Tax is important for repricing goods and services, redistributing income within the economy and reducing poverty and inequality.
Effective taxation can also improve the relationship between government and the people- as it promotes accountability and transparency. Most importantly, taxation is the only viable way in which government can raise money to provide better education, health and other social services to people.
However, taxation should be done fairly and progressively with everyone contributing according to how much they earn. Taxes should enable government to collect revenue without the load unfairly falling on the poor.
But Uganda’s taxation system is doing the opposite and targeting the poorest while the richest manage to make money out of the economy without paying their fair share of taxes.
Uganda’s 2019/2020 budget is estimated at Shs 40.4 trillion. In order for the government to meet its target of financing at least 47 per cent of the budget will require collection of taxes amounting to Shs 18.8 trillion.
But with the trend of targeting poor Ugandans while exempting big corporations, it is not just citizens who lose but also government that ultimately fails to collect revenue enough to run the country.
For instance, parliament recently allowed an amendment of the Tax Procedures Code Act to provide for a tax waiver amounting to Shs 500 billion for private companies on whose behalf government is expected to pay taxes.
Also, despite having passed an amendment to allow tax on Over The Top Services (OTT), also known as social media tax, MPs are proposing that government pays this tax on their behalf. According the World Bank, tax exemptions cost Uganda revenue estimated at four to five percent of its GDP annually.
The government awards exemptions on the assumption that the exemptions will benefit citizens. The belief is that basic commodities will be more affordable and exempted companies will provide jobs for people who will then contribute to the tax base. However, this has not often been achieved.
For example, exempting the supply of drugs and medicines from VAT has not translated into cheaper drugs for the everyday person. Besides, many companies provide jobs that pay way below the taxable threshold of Shs 235,000.
Due to loss of revenue as a result of these exemptions, government has had to immensely rely on loans and indirect taxes such as Value Added Tax (VAT). These taxes are imposed even on the most basic items such as salt, sugar and kerosene on which poor people spend a large portion of their income.
This creates an unfair system where poor people pay taxes equal to those paid by the rich despite their low incomes. This regressive tax system deepens inequality and makes it impossible for government to collect the much-needed revenue that could drive development and improve essential services such as health, education and agriculture.
This year’s proposed waivers have only compounded the situation and put into question the priorities of government. The Shs 500 billion waiver is enough to pay 69,444 grade three primary school teachers a monthly salary of Shs 600,000 for a whole year. Alternatively it is enough to pay 67,954 nurses a monthly salary of Shs 613,158 for a year.
It is important that MPs, while passing the budget, put into consideration the needs of the citizens they represent- by investing in the critical sectors such as health, education, water and sanitation rather than allocating resources to their own interests. Parliament should stay the proposal to pay taxes on OTT for MPs.
If Members of Parliament cannot afford to pay OTT, then how can ordinary citizens who earn much less?
It is essential that the auditor general undertakes a comprehensive audit for all tax expenditures in Uganda and publish this information to ensure transparency and accountability.
Any exemption, statutory or from the executive, should follow well-laid-out guidelines. Uganda presently lacks clear guidelines on tax exemptions. As the 2017 Auditor General’s report highlighted, “There are no clear guidelines for granting exemptions, neither are there routine reviews of the impact or benefits accruing from tax incentives, exemptions and holidays that justifies their continued existence.”
The necessary guidelines should, therefore, be developed and made public. Government should establish a diverse panel, including policymakers and civil society, to evaluate the relevance of awarded tax incentives, exemptions and holidays. These measures would contribute to a progressive, transparent and accountable tax system in Uganda.
Jane Nalunga is the country director, SEATINI Uganda