Despite increased revenues, the government, contending with mounting public expenditure, is concerned over a seemingly stagnant tax-to-GDP ratio and occasional shortfalls in tax collections by the Uganda Revenue Authority (URA). Large taxpayers also object to the current tax regime, citing its disproportionate burden on a narrow base of taxpayers.
The civil society, too, criticizes the tax structure as one with perverse incentives and exemptions that contribute little to revenue generation, nor align with the broader economic objectives of the government. After nearly 30 years of tax reforms in Uganda, there is need to reassess the country’s tax system to align with current economic realities.
The review should analyze the impact of tax policies on various sectors, emphasizing inclusivity, transparency and predictability. The goal would be to create a tax regime that not only enhances revenue but also fosters an environment for economic development and social progress.
ROBUST TAX SYSTEM
A resilient and well-aligned tax system is a pivotal instrument for revenue mobilization facilitating the provision of essential social services, upholding the rule of law, fostering infrastructural development, and discouraging detrimental societal behaviour. In times of budget gaps, governments often resort to borrowing, but it is crucial to strike a balance to prevent an unsustainable debt burden.
Adjusting budgets by rationalizing expenditures is an alternative, but this is seldom implemented, further complicating the already challenging budget deficit situation. This emphasizes the role of taxes as the primary revenue source for the government.
Building a strong tax system necessitates an ongoing process of critical evaluation and phased, periodic adjustments and reforms that align with the constantly changing economic landscape.
UGANDA’S TAX ASPIRATIONS
While Uganda lacks a comprehensive tax policy, the country’s tax objectives can be inferred from various sources such as the Domestic Revenue Mobilization Strategy (DRMS), the National Development Plan (NDP), tax laws, amendments, and statements from senior government officials.
The NDP sets an ambitious goal of raising Uganda’s tax collection to GDP ratio from the current nearly 13 per cent to 18 per cent. However, the DRMS rightly identifies that the country’s tax regime is mainly driven by short-term revenue pressures, lacking adequate consideration for broader economic, distributional, and social welfare impacts.
Unfortunately, there appears to be a lack of significant efforts to address and reverse this trend. Criticism often targets the URA for perceived underperformance in tax collection. However, it is crucial to acknowledge that URA functions as a last-mile agency, implementing government-formulated laws.
Placing sole blame on URA is misguided; there must be a collective acknowledgment of the government’s ownership of challenges in Uganda’s tax regime to make meaningful progress towards reform.
REACTIVE TAX CHANGES
Despite the aspirations outlined in the DRMS, Uganda’s tax framework is plagued by short-term, ad hoc adjustments that prioritize immediate revenue gains at the expense of long-term economic sustainability. Tax amendments in recent years have been marred by inconsistencies, necessitating corrections, withdrawals, or immediate revisions the following year.
This pattern undermines the stability necessary for fostering investor confidence. There is a pressing need for a more coherent an articulated approach to tax policy to ensure consistency and support the country’s long-term economic goals. Certain amendments, ostensibly aimed at boosting tax revenues, appear to contradict the country’s overarching economic objectives.
It remains unclear why the government would uniformly propose to restrict the carry forward of tax losses, including those legitimately arising from capital investments crucial to Uganda’s economic development agenda. Moreover, there is a noticeable misalignment between tax imposition and the government’s goals of improving broadband internet accessibility.
Uganda imposes some of the highest taxes on internet in the region. Similarly, the recent several amendments to the rental income tax regime have made investment in real estate less attractive, despite a shortage of housing in Uganda.
The inconsistent approach in enacting tax laws not only creates confusion but also opens the door to opportunistic lobbying of the political class that is neither sustainable nor beneficial in the long run, as it only serves the short-term aspirations of the few and powerful. Uganda’s pursuit of an increased tax-to-GDP ratio will continue to struggle unless it embraces grounded, realistic medium to long-term tax proposals.
The current strategy of annual reactive, periodic changes in tax rates and the introduction of new taxes has proven ineffective, sidestepping fundamental structural challenges in the economy and the tax regime. Expecting positive outcomes from this consistently failed strategy is futile.
Evaluating the performance of the URA and the Tax Policy Department solely based on year-to-year increments in tax collection, devoid of consideration for the broader economic and societal context, perpetuates the unsustainable practice of imposing short-term taxes. Such an approach fixates on tax collections for the following year, overlooking potential repercussions on the long-term economic vitality.
The government’s focus on soft targets needs reconsideration. Bold discussions on the optimal mix of direct and indirect taxes, appropriate rates, and expanding the tax base to include the informal sector are crucial. High tax rates don’t necessarily guarantee increased tax collections.
Addressing governance concerns is pivotal to ensure that tax revenue translates into quality public services, fostering accountability and strengthening the social contract for improved tax compliance.
The writer is the managing partner, Cristal Advocates
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