Tax exemptions, a plus or minus tactic?

Business

 In Uganda, as in many other countries, there has been ongoing concern about the amount of revenue forgone due to tax exemptions. Money foregone refers to the revenue that the government chooses not to collect as a result of these exemptions. The current tax exemptions include but not limited to:

  • A tax holiday of ten years is available to exporters who export at least 80% of their produce of finished goods, subject to certain conditions.
  • Plant and machinery is exempt from customs duty on importation. Additionally, a VAT deferral facility is available where VAT is deferred on importation of plant and machinery and subsequently waived upon approval by the relevant authorities.
  • A deduction of 2% of income tax payable is granted to any employer who can prove to the URA that at least 5% of their employees on a full-time basis are people with disabilities.
  • The income of an operator in an industrial park or free zone or the income of any other person carrying on business outside the industrial park or free zone whos invesrtment capital over a period of ten years is at least USD 10 million in the case of a foreigner or USD 300,000 in the case of a citizen, or USD 150,000 in the case of a citizen whose investment is placed up country, among others.

The concern is that while exemptions can serve important economic and developmental purposes, excessive or poorly targeted exemptions may erode the government's revenue base and hinder its ability to fund essential services and infrastructure. To address these concerns and enhance domestic revenue mobilization, Uganda may implement strategies aimed at optimizing its tax system. Such strategies could include reviewing and rationalizing existing tax exemptions to ensure they align with development goals and do not unduly compromise revenue collection.

Eralier in the year, the International monetary fund indicated continued repealing of tax exemptions would help government realize at least 417 billion shillings in previously foregone tax revenues in the financial year 2022/23. These repealed revenues focused on income tax (310 bn) and value added tax (107 bn) although this was below the 2.8 trillion Uganda revenue authority said in January  was rather foregone in tax exemptions, credits and deferrals. Additionally, efforts might be made to improve tax compliance, strengthen tax administration, and explore alternative revenue sources.

URA’s capacity

Whereas the tax man then remains with other duties such as advisory, assessment and even collection of the other taxes, the tax body remains highly incapacitated in terms of manpower with the current tax collector to audience ration being at 1:16,000, a number too huge for effective monitoring.

This conversation comes on the heels of constrained financial inflows including a world bank notice that it would not allow any new loan requesst from Uganda following the passing of the Anti homosexuality bill. Budget support dropped by 2.7 trillion shillings as for the next financial year 2023/24 says Paul Omara a member of the Budget committee of parliament. As the budget cycle for the next financial year begins, one would simply ask, “Is it time to tighten the belts even more?

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