For many Ugandans, the current financial year 2013/14 is supposed to be a year of strong economic growth; however, taxes collected so far point to a different story unfolding.
While announcing the tax collections for the first half of the financial year ended December 2013, Allen Kagina, the Uganda Revenue Authority (URA) commissioner general revealed that the Authority is facing its largest deficit in recent years.
“When the economy is not doing well, you cannot expect miracles from the tax sector.
Corporate taxes are declining meaning the economic activity is weak,” Muhammad Sempijja, the Ernst and Young tax partner and country leader says. “Tax collections are part of a larger story. What we are reading is that the economy has not rebounded significantly enough – though it is better than the year 2012.”
While the economy is projected to grow between 6% and 7%, the manufacturing, telecom, banking, trade and leisure industry have taken significant hits making it harder to get to projected growth.
International taxes have hit sh1.731 trillion at the end of December against sh1.757 trillion, some sh26.42billion off targets. Domestic taxes performed much worse registering sh2.228 trillion against a target of sh2.445 trillion, recording a deficit of sh216billion.
Corporation taxes registered a sh161.19b shortfall with 325 companies that posted profits in the financial year 2011/12 registering losses in 2012/13. This is just part of the story.
Value Added Taxes registered a sh118.14billion short fall, withholding taxes fell short by sh30.72billion, and taxes on imports fell short by sh101.16 billion.
Quarterly economic growth figures showed a 0.6% decline at the end of December, leaving growth at 5.96%.
Sempijja notes that average inflation is estimated at 6.8% which is higher than the targeted 6.2% level, he adds that this has an impact on the incomes of the low income tax payers who spend the bulk of their money on food.
The Bank of Uganda (BoU) monetary policy is commended for controlling inflation through the tool of adjusting the BoU interest rate which affects the demand for credit,
however, in my view, this has been one sided focused – looking at onloy controlling aggregate demand without solving the supply side problem which has not solved other major obstacles like unemployment,” Sempijja says.
He notes that the movement of the benchmark Central Bank Rate (CBR) to 11.5% from 12% is too marginal and even then commercial bank loan rates of between 18% and 20% are still too high, slowing economic activity.
The exchange rate has also been stronger than originally anticipated. The shilling has been trading at an average sh2400 against a sh2,500 target against the US dollar. More taxes are collected when the shilling depreciates.
A Central Bank report says that the shilling is currently over priced relative to its fundamentals, however, Louis Kasekende, BoU deputy governor says that the situation will self-correct with time.
Kagina points out that the war in south sudan has reduced export volumes to the country affecting company margins mostly. “We have started to see improvements in exports to Juba since the signing of the ceasefire, however, a pick-up in exports to other parts of South Sudan might take more than six months,” she says.
South Sudan has emerged as the top destination for Uganda’s manufactured products such as cement and steel. The ongoing conflict in the country has given more prominence to Rwanda in Uganda’s export plans.
The finance ministry has created an Integrated Financial Management System (IFMS) which should hasten the payment of government suppliers.
Kagina notes that due to upgrades to the system, withholding taxes worth sh30.72billion from government suppliers went uncollected by December 2013. This amount should be collected in the next six months.
The URA expects to successfully push for an increase in taxes on undenatured spirits from 100% to 140%. A strong lobby had stayed the increment resulting a tax loss of sh 47billion.
After approving the increased excise duty rates on spirits, the sector is expected to stabilize,” Kagina says in a report.
A tri-partite partnership between the URA, Kampala Capital City Authority (KCCA), and the Uganda Registration Services Bureau (URSB) is expected to widen the tax net and collections to steer collections towards the sh10.5 trillion tax collection targets.