BUDGET TRENDS CIVIL SOCIETY BUDGET ADVOCACY GROUP JULY 2018 VOLUME 6 Interview with Hon. Mukitale Stephen Adyeeri P.5 MOBILE MONEY TAX IS NEITHER NEUTRAL NOR EQUITABLE CENTRAL BANK P.2 Domestic Revenue mobilisation in Effective regulation Uganda P.3 needed to improve revenue mobilisation P.6
EDITORIAL Greetings from the Civil Society Budget Advocacy Group Welcome to our latest issue of the Budget Trends magazine. We hope that you are having a great start to the new financial year 2018/19. Here at CSBAG, we have successfully sustained our advocacy towards ensuring that the budget process is transparent, fair and that it meets the needs and aspirations of all Ugandans. Towards the end of the last financial year and into the current financial year, the issue of taxation has generated heated debate which led to outcry by sections of the public who particularly demanded the scrapping of the controversial 1% value transaction tax and the Shs200 over the Top (OTT) tax on social media. We however realise that the above controversial taxes point to a broader domestic resource mobilization challenge that government needs to address. As such, we have decided to focus on the broader aspect of Domestic Revenue Mobilisation in Uganda. Be sure among others to catch our interviews with experts on the subject matter from a technical and legislative perspective.good reading! Julius Mukunda CSBAG Executive Director 2 SOCIAL MEDIA TAX PILES PRESSURE ON UGANDA S INFLATION The introduction of Shs200 daily tax on social media raised Uganda s annual headline inflation to 3.1 per cent from 2.1 per cent. Uganda Bureau of Statistics (Ubos) said this during the release of the Consumer Price Index (CPI) for the year ending July. According to Vincent Nsubuga, the UBOS principal statistician, the main driver was Kampala high income registered the highest annual inflation of 5.0 per cent for the year ending July 2018 compared to 3.0 per cent recorded for the year ended June 2018. MOBILE MONEY TAX IS NEITHER NEUTRAL NOR EQUITABLE BOU Bank of Uganda says the proposed 0.5% tax on mobile money withdrawals will retard the growth of financial inclusion. Even though the proposed Bill reduces the tax to 0.5% and limits it to withdrawals, it is still not neutral, fair, equitable and has additional dangers of retarding growth of financial inclusion, said Charles Abuka, the director of Statistics at Bank of Uganda. communication inflation, which registered an increase of 20.3% during the month of July from the 0.0% recorded for the month of June. Nsubuga attributed the monthly increase to an increase in core inflation that registered a 1.4% rise in July from the 0.1% increase recorded in June. The Ubos director of macroeconomic statistics, Dr Chris Mukiza, said the OTT tax made people s expenditure on communication services increase in the last one month but its impact on inflation is likely to remain where it is because it is a fixed rate. Dr Mukiza said the OTT tax has hit Kampala the most, with all the income groups registering a rise in inflation because social media is mostly used by people in the city. Kampala high income registered the highest annual inflation of 5.0 per cent for the year ending July 2018 compared to 3.0 per cent recorded for the year ended June 2018. The second highest inflation was registered in the Kampala low income group at 3.3 per cent for the year ending July 2018 compared to 2.2 per cent recorded in the year ended June 2018, he said. However the overall increase in annual headline inflation is largely attributed to the annual core inflation that rose to 2.5 per cent for the year ending July 2018, compared to the 0.8 per cent registered for the previous year. Mr Abuka who was appearing before the Finance Parliamentary Committee which was srutinising the Excise Duty (Amendment) Bill 2018 recently. The Central Bank also reported that since its implementation on July 1, the value of mobile money transactions declined by Shs672bn, in the first two weeks of July, compared to the first two weeks of June. The Central Bank also reported that since its implementation on July 1, the value of mobile money transactions declined by Shs672bn, in the first two weeks of July, compared to the first two weeks of June. CIVIL SOCIETY BUDGET ADVOCACY GROUP P.O. Box 660, Ntinda Plot 11 Vubyabirengye Close, Ntinda Nakawa Rd Fixed Line: Mob: +256-755-202-154 E-mail: csbag@csbag.org Web:www.csbag.org CSBAGUGANDA CSBAG/Facebook.com
3 Domestic Revenue MOBILISATION in Uganda Introduction The role of collecting taxes and other revenues in Uganda within the jurisdiction of specified laws is a preserve of the country s tax body- the Uganda Revenue Authority (URA), which was established twenty seven years ago in 1991. The Value Added Tax (VAT) was introduced in Uganda in 1996. VAT together with excise duty constitutes indirect domestic taxes in Uganda. These are charged on various products consumed in the country by the citizens. On the other hand, there are direct domestic taxes like Pay As You Earn (PAYE), rental income tax and withholding tax among others. Over the period 1996/97 to 2016/17, Gross revenue collections by URA amounted to UGX 90,551.07 billion, growing from UGX 742.62 billion in 1996/97 to UGX 12,894.95 in 2016/17. Relatedly, Net URA 15,000.00 10,000.00 5000.00 0.00 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 Collections (Excl. Govt. taxes & Tax Refunds) increased by UGX 11,991.28 billion from UGX 728.35 billion in 1996/97 to UGX 12,719.63 billion in 2016/17. From this, it is evident that Uganda s tax revenue has risen over time. See figure 1 for details; 2004/05 2005/06 2006/07 2007/08 2008/09 Net URA collections (Excl. Govt. taxes& Tax Refunds 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 Gross Revenues 2016/17 Figures for direct and indirect taxes show that over the last ten years (1996/97 to 2016/17) both indirect taxes and direct taxes have grown but the direct taxes exceed the indirect taxes. 