To tax or not to tax key economy drivers

By Julius Businge

Business owners query new taxes on ICT, education, health, agriculture

Francis Kamulegeya, the senior country partner for PriceWaterHouseCoopers in Uganda says “you cannot grow a sector without taxing it”.

Kamulegeya’s view flips the common belief that “you cannot grow a sector without giving it incentives”.

But Kamulegeya’s tax-to-grow strategy appears to be what Finance Minister Maria Kiwanuka is applying in the newly read 2014/15 national budget [estimated at slightly over Shs 15 trillion]. Will it work?

Just a week to the reading of the 2014/2015 budget; in his State of the Nation Address on June 5, President Yoweri Museveni had said the government’s priority sectors are agriculture, industry, services and ICTs.

He appeared to signal special status; that is incentives, for them when he said these sectors are critical for wealth creation and access to employment.

The question still puzzling many is why, instead of giving incentives in the budget, taxes were imposed on the supply of computers, agriculture inputs, private schools, printing services for educational purposes among others yet the country must build on these for future prosperity?

It is possibly one of the reasons why Kamulegeya, while commenting on the budget, describes Kiwanuka’s tax policies as “tricky” and recommends caution on implementation.

“Of course you cannot grow a sector without taxing it,” he says, “but you have to balance the two, hopefully government did that.

“It is a tough budget, but these are tough times…if the government delivers, it will be a price worth paid.”

Kamulegeya also adds another dimension to the discussion: where does the government propose to spend the money it is collecting?

Tax gambles

The increased tax gamble is the government’s attempt to fund the budget amidst fears that donors may withdraw some of their aid, for various reasons as happened in the past.

The FY 2014/15 budget will run under the theme: “Maintaining the Momentum: Infrastructure Investment for Growth and Social Economic Transformation”. It aims to achieve real economic growth rate of at-least 7% per annum and position Uganda to compete favourably in the context of EAC integration.

In the budget, Kiwanuka has proposed over 15 new taxes intended to grow the tax base currently ‘sleeping’ at about 13% to the GDP. That is lower than the average of about 20% for Sub-saharan countries.

The new tax regime comes at a time when the Uganda Revenue Authority (URA) has recorded a Shs 475 billion as provisional revenue shortfall for FY 2013/2014 resulting from a bad year for tax payers in the services industry; telecom and banking, and manufacturing among other businesses. The body had a collection target of Shs8, 578 billion in FY 2013/2014.

The proposals, if passed, will give government about Shs530 billion (about 3.5%) of the entire budget.

It is possible for almost all the proposed tax measures to pass since Parliament is dominated by her NRM Members of Parliament who usually do not contradict President Museveni who is also the owner of the budget.

Some analysts say Museveni and Kiwanuka appear to be gambling and risking all because the new taxes target sectors which, if well managed, could transform the country from a peasantry to a modern and self-sustaining economy.

Kiwanuka is proposing to tax private schools, insurance companies, and the ICT sub-sectors.

Under the VAT proposals, she has terminated exemption on income derived from educational institutions, and supply of new computers, desktop printers, computer parts & accessories, and computer software licenses.

In the services sector, she has terminated VAT exemptions on hotel accommodation in tourist lodges and hotels outside Kampala district, and on the supply of insurance services except medical and life.

She also announced the termination of VAT on supply of specialised vehicles, plant and machinery services and civil works related to roads and bridges construction, agriculture, water, education and health among other taxes.  Under agriculture, the minister wants to remove exemptions on the supply of feeds for poultry and livestock, supply of agriculture and diary machinery, and supply of packaging materials to the diary and milling industries.

The VAT exemptions on supply of cereals grown, milled, or produced in Uganda, supply of processed milk and milk products, supply of machinery and tools for agriculture, supply of seeds, fertilisers, pesticides and hoes are to be removed.

All proposed agriculture VAT measures, are expected to generate Shs 30.4 billion, about 0.2% of the entire budget.

Once passed, it means, there will be an additional 18% VAT cost on the supply of these inputs.

But should a sector that is struggling with a meager growth of 1.5% and employing almost everyone be taxed or given incentives?

Catching the informal sector

“If I was in her shoes I wouldn’t tax them,” says Adolf Sabiiti, the general manager at Mpanga Tea Growers – one of the largest tea companies in Uganda, “I would rather find ways of developing the sector by empowering the institutions in charge of the agriculture sector in this country.”

