Can Uganda collect more taxes? The World Bank thinks so

The agriculture sector in Uganda is undertaxed, contributing less that 1% to total revenues, because of exemptions based on equity concerns. These exemptions also capture large-scale farmers who would not be adversely impacted by taxation. Credit: Xavi Moll on Unsplash

The World Bank’s 11th Economic Update focused on domestic resource mobilisation and how Uganda can raise more money locally. In the last financial year, Uganda Revenue Authority collected Shs13 trillion which was less than half of the Shs29 trillion needed for the national budget.

To make up the difference, the government has to borrow, and the loans attract interest. But with the suggested tax reforms, the World Bank Uganda hopes that Uganda can raise more revenue and reduce its reliance on donors and development partners.

The Bank’s suggestions on how Uganda can raise more tax revenue are not increments in current taxes, but rather areas in which a different way of levying taxes would widen the tax base and therefore increase the revenue collected.

1. Tax the agriculture sector and introduce a threshold capturing large farmers
Despite being one of the biggest contributors to GDP and the sector employing the biggest number of Ugandans, agriculture contributes less than 1% to total revenues because of exemptions based on equity concerns. These exemptions, meant to support small farmers, also capture large-scale farmers.

The Bank suggested that the government introduces VAT taxation with a threshold of Shs150 million so that large-scale farmers are added to the tax base. For those who are not formal and therefore impossible to tax, the government was encouraged to identify and incentivise them to formalise.

PricewaterhouseCoopers Uganda’s Francis Kamulegeya, while speaking at the launch, said that the tax exemption on agriculture is more emotive than sensible.

2. Review tax point for airtime
One of the new taxes proposed by the government in the coming financial year is a 1% tax charge on every mobile money transaction. However, the tax would impose large charges on mobile money users and discourage people from the service, which could have serious implications on the gains in financial inclusion from mobile money.

The World Bank’s suggestion is to review the tax point for airtime, especially with more people preferring to load airtime using electronic methods rather than scratch cards. A tax paid by telecom companies at the point of supply should be introduced, the Bank said.

3. Streamline taxes on alcoholic beverages and the non-alcoholic excise duty policy
Currently, non-alcoholic products like energy drinks, flavoured milk, and bottled tea are outside the excise tax net. The excise duty rate policy for alcoholic beverages in Uganda is based on the classification of products by raw material instead of alcohol content.

The Bank’s suggested reform is to classify alcoholic drinks by alcohol content and ensure that all forms – like non-malt beers – are included in the taxation bracket.

4. Manage VAT offsets and exemptions
About 2.5% of total tax revenue is foregone in offsets with most from VAT, according to Moses Kajubi, an economist at the World Bank. Kajubi said that offsets are currently valued at Shs2.4 trillion, with taxpayers claiming as much as Shs5bn while the law requires that only Shs5m is carried forward.

Offsets are balances due to the taxpayer when they have paid more in tax. That they are not collecting this money is a sign of avoiding tax audits, said Kajubi.

The Bank report suggested that URA remove the manual entry of offsets. Computerisation would not allow the entry of a figure above Shs5m as required by law.

5. Review taxation on motor vehicles and motorcycles
The World Bank also suggested that the tax body review the environmental tax on motor vehicles and consider replacing it with a broad-based and progressive excise tax for motor vehicles.

There is an environmental levy of 35% of the cost, insurance and freight value for vehicles between 5 and 10 years old, and to 50% for those older than 10 years. The tax, which makes older cars more expensive, is meant to discourage the importation of old vehicles in order to protect the environment. The World Bank argues that the environmental tax gives the country a limited tax base and is subject to customer choices.

Motorcycles should also be subject to this excise duty.

6. Review tax exemptions
One of the largest tax leakages in Uganda is due to tax exemptions that are sometimes “inefficient and too generous”. This has led to the loss of potential revenue in exemptions across the tax categories: VAT, excise duty, corporate income tax, and personal income tax.

The Bank suggested a revision and a new system be put in place to evaluate and remove inefficient exemptions. “For instance, in financial services fee and commission-based services, supply of medical equipment and items like betting, lotteries and games of chance and services such as insurance brokerage, supply of goods and services by hydro-electric contractors or sub-contractors should normally be standard rated for VAT.”

They also suggested that best practice would be to keep primary, secondary and higher education VAT exempt but the commercial institutions like coaching institutions should be under the standard tax regime.

Some exemptions were revealed to introduce unfair VAT treatment between local and imported items like imported exercise books that are VAT-exempted. “Only books that are fit to be included in a library should be VAT exempt,” the report said.

7. Work with other agencies to pool data within the informal sector
Informal activities account for 45% of GDP. However, the sector transacts in cash, is immobile and hard to reach, according to Mr Kajubi. So while a lot of business is transacted, very little of it is taxed.

But according to the Bank, the tax body could look to other agencies to identify businesses that can be taxed. Agencies like the Uganda Registration Services Bureau which registers businesses, the Local Government that issues trading licenses and the Uganda Communications Commission that receives non-tax revenues from telecom companies.

The World Bank country director, Christina Malmberg Calvo was quick to add that all this will work only if the government is using the resources well and transparently to motivate the citizens to pay tax.

“Revenues are one side of the coin. Public investments have to be carefully selected. They have to be very competitively procured,” said Ms Malmberg.