Will Uganda Revenue Authority beat its tax collection target?

Farmers attend to coffee seedlings. The agriculture sector continues contributing less taxes at the expense of those in the formal economy who are within the taxman radar. Photo by Rachel Mabala 

In Summary

• To widen the tax base, Uganda Revenue Authority (URA) has implemented several revenue strategies, some of which have been termed as regressive. But analysts say URA’s hurdle will remain stiff as long as the agriculture sector, one of the major segments of the economy contributes less taxes than other formal sectors.

By Ismail Musa Ladu

With four months to close the 2019/2020 revenue collection calendar, the race to the finish line has picked up pace. The focus? To avoid a repeat of the first half of the year performance that closed with a shortfall of nearly Shs700 billion. This is an equivalent of nine times the budget allocated to the ministry of trade.

The tax body’s revenue collections have been rising year-on-year, due to tax collectors’ drive with Ms Doris Akol, the Commissioner General, steering the wheel.
To widen the tax base, Uganda Revenue Authority (URA) has implemented several revenue strategies - some of which have been termed as regressive. These have accounted for improved revenue performance from Shs11.2 billion in the financial year 2015/16 to Shs16.6 billion in the financial year 2018/19.

Despite the optimism of the tax collector, analysts say URA’s hurdle will remain stiff as long the agriculture sector continues contributing less taxes at the expense of those in the formal economy who are within the taxman radar.

Agricultural sector which contributes between 20 and 30 per cent of GDP remains under taxed yet it shelters a large number of informal players who earn taxable income. Agriculture sector contributes less than 0.3 per cent to tax revenue. This figure is set to decline further, given massive tax exemptions.
Mr Fred Muhumuza, an Economics lecturer at Makerere University explains that Agriculture, generally, does not get taxed directly, but is a major driver of demand given its dominance as a source of income for many households.

“Without adequate income, we don’t get enough counsumption of taxable items which undermines tax revenues. Besides, many agro processing facilities and traders in agro produce pay personal or business incomes that get affected if production is low,” Mr Muhumuza says.

However, significant strides have been registered in domestic revenue through tax reforms such as the Tax Payers Expansion Project (TREP), digitalisation of tax collection, enhancing tax compliance and trying hard to expand the country’s tax base, whose make up consists of nearly half of the informal sector players. Most of these are outside the tax bracket despite earning taxable income.

Over the years, URA also rolled out the Travel Assessment System at Entebbe Airport for checking drug smuggling, wildlife tracking, terrorism and customs violation to enhane surveillance on suspicious customs transactions.

“We believe all these are good initiative towards addressing the leakages in tax revenue collections which was being lost,” the executive director, CSBAG Mr Julius Mukunda, said in a sideline interview recently.

He continued: The above measures have resulted in a year to year growth in revenue. For example, financial year 2018/19 saw an increased by 24 per cent leading to approximately 1.4 per cent Tax to GDP ratio the following financial year.”

Despite the increase in revenue from Shs10.6 trillion in 2014/15 to Shs27.4 trillion in 2018/19 of which 65 per cent were tax revenues, government spending has not only continued to outstrip revenue, a situation that escalates the annual budget deficit, but the tax body has found it difficult to hit its annual collection targets.

The half year revenue deficits registered by URA is an equivalent of a budget that can run Uganda National Bureau of Standards for not less than 10 financial years. It is five time more than the total budget allocated to the ministry of trade.
So far, the budget deficit has increased from Shs3.37 trillion in 2014/15 to Shs7.4 trillion in 2018/19, which is nearly half of total tax revenue. To finance the deficit, the government has continued borrowing, resulting into an increase in the public debt.

Shortfalls
That said, tax experts cast a dim view when asked whether URA will surpass its target, or hit the financial year revenue collection target of Shs18.3 trillion.

The tax prefect revenue collection performance registered during the half year period July to December 2019, was projected to collect slightly more than Shs9.7 trillion.

However, what was collected was amounted to a net revenue of Shs9.0 trillion, recording a shortfall of Shs697 billion, an equivalent of nearly nine times the budget allocated to the ministry of trade.

Revenue shortfalls over the last four years, with the exception of the previous financial year (2018/19), have been a permanent fixture on URA’s financial statement.

Should this be the same story (shortfall) by close of the financial year in June, just months away, tax experts and budget analysts predict a glaring implication on the national budget and financing arrangements which affects service delivery.

Tight revenue targets
The ministry of Finance (government) despite limited efforts to nurture and grow businesses/entrepreneurship still has the audacity to dictate increased revenue collection targets.

