The private sector wants tax cuts to offset the corrosive effect of higher lending rates and the rising cost of energy
Uganda’s private sector wants a reduction in taxes to off-set uncompetitive costs of production due to high interest rates and increased energy costs.
They argue that reduction of taxes would increase production and allow them to compete in the Eastern African region, without compromising government revenue.
Private Sector Foundation of Uganda (PSFU) wants government to reduce Value Added Tax (VAT) from the current 18 to 15 percent in the next financial year. They argue that this will increase production and, in the long run, expand the tax base, leading to higher revenue collections.
According to PSFU Executive Director, Gideon Badagawa, this is also the only way government can fight inflation.
PSFU’s Director for Policy Advocacy, Moses Ogwal, argued that at less than 70% capacity utilization, especially due to energy shortages, reduced demand and below capacity production, Ugandan companies could use a boost in production.
But informed sources say that however well-reasoned, it is unlikely this proposal will be accepted by government.
“It is unlikely,” said an official at Uganda Revenue Authority (URA) when contacted.
International taxes performed 90 percent below target in the first half of 2011/12, and government is looking to local taxes for revenue. Out of the Shs 2,927.5 billion (US$1.2 billion) collected in the last six months, local VAT collections contributed Shs 420.45 billion (Shs$178 million) - the only sector that performed above revenue target. Unhappy that parliament had abolished VAT on piped water, URA was reported to be unwilling to concede any further cuts.
In addition to stimulating production, a reduction in VAT - a consumption tax - would off-set the effect of the recent increase in energy tariffs.
Badagawa said while PSFU would not push for a reduction of power tariffs, as they have risen all over East Africa, taxes in Uganda are on the higher side of the regional average, with VAT at 18%. Kenya levies VAT at 16 percent, Tanzania 18% and Rwanda 18%.
Energy tariffs in Kenya attract 12 percent in VAT compared to Uganda’s 18 percent.
“I am in business to get a profit and as a price taker my revenue is constant, the current situation where costs of production are high means I will have to cut on my variable costs,” Badagawa says.
Cold turkey
High interest rates forced up by Bank of Uganda’s continually rising Central Bank Rate (CBR) and high energy costs are forcing manufacturers to reduce staff, swelling the rising numbers of unemployed.
“People will lose jobs which will shrink the number of buyers and business,” Badagawa says.
Some critics argue that BOU’s rapid increase of the CBR was excessive and could lead Uganda into an unnecessary recession.
Dr Isaac Nkote, a finance lecturer at Makerere University Business School, said Uganda was facing moderate inflation and BOU should have slowly and steadily reduced inflation to avoid further shocks to business. Dr Nkote said BOU could have used “moral persuasion” to convince commercial banks to reduce lending. Instead, the central bank applied the “cold turkey method” reserved for economies facing hyperinflation.
He argued that the drastic increase in the CBR, from 13% to 23% in six months, had increased the average loan repayment period by up to ten months, and forced an increase in interest rates even when commercial banks can get money cheaply.
But BOU Governor Emmanuel Tumusiime-Mutebile says the “cold turkey approach” was necessary since Uganda’s inflation had shown the potential to turn into hyperinflation, as it rose rapidly from zero in November 2009 to 30 percent in October 2011.
With interest rates 30% and above, and commercial banks only lending to clients with substantial collateral, the cost of finance has overtaken the rate of return.
“No business could have a return rate of more than 25 percent,” Badagawa said.
Some economists say Uganda’s interest rates have always been high due to a dependency on donor money, which accounts for Uganda’s heavy dependency on monetary policy to maintain macroeconomic stability by mopping up excess liquidity and stabilising the shilling.
Lawrence Bategeka, a public sector policy research fellow at the Economic Policy Research Centre (EPRC), argues that high interest rates are the price paid for absorbing donor funds not backed by economic activity.
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written by Michael Kors, February 17, 2012
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