By Sserunjogi Brain

There has been an ongoing debate among different policy-makers and civil society on the feasible short and medium-term measures to increaseinternally-generated funds for long-term financing of government investments. Domestic resource mobilization efforts in Uganda have stagnated in the region of 12 to 13 per cent in the last ten years. Therefore, improving the level of domestic revenue collection could be one sustainable channel for raising funds for financing the budget.

The biggest paradox, however, is on who is currently excluded from the tax bracket and what practical ways should be adopted to ensure that the domestic tax base is widened without hurting the already- burdened traditional tax sources and cause further social discomfort.

There has been increased effort for a regional integration – East African Community – calling for free movement of goods and people in the region, with a view of increasing domestic revenue taxes at reduced pressures and broadened bases.

There is a theory that increased mobility of labour and other factors of production has the ability to broaden the tax bases, and hence resulting in a downward pressure on tax rates. In Uganda, the context has been on how to unlock the informal sector that is largely untaxed but has the potential to be the leader in driving the economy.

The informal sector includes market vendors, cobblers, street vendors as well as peasant farmers who make majority of the population. There are a number of practical short and medium-term measures that the government could adopt to improve the persistently-low level of tax revenue to GDP collection levels to finance the budget. Notable amongst these is unlocking the informal sector: small and medium-scale businesses including commercial agriculture and agro-processing activities which employ a critical mass of the rural population. While this could be a feasible idea, direct taxation of the majority of peasants could have far- reaching socio-economic and political consequences that policymakers should take care of.

The overriding principle, however, is to have a simple and easy tax policy that captures and motivates the larger informal sector into the tax net through registration and license that eases tax collection.

Second, the Ministry of Lands, Housing and Urban Development needs to map out all land in Uganda and ‘tag’ each owner using the national identity card. According to the National Development Plan (NDPII) report, only 20 per cent of land is registered in Uganda.

Customary land tenure accounts for 80 per cent of the total land available and is largely untitled. Improving land registration in Uganda shall facilitate urban planning, improve local and foreign investment confidence, reduce the cost of government infrastructure development and, hence, increase the local tax base.

With Buganda kingdom’s recent campaign to regularize land rights of ekyapa mu ngalo (loosely translated as a land title in your hands), the government should leverage on this campaign and adopt similar measures especially in areas with high rates of customary land ownership to ensure that all land is registered.

Third, government should invest in mobilizing the larger informal sector businesses and activities into cooperatives across different sectors, for easy access to financial services for profitable investment. The major impediment has been on how to transform the informality to formality across sectors.

By forming cooperatives, a largely-unorganized informal sector can be transformed into a formal one, making it easy for the government to track their income performance for tax collection purposes.

The fourth move is renationalizing tax exemptions to only investments that are underperforming and fairly distributing tax exemptions to both local and foreign investors. This shall create equity and confidence in tax contribution.

There is evidence that the government continues to unfairly allocate tax exemptions to even investments that are already making profits. This is cheating the country and is creating more burdens to the compliant taxpayers. If this is not curtailed, it may create a spiral of tax evasion and avoidance across several businesses.

Lastly, the government needs to address constraints that continue to affect business competiveness and profitability in Uganda. These have a reducing effect on the cost of doing business.

They include investment in infrastructure mainly energy, transport, and human capital development. A well-developed infrastructure will reduce the cost of doing business, improve efficiency and encourage domestic as well as foreign investors to expand productive capacity and hence expand the local tax base as well as employment.

 

The author is dr. Brian Sserunjogi, a research fellow at Economic Policy Research Centre

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