Government wrong on plan to tax bank withdrawals- says civil society

Civil society organizations have blasted government over its recent move aimed at taxing cash withdrawals from commercial banks.

In a February 9, 2021 letter by Patrick Ocailip, the deputy secretary to the treasury in the Ministry of Finance wrote to the Governor, Bank of Uganda seeking an opinion and data not later than Friday, February, 12, 2021 on the matter.

Addressing journalists on Sunday, Jane Nalunga,the  Executive Director for SEATINI-Uganda said since the biggest percentage of Ugandans are in the informal sector, the number of those who save with commercial banks is very small, adding that the new tax will further exacerbate the situation.

“Uganda’s economy is largely informal which partly contributes to low domestic revenue generation in the country as noted in the new Domestic Revenue Mobilization Strategy for Uganda. The proposed 0.5% charge on all bank withdraws will discourage the informal and shadow economy operations as economic agents will shy away from depositing their money in the formal commercial banks,”Nalunga said.

This, she said, may have undesired trickledown effects of reduction of bank transaction amounts.

“Relatedly, the proposed tax is likely to reverse efforts put in place to move people from the informal sector to the formal sector since the tax is a disincentive to going formal.”

According to the CSOs, the proposed taxation of bank withdraws will limit tax compliance among the members of the public.

Sophie Nampewo, a budget policy specialist at the Civil Society Budget Advocacy Group explained that the move is double taxation, noting that many would-be taxpayers will prefer running away from paying taxes.

“This move will also subject those people whose incomes are already taxed to a double taxation, with the excise duty already imposed on the account, and the additional withdraw taxes. For example banking services are already heavily taxed additional Excise duty of 15% and the burden is majorly transferred to the clients, which has made banking costly. Therefore, the tax proposal is already unfair and is not a measure for compliance,” Nampewo noted.

The move to tax bank withdrawals will discourage cashless transactions which many businesses had adopted after the onset of the Coronavirus pandemic last year.

According to John Walugembe, the Executive Director for the Federation of Smalla and Medium Enterprises, the move is likely to increase the cost of operation for many businesses which could in turn discourage cashless transactions.

“Moreover, the present banking culture coupled with the weak infrastructure are not supportive of this move. This move is likely to widen this gap. Such a tax will create a strong incentive to shift away from holding bank deposits to using cash which defeats the idea of promoting a cashless economy that the country is gradually growing into, especially in the wake of the COVID-19 pandemic,” Walugembe said.

Advice

The Civil Society Organisations urged government to drop the proposal since it will have adverse effects on the economy and will end up not serving its purpose.

“Government should drop this proposal and instead engage in a broad rethinking the domestic resource mobilisation architecture that will support the resuscitation of the crumbling economy after COVID-19,”said SEATINNI Uganda’s Jane Nalunga.

“Government should renegotiate and fast-track ongoing negotiations of existing Double Taxation Agreements e.g. Netherlands-Uganda DTA and Mauritius-Uganda DTA to regain taxing rights on dividends, royalties and interests. This will close the loopholes for tax revenue leakages so that the revenues are reinvested in the economy.”

The CSOs urged government to adopt progressive tax measures that ensure fairness, equity and inclusiveness.

Last week, the State Minister for Finance, David Bahati said that no taxes can be imposed without the approval of Parliament.