Govt under pressure to revise taxes over Covid-19

Mukwano Shopping Arcade in Kampala on August 3, 2021. In a bid to curb the spread of the Covid-19 pandemic, government enforced two nationwide lockdowns. However, many businesses are struggling to pick up despite the reopening of the economy. PHOTO/MICHAEL KAKUMIRIZI.

What you need to know:

  • Crisis. Government is reviewing the tax measures that came into force on July 1 as part of its response to the post-lockdown aftershocks.
  • Trade minister David Bahati says there is an outcry among business community over the new taxes.

The government is reviewing new tax measures that came into force on July 1 as part of its emergency response to the post-lockdown aftershocks that have ruined some companies and forced others to cut jobs in order to stay afloat. 

Along with what sources called strategic review of the 2021/2022 tax regime and budget cuts, the government under “enterprise development agenda”, is prioritising Micro, Small and Medium Enterprises (MSMEs) with a new stimulus package of Shs200b. 

Daily Monitor understands that Trade Ministry officials are working with their Finance counterparts to develop guidelines on accessing the funds.  

However, under the new Covid-19 response strategy, the government is talking with participating financial institutions to contribute up to 50 per cent of the funds.

On Friday, Mr David Bahati, the  State Minister for Trade, Industry and Cooperatives, acknowledged that introduction of new tax policies amid the current economic hardships has led to outcries by business community in the country. 

Addressing MPs on the impact of Covid-19 on the Tourism, Trade and Industry sector, the minister cited new taxes under the textiles sector being charged per kilogramme of garments. This, Trade officials said, has affected the sector adversely.

To address this concern, Mr Bahati said: “There are ongoing discussions within government, and with the private sector to consider reviewing these tax policies in order to balance the need to grow the domestic textile sector and growing other sectors of the economy – including the textile sector itself.

New tax measures
Before President Museveni imposed the 42-day lockdown on June 18, the 10th Parliament had on April 30 scrapped excise duty on Over-the-Top (OTT) and introduced a new excise duty rate of 12 per cent on airtime, value-added services and Internet data. 

Parliament also introduced a Shs100 tax increase per litre of petrol and diesel, a 30 per cent or Shs230 tax on each litre of beer and other alcoholic drinks that are locally produced. 

Even non-alcoholic drinks were not spared. Parliament approved a 12 per cent or Shs250 tax on each litre of locally-produced non-alcoholic drinks. 

Section 5 of the Income Tax Act was also amended and forced property owners to pay 25 per cent rental income tax. They also approved export levy of 7 per cent on the value of fish maw, imposed an export levy of 5 per cent and 10 per cent on processed and unprocessed gold and other minerals respectively. 

The increment in taxes which government officials, MPs, and other stakeholders seek to review in an attempt to jump-start the economy and protect jobs, were imposed at a time when almost all businesses were struggling after the first lock lockdown. 

The new tax measures introduced before the second lockdown complicated matters. Those calling for Covid tax relief had, however, asked the government to emulate other countries that were offering incentives for businesses to stay afloat. 

Traders under their umbrella body, Kampala City Traders Association (Kacita), have asked for a six-month tax waiver to support economic growth and recovery and talked of the problem of redundancy and “an epidemic of struggling and dying businesses” in the post-lockdown period. 

“The taxes they did not increase should be left as they were, but for those which were increased [before the second lockdown], the government should stop implementing them for the next six month so that a half year is given for business to recover,” Mr Isa Ssekitto, the Kacita spokesperson, said. 

Insensitive tax policy
Mr Edson Rugumayo, the Western region Youth MP, has criticised what he called an insensitive tax policy and asked government to use the Covid-19 opportunity to review the 2021/2022 tax measures with a view of creating jobs for the youth and support economic recovery. 

“The tax measures didn’t envisage the pain of a second lockdown…businesses have collapsed and many people especially the youth are jobless. It’s logical that Cabinet sits and reviews them before it’s too late…I think the opportunity this Covid crisis presents is for government to tailor especially its tax policy to benefit these people most at risk,”  Mr Rugumayo said. 

He added: “Current policies like tax holidays tend to benefit larger investors more than the smaller ones. Access to financing for small business is also a major challenge. When you combine difficulty in accessing cheap financing together with an insensitive tax policy, you ruin any efforts for recovery let alone start a business in these tough times.” 

Internally, Daily Monitor understands that the discussion on reviewing tax measures has polarised officials. For instance, when contacted on Friday, Mr Henry Musasizi, the State Minister for Finance (General Duties), advised those calling for the review of tax regime to wait for June 2022. 