5,000.00 4,000.00 3,000.00 2,000.00 1,000.00 0.00 1996/97 Direct Domestic Taxes 1998/99 2000/01 2002/03 2004/05 2006/07 2008/09 2010/11 2012/13 2014/15 2016/17 Indirect Domestic Taxes Indirect taxes such as VAT and excise duty totaled to UGX 19,597.12 billion over the period 1996/97 to 2016/17. VAT had the highest percentage at 70% (UGX 13,709.83 billion) with excise duty at 30% (UGX 5,887.29 billion) Taxes on international trade Like domestic, direct and indirect taxes, taxes on international trade have witnessed an increasing trend between the period 1996/97 to 2016/17. From the above analysis, it is evident that Uganda s tax revenue is growing however the tax to GDP ratio stands low at 14%. 6,000.00 4,000.00 2,000.00 0.00 1996/97 1998/99 2000/01 2002/03 From the above analysis, it is evident that Uganda s tax revenue is growing however the tax to GDP ratio stands low at 14%. The Ministry of Finance has a 5 year 2004/05 2006/07 2008/09 2010/11 2012/13 Taxes on international Trade 2014/15 2016/17 Domestic Revenue Mobilization strategy whose main objective is to raise the tax to GDP ratio from 14% to 16% by 2023 in line with National Development Plan II.
4 Government started charging shs 200 on every user of social media, which curtails access to and flow of information, increases the cost of doing online business among other negative effects The impact of mobile money tax and the untapped tax potentials for Uganda For the financial year 2018/19, Government introduced various taxes in an effort to raise more revenue. These included unfair tax reforms that hurt the citizens, the 1% transactions value tax on mobile money which was termed excise duty tax. Additionally, Government started charging 200/= on every user of social media, which curtails access to and flow of information, increases the cost of doing online business among other negative effects. Since it took effect on 1st July 2018, there was a lot of public outcry from various stakeholders to have this tax reviewed. This forced Government to reverse the tax to charge 0.5% on withdrawals. But even with this move, one is compelled to rethink the definition of excise duty tax. By definition, excise duty is a tax levied on production/sale of a particular product. How does withdrawing of one s money tantamount to a sale of a product? CSBAG is supportive of Government s DRM efforts because they are a key source of the much needed revenue for development programmes. However, CSBAG is keen on getting Government to opt for better avenues of DRM with less adverse effects on the citizens. Possible alternatives Uganda has several untapped or underutilized potential tax avenues which are attributed to inefficient tax collection methods or tax compliance indiscipline as some people have chosen to evade taxes. Following its consistent pleas and constructive engagement CSBAG is pleased that Government moved to replace the transaction value tax with a 0.5% tax on only withdraws but CSBAG further proposes some avenues for government to explore. These include; Charging the transaction fees instead of transaction values (cash deposits, withdrawals and deposits); Increasing excise duty from 15% to 20% on transaction fees; Extending this tax to banks, charging banking transactions including Agency banking and ATM withdrawals. This will not only increase the tax collection opportunities but ensure fairness in taxation; Taxing the escrow account held by banks (currently estimated at UGX 800bn); Distributing to mobile money subscribers the interest that commercial banks generate from the escrow accounts. This will not only generate additional income for the users but also increase the saving behavior of Ugandans Incorporate the OTT in the excise duty (as a percentage and not absolute figure) on data charges so that when a user pays for data from the Mobile Network Company, they have cleared their dues with the tax obligation. Exploring other sources of government revenue There exist loopholes in the management of mineral resources in the country. Illegal mining activities have been witnessed in various gold mines in Uganda for instance in Mubende district and Karamoja region among others in Uganda. This has resulted in under declaration of royalties from gold exports for instance according to the Auditor General s report for FY 2016/17, out of the 800 Kg of gold exported only 12 Kg were declared. This made the country loose revenue ranging from USD3.39m to USD 16.95m in royalties from the undeclared gold exports and imports depending on the applicable rates of 1% and 5% for the imported or locally mined gold respectively. There is also need to categorize commercial farmers in Uganda according to their capital. This will guide the government on how to tax these farmers for instance farmers whose turnover is equal to or above UGX 100 million should pay VAT. In addition, Government should work hard to reduce on the level of corruption and provide the needed services from the collected taxes. With quality service delivery, tax compliance is expected to rise among the citizens and as a result, there will be more revenue generated. Conclusion It is expected that government raises resources to fund development projects and provide social services to the people. However in taxing the citizens, the government should do it in a way that does not leave the citizenry in a worse off state.
