Will the new tax amendments FY 2022/23 contribute towards making Uganda’s tax regime more progressive?
On 14th June 2022, Hon Matia Kasaija, through the Budget speech, highlighted that the Government’s stance for the FY 2022/23 was neither to introduce new taxes nor increase existing rates. This was on account to support economic recovery in addition to reducing tax leakages. According to the Minister, the amendments are intended to simplify the laws, clarify previously ambiguous provisions, and close loopholes that may lead to revenue leakage.
It’s worth noting that this commitment is an adoption of the 10th parliament recommendation made on Thursday 29th April 2021, with a consideration to review the tax legislation from annually to at least three years. This was aimed at ensuring predictability in decision-making by investors when undertaking investment decisions in Uganda.
With no new taxes introduced in FY 2022/23, this approach offers some remedies that could capture some business and high-income earning individuals into the tax bracket by re-enforcing tax administrative rules and measures.
For instance, measures like the temporary closure of businesses until compliance with the requirements of electronic receipting and invoicing, mandatory disclosure of information on contracted services, mainly under the oil and gas sector, and long-term contracts under the construction sector. Further to push compliance, criminal charges and penalties have been introduced. For example, failure to file an information return for purposes of automatic exchange of information is now punishable by imprisonment up to 10 years, a UGX 50 million penalty charge or both. According to the new amendments, sharing misleading information for tax purposes now attracts a UGX 110Million penalty. All these “strict “ requirements are intended to increase compliance and reduce the leakages that undermine domestic revenue efforts in the country.
As indicated earlier, the amendments in the Domestic Tax laws are meant to increase the tax revenue collection to meet the FY 2022/23 target of Shs. 23,754.9 billion and Shs. 1,795.9 billion for Tax and Non-Tax Revenue, respectively.
While the intention of these measures is good, the question remains on whether the new amendments will contribute toward making Uganda’s tax regime more progressive and distribute the tax burden equitably. Tax progressivity mainly assesses how well a country’s tax policies and their implementation are reducing inequality using the three indicators that is progressivity of tax policies, which looks at whether the burden falls more on those who can afford to pay, Implementation of tax policies which examines the success of tax collection for the main taxes both in policy and practice and lastly Impact of tax on inequality looking at the effect of tax on reducing income inequality.
Uganda’s tax regime predominantly depends on indirect taxes, commonly known as consumer-based taxes, including Value Added Tax (VAT), Excise-Duty, and Customs Duty, among others. These taxes contributed on average in FY 20202/21 64.4% to the total tax revenue collections, according to Oxfam’s Fair Tax Monitor report 2021. This makes the tax regime highly regressive because people with less disposable income spend a significant proportion of their incomes on consumption. In terms of reducing inequality, Uganda’s tax pillar still underperforms at only 2% compared to Tanzania’s 11%, according to the Commitment to Reducing Inequality (CRI) 2021 Index report, which considers the redistributive element of the taxes in general.
Well, as the new tax measures are targeted towards increasing total tax revenue collections and reducing leakages, URA, together with development partners, should invest heavily in mass tax education to raise awareness of the high cost of non-compliance to the tax payers business as the heavy penalties could suffocate many businesses, which in turn could sabotage the intended purpose of the amendment potentially reducing the tax base further. The mass awareness should also be targeted towards raising the taxpayers' interest in voluntary disclosure of tax information, especially the High-Net-Worth Individuals, enhancing trust in government and respect for legal tax obligations. This will cause quasi-voluntary compliance, which could be less costly than enforcement measures as dictated by the new amendments
To further curb tax leakages and revenue losses, the cost-benefit analysis aspect introduced on the Bujjagali Hydropower tax exemption should be extended to determine whether Uganda benefits from the generous tax incentives and exemptions awarded to foreign investors in the bid to attract foreign Direct Investment. This could help the country to assess and understand the extent of the negative impact attributed to revenue losses from exemptions and possibly limit the establishment of high-profit and short-lived projects that benefit the few.
Nevertheless, the new tax amendments, if effectively administered, have the potential to increase Uganda’s tax revenue collections which holds enormous potential for funding government programs geared toward public service delivery. It would also partly embrace the vertical taxation principles where more income-privileged persons could pay more taxes, thus increasing their tax contributions and consequently increasing the progressivity of our tax regime.