“The current tax regime became effective on 1st July this year. You can’t start proposing reviews on it at this stage. Let’s allow it [to] first work so that we have enough basis for proposing reviews if any in June next year, “Mr Musasizi said. 

Leader of Opposition weighs in
Mr Mathias Mpuuga, the leader of Opposition in Parliament, said: “As a mature debtor nation, you can’t afford piece-meal planning and budgeting. A financing framework must as of necessity be able to impact on the growth poles of the economy, because protection of the fragile jobs is very key.” 

He added: “If companies cannot keep jobs, then be sure you are preying on an already narrow and fragile tax base. The choice of the tax regime and attendant overall fiscal choices should be made in a way that the status quo is maintained before making an adventure for more.” 

Prof Wasswa Balunywa, the head of Makerere Business School (Mubs), criticised the government stimulus package and Covid response as reactionary and explained that tax policy or fiscal policy is one of the instruments that the government uses to manage an economy. 

For instance, if government wants to stimulate production in an economy, it gives selected businesses tax waivers or reduces taxes. 

“In most cases when you reduce taxes you’re giving people more money to spend… but this must be judiciously done to avoid distortions. The current effort by government to me is reactionary. It should be more planned. There must be better approach to policy and we must ask ourselves how do we bring economy back?” Prof Balunwya said. 

He added: We need a short-term view and a long term-view of the things we must do to support economic growth. It doesn’t make sense to just reduce taxes for everybody. There should be a selected number of industries which we know are going to enable the country to get back on its feet, such industries should be protected. Taxes should be planned in such a way we are able to achieve sustained production or increased production in areas where we think we need to stimulate production to revive economy.”  

What should be done?
The reality, according to Prof Ogenga Latigo, is that with the Covid lockdown, businesses are down (demand, sales, and prices) but overheads; rent, staff salaries, interest on loans don’t change. In the circumstance, businesses incur losses, he said.

“So what are the taxable incomes against which Uganda Revenue Authority would, can and should demand payment of taxes that were previously pegged on certain presumed levels of revenue flow, earnings and profits that do not [now] exist?” he asked. 

He added: “How can the country keep businesses afloat to uphold its economy without direct cash injections and if taxation will force them under?” 

In the circumstance, Prof Latigo argues that the fate of the country and its economy, is at stake and government intervention is a must. 

He proposes that the government consider suspending payment of taxes, and even provide for tax reimbursement for businesses that faithfully paid their taxes; give established businesses, based on objective criteria of adverse effects suffered, low-interest loans to borrow or grants to pay off existing loans; put moratorium on ground rent and business rent payments and clearly document rent agreements to enable future interventions; and, prioritise support to agriculture and agricultural value chains given the threat of food shortage and adverse weather. 

To arrive at these, Prof Latigo calls for systematic evaluation and engagement with key stakeholders, and ensure that corruption and opportunistic claims do not undermine these efforts and adds that “there is also need to think long-term and to push the economy to recognise and fit in to the new normal.”

Waiving rent arrears
Addressing concerns from the business community, Mr Bahati cited rent arrears accrued by tenants in arcades, shopping malls and business centres due to lockdown. 

The minister explained that many traders failed to pay the arrears and that some landlords have confiscated their stock, citing outstanding financial obligations including bank loans and taxes, making it hard for them to waive off the rent arrears. 

The minister explained that the government through the Trade ministry engaged with the landlords on waiving off the arrears for July since the majority tenants had already paid for June. 
Some landlords have, however, proposed to waive off the rent and others have agreed to scatter the payment of arrears. 

“[The] government is considering the landlords’ proposal of declaring rent arrears as loss when filing tax returns to be considered during assessment of rental income obligations,” Mr Bahati said. 

Both the traders and landlords are also facing challenges in repayment of bank loans. Over 90 per cent of both fixed and working capital is borrowed capital. The lending institutions have maintained the interest rates even for the periods of lockdown. 

Capital has also been lost in paying back the loans and other expenses outside the business operations.  Government through Bank of Uganda has guided the banks to reschedule the loan and interest repayments. 

Mr Bahati, however, reminded MPs that the pandemic didn’t not spare Uganda and that in line with the global practice and World Health Organisation guidelines, lockdown(s), inevitably a negative knock-on impact on the economy, was necessary.

Economic outlook 
The economic outlook for the country continues to be uncertain, largely because of the unpredictable path of a pandemic that has so far killed more than 2,400 people in Uganda. 

The pandemic has slowed growth to its lowest pace in over three decades and increased shocks hitting the economy. 

The medium-term outlook for Uganda has worsened considerably due to the impact of Covid-19, and experts say risks are tilted heavily to the downside.

 Nonetheless, Minister Bahati says there are signs of a gradual recovery particularly in the manufacturing sub-sector with its growth rate increasing by 0.8 percentage points in 2020/2021. 