“For example, in the financial year 2018/19 the collection was Shs16.3 trillion but government increased the target by 24 per cent, meaning Shs20.3 trillion will have to be collected in this financial year 2019/2020,” Mr Mukunda who is also a budget and policy expert, said.
He continued: “These revenue targets that are in most cases not attainable, affect proper planning and budgeting.”

When contacted last week on Wednesday, the country leader of Ernst &Young (EY), Mr Muhammed Ssempijja, told Prosper Magazine that revenue collection targets for the tax man have for a while now been unrealistic.

Mr Ssempijja notes that many of his professional peers are uncertain that the tax prefect will hit their revenue targets coonsidering that the environment is not conducive enough for them to easily go about their job.
“The targets are so high. It is unlikely that URA will hit its targets; so I don’t expect it to beat their targets, specifically because of the performance of the economy,” Mr Ssempijja said.
He continued: “If the economy is doing well, then there will be more economic activities to collect taxes from. As a result, shortfalls will be minimised.”

It appears the prescription to the lull although resurging economy, according to Mr Ssempijja lies in the proper usage of allocation of the national budget to areas he describes as productive segment of the economy, namely small scale and medium businesses, agriculture and not to mention deliberate efforts to create conducive environment for businesses and investment.

On the hand, he cautioned against massive and exaggerated investment in public administration describing it as a non-productive sector of the economy because it does not create wealth—or positively impact the country’s GDP—total value of goods and services produced in the country quarterly or annually.

Although infrastructure such as roads are critical, Mr Ssempijja is of the view that that alone is not enough to spur the kind of economic growth the country would benefit from, urging the government to invest more in the aforementioned areas considering their ripple effects in several economic sectors, including tax mobilsation and collection.

Underperformance
A report by Civil Society Organizations under the Umbrella of CSBAG together with Tax Justice Alliance Uganda highlighted disturbing reasons explaining persistence underperformance over the years.

The report issued recently noted that counterproductive tax measures such as OTT and mobile money which government has failed to let go of, have not yielded expected results.

According to URA, VAT attributed to a lower than expected outturn of slightly more than Shs92 billion on phone talk time, Shs38 billion on sugar, Shs28 billion on beer and Shs41 billion from the wholesale and retail trade.

Ms Akol attributed this shortfall to many people using internet calls as opposed to phone talk time. The Value Added Tax (VAT) on phone talk time was affected by the changes in user tastes where users prefer the use of data for communication through whatsApp, viber and facebook as opposed to direct calls using airtime.

The tax prefect has also been reporting delayed implementation of planned policy and administrative measures that were targeted to start July 1, 2019 such as; Digital Tax Stamps (DTS), Electronic Fiscal Devices (EFD) and gazzetting of withholding VAT agents, rental tax rates and the implementation of a specialized rental income tax collection solution which did not take off.

Specifically, digital tax stamps would stamp out illicit production and fight counterfeiting, real time tax accounting and reconciliation for tax stamps and real time enforcement. Overall, the policy measures yielded total revenue gain of Shs52.4 billion by the end of December 2019 against an annual target of Shs847 billion.

Regarding “Harmful” tax incentives and exemptions, the tax body reported that most of the policies and legislative changes introduced for this financial year were revenue reducing and erosion on the existing tax base, especially the corporation income tax base.

Examples include changes made to Section 21(1) (ae), (af), (ag) of the Income Tax Act introducing income tax exemptions for selected strategic investments. As a result, URA anticipates to fore go about Shs500 billion tax revenue in this financial year.

During July to December 2019, the tax waiver on imported brown husked rice led to revenue foregone of $5.8 million.

Further, other policy measures that have led to revenues forgone include; steel billets, cement clinkers, ban on importation of cars above 15 years old among others.

The unwarranted tax exemptions negatively impact on domestic revenue mobilisation efforts and affect budget financing. Government through ministry of finance should be keen on scrutinizing tax exemptions and tax incentives.

Adopting to the terrain
As the taxation landscape becoming more volatile, URA has designed a strategy to navigate the terrain to harness the tax paying culture.

The URA Corporate Plan 2020/21 - 2024/25 is premised on the need to develop an engaged population to enhance the taxpaying culture. This will be done by engaging taxpayers through “productive partnerships, leveraging technology, data and innovative staff.”

The strategy shall focus efforts on four strategic themes which will collectively create value.

Further, URA has also shifted its strategy from a revenue centred institution to a client centered entity to improve service delivery, implementation of Digital Tax Stamp and Electronic Fiscal Devices (EFD)/e-invoicing to be piloted on March 1, 2020.