RETHINKING THE DOMESTIC REVENUE MOBILISATION STRATEGIES AMIDST THE COVID-19 PANDEMIC IN UGANDA
During the month of March 2020 the World Health Organisation declared the outbreak of the corona virus as a pandemic. As of 28th March 2020, globally there are 629,655 confirmed cases of Covid-19 and about 28,968 deaths while in Uganda we stand at 30 cases with no death. Uganda is currently facing a partial lockdown as part of the Presidential directives issued on Covid-19. This has foreseen impacts on trade, tourism, industrialisation among others and could lead to an economic recession; in fact Ugandans are already feeling the negative impact of the pandemic on our economy and on their daily lives and are in dire need of economic relief from Government.
In lieu of this situation, we CSOs under the Tax Justice Alliance Uganda (TJAU) would like to convey our appreciation to the government for the measures put in place to curb the spread of the virus among the citizens. We would however like to express our concern on key issues that would need to be addressed in order curb the effects of the pandemic.
Our Concerns and Recommendations!
Annual Budget Process for FY 2020/21
This comes at a time when the government of Uganda is discussing the budget FY 2020/21. Part of this process will include discussions on the annual tax amendments bills on Value Added Tax, Income Tax, Excise duty, Stamp duty, among others. However, with the confirmation of the virus in Uganda, Parliament has agreed to cut the Budget process from two and a half months to only two weeks. This is a situation of business unusual and things should not remain the same since difficult times call for a change in strategies. The tax bills were drafted before the pandemic and government needs to take into consideration its effect on the proposed strategies.
Recommendation: Government should not rush the budget process. More than ever, government needs to review the proposed tax amendments FY 2020/21 and introduce tax measures that will be responsive to the needs of the economy and citizens amidst the ongoing pandemic.
Control inflation arising from a hike in prices of basic commodities
Given the expected economic crisis, majority of businesses have hiked the prices of essential goods including salt, food, fruits and medicines. Although the President issued a directive to revoke the licences of businesses which have hiked the prices of goods, the prices have continued to rise. We recognise that Uganda runs a free market economy which allows the force of demand and supply to determine the market prices.
Recommendations: Government during this period should put in place a price fixing mechanism to set a maximum price for goods such as sugar, salt, foodstuffs and other basic home items to ensure that citizens can ably access them at affordable prices. Additionally, government should devise means of providing basic needs such as food, water to the most vulnerable groups.
Increasing Debt burden of Uganda
Earlier reports by Ministry of Finance, Planning and Economic Development, indicated that without the spread the Corona virus in Uganda, or its quick containment to avoid widespread infections within the population, revenue collections will register an additional shortfall of about Shs 82.4 billion for the remaining period of the FY20l9 /20 (March-June) and about Shs 187.6 billion in FY 2020/21. The corona virus will mainly impact international trade taxes (reduction in value of imports) as well as consumption taxes (VAT and Excise duty) due to the slowdown in the industry and services sectors. This will lead to the increased debt to finance Uganda’s budget for FY 2020/21.
According to a statement presented to Parliament by the Minister of State for Finance, Hon. David Bahati, with the COVID-19 the government of Uganda has had to seek a budget support loan on concessional terms worth US$ 100 million for FY2019/20 and US$ 90 million for FY2020/21 from the World Bank. This is in addition to the Uganda’s total public debt which grew from $12.55 billion (Shs 46.36 trillion) at end June 2019 to $13.33 billion (Shs48.91 trillion) by end December 2019. (MoFPED, Feb.2020) This burden will have to be transferred to the taxpayers who will have to incur higher taxes in order to pay the debt.
Recommendations: Strict attention should be put on the funds that government has had to borrow for the COVID-19 pandemic to ensure that they are put to proper use in order to avoid wastage of taxpayers money. Given the presidential directive to cancel all travels to and from the county, government should re-direct funds meant for government travels during this period to cater for the country’s needs during the pandemic.
Support the contingency fund using domestic revenues
Much as government allocated Shs. 77bn to the contingency fund in FY 2017/2018, the allocation was below the 0.5% of the previous financial year’s budget as provided under Section 26 of the Public Finance Management Act, 2015. The trend has not changed in the preceding FY 2018/2019 and 2019/2020 as it has continuously fallen short of the target under the PFM Act.
Recommendation: In FY 2020/2021, government should support the contingency fund as per Section 26 of the Public Finance Management Act of 2015 i.e. government should allocate an equivalent of 0.5% of the previous financial year’s budget.
Low disposable income due to high Personal Income Tax rates
Due to the current economic hardships which have previously been characterized by high rates of inflation (5.6% p.a.), high cost of credit (27% p.a.), low incomes (27% poverty level) among the people, there is reduced saving and consumption because of low disposable income. We note that these are likely to increase given the expected economic hardship as a result of the COVID-19 pandemic and the current measures put in place by government to curb the spread of COVID-19.
Furthermore, the low activity in industry and services sectors will result into loss of jobs further leading to a decline in economic growth and an increase in the level of poverty. The number of people that could be pushed into poverty is estimated at approximately 780, 000.
We also note that there is a high tax rate for Personal Income Tax (PAYE) which was last adjusted in FY2012/13 when the exchange rate was US$2,500 shillings. Today, the exchange rate has increased by 45% to an average of 3,800 shillings for 1US$. Uganda’s average household monthly expenditure rose from Shs 328, 200 in 2012/13 to Shs 35, 600 in 2016/17, representing a real increase of 7 percent within a three year period2. This shows that the cost of living has increased, yet earnings have reduced. The PAYE threshold in 2012/13 was equivalent to US$94. Today, the same threshold is equivalent to US$64, implying a net reduction of US$30 in earnings, which could explain the increasing poverty levels.
