Tax waivers in Uganda are suppressing the country’s revenue generation, and it appears that the country could now lose over $700 million in tax arrears (close to half of the national budget). The amount, which the government has failed to pay on behalf of contractors, accumulated over a period of five years (2013-2018).

According to the Budget Framework Paper for 2019/20 fiscal year, the Uganda Revenue Authority (URA) lost about $272 million in waivers and incentives in the 2013/14 year alone.

The skyrocketing tax arrears have caught the attention of Parliament’s National Economy Committee, which scrutinized the Budget Paper as presented by the Ministry of Finance. The committee observed the alarming growth of the arrears, which by the end of 2017/18 financial year had reached $730 million.

“This is worrying given that Uganda’s revenue efforts as measured by the tax to GDP ratio have stagnated at about 14 percent,” the report reads.

Uganda’s tax efforts have not been matching its economic growth. Last year, there was a significant shortfall – while URA was given a target of $4.7 billion, it realized a shortfall of $151 million.

Underlying cause?

The report indicts the government for shielding contractors who should ideally meet their tax obligations on the contracts for which they are paid.

“The accumulation of tax arrears has been caused by the failure of the government to pay suppliers of goods and services. There are also instances where the URA is directed to release goods before taxes are provided,” the report adds.

It has been observed that arrears are usually awarded at the order of well-connected politicians and business persons who pressurize the URA to bypass procedure.

“These are taxes that contractors owe URA but because the government wants to reduce the costs of projects like those in the construction sector, it says it will pay, but then it does not pay because there is no money,” Deputy Secretary to the Treasury, Patrick Ocailap said. 

In 2018, URA Commissioner General, Doris Akol, revealed that the institution would write off tax arrears amounting to $108 million owed by government. Also, an additional $54 million was not collected from Uganda Telecom upon a directive by the president who preferred that the debt be translated into government shares in the company.

“The government is willing to pay the arrears but the money has not been provided for in the budget. Normally, we put the taxes in arrears and when the government fails to pay, we write them off,” Ocailap added.

Implications on the economy

There is a rationale for granting tax exemptions and incentives. As a policy tool, it is used to spur economic growth through attaining of certain policy objectives or as an avenue of encouraging activities that will lead to setting up of investments for future revenue generation.

Tax exemptions are often used to support emerging local companies that may either solve a crucial socio-economic problem or need to be protected from the vagaries of open competition. Also, they are implemented to encourage the location of industries in particular areas of the country, foster economic diversification and create opportunities for accessing foreign markets.

However, the degree to which tax incentives and exemptions are used in a country affects the tax mobilization capacity of a given economy. Tax exemptions tend to reduce revenue in the short run and may eventually have negative effects on revenue generation if the government defaults on money waived, as in the case of Uganda.

If the country is to realize the intended policy objective for the use of tax waivers, exemptions and incentives must be given in a properly structured environment

In line with the recommendations of the Southern and Eastern African Trade Information and Negotiations Institute (SEATINI), it is imperative for all stakeholders to agree on the sectors to benefit from the incentives, to set up mechanisms for monitoring and evaluating the intended benefits and to have a transparent method for determining the companies to benefit from the incentives.

More so, the government will be required to implement a robust revenue mobilization strategy to improve collection and avoid the failure of revenue efforts overstretching the country’s capacity to service its debts.