IMF advice to Uganda to lift tax exemptions on Saccos is faulty and unfortunate

Author: Raymond Mugisha. PHOTO/FILE

What you need to know:

  • Often times, we end up having a small working group shouldering responsibility for their folks, resulting in a burdensomely high dependency ratio.

Last week, I read a newspaper article explaining how and why the International Monetary Fund (IMF) recently offered advice to Uganda to lift tax exemptions on Savings and Credit Cooperative Societies (SACCOs). In 2017, government introduced amendments to the Income Tax Act to exempt SACCOs from taxes for 10 years until 2027. 

The article stated that the IMF has said that government of Uganda should consider removing exemptions on incomes of SACCOs as a near-term revenue priority to boost corporate income tax collections.

In their fifth review under the Extended Credit Facility Arrangement and Request for Modification of Performance Criteria, the IMF said government needed to conduct a comprehensive cost-benefit analysis to determine the impact of some tax incentives, suggesting that exemptions on SACCOs should be repealed and restricted to “microfinance cooperatives serving low-income investors”.

The above advice from IMF is unfortunate. Developed nations, where the IMF has a guiding seat, run extensive social security programs. Such programs, which their governments run to provide protection to individuals and households to ensure access to health care and to guarantee income security, particularly in cases of old age, unemployment, sickness, invalidity, work injury, maternity or loss of a breadwinner, are considered so serious that International Labor Organization conventions and UN instruments define it as a basic human right.

In 2023, 21 percent of the budget of the United States of America went into Social Security payments. In 2023 to 2024, the UK forecast for expenditure on social security stands at GBP290.9 (approximately one quadrillion four hundred twenty-five trillion three hundred forty-nine billion two hundred eighty million Uganda shillings).

Developed nations can afford these straight payments to keep the less fortunate of their people eating, staying appropriately housed, etc. Countries as our own cannot afford these straight payments in form of social security, if the amounts are to be sufficient for purpose. 

Often times, we end up having a small working group shouldering responsibility for their folks, resulting in a burdensomely high dependency ratio. This traps the working class in a rat-race, in which they are unable to capitalize their earnings towards meaningful investment and financial transformation, a problem for themselves and society as a whole.

 Government also makes effort towards a social security framework that mimics that in advanced countries. That is how we have some periodic monetary payments to the very old members of society, for example. The impacts of all the above is not sufficient to address the social security needs that we face as a country. 

As such, communities innovate social security measures, designed along our social construct. We thus have community savings groups, “funeral insurance” programs in which communities form themselves into groups that join hands to contribute to funeral costs when their members lose loved ones, community gifting of cows to individuals whose herds suffer misfortune, rotational farm-work sessions where members congregate and accomplish extensive farm activities for members, one at a time, and similar other initiatives.

The above social protection measures, generally organized by communities on voluntary basis, are a core part of our social security machinery. Without them, our masses would fracture immeasurably.  
Anyone with a good understanding of how our communities operate, especially in the mass countryside, would knowingly rank SACCOs closely with the above less structured measures. SACCOs, serving an extensive population in our rural areas, offering opportunities for savings and credit on terms often customized along societal collective agreement, are a prized social security mechanism when left to operate without huge operating burdens. 

Tax exemptions capacitate SACCOs to extend affordable services to the masses, and this translates into continuity of farming enterprises in the countryside, the ability of poor families to send their children to schools, ability of the less fortunate to access quick loans to meet sudden needs around their health, investments and other various positives for our people. 

Anything that compromises the continued and unfettered flourishing of SACCOs is counter-productive. The outcome of tight-marking SACCOs is that we shall have a more disenfranchised rural populace, in an environment which is already financially polarized between urban and rural dwellers. 

Government would have to fill created gaps, by devising more initiatives of a social security nature to protect rural masses. Against competing priorities in the government’s budget, it is also highly likely that such initiatives would be less effective and less sustainable than the strategic empowerment that masses get through SACCOs.  

While I do not want to imply that lifting tax exemption would suddenly destroy SACCOs, significantly tampering with them now is an outright and huge dent on efforts towards economic transformation at grassroots. 

SACCOs not only lessen the burden of government to take care of the low-income category citizens, but also progressively elevate that category towards self-sustenance. The IMF, apart from being good at the mathematics of foregone tax collections is certainly aware of the long-term and holistic transformative impact of “unencumbered” SACCOs on low-income Ugandan.

Raymond is a Chartered Risk Analyst and risk management consultant
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