Interview

During the review of Uganda’s economy, the International Monetary Fund said some of Uganda’s tax incentives, which continue to hurt tax collection growth prospects, have “outlived their usefulness.”

Jeff Mbanga conducted an email interview with Ana Lucia Coronel, the IMF Resident Representative in Uganda, about tax incentives.

What kind of Uganda’s tax exemptions do you think have outlived their usefulness?

Ultimately, it is the government’s role to evaluate each exemption from a cost-benefit perspective. But we see scope for reducing the number of exemptions in the law.

Examples include VAT exemptions on the supply of feeds for poultry and livestock, the supply of upcountry hotels, the supply of machinery used for the processing of agricultural or dairy products, the supply of new computers and software, the supply of packaging materials and the textile sector.

These exemptions had a rationale and a purpose at some point in time, but their usefulness has to be reassessed. Perhaps they have already met their purpose. One example is the VAT exemption on the sale, lease or letting of hotels that was instituted in 2009 to help the industry prepare for the African Union Summit that was to be held in Kampala the following year.

This exemption is still in place four years later. Moreover in light of Uganda’s sustained economic growth and financial deepening in the last decade, the government should bring within the tax net all capital gains of individuals.

Gains realised by individuals with respect to non-business assets were left outside the scope of taxation largely for practical administrative reasons at the time the law was initially drafted. However, URA is now in a position to monitor and enforce compliance on these transactions which have undoubtedly grown in importance in recent years.

What feedback has the IMF got from the government over your proposal of elimination of tax incentives, considering you have been calling for this for two years now?

Raising tax revenues is a key pillar of the authorities’ economic programme supported by the IMF, and removing inefficient exemptions is a crucial step to that end. Nonetheless, it is challenging in any country to achieve consensus on the importance of eliminating tax incentives.

These are seen by some as a way to attract foreign investment even though there is little support for this view in the scientific literature. Special interest groups are quick to defend their privileges in the face of any attempt to level the playing field; however, tax policy should be used as a tool to level the playfield.

Others claim that informality and the large agricultural sector are responsible for low tax collections in Uganda. Our analysis does not support this claim.

We do not believe that relying exclusively on administrative reforms and improvements to increase the tax yield is going to sustainably improve the tax/GDP ratio, which as you know is the lowest in the region.

However, our analysis of the data and engagement with URA indicates that the largest revenue gains are to be made by having the largest taxpayers pay their fare share of taxes.

Don’t you think there is a risk for government to abruptly unwind tax exemptions considering companies have made investment strategies based on the tax exemptions?

This should not be an abrupt decision. This should be part of a comprehensive strategy to increase tax revenues in Uganda. Of course this will certainly mean a higher burden for taxpayers.

But given the low tax-to-GDP ratio in Uganda compared to other EAC and SSA countries, there is still ample scope to increase that burden without crippling the economy. Indeed, higher tax revenues will also mean lower interest rates as government will not have to borrow as much to finance the budget.

This in turn is expected to promote further investment in Uganda. Finally, the ultimate objective of increasing tax revenue is to finance critical government investment that will benefit all Ugandans and companies operating in the country by reducing growth bottlenecks such as infrastructure, education, health, etc.

Do you feel, given Uganda’s energy needs, that government should consider unwinding the tax incentives in the energy sector?

I would not like to focus on details on specific sectors at the moment. As I indicated in the press conference, we are still awaiting for the authorities’ study on the tax gap.

This study will give us a better idea of the cost/benefit of incentives to particular sectors. On the second point you are raising, there is a tradeoff between the benefit of raising tax revenues and closing the energy gap that needs to be carefully analyzed.

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Comments

 
+1 #1 Akot 2013-12-12 21:22
France has seen the highest progressive taxation ever-organised tax collection, it is also seeing the level of povrety rising at a time when govt. is proud of its tax collection!

All social services are reduced at a time when French president is so proud of the billions collected in tax so far! He put pause because of coming local election - his party is faring badly! No one thinks of private business in France due to tax!

UK withheld from heavy taxation & private firms are doing better-employing thus helping economy!

Banks can count on govt.bail outs, not tax payers-private firms! No poor get any help from banks!
Govts.listening to IFM/World Bank are driving their tax payers-populations to pouvrety!
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