Tax cuts: Govt must tighten purse strings
What you need to know:
We therefore continue to urge the government to pursue structural reforms to the tax base that will focus less on income and more on, say, asset wealth.
Uganda has had a difficult history with the issue of tax exemptions, confronting the subject with a conflicted blend of candour and evasion. For four years on the bounce, however, the country’s Finance Ministry has settled into a routine of publishing annual tax expenditure assessments.
We reckon this pursuit of transparency, discernible in taking stock of the impact of exemptions and reliefs, should not go unremarked. So rather than sustaining a combative mood, the Finance Ministry's latest tax expenditures report should be welcomed with rapt introspection. If you missed it, the report relayed the fact that Shs3.6 trillion was lost to exemptions, rate reliefs, allowances, deferrals, and credits in the Fiscal Year (FY) 2023/24.
The figure, as the ministry noted in its body of work, is “equivalent to 1.78 percent of GDP and 13 percent of total tax collections (Shs27.3 trillion).” The marginal drop (from FY 2022/23 when 2.0 percent of GDP was forgone in tax exemptions) renders disingenuous any narrative that the government’s policy wonks do not emerge from all of this smelling of roses. Yet it would be foolhardy not to admit that there is work to be done. With aid from development partners evaporating, the government of Uganda (GoU) can ill afford dishing out customs duties in a manner that is not judicious.
Fiscal rules that have been imposed on it leave the GoU with little room for manoeuvre. Or generosity for that matter. This, if we must stress, is no mean feat. It necessitates standing up to powerful vested interests that preach water and drink wine. And it is not just customs duties. The annual state subsidies that so-called successful capitalists require to perform their roles also have to be called into question. We will not name names because the frequency of the requests has made the beneficiaries quite familiar to all and sundry.
While we can understand that the GoU does not want to be accused of suffocating enterprise with ill-targeted levies, judiciousness is of the essence. Responsible fiscal choices have to consequently be made. This effectively means frowning upon implementing unaffordable subsidies and tax cuts. But as budget support continues to dwindle, it will be interesting to see whether the established revenue-raising levers in the Treasury will continue to be engaged—value added tax or VAT and income tax.
The tax expenditures report for FY 2023/24 showed that “the revenue forgone from VAT [tax exemptions] declined from Shs1.1 trillion or 0.61 percent of GDP in the FY 2022/23 to Shs667 billion or 0.34 percent of GDP in FY 2023/24.” The Finance ministry said this was attributable to “improved administrative efficiency in the management of the VAT deeming regime.”
The continued focus of the tax base on income despite or in fact because of its static size in a sense beggars belief. The presumption by many in formal employment circles that a burden is being heaped on hardworking people will as such persist. We therefore continue to urge the government to pursue structural reforms to the tax base that will focus less on income and more on, say, asset wealth. But above all, the government has to summon the scrooge in it when tax exemptions blip on the radar.
