Do the proposed tax amendments reflect widening of the tax base?

The Ugandan government has recently made proposals for significant amendments to its income tax law, among which include the shift from the capital gains tax regime to the withholding tax regime in a bid to widen the tax base and increase revenue collection.

Currently, capital gains tax is levied on the gains derived from the sale of an asset such as a house, land, or shares.

However, the government proposes to replace it with a cross- cutting withholding tax, which will be levied on the gross proceeds of the sale as opposed to the resultant gain.

This is a fundamental diversion from the traditional principles of taxation on income which should be rightfully charged on profit or gain, as articulated by Adam Smith.

Nevertheless, the government maintains that tax is expected to widen the tax base and increase revenue collection, which will fund development projects in the country.

However, not all tax policy measures can improve the structure of tax systems, some have a negative impact on revenue collection.  

Whereas Government revenue-raising intentions are laudable amidst a dip in domestic revenues from 2020, the proposal has raised several concerns on the effects of the proposed amendments on the tax base, and whether the move will increase the burden on the already existing taxpayers as opposed to widening the tax base.

Firstly, it’s important to note that out of a population of 47.12 million, Uganda’s tax base is currently comprised of 3.2 million taxpayers.

Looking at the number, it appears more feasible for Government to prioritize optimizing the untapped revenue potential by widening Uganda’s tax base so that more Ugandans can contribute to tax revenue than presently where only a few in the formal sector are doing so.

However, by proposing the imposition of a WHT regime, the recent proposals suffice as a short-term strategy that does not respond to the long-term problem.

This will likely affect the business terrain by further taxing the already exhausted list of taxpayers and further dampening the economy in the post Covid recovery period.

Secondly, the imposition of a wide-sweeping tax on the formal sector is an upset to the business realities, ignoring the gain principle and taxing gross proceeds discounts the factor of losses incurred on asset disposal and in turn, disallows the utilization of business deduction arising from such loss.

To alter the regimes is to ignore the business realities and character of business assets.

Thirdly, today is not the time to impose a regressive tax policy as most of the world is still recovering from the impacts of the COVID-19 contagion. To bring the damage into context,

Considering the post Covid-19 recovery period a shift in asset taxing regimes from hard to harsh will have an adverse effect on Uganda’s economy and in turn achieve the result of reducing local investment, business expansion, asset acquisition and foreign direct investment.

In the alternative government should seek to tax the least taxed sectors of the economy through monetization of 39 percent of GDP that is subsistence and not contributing to tax revenue. Widening the tax base will relieve the already exhausted taxpayer population in the formal sector.

In conclusion, the shift from the capital gains tax to the withholding tax is a significant amendment to Uganda’s income tax law.

While the move is aimed at widening the tax base and increasing revenue collection, it may serve to cripple the already limping economy by merely increasing the tax burden on existing taxpayers. In today’s global economy investment is very mobile. 

Businesses can seek to invest in any economy to find the highest return, these will include looking at favorable tax climates, exercise capital and investment outflow can facilitate slow economic development in a post Covid recovery period.

The alteration can also lead to reduced domestic investment, and damage the progress made under the voluntary tax compliance by encouraging tax evasion. 

It is now time for the Ministry of Finance and Uganda revenue authority to explore long term measures to improve tax revenue through over improvement of economic activities in the country as opposed to short term measures which tend to have adverse impact to the already overtaxed formal sector.

Mr Allan Mugisha,  Tax Executive Director, Ernst & Young