Uganda losing a fortune in potential revenue due to ineffective tax collection – World Bank

Uganda is not collecting as much as it could in taxes, according to the latest country economic update from the World Bank launched today in Kampala.

The World Bank believes that Uganda should be collecting double what it currently does in taxes, according to the economic update. It estimates that in 2015, Uganda’s revenue outcome of 11.7% of GDP could have been as high as 23.3% of total economic output.

Uganda’s tax-to-GDP ratio has grown by an average of 0.2% every year from 1996 to 2016, and the share of revenues reached a range of between 10% and 13.8% of GDP.

The country’s total tax collections in 2016/2017 were Shs12.8 trillion, increasing by 12.2% from the previous financial year. GDP at current prices was Shs91.3 trillion, translating into a tax-to-GDP ratio of 14%. Increasing that to 23.3% means that Uganda would have collected Shs21.2 trillion in taxes, leaving a potential revenue shortfall of Shs8.4 trillion.

The report said that Uganda loses as much as 4% of its revenue in tax exemptions, 2.5% of which is lost under value-added tax. VAT was introduced in 1996 and is Uganda’s most important source of revenue.

With less generosity in the use of tax reliefs, the report estimates that Uganda’s tax-to-GDP ratio could have reached to between 16% to 20%. Currently, the tax-to-GDP ratio is 11.7%.

Moses Misach Kajubi, a senior public sector specialist at the World Bank, said that there were also unusually large offsets in VAT, with some taxpayers having as much as Shs5bn in money owed to the tax collector. The law only allows for a maximum of Shs5m to be carried forward to the next tax year.

By the end of June 2017, offsets totalled about Shs2.4 trillion, the report said.

Christina Malmberg Calvo, the Bank’s country manager, emphasised that revenue collection and mobilisation was only one side of the equation; revenue must also work for the populations, she said.

The World Bank – which funds several projects with the finance ministry and the Uganda Revenue Authority, the country’s tax collector – expressed commitment to helping Uganda in reforming its tax policy and maximizing its potential.

Some of the recommended reforms include the taxation of the agriculture sector. The Bank advised that exemptions in the sector be calculated through income thresholds so that large farmers who are producing cash crops or breeding cattle are included in the tax base. An optimal income of Shs150 million was suggested.

The update also recommended the participation of local governments in the mobilisation of taxes, especially from the informal sector. Figures from the Uganda Bureau of Statistics show that informal activities account for 45% of Uganda’s GDP. However, according to Mr Kajubi, the informal sector transacts in cash which is difficult to tax, is immobile, and hard to reach.

A closer relationship between local governments and government agencies like the Uganda Registration Services Bureau and URA would help in the identification of actors within the sector to enable taxation, Mr Kajubi said.

The Bank also recommended establishing a tax expenditure governance framework to manage tax exemptions. The framework would identify fiscal rules around tax expenditures, subject new exemptions, and evaluate the current exemptions to mitigate losses through ad-hoc tax exemptions.