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The trouble with URA

 

Focus in the past few months has been on URA, whose headquarters are in Nakawa.

Why Museveni’s focus on corruption as the biggest problem of tax administration misses the big picture

THE LAST WORD | ANDREW M. MWENDA | During his national address after the reading of the 2020/21 Budget, President Yoweri Museveni decried the low ratio of tax to GDP in Uganda, which stands at 14.3%. Since 1997, this ratio has stagnated only growing from 11% in 23 years. Museveni then said that this is largely because of corruption at the Uganda Revenue Authority (URA), which, he said, he has now addressed through the changes in the leadership he has forced onto that organisation.

Corruption is a problem at URA, indeed a big problem. But it is not the biggest problem. The bigger problem at URA is one of tax policy; the second is tax administration where corruption is just a part. The bigger tax administration problem is human resource capacity to identify taxpayers and make them compliant. Yet the tax law in Uganda is designed to punish tax compliance and reward noncompliance; a pathology that is often self-reinforcing. For most Ugandans registering to pay taxes is a sure ticket to economic destruction. Why?

Uganda’s tax code was largely borrowed from the Western world: Switzerland, USA, UK and Netherlands as best practice. However, it is implemented in a different economic and social context, which makes it dysfunctional. And this reflects the continuous pathology in Africa: our problems are often local but when it comes to designing solutions, we ignore many aspects of our reality. Instead we retreat to textbook theories that were written explaining the experience of other more advanced nations. Yet such theories, laws and practices evolved organically out of the experience of these countries and reflect a unique (as opposed to a universal) reality that requires relevant responses.

For instance, in the USA or Switzerland, 98% of taxpayers are compliant and this is because of many reasons. Most businesses there are formal, which makes compliance easy to enforce. Many of these businesses are listed on the stock exchange, a factor that imposes compliance obligations on them without having to be pushed by the revenue agencies of the state. Many others need loans from banks or desire to attract equity investors outside the stock market and this requires proper books of account. The rewards of compliance to business growth are thus high.

Thus the tax code in these countries is designed to heavily punish those who are non compliant, in fact with the aim of driving them out of business. This is because noncompliant taxpayers are very few bad apples in a large basket of largely compliant ones, thereby presenting the risk of contagion to the entire basket. It makes sense, therefore, for the tax code to seek to deliberately eliminate them. So the tax code is designed with prohibitive fines and penalties.

But the reverse is the case in a poor backward economy like Uganda. A huge chunk of economic activity is in the informal sector. Therefore 95% of actual and potential taxpayers are not compliant. The challenge of tax policy in Uganda is to design a tax code that can attract people to become formal. This means that the tax code should aim to reduce the costs a potential taxpayer will encounter to move from informality to formality i.e. to register.

6 comments

  1. Andrew, I could not agree with you more on URA.

    • Andrew,the formal businesses in Uganda don’t pay tax. They are owned by untouchables in this country. Therefore, going formal may not save URA in Uganda. Whether changes are made a thousand times in URA,as long as we have individuals above the law in Uganda, revenue collections will remain low! Karl Marx,pointed out why Germany developed faster than other countries in Europe. The reason is in Germany everyone has to toe the line. This is exactly what is lacking in Uganda.
      To an upcoming entrepreneur in Ugandan, evading tax is the most viable growth strategy to be embrace from celebrated Ugandan entrepreneurs.
      I can assure you Andrew, whether you are appointed as commissioner general at URA,and you implement such ideas you have. The results will still remain the same.

  2. The foreign investors that would pay taxes to URA get long term tax holidays after giving kick backs worth millions of dollars to powerful individuals, who then convince the president to give the foreign investors tax holidays. Then URA comes after poor Ugandans, who have very low capital to start with, purposely to run them out of business. Most of the enforcement officials at URA have never started or run a tomato stall and would never understand the pains of running a business in this economy.

  3. James Jomes bantu

    The problem is not how much revenue is collected in a fiscal year (FY), but from what?. Government needs to find other ways of making money, not only revenue and tax as its sole source of income, its a grave misconception on the government side. Not forgetting that over taxing and revenue collection can drive businesses men out of trading. In the case of uganda enough businesses have ceased from trading in uganda and some have relocated to Burundi and South Sudan. Uganda’s exorbitant tax regime has failed miserably and the more demand for more and high taxing system will cause more exodus of potential investors to other regions in Eastern Africa.

  4. Government needs to have its own clearing and forwarding company for purposes of effective monitoring and control of tax payment.

    Most of the uncollected tax leak through the private clearing and forwarding firms.

  5. The key point here is simply one; Uganda is a very disorganised state. Everyone would love to take advantage of such a situation be it informally or formally. We hv certain individuals who untouchable and touchable n this country who can influence systems either way. We hv institutions that can contain or even eliminate corruption but they cant simply because they ain’t given space to enforce their legislated mandate. Those advanced countries don’t hv the kind of politics we exercies in the third world. This is all down to leadership. Period.

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