Tax avoidance – a challenge for Uganda

The collection of tax money is one of the major difficulties for governments, and it is an essential source of income. Tax evasion – if a return is not filed and taxes are paid when due – is this unlawful. Action against the individual or organization concerned may be taken if proven guilty. Ironically, tax avoiders – who use loopholes in legislation to dodge certain taxes – might escape the penalty since it is not considered to be contrary to the law.

Statistics from Uganda Revenue Authority show that, despite the vast population engaged in economic activity, barely one million persons in Uganda pay taxes.

The small number of taxpayers means that the government is still very much committed to increasing domestic income in order to support the national budget, which remains financed partially by foreign help in the form of loans and grants.

However, the government’s fiscal difficulties are substantial in that government spending has been consistently higher in recent years than revenue.

The Commissioner-General of the Revenue Authority of Uganda, Mr. J. Musinguzi Rujoki, spoke on Thursday, at the post-National Budget Forum Absa Bank Uganda to discuss the National Budget FY2021/22 and promote discussion between the private and public sectors on the effects of the National budget on manufacture and commerce in Kampala Serena Hotel. However, not everybody pays tax actively.

“Only one million persons in one year have been active and have received tax returns. This figure is still quite modest in comparison to the entire Ugandan population,” he added.

Mr. Musinguzi stated that Uganda has a GDP tax ratio of 12 to 13 percent of the Gross Domestic Product, one of the lowest in the region.

In 2019, the government announced the 2019/2020-2023/24 domestic income mobilization strategy to reduce the gap between existing and prospective revenues. In addition to that, it is worth noting that tax avoidance results show up in several financial sectors. One of the examples of this is Forex trading in Uganda. Investors trading Forex, according to data collected and published by Ugandan Forex trading brokers, avoid taxes and about 36% of investors refuse to pay taxes, which are one of the ways for companies to make money. Moreover, it should be said that the DRUMs primary goal is to raise revenue collections by raising Uganda’s tax-to-GDP ratio to 16-18% during the next five financial years. This will make Uganda closer to its actual value and surpass the goal of a 16% tax-to-GDP ratio as laid forth in the NDPII and the NDP III Tax Charter.

The Department expects that the DMRS would provide extra income to support the state budget; develop a positive investment flow; and tackle issues of equality and transparency in the tax system.

It expands on the existing government’s policy that the tax revenues as a proportion of GDP should be increased by at least 0.5% every year, which means that they will rise at a rate higher than the growth rate in GDP.

Mr. Musinguzi voiced worry at the far-reaching progress Uganda still needs to make, as its total population of 45 million is one million individuals in the fiscal register.

He added that commerce and manufacturing are the greatest tax contributors, referring to Uganda’s top taxpayers. Trade accounts for somewhat more than 30% and production between 20 to 24%.

“However, Covid 19’s influence has led to a 24% to 23% decrease in production and commerce dropped by 30.7% to 30.5%. This may sound little but they continue to assist the income collection of the top taxpayer (trade and manufacturing)” he added.

He said URA will increase the extension of the tax register to collect domestic income since this is how Uganda is autonomous to fund the national budget without relying on its donors.

The finance manager for Uganda, Mr. Kenneth Mugambe stated that the budget 2021/22 focuses on the demographic revenue in Uganda through targeted interventions and economic development.

Mr. Mugambe added that the parish models will be used by the government to enhance the income of individuals.

In those regions where there are no parish heads, Community workers, and data collecting centers for accuracy, the government will rebuild parishes by hiring parish leaders.

“In the first quarter of FY 2021/22, we intend to commence the reclamation of main parishioners. 50% of the parish leaders don’t have a parish bishop, the parish model starts at Ss200 billion, plans are designed to utilize SACCOS in the parish and use the community of developers to veto the access of individuals to the fund,’ he added.

Mr. Mumba Kalifungwa, the general manager of Absa bank, said that Uganda’s budget for 2021/22 is well aligned with National Development Plan III because it covers agricultural practices, industrialization, commerce, growth in oil and gas, mineral development (exploration), skill development, development of infrastructure and digitization.

“In agriculture, the state gives numerous interrelationships in the financing facility. The government has allocated 50 billion shares in the budget so that a contribution of 100 billion shares will be paid by the banks as long as 50 billion shares are contributed. It has increased to 600 billion Shs since the creation of the Agriculture Credit Facility in 2009.

Mr. Kalifunga said the construction of infrastructure is well aimed at facilitating commerce, industry, and industrialization since there are links between roads and energy.

The current Director of TradeMark East Africa, Ms. Damali Ssali, stated Kampala contributes 80% of Uganda’s GDP, but the logistical issues continue to have implications for the region’s commerce. Ssali said: “The total annual loss of shs800 million in Uganda is due to logistics issues in the corridors.”

Ms. Ssali revealed deceptions about Ugandan exports such as 500 million-dollar coffee, 200 million-dollar fish, and 200 million-dollar dairy exports. “While coffee exports are worth over $500 million per annum, 90% of coffee exports from Uganda are coffee beans. Value added in coffee exports is thus necessary,” she added.

“Cash flow to private industry loans remains a concern,” said Daniel Birungi, executive director of the Uganda Manufacturers Association.

The subject of tax evasion is fascinating in Uganda. Many analysts think that Uganda’s fiscal system complies with global criteria. Uganda has the highest income and corporation tax rate of 30 percent per year.

It is not just because of individuals who deliberately evade paying tax that tax avoidance takes place. There are informal sectors that the fiscal system does not capture as well as the public’s misunderstanding of tax issues. There are three things the government can do to minimize tax avoidance – to enhance the legislative framework, to remove tax avoidance opportunities, to provide stronger incentives to pay taxes, and foster convincing and broad-reaching tax knowledge.

Tightening the legal framework to gradually filter out the chances to bypass taxation is the most evident way of decreasing fiscal avoidances. The most appropriate persons would be tax attorneys and advisors to “creaturely” reduce their lawful tax load by assisting companies and individuals to live. However, to draw them to the other side, the government will need to provide enticing compensation packages.

A more innovative and productive solution would be to increase tax incentives. For instance, it would be useful if the tax system were reorganized to provide tax discounts on investment in organizations, which finance the development activities of the government.

A fundamental reason why individuals are not paying taxes is that they cannot see any major changes in public services affecting their lives directly. There are no better roads in rural regions in the urban populations. The affluent do not use as much public infrastructure as the poor do, for example, public schools and public transport.