News Column

Negative Economics of Tax Exemptions

June 23, 2014

Julius Businge

Ms Ana Lucia Coronel, the IMF Resident Representative in Uganda, has been one of the most vocal critics of tax incentives/exemptions in Uganda. Indeed, even other key bilateral donors including the World Bank have over the years been calling on government to scrap tax incentives, saying they had outlived their usefulness and more so at a time when there was need to widen the tax base and raise abundant revenue to finance a larger part of the budget. "These exemptions had a rationale and a purpose at some point in time, but their usefulness has to be reassessed. Perhaps they have already met their purpose," Coronel told a local newspaper in a recent interview.

The IMF boss has always held the stance that Uganda no longer needed the many tax incentives it offers as its liberalized economic climate is already ideal to attract foreign direct investment without need for any special favors. She has also reasoned that given Uganda's low tax-to-GDP ratio - 13% compared to the SSA average of 20%, higher tax revenues would have advantages that include lower interest rates as government would not have to borrow as much to finance the budget.

Indeed, various surveys have shown that what investors need more than incentives are a better environment for doing business such as better infrastructure, and utilities such as cheap energy, and piped water, which bring in better returns on investment than the tax incentives. The government appears to be getting the sense of that simple logic - finally.

While presenting the budget on June 12, Finance Minister Maria Kiwanuka announced the scrapping of several tax exemptions, which she expects Parliament to pass so as to raise the revenue to fund her record Shs 15 trillion budget. Indeed, Patrick Bitature, the chairman of the Private Sector Foundation Uganda (PSFU), had one message for the private sector, pay up your taxes. Speaking at a post budget dialogue organized by the private sector apex body at the Uganda Manufacturers Association (UMA) on June 13, Bitature, who also sits on the board of several other entities including chairing the Uganda Investment Authority Board, was unequivocal in his support for a culture of paying taxes if the business sector wants better facilities and services.

Improving business climate:

Uganda ranks among the top ten recipients of foreign direct investment (FDI) in sub- Saharan Africa. Investment opportunities in infrastructure development, oil and gas, agriculture, mining and telecommunication are supported by sustained political stability and the macro-economic environment are key to attracting FDI.

The World Bank's Doing Business Indicators for 2014 ranks Uganda against other countries in the world on several different features of the business environment. Overall, Uganda ranks 132nd out of 189 countries, a fall of six (6) places from 126th in the previous year.

Under the theme: "Maintaining the Momentum: Infrastructure Investment for Growth and Social Economic Transformation", this year's budget is projected to raise 81.8% revenue of the entire budget from local revenue.

The balance will come from external support in form of aid and borrowing from internal and external sources.

Francis Kamulegeya, the senior partner at PwC, said consumers will feel the pinch of the new taxes once passed. "But why not, you need a road, security, medicines and other social services," he said, adding that the issue should be ensuring that the money is used for the purpose for which it was collected. What remains to be seen is what the government is going to do about the hefty exemptions it accords to several foreign investors without much justification.

For more stories on investments and markets, please see HispanicBusiness' Finance Channel

Source: AllAfrica

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