Recommendation: Government should revise PAYE to enable citizens earn the real income with an increment of 45% as shown in the table below. We also propose that the thresholds are revised during this crisis to cater for inflationary tendencies.
The Need for Tax Reliefs in Response to the COVID-19 situation
Tax relief measures on medical equipment and Investment in healthcare Investment in healthcare services and access to medical equipment:
Despite previous out cries by citizens for government to invest in Uganda’s healthcare, the sector has remained largely underfunded. There is shortage of medicines, medical equipment in health facilities, limited isolation structures for infected persons and very few health workers across the country. With a doctor to patient ratio of 1:11,000 against the recommended 1:100, there is need for government to employ more health workers. With only 55 ICU beds across the country, there is need for the government to equip all health centers and thus ready them for the containment of COVID-19.
Government should provide for tax exemptions on healthcare items during this period; this includes, mattresses for hospital use, hospital gloves, masks and protection gear that will be used during this period to curb the COVID- 19 pandemic.
Government should provide a daily wage and exempt the income of healthcare workers from tax during this period: This will contribute to motivation of the health workers and encourage them to work towards fighting the disease.
Tax relief measures on household utilities and essential goods:
We note that given the need to combat the COVID-19 pandemic through the observance of proper Water, Hygiene and Sanitation (WASH) practices such as regular washing of hands, drinking and storing safe water and generally maintaining clean homes. However, in Uganda, only 18% of the population nationally has access to a basic sanitation service (WHO/UNICEF-JMP 2019). Therefore, there is need for government to ensure that citizens can access WASH facilities to ably combat the COVID-19 pandemic. Also there is need to enhance access to household energy services including grid electricity or yaka and solar power among low income households. It should be recalled that in 2017, the Bujagali Hydro Power project received a tax holiday from a period of 5 years. However, power tariffs have remained high hence limited access to electricity across the country.
There is need for government to enhance access to household energy services such as YAKA (grid electricity) and home solar power to ably support in combating the COVID-19. To this effect, government should either waive VAT on electricity during this period or set a maximum price to enable the already burdened population to access it.
Government should provide for an exemption of VAT on items required for enhancing access to WASH related items by the citizens. Such items include piped water, soap, sanitizers and other materials made solely for WASH. We therefore support ongoing efforts by the private sector including Uganda Manufacturers Association who have come up to request for this move.
Tax relief on over the top services to increase access to internet services and Information on COVID-19:
During the FY 2018/19 government imposed a tax on Over the Top (OTT) services which includes social media sites. This tax however limits access to information among the citizens on the status of COVID-19. By February 2019, according to the Uganda Communications Commission, the number of internet users had reduced by 2.5 million. This was partly attributed to the introduction of taxes on social media which are not affordable for many.
The low internet access also contributed to registering a high avoidance rate and hence a huge deficit of Shs. 234.48 billion in OTT that performed at 17.44% (URA, 2019). While telecom companies have taken steps to reduce the price of data bundles, it still remains a challenge for Ugandans to access information through social media platforms given the need for them to incur a charge of Shs. 200 per day to access these sites. Therefore, citizens may be short of information on how the disease is spread, how they can prevent it and how to react in case they get it. Citizens might also be short on information on government effort to contain the disease.
During this period, we urge government to remove taxes on Over the Top services. This will enable more Ugandans to access internet phone services which will in turn ease the spread of information on how to prevent the spread of COVID-19 and how to care for those who have been infected or affected by the disease.
Tax cuts/relief due to the economic hardships during the COVID-19 pandemic:
It is expected that due to the economic crisis arising out of the COVID-19 pandemic, companies especially Multi-national companies will demand for tax breaks and bail outs from government. This will be so despite the fact that some of these companies have previously evaded payment of tax and have made use of loopholes within the tax laws to reduce their tax burden. Due to large tax incentives and exemptions which have cost the country over 4-5% of its GDP, Uganda has not been able to adequately invest in improving its healthcare system. We also recognize that the Ministry of Finance, Planning and Economic Development has held engagements with the private sector to forge a way forward on how businesses will survive during the ongoing pandemic.
In response to this, we propose that government puts in place a requirement for a country by country reporting before Multi-national companies are granted any tax cuts or breaks.
If there is need to offer tax cuts, government should only provide them to companies that present a tax clearance certificate with proof that they have previously paid their fair share of taxes during the past period.
Instead of offering tax cuts or tax breaks, government should consider an allowance for deferred payment of these taxes within a period of at most one year. However, a strict mechanism should be put in place to ensure that these payments are made.
Taxation of the Digital Economy after the COVID-19 Pandemic
In order to curb the spread of COVID-19 government has encouraged citizens to use online platforms to access goods and services thus limiting the spread of the disease. This has seen more citizens embracing the use of digital platforms to access basic goods and services. At the moment some of the platforms are offering free services hence gaining appreciation from the general public on their efficiency.
After the pandemic, the government of Uganda needs to benchmark India by investing in technology, and putting in place policies aimed at digital taxation. This also requires building the capacity of the URA staff to understand the dynamics of digital taxation.
As Civil Society Organisations, we call upon Government and other stakeholders to put into consideration the above observations and recommendations. We call upon the citizens to stay safe and follow the Ministry of Health guidelines and preventive measures during this period. Together for a healthy society, that contributes to a fair, just and accountable tax system in Uganda.