5 Progressive taxes, Gov t accountability key to raising resource base Interview with Hon. Mukitale Stephen Adyeeri What do you think Government needs to do to increase revenue collections without making the poor poorer? Before we talk about looking for more taxes, government should first account for what has been collected. Where has our revenue been invested before? Accountability is a very key aspect in increasing the revenue base. The more accountable government is, the higher the chances of increasing the resource base. Secondly, taxes should be progressive in nature; citizens who earn highly should pay taxes on behalf of the poor. Unfortunately the poor and the rich in Uganda pay an equal amount of tax and therefore the same burden. When it comes to OTT for example, a poor man in Buliisa will pay as much as a rich business man in Kampala which makes it a regressive tax. Taxes should redistribute. Money should be collected from the rich, redistributed and spent on the poor so that the economy remains balanced. The country is also faced with high levels of wastage. A lot of public resources are being wasted. Recently, the President said there are so many agencies performing the President s office and State House alone spend UGX 320bn per year, which is higher than the annual expenditure of 6 ministries combined including Ministry of Gender Labor and Social Development, Ministry of ICT and many more. same duties. I think we need to restructure and eliminate wasteful, dysfunctional and unwanted agencies so that we remain only with the ones we need. When we keep entertaining these wasteful agencies, we are dumping tax payers money in a bottomless pit. Additionally, costs on public service and public administration are too high. President s office and State House alone spend UGX 320bn per year, which is higher than the annual expenditure of 6 ministries combined including Ministry of Gender Labor and Social Development, Ministry of ICT and many more. Government should also check the existing tax policies and public investment programs to determine whether or not they are profitable and relevant to the economy. For example does this country need more of Universal Primary Education (UPE) and Universal Secondary Education (USE) or do we need more skilling programs? A lot of money is being spent on the wrong projects. Tax exemptions are incentives for investment used by government to provide relief from taxes and to expand economic activity. To what extent has the government utilized tax exemptions to boost economic growth? It is not always true that tax exemptions are an incentive to investment. Investors do not come to a country because of exemptions. Serious investors actually get worried when your country exempts them from tax because that could be an indicator that the country is covering up for something. If a country is accessible, has a reliable market, is democratic, secure and peaceful, and the cost of production is fair, then investors will definitely be attracted. Tax exemptions in this country are abused and used by Hon. Mukitale Stephen Adyeeri
6 politicians for their own benefit. Tax evasion and tax exemptions are regarded as key sources of revenue leakages. What should Parliament do to reduce the significant revenue loss that is attributed to tax evasion and exemptions? It is important that people first understand the distinction between tax evasion, tax exemption, and tax avoidance. Currently, hundreds of companies are using their books of accounts, declarations, and transfer pricing to avoid paying taxes. Secondly, there is no clear criteria for tax exemptions and rather, it is targeting specific individuals for what could be political reasons. To reduce these leakages therefore, tax exemptions should be uniform and generalized. If the government decides to provide tax incentives for the dairy industry, the exemptions for example should be extended to all dairy farmers, producers, manufacturers, and processors rather than a handful of selected individuals. What is your take on the transactions value tax on Mobile Money? Discussing the mobile money tax is only discussing the symptom of the problem, which may not help the country. Imposition of such a tax without first understanding the weight of its burden was improper. A good tax is fair; like I said, tax the rich on behalf of the poor. In this case, tax telecom companies on behalf of poor Ugandans. Clearly what we are doing is the total opposite. The burden of the Mobile Money Tax is entirely being shouldered by poor Ugandans while the rich telecoms remain with more profits. Do you agree with claims that the mobile money tax is a desperate measure by government to collect revenue at the expense of poor and vulnerable Ugandans? Government is desperately looking for money because they are spending too much unnecessarily. Once we reduce unnecessary expenses, government will stop rushing into desperate taxes. What do you think Government should do to help Ugandans appreciate the value of paying taxes? Government should first become accountable. Paying taxes is okay but how is the money being spent? Citizens are paying a multitude of taxes and the burden of these taxes is quite heavy. It is citizens duty to pay taxes but it is also government s duty to provide accountability for these revenues. Government should also go back to basic principles; get a plan for the taxes, understand the revenue base then plan for how to spend the revenues collected. Unfortunately, we are moving in the reverse direction. We tend to spend before planning. If government wants to make money, it should stimulate the economy to grow, pay all arrears of citizens, stop domestic borrowing and compete with the private sector. Effective regulation needed to improve revenue mobilisation Interview with Moses Kaggwa - Ag, Director Economic Affairs at the Ministry of Finance What is the single most important challenge to Uganda s domestic revenue mobilization efforts? The informality of