The gradual recovery in the manufacturing sector, according to the Trade minister, is attributed to government’s stimulus measures such as recapitalisation of Uganda Development Bank (UDB), deferment of taxes moratorium of loans, reduction in the central bank rate and gradual ease of lockdown, among others.

Manufacturing sector has played a critical role in the fight against Covid-19 by supporting government efforts. 
For instance, more than 160 factories have undertaken research and repurposed their production lines to produce products that are critical in the Covid response. 

Some of the products essential products are; protective personal protective equipment (PPEs) such as masks, gloves, face shields, and hazmat suits/plastic overalls; sanitisers, disinfectants etc.
“We have established capacity to produce more than 200 million pieces of masks per year and 5,000 cylinders of medical oxygen per day,” Mr Bahati said.

He added: “In some product lines stated above, we have excess capacity and the Ministry is leading bilateral negotiations with our trading partners in the great lakes regions to export the products.”

According to Mr Bahati, the containment measures however, allowed continued industrial and agricultural production, internal cargo movement, as well as international cargo movement.

“The impact of these calculated measures with respect to trade and industry was that international trade continued to flourish and industrial production continued, although there was a shock at the start of the lockdown,” said Mr Bahati. 

The minister informed MPs that the containment measures affected the services sector, such as tourism, hotels, retail and wholesale trade, commercial transport, and financial Services, the most.

“The impact manifested through, among others, reduced sales, and loss of jobs,” Mr Bahati said.

What some of the key players say...

David Bahati, Trade, Industry & Cooperatives boss: The government post Covid-19 Response Strategy is premised on addressing the channels through which the impact is being transmitted to the economy, and addressing the ‘survival’ needs of mankind.  Government’s medium to long-term strategy is to vaccinate a sizeable number of the population [21.9million].  

Fred Muhumuza, economist, researcher: Government is struggling and needs revenues. Most taxes are directly related to business performance meaning they are not being paid anyway. The bigger problem is business people fail to adjust other costs down wards and blame it on taxes. Businesses have to adapt to new models and scale down certain costs. Government must do the same.

Mathias Mpuuga, Leader of Opposition: It is tragic in these tough times to have a regime in the evening, most operators of the regime are in the survival rung. We have demanded for a multi sectoral Covid-19 response to no avail! A peaceful approach to the pandemic is making matters worse. Many Ugandans are suffering and our economy is on its knees but the government is unmoved.

Thomas Tayebwa, Govt Chief Whip: Everyone appreciates the economic situation in the country but we must also understand that we have national obligations we cannot postpone. Govt already projects a revenue shortfall of around 2 Trillion and has instituted austerity measures to mitigate the effects. We shall receive and critically review such proposals as the private sector.

Prof Venansius Baryamureeba, politician: Private sector creates jobs in addition to paying taxes. When a business collapses Ugandans lose jobs and the government does not collect taxes from the collapsed business.  It’s in the best interest of government to enable businesses recover just like it has been done in other countries. It’s the only sure way to stop the economy from going into recession.

Jim Mugunga, Finance ministry spokesperson: Government has been proactive in responding to challenges posed by Covid-19. We believe the current challenges can be addressed through targeted stimulus efforts towards SMEs. The current Covid-19 challenges cannot be resolved by a «single tax review dose” but through timely focused and progressive measures.

Alice Alaso, Deputy National Coordinator, ANT party: A struggling economy like ours under the weight of Covid-19, unemployment and disaster cannot afford those ill-thought taxes. Businesses have already closed [and others struggling to stay afloat].

Internet tax and property tax is double taxation, killing innovation. ANT has convened a multi-disciplinary online dialogue for next week to deal with this.

Julius Kapwepwe, UDN boss: We expect comprehensive and coordinated Uganda and East African Community-wide focused tax reduction, deferred tax policy measures and no penalties to mainly the SMEs this FY 2021/2022 and gradually over FY2022/2023. Investment in community information infrastructure as being mooted under Parish Model will be fundamental.

Geoffrey Ekanya, former Shadow Finance Minister: Most African economies have all taken that direction [review of tax measures] including stimulus packages. Imagine government has now received Covid-19 stimulus package twice from International Monitory Fund (IMF) without addressing tax  exemptions, rent and  debit  forgiveness. Several SMEs will  collapse and government will not collect the taxes needed.

Ruth Biyizika, Private Sector Foundation boss: Government should look at how they can readjustment the budget allocation so that the money can go to the sectors affected more, but have the potential to come up very fast, and then also come up programmes to ensure that it is easier for the private sector to access cheap credit. Some of the interest rates should be waived, especially penalties.