Big Interview: Uganda’s tax regime is harming businesses, says Prof. Augustus Nuwagaba

Big Interview

A favourable business environment with clear and consistent policies, reduced bureaucracy, and improved infrastructure is vital for business growth and contributing to a nation's prosperity.

However, a tax regime that is unfair can have a severe negative impact on small and medium-sized enterprises (SMEs).

These businesses struggle with the expenses of complying with complex tax laws, and they are more vulnerable to corruption and bribery.

During a People and Power interview on NBS television, Augustus Nuwagaba, a consultant and economic expert, stated that Uganda's tax laws are killing businesses and not attractive to them. Nuwagaba acknowledged that although the government needs money to run the country, it is essential to pay legitimate taxes.

Excerpts below


Apart from the financial sector, are there any other liberalisation measures that you believe should not have been implemented?

The first mistake was the liberalisation of the financial sector and the sale of Uganda commercial bank. When I look at the current data that we have from Ethiopia and from Kenya. Ethiopia Commercial bank is the highest performing. KCB is performing well.

So, it was therefore not true that Uganda commercial bank was not performing because it was a government bank. It was not performing because of their factors. The power sector should also not have been privatized.

The government should have done whatever it takes to ensure that the power sector is not privatised because the cost of power determines very many things. It determines the production cost, it determines prices of fuel, it now determines the price of commodities. It determines inflation and then the cost of foods. The problem that we now have in the fuel which is imported inflation. we advised the government not subsidized petrol and diesel because we consume 6 million liters everyday (with no reserves) and if we are going to have government which subsides when do you know that Russian-Ukraine war is going to end, when do you know that Saudi Arabia is going to behave and continue to produce 11. 4 barrels a day. You don’t know how they are going to behave.


As a country, do we have a viable solution to address our current challenges?

I think the solution is on the demand side not on the supply side. We have been increasingly going to the middle class. The middle class has increased so there are many homes which are still living under the poverty line but also there has been a growing middle class and therefore consumption of oil products has increased. We advised the government not to subsidize energy. So oil is not a solution to these things. We need to stop over dependence on these products and reduce demand, the price will go down.

Regarding the liberalization of the energy sector, do you think there are any decisions that should be reversed?

Yes, we need to go back and the government has already gone back. The cabinet has agreed to establish the cooperative bank. That is a done deal now. What we also want is the establishment of an agricultural bank.

Any economic activity in Uganda that is going to revamp this economy is going to revolve on agro industrialization. We need to have a bank which speaks the language of agriculture, agro industrialization, agro business and agro processing. We cannot do that without cheap and manageable power. The current price of electricity is high.

In the agricultural sector, there are concerns about the death of cooperatives and calls for boards like the coffee marketing board. Are these boards still relevant in today's world?

Those boards are relevant but now the economy is liberalized. Those boards if they are to be reestablished they will be competing with the producers. The importance of the cooperatives, their main role was not only to sell. It was quality assurance which is a very big problem now and aggregation. These cooperatives were very instrumental in quality controls. They were instrumental in procurement of acaricides, pesticides which are not fake. There was a time the president invited me in Rwakitura and he was bordered with fake drugs.


Given our decision to liberalize, does the government still have a role in protecting consumer interests?

The economy is 100% liberalized. The government abdicated its role from things like setting prices, pegging Ugandan shillings in the dollar, it has failed to control pricing. What used to happen for example under the coffee marketing board is that the price of coffee was controlled. They used to have buffer stock and stabilization funds. If you produce more coffee, the price of coffee would definitely go down. If you produce less, the government would buy the coffee in terms of bumper harvest and keep it to control the price of coffee and there you had coffee marketing bored but now you cannot do that. The government is supposed to create an enabling environment for businesses. In some sectors the government has done well for example in the control of inflation.


The government's current industrial agenda emphasises commercialized agriculture, industry, ICT, and services. Do you believe this approach will lead us to middle income status?

Yes, because the way the current economy is structured is that services almost contribute about 43.3% of the GDP. The primary sector which is agriculture contributes about 23% to about a quarter of GDP but you know that the agricultural sector is the one which employs over three-quarters. It contributes less than a quarter of GDP but contributes more than Three-quarters to GDP. This is upside down .It means there is no level of productivity.