the economy is a huge challenge. A lot of taxable transactions are not captured. People make and receive payments informally which makes it hard to trace them. Secondly, large tax payers, who shouldn t be considered small, hide under the informality cloud. There are so many people in manufacturing, wholesale, retail, and in agriculture who are disguising themselves and hence evading taxes. Speaking of informality, how do you think we can reduce its high levels? We need to start with effective regulation of the economy. The construction sector for example is one of the fast growing sectors of the economy. You will see a new building everywhere but because the service is provided informally, it cannot be traced or tracked and in the end, there is no revenue collected. Nobody should therefore get a permit to construct a building unless s/he has a registered contractor with a TIN. Equally, the transport business is not regulated. We have no records of who owns what. We therefore need to set up lawful associations within the transport business to coordinate and regulate the industry as well as collect taxes. Uganda is said to be losing about Shs2trillion a year due to tax incentives and exemptions? What sustainable steps should government take to curb the current significant revenue leakages that are attributed to tax incentives and exemptions? From a technical perspective, I would say that we need to abolish all tax incentives and exemptions and replace them with low tax rates. Incentives tend to distort the tax system because there are people who may think that some are being favoured more than the rest. As a result, the ones who feel are being left out consider the tax system unfair and will create their own tax incentives which eventually amount to tax avoidance or evasion. Is there a clear criteria for awarding tax incentives and exemptions? If so, why is there popular belief
7 that these tax incentives and exemptions are unfair? There is a clear criteria for tax incentives. People should however understand that most of these incentives and exemptions are no longer enterprise based but are sector based. When we look at the agroprocessing sector for example, there is a tax exemption on its income, on all inputs for agriculture, on seedlings, on pesticides and on fertilizers. However, other sectors have taxes on their inputs, on their profits and so on, which creates the perceived unfairness. In your professional view or analysis, why do think the move to impose a transactions value tax on Mobile money has drawn widespread dissatisfaction? Nobody ever wants to pay tax. When a tax affects majority of the population, a mass reaction is expected especially from people who don t want to contribute towards resource mobilization. Mobile money tax is a new and direct tax and that is why many people are not happy with it. There is a beauty with the mobile money tax; it is on a very large base Moses Kaggwa Acting Director Economic Affairs at the Ministry of Finance which is one of the principles of a good tax. About Shs66trillion is being exchanged and going through a system in over 1.2bn transactions. People should contribute to government services for using these mobile money platforms. We release money every quarter, publish this information and ask people to go to their districts to understand how much money has been allocated and how it will be utilized. Some claim that government is focusing on soft revenue mobilization sources at the expense of better options that would yield better revenues, would you agree with that assertion? People who claim that there are better tax options for government to explore should bring them to table. Government s so called focus on soft revenue mobilization sources is based on available options. What options are being left out by government? Many Ugandans do not seem to appreciate the value that comes with paying taxes. What do you think should be done to change their mindset? On a regular basis, we can first, remind people that they are paying taxes both directly and indirectly and secondly, show them how those taxes are being used. We release money every quarter, publish this information and ask people to go to their districts to understand how much money has been allocated and how it will be utilized. Unfortunately, many of them do not care. Once people are aware of their contribution to domestic revenue, they will force government to be accountable for every shilling. However, people should also understand that they have to pay for government services. The roads are being built daily, there are health centres in all sub counties, we have national security, and over 10 million pupils are enrolled in primary one per year, most of whom go to schools under the Universal Primary Education (UPE) program. Government continues to grapple with the challenge of broadening the tax base. What are some viable and sustainable steps that should be taken to change the status quo? We have a generally good tax system. In terms of Value Added Tax (VAT), we have limited tax exemptions which contributes to the broad tax system. The same applies to our income tax; there are few exemptions and limited discretions. However, we need to fix the compliance issues in administration, address issues of integrity, address leakages and tax exemptions. Our budget should also be an investment rather than consumption, focused on pro-growth areas like agricultural extension services, tourism, minerals, education and skills development among others.
8 8 Our Vision A Uganda with a people centered budget. Our Mission Working towards ensurng that budget at local and national levels are financed, designed, implemented and monitored to promote prudent and transparent allocation of national resources for the benefit of marginalised groups Civil Society Budget Advocacy Group (CSBAG) Plot 11 Vubyabirengye Close, Ntinda, Nakawa Road. P.O.BOX 660, Ntinda Fixed Line: +256 755 202 154 Email: csbag@csbag.org Website: www.csbag org