Broaden not deepen taxes
Analysts who have been pushing for new measures that bring in new taxpayers to broaden the tax base are disappointed that the Minister of Finance is instead pushing for the same old measures that burden the same taxpayer with higher or different taxers.
The heavy dependence on export taxes; mainly on coffee, sales tax and income tax in the early 1990s has been replaced by even a broader reliance on customs and excise duties, VAT on imports and local products and tax on petroleum imports, PAYE, and import and excise duties for government revenue. But the annual license levy on vehicles, the Minister initially proposed, is an old tax that the government abolished in 1997.
Broaden tax base
Going forward, Nalunga said the government should broaden the tax base and not deepen the taxes as the proposed new taxes are targeting the same tax payers.
“For the case of imposing tax on internet, let the government go big fish like Jumia, Uber, and Amazon,” she said.
She said the government should also allocate resources to productive sectors so that they are able to raise more revenue to finance various activities.
Tax on fuel and motor vehicles that appear to be the main issue this year have for years been a soft spot for the Ministry of Finance to milk an extra shilling from motor vehicle owners.
Car owners in Uganda must bear an import duty of 15% of value, 18% VAT, Import Commission of 2%, Witholding Tax of 6%, Excise Duty of 10%, an environmental Levy of between 35-50% depending on age of vehicle, and an infrastructure levy of 1.5%. In brief, the tax paid is sometimes higher than the cost of the motor vehicle.
Operational expenses of motor vehicle are equally targeted. The tax on fuel is increased nearly every financial year. It was raised from Shs1, 000 to Shs1, 100 in FY 2016/17, from Shs1, 100 to Shs1200 in FY2017/18, from 1200 to Shs1, 350 in FY2020/21, and now from Shs1, 350 to Shs1,450 in FY2021/22.
And as Lwemiyaga MP, Theodore Ssekikubo, told the Minister of Finance during the debate, increasing the fuel tax is counterproductive, especially in a year of COVID 19 slowed economic activity.
“You can’t afford having the pump price increased because it will be transferred to the consumer and basic commodities such as food and soap will also be affected,” Ssekikubo said in parliament.
But the government pushes a similar low-hanging fruit strategy. It goes for mobile phone owners; through the 12% internet access tax in spite of the negative likely effects on budding online businesses and 30% tax on rental incomes in spite of declining occupancy rates due to slow economic times.
“Taxes on internet data, for instance, have wider ramifications on both the government and people,” Robert Ssuuna, a Tax, Trade and Investment Consultant , who has worked in both the government, academia and civil society organizations told The Independent in an interview.
“The government is currently implementing an infrastructure for E-Governance, and backbone network to have all MDAs connected, and excise duties on data are shooting government’s own foot. Access, affordability, and availability of internet are not a luxury.”
He said it is surprising that excise duties which are meant to be charged on luxuries or harmful products are being directed to the data customers.
Expert observers such as Badagawa, said the government should instead of increasing penalties for tax non-compliant, first consider tax education.
“You can come up with a law but implementing it is no easy and increased penalties cannot make compliance. The government should look at the reasons why people are not following the law and address those issues,” he said.
“Compliance is not by coercion but persuasion. Account for the taxes people are paying through service delivery. Build schools, hospitals. When people see what the taxes are being used for, they will comply”
Gideon’s argument’s rhymes with recent studies which show that high penalties for tax non-compliance result in minimum positive outcomes.
A study published in the International Journal of Business, Economics and Law in 2017 dubbed ‘Tax penalties and tax compliance of small medium enterprises in Malaysia’ found that citizens are likely to be extremely resentful of tax systems where extensive enforcement is used. This resentment can further lead to tax non-compliance.
The study also found that pure penalty system used in practice is suboptimal, and that tax authorities should consider implementing the mixed penalty-reward system whereby a taxpayer who fails to comply with tax law will pay a penalty and those who pay the tax get rewards as this will help to improve the tax compliance without lowering the tax revenue of the government.
“Tax penalties that are considered too high or punishment that is too extreme could cause backfire such as bribery and corruption, yet could lead to the increasing numbers of tax non-compliance,” notes part of the study co-authored by Yunus Nuridayu.
The study adds that in order to come out with effective policies in reducing tax evasion, the tax authorities need to understand the behavioural aspects of tax compliance’s decision.
Similarly, tax compliance is also greater when the individuals perceive some benefits from a public good funded by the tax payments while changes in fine rates appear to have little effect on tax compliance behavior, according to another study titled ‘A Review of Factors for Tax Compliance in Romania.’
“It therefore appears that there are additional tax policy instruments beyond the standard prescription of enforcement actions that government can enact to achieve its desired degree of compliance with the tax laws,” the study notes.
“In fact, some of these standard instruments ‐ greater penalties ‐ may be largely ineffective in increasing tax compliance.”
Economists including Makerere University’s Dr. Fred Muhumuza and Makerere University Business Schools Ramadhan Ggoobi said that introduction of new taxes par se is not bad but the timing is bad for the government to make such amendments.
“The intention of the introduction of the taxes is good but the timing is bad. This is a historical mistake we are trying to correct wrongly,” Muhumuza said while appearing on NBS TV, adding that the government should instead put its focus on how they can make household income grow which will, in turn, increase domestic revenue other than ‘milking’ already overtaxed Ugandans.
“If someone is working for the stomach, even if you taxed them, you are going to get so little. The easiest market to rely on is the domestic market so the government should build it up,” Muhumuza said.