Are we merely putting on a show in agriculture without actually increasing production?

Yes, it is because most of the focus again has been upstream. As of now the agricultural industry is not highly productive, it is using rudimentary equipment and there is no sufficient marketing, aggregation is not sufficient and therefore the returns are low.


With many foreign-based banks operating in Uganda, there are concerns about capital flight. Are there regulations we can put in place to address this issue?

Foreign direct investment is important. Every country which has developed, transformed has attracted foreign direct investment because first of all we lack technology, we lack human capabilities at that level, we lack physical capital. So you need investors which have big money which can establish industries, create employment for people who are employed and can earn. That is how you create aggregate demand and then create accumulated growth. In the 1986/1987 financial year, foreign direct investment was zero. We were under sanctions .So it was not possible to get any foreign direct investment to come to Uganda particularly in the country which is riddled with conflicts.


At what point did Uganda begin attracting direct foreign investment?

It was about the 1988/89 financial year. What we need to do is to enhance direct foreign investment by attracting people who have money. We need to congratulate the government for creating stability for business because from zero to now 3.6% of GDP. It is not a small fit. People are now attracted to come here. When I was in Landon I asked them (those in diaspora) and 1.7 billion dollars that people bring here per year plus tourism which is 1.6 and these girls who are going to work abroad bring in 9 million dollars.

I urged for the creation of a Diaspora bond and the only country which has succeeded in that is Nigeria. The government needs to muscle that money which is out there which is quite a lot. The second issue is to enhance tourism because 1.7 million dollars is not small. And this is against the background of very not good publicity. I interviewed many Ugandans and I was very disappointed. Some of them have problems with the government here. I told them if you have a problem with the government here, this is the government which is in power now that does not mean, it is the one owning the country. The country is there. You need to promote Uganda. We get more than 1.7 million dollars from direct foreign investment.


Multinational companies dominate various sectors of the economy, leading to concerns about capital flight. What are your thoughts on this issue?

The multinationals are welcome but the problem that we have is over liberalization as I earlier explained. You need people that have money and can invest but you need regulations that can now guide these investments. For example, you can say in order to establish a company here, use local materials. This happens in Ethiopia, South Korea, Ghana among other countries. We have to implement the local content closely. You can say if you want to construct a dam, 30% of the local materials must come from Uganda. I think this local content is not being well implemented but I am sure that the law is there.


How do you view Uganda's incentive regime?

Our taxation regime needs review. For example, we pay corporation tax 30%( this is tax on company profits), we pay income tax 30% and then Pay As You Earn(PAYE) and then VAT which we collect on behalf of the government. Tax regime is killing business, it is not attractive to business. Of course the government needs money to run the country, it is good to pay but it is good to pay tax which is genuine and also that tax is improving business not killing business.

In fact, in many countries, businesses which are not doing well, the government now helps them. The tax regime is a very big incentive for companies and the government needs to consider those regimes that can be detrimental to the performance of these companies and they are very high. But also companies have been abusing some of these incentives. The company is given an incentive for the grace period to tax holidays for the five years and when the period elapses, the company changes the name and register once again. The government must remain with an eagle eye and monitor this.


Most SMEs are unable to meet the financial portfolio to earn tax holidays. What does the future hold for them?

We need special incentives for SMEs because they employ the largest number of people whom we say are in business here in Uganda. It could actually be over 60% of people who are in the informal economy. They are informal in the sense that they are not properly registered. They are not regulated. If you are not regulated is also a problem. We want these people in the informal sector to formalize because they still need services. That is why we have been supporting the government to have them pay provision tax because we need services. Their problem is that most of them are not formalized, they don’t have tax identification numbers. We don’t know where they operate from. It is important to formalize.


In your opinion, what steps must Uganda take to achieve middle income status?

The middle income status is a very good thing to reach at and by the way we have already reached that middle income status. We are under 1059 per capital income and this is good but is it enough, the answer is no. You need to be there for three connective years. We need improvement in welfare, education. We also need improvement in income, improvement in health.

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