and should be looked into. House Speaker Anita Among, therefore, directed State minister of Finance, Henry Musasizi to bring a complete list showing tax exemption beneficiaries for parliamentary scrutiny.
Many MPs also questioned the exemption policy which gives the Ministry of Finance almost limitless discretion to determine how tax waivers are granted in an environment where the government is cash-strapped.
Uganda’s economy is facing serious challenges, partly arising from the post-Covid-19 global economic downturn – a situation which MPs said makes the loss of such huge revenues (6 percent of the budget) almost reckless and ironic.
“There is a need to rationalise these tax incentives and exemptions and where necessary use them judiciously targeting productive sectors,” the House Budget committee report tabled on Thursday, as MPs adopted the Shs52.7 trillion 2023/24 national budget, said.
Any further tax exemption, Parliament directed, must now be guided by research into what benefits will accrue to the economy.
Parliament also proposed that the government develops clear criteria for the selection of beneficiaries of tax waivers, exemptions and deferrals.
Those guidelines should be consistent with investment policies laid out in Uganda’s National Development Plan III, MPs said.
In the budget report, MPs further observed that the government only recently undertook a tax-expenditure evaluation in December 2020.
Although the tax-expenditure evaluation report for this financial year is yet to be released, officials from the Uganda Revenue Authority (URA) led by Commissioner General John Musinguzi Rujoki told Parliament on January 10 that close to Shs2.8 trillion in tax exemptions, credits, and deferrals had already been granted.
At the time, Shadow Finance Minister Muhammad Muwanga Kivumbi told Parliament that the revenue losses to exemptions were actually much higher.
“We have almost Shs8 trillion in tax exemptions. We have just highlighted a few. Others are getting corporation tax holidays, which are taxes on profits… they come here, they get free electricity and land, and then they do not pay tax,” Mr Kivumbi said.
He listed some of the beneficiary concerns against the proposed exemptions they enjoyed, which amounted to Shs588 billion, monies he said should be collected to help finance the budget.
In the financial year 2021/22, Shs2.4 trillion or 1.56 percent of Uganda’s Gross Domestic Product was foregone through tax exemptions.
The Shs2.8 trillion lost this financial year is more than twice the allocation to Uganda’s key agriculture sector, and four times more the amount allocated to education in the coming budget for 2023/24.
The rationale for granting exemptions is to attract investment but this has a net negative effect of lowering tax revenue collections.
Some studies have shown that in Uganda’s case, the exemptions do not result in higher investment, and are mostly a pure loss of potential tax revenue. Other issues with the policy include abuse of power and corruption by those entrusted with the duty of deciding who gets exempted.
The URA, for example, is presently under investigation by the Inspectorate of Government for, among others, allegedly granting undue and reckless waivers of tax liabilities to various entities.
Also last month, Parliament announced an inquiry into the circumstances under which the Minister of Energy and Mineral Development, waived taxes worth Shs616 billion owed by gold exporting companies.
Earlier, this newspaper revealed that since July 2021, URA has been unable to collect taxes from gold exports, majorly due to a directive by the Finance ministry stopping enforcement of the 5 percent levy on each kilogramme of gold exported.
In a March 7 letter addressed to the commissioner general of URA, the Minister of Energy and Mineral Development, Ms Ruth Nankabirwa, asked URA to pause the recovery of taxes on gold exports for the last year and part of this year.
Who got exemptions?
A Parliament report shows that about 1, 810 entities were given tax exemptions, of which 1,289 are savings credit and cooperative societies (Saccos); 33 religious institutions and 188 charitable organisations among others.
The report lists other entities which have applied to be exempted from paying taxes.
Zenitaka-Hyundai Joint Venture applied to be exempt for Pay as You Earn (PAYE) tax worth Shs725 million and withholding tax of Shs11 billion.
Brookside Uganda, a firm owned by the family of former Kenya president Uhuru Kenyatta, requested Shs8 billion in corporation tax waivers, according to the report.
Others include the controversial FINASI-International Specialised Hospital Uganda (Lubowa) project, and China Nanjing International Limited.
Effective July 1, 2017, Saccos were exempted from paying taxes for the next 10 years and there are already calls to extend the exemption.
In 2019, however, the Southern and Eastern Africa Trade Information and Negotiations Institute (SEATINI Uganda) recommended that tax exemption for Saccos should be tied to productivity. Saccos with turnovers in excess of the presumptive upper threshold of Shs150 million, SEATINI Uganda argues, should not be exempted.
In its appraisal report issued in January, the International Monetary Fund (IMF) urged Uganda’s Finance ministry to “identify areas for repealing tax exemptions, outline the intended yields, and establish a clear timeline for implementation”.
Reductions in tax exemptions, the IMF argues, will increase the revenue base and contribute to ensuring that Uganda’s debt-to-GDP ratio continues declining over the medium term.
Uganda’s public debt has soared to more than Shs80.7 trillion. In the next budget, Uganda will spend Shs2.64 trillion on external debt repayment, Shs8.3 trillion on domestic debt refinancing, and Shs6.1 trillion on interest payments.
Stop unfair tax exemptions. Exemptions that favour certain categories of taxpayers to others yet they are in the same market field should be avoided. If exemptions are to be given, they should target a particular sector as a whole and not specific taxpayers.
Statutory exemptions should be preferred over arbitrary executive exemptions
Whether exemptions are statutory or from the executive should follow well laid out guidelines. These guidelines should therefore be developed and made public.
Greater parliamentary supervision of executive practices. The precise criteria used in granting tax waivers should be made clear and subject to scrutiny.
Close monitoring of exempt taxpayers in order to protect other income sources that are taxable from likely abuses.
Impose harsh penalties to exempted taxpayers that don’t file tax returns. The penalty should be equivalent to the tax exempted.
*Source: SEATINI Uganda report on tax exemptions April 2019