Over the past several months, Yoweri Museveni’s government has taken several steps to address Uganda’s tax shortfalls and protect against threats to the economy. Within the past few weeks alone, Museveni has deployed the military to protect Chinese-owned industrial parks from thefts and asked the Uganda Revenue Authority (URA) to monitor all calls in the country. The logic behind this mass monitoring: preventing telecommunications companies from underreporting calls by their subscribers.
This past July, Uganda also pressed ahead with a “social media tax” that sparked controversy, even as the widespread use of VPNs to evade the duties resulted in the URA missing its first quarterly collection target of $6.6 million after the tax was applied. Described as the first of its kind, the tax requires a payment of 200 shillings, or $0.05, per day for the use of social media sites including Facebook, Twitter, Skype, and WhatsApp. Traffic for these sites unsurprisingly dropped about 15% in the first half of July.
While the end goals justifying these steps are perfectly legitimate – protecting foreign investment and raising revenue to boost the country’s development – they raise important questions as to whether the government is taking the most pragmatic approach to raising revenue. Militarizing individual places of business doesn’t improve the overall security situation while monitoring telecommunications and taxing social media platforms could harm Uganda’s burgeoning digital economy.
The burden of the social media tax, for example, will be inevitably felt in the Ugandan IT sector, which has attracted global giants like Facebook and Google. The tax could also impede local innovation and investment in the e-commerce sector, as lower-income Ugandans will have a harder time accessing online services and retailers will have a harder time reaching them. Museveni insists the purpose of the tax is to discourage the spread of “olugambo”, a local word for gossip, as well as to earn revenue to fund public services.
Risks aside, Museveni is right about the need to collect revenue. With a tax collection rate of around 13.5% of GDP, the Ugandan government’s coffers are not pulling the capital they need to invest in infrastructure and other key drivers of development. The World Bank estimates up to 40% of the country’s potential revenue is lost due to a shortcoming in Uganda’s tax system. Fortunately, there are simpler ways to address Uganda’s economic shortfalls and collect tax revenue. First and foremost: bringing the country’s informal economy into the light of day.
The informal economy has been the main driver of employment growth for most African economies for years. In Uganda, the informal sector is estimated to account for over 50% of GDP and 80% of the labor force. While the lack of formal protection for workers and low productivity are major downsides, the capital required to create an informal business is negligible and the skills requirements are minimal – making it an accessible form of employment for a large portion of the population.
The rise of digital commerce raises a question mark for the future of the informal sector, and consequently, the livelihood of millions. The Ugandan government needs to formulate a policy that helps small-scale entrepreneurs in the informal sector adopt e-commerce to both formalize and grow their businesses.
While revising bureaucratic constraints on the digital economy, the government also needs to tackle issues of fraud and tax evasion offline. In concrete terms, this means a crackdown down on the black market of counterfeit goods, and particularly bootleg alcohol, that are ubiquitous in Uganda. This is not just a Ugandan problem; the country is a major source for illegal alcohol in neighboring Kenya as well. In September this year, three suspects were arrested in Bondo, a Kenyan village, for smuggling and selling cheap but highly potent liquor from Uganda that led to the deaths of seven villagers.
Here too, establishing standards of transparency and leveraging new technologies will improve Uganda’s business climate as well as tax revenues. “Track and trace” technologies can help combat illicit alcohol and ensure appropriate taxes are paid. In an attempt to crack down on illicit alcohol, the government has announced a digital stamp scheme to verify the authenticity of a product at every stage of the supply chain. However, this measure has been met with resistance by the Uganda Alcohol Industry Association (UAIA), which expressed concerned about the additional production costs it claimed its manufacturers would incur.
What would the Ugandan government do with this revenue? One laudable initiative involves channeling revenue from a 2% tax on alcohol and soft drinks into a fund for HIV treatment. The government expects to raise $2.5 million on an annual basis from the measures, a small but welcome step forward in a country where 1.4 million people are diagnosed with HIV. For this initiative to be successful, however, it must make sure those funds are collected.
The UAIA need only to look across the border to quell its fears. Similar measures were implemented by Kenya and Ghana, with Kenya showing remarkable progress in crackdowns on illicit trade and tax evasion after implementing the Excisable Goods Management Scheme (EGMS). In just a year, domestic excise revenue went up by 43% and tax revenues by 28%.
Technologies offer one avenue of improving transparency in key sectors of the Ugandan economy; assistance from international governance initiatives represents another. Earlier this year, for example, Uganda’s cabinet endorsed a plan to join the Extractive Industries Transparency Initiative (EITI) with a mind to help the underperforming Ugandan mining sector attract foreign investors. The EITI program tracks payments to the government in the oil, gas and mining industries, resulting in a more transparent and accountable extractive industries sector.
While these latter reforms have attracted far less attention from the press, they do significantly more to establish Uganda as a safe, transparent place to invest and do business. That shift, more than any short-term measure the government can take, will help Uganda recapture a rapid rate of economic growth and meet the development goals it has set out for itself.