Increasing Tax Flow Key to Financing Uganda’s Growth and Development – World Bank Report

Increasing Tax Flow Key to Financing Uganda’s Growth and Development – World Bank Report

Improving tax revenue is essential to sustaining economic growth in Uganda, according to a recent World Bank economic analysis for the country. The Uganda Economic Update, Financing Growth and Development: Options for Raising More Domestic Revenues, says that while economic growth has rebounded from 4.5% to 5.5% this financial year, tax collections currently account for 14% of the country’s gross domestic product (GDP), lower than regional peers, and short of the government’s target of 16%. This hinders the country’s capacity to finance investments in infrastructure and deliver essential services.

“Tax is an important source of domestic revenue for a government, and central to spurring growth and opportunity for Uganda to attain its development goals,” said Rachel Sebudde, World Bank senior economist and lead author of the economic update. “Without it, citizens would not be able to have good roads, or access to quality and affordable health care and education.”

Taxes are one of three main sources of government revenue. Borrowing from the local financial markets, and overseas development assistance, while important sources of development finance, are declining steadily and are often not sufficient, the report notes. Loans from the domestic market tend to have higher interests than foreign borrowing, and often have shorter repayment periods, which sometimes reduces government spending on key priorities.

Uganda’s modern tax system is regulated by the Uganda Revenue Authority (URA), which oversees tax administration, offers 24-hour online tax services through eTax, and undertakes regular tax education for clients. This one-stop center has brought together all the local tax authorities under one roof, easing tax payments. At the same time, the Tax Appeals Tribunal has been instrumental in resolving tax disputes. URA’s customs department has automated cargo-tracking, and extended tax handling services to the Kenyan seaport of Mombasa, which handles the bulk of Uganda’s exports and imports.

Despite these innovations, the report says a small percentage of Uganda’s citizens pay taxes. In addition, about 80%of businesses are informal and transact in cash, making it difficult to track and assess them for tax, according to the update.

Naluggya Hanifa, a hairdresser in Kawempe, does not pay taxes. She is self-employed and attends to clients in their homes. Naluggya has dreams of starting her own hairdressing business and is willing to pay taxes as a business owner – if her business is profitable.

“If I am making money, I have no problem paying taxes,” Hanifa said. In her view, everyone should pay taxes, regardless of size of business, because the government needs taxes to deliver on services.

On the other hand, Adong Winnie, a tailor in Gulu, Northern Uganda, said her tax bill is too high. She pays a local service tax of UGX 70,000 (US$20) and UGX 135,000 (US$40) annually for a trading license.

“I am in this tailoring business only for survival, and I feel cheated paying all that money,” she said. “I will just close my shop.”

Within the formal sector, many businesses evade or avoid paying taxes by under-declaring their income, while many foreign firms and organizations enjoy generous tax exemptions, according to the report. Total Value Added Tax (VAT) collections, a tax imposed on the consumption of domestic and imported goods and services, are currently at 4% of GDP, the report says, but without VAT exemptions, the government could collect up to 6.5% of GDP. Personal income tax currently contributes 10% of the country’s total revenue, far below the 40% regional average.

According to the economic update, Uganda could raise up to 23% of GDP annually if it undertakes tax reforms to reduce leakages, expands the tax base by tapping into hard-to-reach economic activities, and improve efficiency of its revenue administration systems.

“If everyone played their part, total collections would rise dramatically and the country would be able to meet a larger part of its spending obligations, currently met through borrowing,” added Sebudde.

The Economic Update also recommends:

  • The use of credit and debit cards, improved regulation of businesses, and simpler and publicly accessible tax procedures to potentially bring taxable entities and hidden transactions into easy reach.
  • Improving efficiency of existing instruments and applying them correctly could rationalize tax exemptions to ensure that the criteria is defined and properly enforced.
  • Reducing tax expenditures to minimize revenue foregone arising from tax exemptions
  • Improving efficiency and effectiveness of revenue administrations such as the Uganda Revenue Authority, local governments (for own source revenue), state owned enterprises (for investment income) and ministries, departments and agencies (non-tax revenue).
  • Enhancing public awareness, transparency, and civil society engagement to increase voluntary tax compliance.

“A strong social contract which encourages tax compliance exists when citizens relate tax payment to actual services delivered by their central or local governments,” said Moses Misach Kajubi, World Bank senior public sector specialist and co-author of the update. “Greater accountability and transparency can also enhance greater confidence by tax payers that their taxes are and will be spent well.”

Source

Share this post