By Regina Navuga
For the first time, in the Financial Year 2021/22, the government of Uganda released a report on tax expenditures FY2019/20.
Publishing a comprehensive tax expenditure report is a statutory obligation and an international standard which for long has not been adhered to.
Tax expenditures are usually defined as a government’s estimated revenue loss that results from giving tax concessions or preferences to a particular class of taxpayer or activity.
The value of allowances, reliefs and exemptions when multiplied by the appropriate tax rates becomes the tax expenditure gap.
Tax expenditures can be very large compared to normal government spending, it is important for civil society organizations to monitor them, assess their impact, and push governments to publish detailed information and carry out periodic reviews.
CSOs under the auspices of the Tax Justice Alliance Uganda and development Partners including World Bank, International Monetary Fund have in the past called upon government to publish these reports annually.
Nevertheless, there have been efforts by Uganda Revenue Authority to publish the expenditure report-an internal document not publicly made available-on a quarterly basis.
Therefore, this a good step and CSOs applaud the government for compiling and disseminating the report.
Tax transparency matters because a society needs to ensure that its tax system is working for the benefit of its tax authority, government, legislators, those who elected them, those who pay taxes and all other stakeholders of that tax system.
The design of the tax incentives has a significant impact on the overall effectiveness of any tax system.
For instance, government will be forced to put in place regressive tax measures “to make ends meet” in this case balance revenue and expenditure needs. It was revealed that in the FY 2019/20, total revenue foregone due to tax expenditures amounted to UGX 5,030.45 billion.
In FY 2019/20, the largest share of these tax expenditures was registered in international trade taxes (UGX 2,129.38 billion) while VAT tax expenditures registered UGX 1,857.75 billion and income tax tax-expenditures stood at UGX 1,043.32 billion.
The report indicates that majority of revenue forgone under the income tax exemptions was employment income tax exemption for armed forces personnel at 172.74 Bn followed by employment income – other than basic salary – for MPs at 82.24 Bn.
These exemptions partly deny Uganda from mobilizing domestic revenue which comes in handy to finance Uganda’s development needs as well as social services for instance health, education, agriculture, among others.
However, we note that the report only focuses on the impact of tax incentives on revenue. It is important for Uganda to conduct a benefit- cost analysis to assess whether the country needs to continue awarding the tax incentives, allowances and reliefs.
If an assessment is conducted revealing the benefits from tax expenditures are very minimal, it is only fair for government to review for instance the tax incentives put in place not forgetting the possibility of recalling the favorable treatment if inimical to Uganda’s interests.
At the moment, all evidence suggest that the societal costs of tax exemptions are high and that the benefits, in terms of additional investments are low.
For instance, the rosy promise of quality jobs and contribution to future revenue is still a dream. Therefore, the assessment should be used to inform decision making process.
Before awarding any tax incentives, government should first assess the challenges facing the individuals and companies and come up with alternative solutions.
We believe that tax incentives are not the only answer to addressing the challenges of the targeted beneficiaries. We call upon government to continuously share information from across the tax system in order to create an effective tax transparency process.
This will enable citizens to hold government and Uganda Revenue Authority to account for their effectiveness in managing the tax system.
As the government of Uganda finalizes the tax expenditure governance framework, we hope that it will take into account the needs of Ugandans, set key parameters on how to effectively manage tax expenditures mainly tax incentives and exemptions.
Furthermore, the framework should be in line with Article 83 2 (e) of the East Africa Community Treaty which provides that Partner States shall harmonize their tax policies with a view to removing tax distortions in order to bring about a more efficient allocation of resources within the Community.
Ms Regina Navuga is a tax expert from SEATINI Uganda