“My message to the minister and parliament is; let there be no taxes on the supply of agriculture machinery and other related taxes, they should find alternative sources of that money,” he said, adding that if passed, the new taxes will hike the cost of agriculture, deter its growth, and discourage potential investors in the sector.

Sabiiti says, for example, Uganda does not have fertiliser plant and his Mpanga Tea Growers, which has operations in Kabarole and Kyenjojo districts farmers, imports.

“Taxing fertilisers, means our tea will not be competitive at regional, international markets,” he said.

Sabiiti is specifically concerned about the effect of the new tax regime on the Agriculture Credit Facility (ACF).   Under the government’s ACF, a facility supervised by Bank of Uganda, Mpanga Tea has been borrowing at 12-13% interest. Sabiiti fears that Kiwanuka’s proposal to Parliament to terminate exemptions on interest income earned by commercial banks on ACF loans could hike interest rates.

He told The Independent on June 20 that he is already groping for alternative sources of funding if local banks increase interest on agriculture loans.

“We are a member of Shared Interest Society in the UK (a community benefit society which acts co-operatively and the world’s only 100% fair trade lender). And we can borrow at cheaper rates compared to those in Uganda,” he said.

But in defense of her proposals, Kiwanuka says the proposed taxes aim to catch the informal sector players who have not been paying tax. According to the Uganda Bureau of Statistics, the informal sector comprises about 40% of the Uganda economy.

On taxing agricultural inputs, she said, the sector is largely informal and contributes less than 1% in taxes yet it is noted as the largest in terms of contribution to GDP – at 21%, and employs over 70% of the entire population.

Kiwanuka’s junior Minister in charge of Planning, Matia Kasaija, says all new taxes have been thoroughly researched and consultations with key stakeholders done.

“Our belief is that government will get revenue from the new tax measures and invest the money to benefit the entire population,” he told The Independent.

Enlarging the tax register

Gideon Badagawa, the executive director at Private Sector Foundation Uganda (PSFU) supports the government on broadening the tax base.

“We continue to depend on the same tax payers; Roofings, MTN and all these other businesses, yet there are people in town here who earn Shs50 million every day and they are not taxed.

“We commend URA’s work so far, but they should move to the top by reaching out to the untaxed group,” he said.

Allen Kagina, the commissioner general at URA says Badagawa and others will, in FY 2014/15, see increased activity to improve tax administration, encourage compliance and building efficiency for businesses to grow, and expand URA’s tax register.

“We are determined to work with and not against businesses to bring in this revenue,” says Kagina.

The tax body is working with the Uganda Registration Services Bureau (URSB), Kampala Capital City Authority (KCCA) and local governments to identify taxpayers and collect taxes from small businesses which have proved hard to reach by URA.

This collaboration, dubbed the Taxpayer Register Expansion Project (TREP), was flagged off in January and is earmarked to expand URA’s tax register by 103,570 value clients;  clients who submit returns and pay income tax-and generate revenue worth billions of shillings in the long term.

The Finance minister hopes the new measures will improve and grow the economy at 6.2% in the FY 2014/15, higher than the projected 5.7% this financial year.

Her budget has been roundly praised by policy makers and the government.

Ann Lucia Colonel, the International Monetary Fund (IMF) Uganda representative, was impressed by the government’s move to fund the budget.

“The budget had been carefully designed to be consistent with macroeconomic stability,” she said.

But Central Bank Governor, Emmanuel Tumusiime Mutebile, has consistently stated that the downside risks to economic growth include the continued weak performance of the agriculture sector.

Kamulegeya of PWC, points at the looming 2016 polls spending, poor budget discipline, failure to allocate the limited resources to the priority sectors of the economy, public sector wage pressures and their impact on service delivery as the major risks to this year’s budget.

He warns that unpredictable weather conditions could negatively impact on agriculture and increase food prices (the largest component in the consumer price index of 27%) and in turn increase inflationary pressures. External shocks, commodity prices, and sluggish global economy may also frustrate Kiwanuka’s hopes, Kamulegeya warns.

Kiwanuka’s new taxes, apart from increasing aggregate government revenue, could reduce cross-sectoral tax disparity.

But her challenges are doubly compounded because the areas she is attempting to tax, such as agriculture, are among the “hardest to tax of all hard-to-tax sectors”. This, according to experts, is due to the small scale of operations, the spatial spread of the activity, and their high susceptibility to exogenous shocks.

These challenges are made worse because most operators do not keep proper books of accounts. So far, the government appears to skirt some of the hurdles by targeting an indirect taxation regime. The outcome, as in many projections around agriculture, is uncertain.